NCERT Class 11 Accountancy Accountancy-II: Chapter 2 — Theory Base of Accounting
This chapter, "Financial Statements - II," from NCERT Class 11 Accountancy (Accountancy-II) focuses on the crucial adjustments needed when preparing financial statements. Building upon the basic final accounts learned previously, it explains that the accrual concept requires revenues and expenses to be recognized when earned or incurred, not just when cash is received or paid. The chapter details the accounting treatment for various adjustments, including outstanding and prepaid expenses, accrued and advance incomes, depreciation, bad debts, provisions for doubtful debts and discounts on debtors, manager's commission, and interest on capital. It emphasizes that these adjustments are vital for ensuring the final accounts present a true and fair view of the business's profitability and financial position. Students will learn how to incorporate these adjustments into the profit and loss account and balance sheet, reinforcing the double-entry system.
Quick info
| Board | CBSE / NCERT |
|---|---|
| Class | Class 11 |
| Subject | Accountancy |
| Book | Accountancy-II |
| Chapter | Chapter 2 — Theory Base of Accounting |
| Language | English |
| PDF type | NCERT Textbook |
| Session | CBSE 2026 |
| Reading time | 4 minutes |
| Word count | 691 |
Learning outcomes
- Describe the need for adjustments in financial statements.
- Explain the accounting treatment for outstanding/prepaid expenses and accrued/advance incomes.
- Discuss adjustments for depreciation, bad debts, and provisions.
- Understand concepts and adjustments for manager's commission and interest on capital.
- Prepare profit and loss accounts and balance sheets with adjustments.
Vocabulary
| Word | Meaning |
|---|---|
| Accrual basis of accounting | Recognizing revenues when earned and expenses when incurred, regardless of cash flow. |
| Outstanding expenses | Expenses incurred but not yet paid. |
| Prepaid expenses | Expenses paid in advance for a future period. |
| Accrued income | Income earned but not yet received. |
| Income received in advance | Income received before it is earned. |
| Depreciation | Systematic allocation of the cost of a tangible asset over its useful life. |
| Bad debts | Uncollectible accounts receivable. |
| Provision for doubtful debts | An estimate of accounts receivable that may not be collected. |
| Provision for discount on debtors | An estimate for discounts that may be allowed to debtors. |
| Manager's commission | Commission payable to a manager, often based on profit. |
| Interest on capital | Interest paid to partners on their capital invested in the business. |
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Practice questions
- Why are adjustments necessary while preparing financial statements? Answer: Adjustments are necessary to ensure that the final accounts reflect the true and fair view of the business's profitability and financial position, adhering to the accrual concept of accounting.
- What is the difference between outstanding expenses and prepaid expenses? Answer: Outstanding expenses are incurred but not paid, while prepaid expenses are paid in advance for future periods.
- How is depreciation adjusted in the financial statements? Answer: Depreciation is debited to the Profit and Loss Account as an expense and credited to the asset account (or shown as a deduction from the asset in the Balance Sheet).
- What is the purpose of a provision for doubtful debts? Answer: It is created to account for potential losses from accounts receivable that may become uncollectible.
Frequently asked questions
What is the core principle behind the need for adjustments in financial statements?
The core principle is the accrual concept of accounting, which states that revenues and expenses should be recognized when earned or incurred, not just when cash changes hands.
Give an example of an outstanding expense.
Salaries for March 2017 paid in April 2017 is an example of outstanding expense.
Give an example of a prepaid expense.
Insurance premium paid on July 01, 2016, for a 12-month period ending June 30, 2017, where the accounting year ends on March 31, 2017, means a portion is prepaid.
What is the accounting treatment for income received in advance?
Income received in advance is shown as a liability in the Balance Sheet and deducted from the relevant income in the Profit and Loss Account.
How does depreciation affect financial statements?
Depreciation is treated as an expense in the Profit and Loss Account and reduces the book value of the asset in the Balance Sheet.
What is the purpose of a provision for discount on debtors?
It is created to account for potential discounts that might be allowed to debtors when they make payments.
Where are adjustments reflected in the final accounts?
All adjustments are reflected in two places to complete the double-entry system: either in the Profit and Loss Account and Balance Sheet, or within the Balance Sheet itself.
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NCERT Class 11 Accountancy — Accountancy-II — Chapter 2 — Theory Base of Accounting. Verified by NCERT Help Editorial Team. Reviewed on 29 Jul 2026. Last updated 10 Aug 2026.