CBSE Class 11 Accountancy Chapter 2: Theory Base of Accounting NCERT Solutions

The Going Concern Concept is a fundamental accounting assumption that posits a business entity will continue its operations for an indefinite period into the future. This assumption is crucial because it allows accountants to differentiate between expenditures. Specifically, it helps in bifurcating revenue expenditure, which relates to the current operating period (e.g., salaries, rent), from capital expenditure, where the benefits are expected to accrue over multiple accounting periods (e.g., purchasing machinery). For instance, if a company buys machinery for ₹1,00,000 with an expected useful life of 10 years, it is treated as a capital expenditure. The annual depreciation of ₹10,000 (₹1,00,000 / 10 years) is then treated as a revenue expenditure for that specific year. Without the going concern assumption, assets might need to be valued at their liquidation value, and the concept of depreciation would not be applicable in the same way.

Revenue should generally be recognised when the sale of goods or services takes place, irrespective of whether the payment is received in cash or on credit. Essentially, revenue is recognised when the right to receive income is established. This means that even if cash is received later, the revenue belongs to the period when the sale was made or the service was rendered. Conversely, if payment is received in advance for goods not yet sold or services not yet rendered, it is not recognised as revenue in the period of receipt; it is recognised when the sale is made or the service is provided.

For example, if Mr. A sold goods in January and received payment in February, the revenue is recognised in January because the sale occurred then. If Mr. A received cash in December for goods to be sold in January, the revenue is recognised in January, not December.

There are certain exceptions to this general rule:

1. Hire Purchase System: In a hire purchase arrangement, the seller recognizes revenue as the instalments are paid by the buyer, rather than at the initial point of sale.
2. Long-term Construction Contracts: For projects like building dams or highways that span multiple years, income is recognised on a proportionate basis. This is usually determined by the 'work certified' by an independent surveyor, rather than waiting for the entire contract to be completed.

The basic accounting equation, also known as the balance sheet equation, is:

$$Assets\; =\; Liabilities\; +\; Capital$$

This equation signifies that the total monetary value of all the assets owned by a business must always be equal to the sum of its total liabilities (what the business owes to external parties) and its capital (what the business owes to its owners).

According to the Realisation Concept, revenue should be recognised when it is earned and realised, or when there is a reasonable certainty of its realisation. In practice, for goods sold on credit, a transaction is typically included in the sales figure for the accounting period when the goods have been dispatched to the customer. Dispatching the goods signifies that the ownership and risks associated with the goods have largely transferred to the buyer, establishing the sale and the right to receive payment.