Commerce Exam  >  Commerce Notes  >  Accountancy Class 11  >  NCERT Textbook - Theory Base of Accounting

NCERT Textbook - Theory Base of Accounting | Accountancy Class 11 - Commerce PDF Download

Download, print and study this document offline
Please wait while the PDF view is loading
 Page 1


25 Theory Base of Accounting
Learning Objectives After studying this chapter, 
you will be able to: 
•	 identify 	 the 	 need 	 for	
theory base of acco-
unting;
•	 explain 	 the 	 nature 	 of	
Generally Accepted 
Accounting Principles 
(GAAP);
•	 s tate 	 the	 meaning	 and 	
purpose of the basic 
accounting concepts;
•	 l i s t 	 t he 	 ac c ount i ng	
standards issued by 
Institute of Chartered 
Accountants of India;
•	 describe 	 the 	 systems 	 of	
accounting; and
•	 describe 	 the 	 basis 	 of	
accounting.
A
s discussed in the previous chapter, accounting  
is concerned with the recording, classifying 
and summaris ing of financial transactions and 
events and interpreting the results thereof. It 
aims at providing information about the financial 
performance of a firm to its various users such as 
owners, managers employees, investors, creditors, 
suppliers of goods and services and tax authorities 
and help them in taking important decisions. The 
investors, for example, may be interested in knowing 
the extent of profit or loss earned by the firm during 
a given period and compare it with the performance 
of other similar enterprises. The suppliers of credit, 
say a banker, may, in addition, be interested in 
liquidity position of the enterprise. All these people 
look forward to accounting for appropriate, useful 
and reliable information.
For making the accounting information 
meaningful to its internal and external users, it is 
important that such information is reliable as well 
as comparable. The comparability of information 
is required both to make inter-firm comparisons, 
i.e. to see how a firm has performed as compared 
to the other firms, as well as to make inter-period 
comparison, i.e. how it has performed as compared 
to the previous years. This becomes possible 
only if the information provided by the financial 
statements is based on consistent accounting 
policies, principles and practices. Such consistency 
is required throughout the process of identifying the 
Theory Base of Accounting 2
Ch02.indd   25 9/29/2022   4:40:30 PM
2024-25
Page 2


25 Theory Base of Accounting
Learning Objectives After studying this chapter, 
you will be able to: 
•	 identify 	 the 	 need 	 for	
theory base of acco-
unting;
•	 explain 	 the 	 nature 	 of	
Generally Accepted 
Accounting Principles 
(GAAP);
•	 s tate 	 the	 meaning	 and 	
purpose of the basic 
accounting concepts;
•	 l i s t 	 t he 	 ac c ount i ng	
standards issued by 
Institute of Chartered 
Accountants of India;
•	 describe 	 the 	 systems 	 of	
accounting; and
•	 describe 	 the 	 basis 	 of	
accounting.
A
s discussed in the previous chapter, accounting  
is concerned with the recording, classifying 
and summaris ing of financial transactions and 
events and interpreting the results thereof. It 
aims at providing information about the financial 
performance of a firm to its various users such as 
owners, managers employees, investors, creditors, 
suppliers of goods and services and tax authorities 
and help them in taking important decisions. The 
investors, for example, may be interested in knowing 
the extent of profit or loss earned by the firm during 
a given period and compare it with the performance 
of other similar enterprises. The suppliers of credit, 
say a banker, may, in addition, be interested in 
liquidity position of the enterprise. All these people 
look forward to accounting for appropriate, useful 
and reliable information.
For making the accounting information 
meaningful to its internal and external users, it is 
important that such information is reliable as well 
as comparable. The comparability of information 
is required both to make inter-firm comparisons, 
i.e. to see how a firm has performed as compared 
to the other firms, as well as to make inter-period 
comparison, i.e. how it has performed as compared 
to the previous years. This becomes possible 
only if the information provided by the financial 
statements is based on consistent accounting 
policies, principles and practices. Such consistency 
is required throughout the process of identifying the 
Theory Base of Accounting 2
Ch02.indd   25 9/29/2022   4:40:30 PM
2024-25
26 Accountancy
events and transactions to be accounted for, measuring them, communicating 
them in the book of accounts, summarising the results thereof and reporting 
them to the interested parties. This calls for developing a proper theory base 
of accounting.
The importance of accounting theory  need not be over-emphasised as no 
discipline can develop without a sound theoretical base. The theory base of 
accounting consists of principles, concepts, rules and guidelines developed over 
a period of time to bring uniformity and consistency to the process of accounting 
and enhance its utility to different users of accounting information. Apart from 
these, the Institute of Chartered Accountants of India, (ICAI), which is the 
regulatory body for standardisation of accounting policies in the country has 
issued Accounting Standards which are expected to be uniformly adhered to, 
in order to bring consistency in the accounting practices. These are discussed 
in the sections to follow.
2.1 Generally Accepted Accounting Principles
In order to maintain uniformity and consistency in accounting records, certain 
rules or principles have been developed which are generally accepted by the 
accounting profession. These rules are called by different names such as 
principles, concepts, conventions, postulates, assumptions and modifying 
principles.
The term ‘principle’ has been defined by AICPA as ‘A general law or rule 
adopted or professed as a guide to action, a settled ground or basis of conduct 
or practice’. The word ‘generally’ means ‘in a general manner’, i.e., pertaining 
to many persons or cases or occasions. Thus, Generally Accepted Accounting 
Principles (GAAP) refers to the rules or guidelines adopted for recording 
and reporting of business transactions, in order to bring uniformity in the 
preparation and the presentation of financial statements. For example, one of 
the important rule is to record all transactions on the basis of historical cost, 
which is verifiable from the documents such as cash receipt for the money paid. 
This brings in objectivity in the process of recording and makes the accounting 
statements more acceptable to various users.
The Generally Accepted Accounting Principles have evolved over a long 
period of time on the basis of past experiences, usages or customs, statements 
by individuals and professional bodies and regulations by government agencies 
and have general acceptability among most accounting professionals. However, 
the principles of accounting are not static in nature. These are constantly 
influenced by changes in the legal, social and economic environment as well 
as the needs of the users.
These principles are also referred as concepts and conventions. The term 
concept refers to the necessary assumptions and ideas which are fundamental 
Ch02.indd   26 9/29/2022   4:40:30 PM
2024-25
Page 3


25 Theory Base of Accounting
Learning Objectives After studying this chapter, 
you will be able to: 
•	 identify 	 the 	 need 	 for	
theory base of acco-
unting;
•	 explain 	 the 	 nature 	 of	
Generally Accepted 
Accounting Principles 
(GAAP);
•	 s tate 	 the	 meaning	 and 	
purpose of the basic 
accounting concepts;
•	 l i s t 	 t he 	 ac c ount i ng	
standards issued by 
Institute of Chartered 
Accountants of India;
•	 describe 	 the 	 systems 	 of	
accounting; and
•	 describe 	 the 	 basis 	 of	
accounting.
A
s discussed in the previous chapter, accounting  
is concerned with the recording, classifying 
and summaris ing of financial transactions and 
events and interpreting the results thereof. It 
aims at providing information about the financial 
performance of a firm to its various users such as 
owners, managers employees, investors, creditors, 
suppliers of goods and services and tax authorities 
and help them in taking important decisions. The 
investors, for example, may be interested in knowing 
the extent of profit or loss earned by the firm during 
a given period and compare it with the performance 
of other similar enterprises. The suppliers of credit, 
say a banker, may, in addition, be interested in 
liquidity position of the enterprise. All these people 
look forward to accounting for appropriate, useful 
and reliable information.
For making the accounting information 
meaningful to its internal and external users, it is 
important that such information is reliable as well 
as comparable. The comparability of information 
is required both to make inter-firm comparisons, 
i.e. to see how a firm has performed as compared 
to the other firms, as well as to make inter-period 
comparison, i.e. how it has performed as compared 
to the previous years. This becomes possible 
only if the information provided by the financial 
statements is based on consistent accounting 
policies, principles and practices. Such consistency 
is required throughout the process of identifying the 
Theory Base of Accounting 2
Ch02.indd   25 9/29/2022   4:40:30 PM
2024-25
26 Accountancy
events and transactions to be accounted for, measuring them, communicating 
them in the book of accounts, summarising the results thereof and reporting 
them to the interested parties. This calls for developing a proper theory base 
of accounting.
The importance of accounting theory  need not be over-emphasised as no 
discipline can develop without a sound theoretical base. The theory base of 
accounting consists of principles, concepts, rules and guidelines developed over 
a period of time to bring uniformity and consistency to the process of accounting 
and enhance its utility to different users of accounting information. Apart from 
these, the Institute of Chartered Accountants of India, (ICAI), which is the 
regulatory body for standardisation of accounting policies in the country has 
issued Accounting Standards which are expected to be uniformly adhered to, 
in order to bring consistency in the accounting practices. These are discussed 
in the sections to follow.
2.1 Generally Accepted Accounting Principles
In order to maintain uniformity and consistency in accounting records, certain 
rules or principles have been developed which are generally accepted by the 
accounting profession. These rules are called by different names such as 
principles, concepts, conventions, postulates, assumptions and modifying 
principles.
The term ‘principle’ has been defined by AICPA as ‘A general law or rule 
adopted or professed as a guide to action, a settled ground or basis of conduct 
or practice’. The word ‘generally’ means ‘in a general manner’, i.e., pertaining 
to many persons or cases or occasions. Thus, Generally Accepted Accounting 
Principles (GAAP) refers to the rules or guidelines adopted for recording 
and reporting of business transactions, in order to bring uniformity in the 
preparation and the presentation of financial statements. For example, one of 
the important rule is to record all transactions on the basis of historical cost, 
which is verifiable from the documents such as cash receipt for the money paid. 
This brings in objectivity in the process of recording and makes the accounting 
statements more acceptable to various users.
The Generally Accepted Accounting Principles have evolved over a long 
period of time on the basis of past experiences, usages or customs, statements 
by individuals and professional bodies and regulations by government agencies 
and have general acceptability among most accounting professionals. However, 
the principles of accounting are not static in nature. These are constantly 
influenced by changes in the legal, social and economic environment as well 
as the needs of the users.
These principles are also referred as concepts and conventions. The term 
concept refers to the necessary assumptions and ideas which are fundamental 
Ch02.indd   26 9/29/2022   4:40:30 PM
2024-25
27 Theory Base of Accounting
to accounting practice, and the term convention connotes customs or traditions 
as a guide to the preparation of accounting statements. In practice, the same 
rules or guidelines have been described by one author as a concept, by another 
as a postulate and still by another as convention. This at times becomes 
confusing to the learners. Instead of going into the semantics of these terms, 
it is important to concentrate on the practicability of their usage. From the 
practicability view point, it is observed that the various terms such as principles, 
postulates, conventions, modifying principles, assumptions, etc. have been 
used inter-changeably and are referred to as Basic Accounting Concepts in the 
present chapter. 
2.2 Basic Accounting Concepts
The basic accounting concepts are referred to as the fundamental ideas or 
basic assumptions underlying the theory and practice of financial accounting 
and are broad working rules for all accounting activities and developed by the 
accounting profession. The important concepts have been listed as below:
 • Business entity;
 • Money measurement;
 • Going concern;
 • Accounting period;
 • Cost
 • Dual aspect (or Duality);
 • Revenue recognition (Realisation);
 • Matching;
 • Full disclosure;
 • Consistency;
 • Conservatism (Prudence);
 • Materiality;
 • Objectivity.
2.2.1  Business Entity Concept
The concept of business entity assumes that business has a distinct and 
separate entity from its owners. It means that for the purposes of accounting, 
the business and its owners are to be treated as two separate entities. Keeping 
this in view, when a person brings in some money as capital into his business, 
in accounting records, it is treated as liability of the business to the owner. Here, 
one separate entity (owner) is assumed to be giving money to another distinct 
entity (business unit). Similarly, when the owner withdraws any money from the 
business for his personal expenses(drawings), it is treated as reduction of the 
owner’s capital and consequently a reduction in the liabilities of the business. 
The accounting records are made in the book of accounts from the point of view 
of the business unit and not that of the owner. The personal assets and liabilities 
of the owner are, therefore, not considered while recording and reporting the 
assets and liabilities of the business. Similarly, personal transactions of the 
owner are not recorded in the books of the business, unless it involves inflow 
or outflow of business funds.
Ch02.indd   27 9/29/2022   4:40:30 PM
2024-25
Page 4


25 Theory Base of Accounting
Learning Objectives After studying this chapter, 
you will be able to: 
•	 identify 	 the 	 need 	 for	
theory base of acco-
unting;
•	 explain 	 the 	 nature 	 of	
Generally Accepted 
Accounting Principles 
(GAAP);
•	 s tate 	 the	 meaning	 and 	
purpose of the basic 
accounting concepts;
•	 l i s t 	 t he 	 ac c ount i ng	
standards issued by 
Institute of Chartered 
Accountants of India;
•	 describe 	 the 	 systems 	 of	
accounting; and
•	 describe 	 the 	 basis 	 of	
accounting.
A
s discussed in the previous chapter, accounting  
is concerned with the recording, classifying 
and summaris ing of financial transactions and 
events and interpreting the results thereof. It 
aims at providing information about the financial 
performance of a firm to its various users such as 
owners, managers employees, investors, creditors, 
suppliers of goods and services and tax authorities 
and help them in taking important decisions. The 
investors, for example, may be interested in knowing 
the extent of profit or loss earned by the firm during 
a given period and compare it with the performance 
of other similar enterprises. The suppliers of credit, 
say a banker, may, in addition, be interested in 
liquidity position of the enterprise. All these people 
look forward to accounting for appropriate, useful 
and reliable information.
For making the accounting information 
meaningful to its internal and external users, it is 
important that such information is reliable as well 
as comparable. The comparability of information 
is required both to make inter-firm comparisons, 
i.e. to see how a firm has performed as compared 
to the other firms, as well as to make inter-period 
comparison, i.e. how it has performed as compared 
to the previous years. This becomes possible 
only if the information provided by the financial 
statements is based on consistent accounting 
policies, principles and practices. Such consistency 
is required throughout the process of identifying the 
Theory Base of Accounting 2
Ch02.indd   25 9/29/2022   4:40:30 PM
2024-25
26 Accountancy
events and transactions to be accounted for, measuring them, communicating 
them in the book of accounts, summarising the results thereof and reporting 
them to the interested parties. This calls for developing a proper theory base 
of accounting.
The importance of accounting theory  need not be over-emphasised as no 
discipline can develop without a sound theoretical base. The theory base of 
accounting consists of principles, concepts, rules and guidelines developed over 
a period of time to bring uniformity and consistency to the process of accounting 
and enhance its utility to different users of accounting information. Apart from 
these, the Institute of Chartered Accountants of India, (ICAI), which is the 
regulatory body for standardisation of accounting policies in the country has 
issued Accounting Standards which are expected to be uniformly adhered to, 
in order to bring consistency in the accounting practices. These are discussed 
in the sections to follow.
2.1 Generally Accepted Accounting Principles
In order to maintain uniformity and consistency in accounting records, certain 
rules or principles have been developed which are generally accepted by the 
accounting profession. These rules are called by different names such as 
principles, concepts, conventions, postulates, assumptions and modifying 
principles.
The term ‘principle’ has been defined by AICPA as ‘A general law or rule 
adopted or professed as a guide to action, a settled ground or basis of conduct 
or practice’. The word ‘generally’ means ‘in a general manner’, i.e., pertaining 
to many persons or cases or occasions. Thus, Generally Accepted Accounting 
Principles (GAAP) refers to the rules or guidelines adopted for recording 
and reporting of business transactions, in order to bring uniformity in the 
preparation and the presentation of financial statements. For example, one of 
the important rule is to record all transactions on the basis of historical cost, 
which is verifiable from the documents such as cash receipt for the money paid. 
This brings in objectivity in the process of recording and makes the accounting 
statements more acceptable to various users.
The Generally Accepted Accounting Principles have evolved over a long 
period of time on the basis of past experiences, usages or customs, statements 
by individuals and professional bodies and regulations by government agencies 
and have general acceptability among most accounting professionals. However, 
the principles of accounting are not static in nature. These are constantly 
influenced by changes in the legal, social and economic environment as well 
as the needs of the users.
These principles are also referred as concepts and conventions. The term 
concept refers to the necessary assumptions and ideas which are fundamental 
Ch02.indd   26 9/29/2022   4:40:30 PM
2024-25
27 Theory Base of Accounting
to accounting practice, and the term convention connotes customs or traditions 
as a guide to the preparation of accounting statements. In practice, the same 
rules or guidelines have been described by one author as a concept, by another 
as a postulate and still by another as convention. This at times becomes 
confusing to the learners. Instead of going into the semantics of these terms, 
it is important to concentrate on the practicability of their usage. From the 
practicability view point, it is observed that the various terms such as principles, 
postulates, conventions, modifying principles, assumptions, etc. have been 
used inter-changeably and are referred to as Basic Accounting Concepts in the 
present chapter. 
2.2 Basic Accounting Concepts
The basic accounting concepts are referred to as the fundamental ideas or 
basic assumptions underlying the theory and practice of financial accounting 
and are broad working rules for all accounting activities and developed by the 
accounting profession. The important concepts have been listed as below:
 • Business entity;
 • Money measurement;
 • Going concern;
 • Accounting period;
 • Cost
 • Dual aspect (or Duality);
 • Revenue recognition (Realisation);
 • Matching;
 • Full disclosure;
 • Consistency;
 • Conservatism (Prudence);
 • Materiality;
 • Objectivity.
2.2.1  Business Entity Concept
The concept of business entity assumes that business has a distinct and 
separate entity from its owners. It means that for the purposes of accounting, 
the business and its owners are to be treated as two separate entities. Keeping 
this in view, when a person brings in some money as capital into his business, 
in accounting records, it is treated as liability of the business to the owner. Here, 
one separate entity (owner) is assumed to be giving money to another distinct 
entity (business unit). Similarly, when the owner withdraws any money from the 
business for his personal expenses(drawings), it is treated as reduction of the 
owner’s capital and consequently a reduction in the liabilities of the business. 
The accounting records are made in the book of accounts from the point of view 
of the business unit and not that of the owner. The personal assets and liabilities 
of the owner are, therefore, not considered while recording and reporting the 
assets and liabilities of the business. Similarly, personal transactions of the 
owner are not recorded in the books of the business, unless it involves inflow 
or outflow of business funds.
Ch02.indd   27 9/29/2022   4:40:30 PM
2024-25
28 Accountancy
2.2.2  Money Measurement Concept
The concept of money measurement states that only those transactions and 
happenings in an organisation which can be expressed in terms of money 
such as sale of goods or payment of expenses or receipt of income, etc., are 
to be recorded in the book of accounts. All such transactions or happenings 
which can not be expressed in monetary terms, for example, the appointment 
of a manager, capabilities of its human resources or creativity of its research 
department or image of the organisation among people in general do not find 
a place in the accounting records of a firm.
Another important aspect of the concept of money measurement is that the 
records of the transactions are to be kept not in the physical units but in the 
monetary unit. For example, an organisation may, on a particular day, have 
a factory on a piece of land measuring 2 acres, office building containing 10 
rooms, 30 personal computers, 30 office chairs and tables, a bank balance of 
`5 lakh, raw material weighing 20-tons, and 100 cartons of finished goods. 
These assets are expressed in different units, so can not be added to give any 
meaningful information about the total worth of business. For accounting 
purposes, therefore, these are shown in money terms and recorded in rupees 
and paise. In this case, the cost of factory land may be say ` 2 crore; office 
building ` 1 crore; computers `15 lakh; office chairs and tables ` 2 lakh; raw 
material ` 33 lakh and finished goods ` 4 lakh. Thus, the total assets of the 
enterprise are valued at ` 3 crore and 59 lakh. Similarly, all transactions are 
recorded in rupees and paise as and when they take place.
The money measurement assumption is not free from limitations. Due to the 
changes in prices, the value of money does not remain the same over a period 
of time. The value of rupee today on account of rise in prices is much less than 
what it was, say ten years back. Therefore, in the balance sheet, when we add 
different assets bought at different points of time, say building purchased in 
1995 for ` 2 crore, and plant purchased in 2005 for ` 1 crore, we are in fact 
adding heterogeneous values, which can not be clubbed together. As the change 
in the value of money is not reflected in the book of accounts, the accounting 
data does not reflect the true and fair view of the affairs of an enterprise.
2.2.3  Going Concern Concept
The concept of going concern assumes that a business firm would continue to 
carry out its operations indefinitely, i.e. for a fairly long period of time and would 
not be liquidated in the foreseeable future. This is an important assumption 
of accounting as it provides the very basis for showing the value of assets in 
the balance sheet. 
Ch02.indd   28 9/29/2022   4:40:30 PM
2024-25
Page 5


25 Theory Base of Accounting
Learning Objectives After studying this chapter, 
you will be able to: 
•	 identify 	 the 	 need 	 for	
theory base of acco-
unting;
•	 explain 	 the 	 nature 	 of	
Generally Accepted 
Accounting Principles 
(GAAP);
•	 s tate 	 the	 meaning	 and 	
purpose of the basic 
accounting concepts;
•	 l i s t 	 t he 	 ac c ount i ng	
standards issued by 
Institute of Chartered 
Accountants of India;
•	 describe 	 the 	 systems 	 of	
accounting; and
•	 describe 	 the 	 basis 	 of	
accounting.
A
s discussed in the previous chapter, accounting  
is concerned with the recording, classifying 
and summaris ing of financial transactions and 
events and interpreting the results thereof. It 
aims at providing information about the financial 
performance of a firm to its various users such as 
owners, managers employees, investors, creditors, 
suppliers of goods and services and tax authorities 
and help them in taking important decisions. The 
investors, for example, may be interested in knowing 
the extent of profit or loss earned by the firm during 
a given period and compare it with the performance 
of other similar enterprises. The suppliers of credit, 
say a banker, may, in addition, be interested in 
liquidity position of the enterprise. All these people 
look forward to accounting for appropriate, useful 
and reliable information.
For making the accounting information 
meaningful to its internal and external users, it is 
important that such information is reliable as well 
as comparable. The comparability of information 
is required both to make inter-firm comparisons, 
i.e. to see how a firm has performed as compared 
to the other firms, as well as to make inter-period 
comparison, i.e. how it has performed as compared 
to the previous years. This becomes possible 
only if the information provided by the financial 
statements is based on consistent accounting 
policies, principles and practices. Such consistency 
is required throughout the process of identifying the 
Theory Base of Accounting 2
Ch02.indd   25 9/29/2022   4:40:30 PM
2024-25
26 Accountancy
events and transactions to be accounted for, measuring them, communicating 
them in the book of accounts, summarising the results thereof and reporting 
them to the interested parties. This calls for developing a proper theory base 
of accounting.
The importance of accounting theory  need not be over-emphasised as no 
discipline can develop without a sound theoretical base. The theory base of 
accounting consists of principles, concepts, rules and guidelines developed over 
a period of time to bring uniformity and consistency to the process of accounting 
and enhance its utility to different users of accounting information. Apart from 
these, the Institute of Chartered Accountants of India, (ICAI), which is the 
regulatory body for standardisation of accounting policies in the country has 
issued Accounting Standards which are expected to be uniformly adhered to, 
in order to bring consistency in the accounting practices. These are discussed 
in the sections to follow.
2.1 Generally Accepted Accounting Principles
In order to maintain uniformity and consistency in accounting records, certain 
rules or principles have been developed which are generally accepted by the 
accounting profession. These rules are called by different names such as 
principles, concepts, conventions, postulates, assumptions and modifying 
principles.
The term ‘principle’ has been defined by AICPA as ‘A general law or rule 
adopted or professed as a guide to action, a settled ground or basis of conduct 
or practice’. The word ‘generally’ means ‘in a general manner’, i.e., pertaining 
to many persons or cases or occasions. Thus, Generally Accepted Accounting 
Principles (GAAP) refers to the rules or guidelines adopted for recording 
and reporting of business transactions, in order to bring uniformity in the 
preparation and the presentation of financial statements. For example, one of 
the important rule is to record all transactions on the basis of historical cost, 
which is verifiable from the documents such as cash receipt for the money paid. 
This brings in objectivity in the process of recording and makes the accounting 
statements more acceptable to various users.
The Generally Accepted Accounting Principles have evolved over a long 
period of time on the basis of past experiences, usages or customs, statements 
by individuals and professional bodies and regulations by government agencies 
and have general acceptability among most accounting professionals. However, 
the principles of accounting are not static in nature. These are constantly 
influenced by changes in the legal, social and economic environment as well 
as the needs of the users.
These principles are also referred as concepts and conventions. The term 
concept refers to the necessary assumptions and ideas which are fundamental 
Ch02.indd   26 9/29/2022   4:40:30 PM
2024-25
27 Theory Base of Accounting
to accounting practice, and the term convention connotes customs or traditions 
as a guide to the preparation of accounting statements. In practice, the same 
rules or guidelines have been described by one author as a concept, by another 
as a postulate and still by another as convention. This at times becomes 
confusing to the learners. Instead of going into the semantics of these terms, 
it is important to concentrate on the practicability of their usage. From the 
practicability view point, it is observed that the various terms such as principles, 
postulates, conventions, modifying principles, assumptions, etc. have been 
used inter-changeably and are referred to as Basic Accounting Concepts in the 
present chapter. 
2.2 Basic Accounting Concepts
The basic accounting concepts are referred to as the fundamental ideas or 
basic assumptions underlying the theory and practice of financial accounting 
and are broad working rules for all accounting activities and developed by the 
accounting profession. The important concepts have been listed as below:
 • Business entity;
 • Money measurement;
 • Going concern;
 • Accounting period;
 • Cost
 • Dual aspect (or Duality);
 • Revenue recognition (Realisation);
 • Matching;
 • Full disclosure;
 • Consistency;
 • Conservatism (Prudence);
 • Materiality;
 • Objectivity.
2.2.1  Business Entity Concept
The concept of business entity assumes that business has a distinct and 
separate entity from its owners. It means that for the purposes of accounting, 
the business and its owners are to be treated as two separate entities. Keeping 
this in view, when a person brings in some money as capital into his business, 
in accounting records, it is treated as liability of the business to the owner. Here, 
one separate entity (owner) is assumed to be giving money to another distinct 
entity (business unit). Similarly, when the owner withdraws any money from the 
business for his personal expenses(drawings), it is treated as reduction of the 
owner’s capital and consequently a reduction in the liabilities of the business. 
The accounting records are made in the book of accounts from the point of view 
of the business unit and not that of the owner. The personal assets and liabilities 
of the owner are, therefore, not considered while recording and reporting the 
assets and liabilities of the business. Similarly, personal transactions of the 
owner are not recorded in the books of the business, unless it involves inflow 
or outflow of business funds.
Ch02.indd   27 9/29/2022   4:40:30 PM
2024-25
28 Accountancy
2.2.2  Money Measurement Concept
The concept of money measurement states that only those transactions and 
happenings in an organisation which can be expressed in terms of money 
such as sale of goods or payment of expenses or receipt of income, etc., are 
to be recorded in the book of accounts. All such transactions or happenings 
which can not be expressed in monetary terms, for example, the appointment 
of a manager, capabilities of its human resources or creativity of its research 
department or image of the organisation among people in general do not find 
a place in the accounting records of a firm.
Another important aspect of the concept of money measurement is that the 
records of the transactions are to be kept not in the physical units but in the 
monetary unit. For example, an organisation may, on a particular day, have 
a factory on a piece of land measuring 2 acres, office building containing 10 
rooms, 30 personal computers, 30 office chairs and tables, a bank balance of 
`5 lakh, raw material weighing 20-tons, and 100 cartons of finished goods. 
These assets are expressed in different units, so can not be added to give any 
meaningful information about the total worth of business. For accounting 
purposes, therefore, these are shown in money terms and recorded in rupees 
and paise. In this case, the cost of factory land may be say ` 2 crore; office 
building ` 1 crore; computers `15 lakh; office chairs and tables ` 2 lakh; raw 
material ` 33 lakh and finished goods ` 4 lakh. Thus, the total assets of the 
enterprise are valued at ` 3 crore and 59 lakh. Similarly, all transactions are 
recorded in rupees and paise as and when they take place.
The money measurement assumption is not free from limitations. Due to the 
changes in prices, the value of money does not remain the same over a period 
of time. The value of rupee today on account of rise in prices is much less than 
what it was, say ten years back. Therefore, in the balance sheet, when we add 
different assets bought at different points of time, say building purchased in 
1995 for ` 2 crore, and plant purchased in 2005 for ` 1 crore, we are in fact 
adding heterogeneous values, which can not be clubbed together. As the change 
in the value of money is not reflected in the book of accounts, the accounting 
data does not reflect the true and fair view of the affairs of an enterprise.
2.2.3  Going Concern Concept
The concept of going concern assumes that a business firm would continue to 
carry out its operations indefinitely, i.e. for a fairly long period of time and would 
not be liquidated in the foreseeable future. This is an important assumption 
of accounting as it provides the very basis for showing the value of assets in 
the balance sheet. 
Ch02.indd   28 9/29/2022   4:40:30 PM
2024-25
29 Theory Base of Accounting
An asset may be defined as a bundle of services. When we purchase an asset, 
for example, a personal computer, for a sum of ` 50,000, what we are buying 
really is the services of the computer that we shall be getting over its estimated 
life span, say 5 years. It will not be fair to charge the whole amount of ` 50,000, 
from the revenue of the year in which the asset is purchased. Instead, that 
part of the asset which has been consumed or used during a period should be 
charged from the revenue of that period. The assumption regarding continuity 
of business allows us to charge from the revenues of a period only that part of 
the asset which has been consumed or used to earn that revenue in that period 
and carry forward the remaining amount to the next years, over the estimated 
life of the asset. Thus, we may charge ` 10,000 every year for 5 years from the 
profit and loss account. In case the continuity assumption is not there, the 
whole cost (` 50,000 in the present example) will need to be charged from the 
revenue of the year in which the asset was purchased. 
2.2.4  Accounting Period Concept
Accounting period refers to the span of time at the end of which the financial 
statements of an enterprise are prepared, to know whether it has earned profits 
or incurred losses during that period and what exactly is the position of its assets 
and liabilities at the end of that period. Such information is required by different 
users at regular interval for various purposes, as no firm can wait for long to know 
its financial results as various decisions are to be taken at regular intervals on 
the basis of such information. The financial statements are, therefore, prepared 
at regular interval, normally after a period of one year, so that timely information 
is made available to the users. This interval of time is called accounting period. 
The Companies Act 2013 and the Income Tax Act require that the income 
statements should be prepared annually. However, in case of certain situations, 
preparation of interim financial statements become necessary. For example, at 
the time of retirement of a partner, the accounting period can be different from 
twelve months period. Apart from these companies whose shares are listed on 
the stock exchange, are required to publish quarterly results to ascertain the 
profitability and financial position at the end of every three months period.
Test Your Understanding - I
Choose the Correct Answer
1. During the life-time of an entity accounting produce financial statements in 
accordance with which basic accounting concept:
 (a) Conservation
 (b) Matching
 (c) Accounting period
 (d) None of the above
Ch02.indd   29 9/29/2022   4:40:30 PM
2024-25
Read More
82 videos|167 docs|42 tests

Top Courses for Commerce

FAQs on NCERT Textbook - Theory Base of Accounting - Accountancy Class 11 - Commerce

1. What is the theory base of accounting?
Ans. The theory base of accounting refers to the set of principles and concepts that guide the preparation and presentation of financial statements. It provides a framework for recording, classifying, and summarizing financial transactions in a systematic and consistent manner. The theory base of accounting helps in ensuring the reliability, comparability, and relevance of financial information for users.
2. What are some key components of the theory base of accounting?
Ans. Some key components of the theory base of accounting include the entity concept, going concern concept, accrual concept, consistency concept, and prudence concept. - The entity concept states that the business and its owner are separate entities, and their transactions should be recorded separately. - The going concern concept assumes that the business will continue its operations for the foreseeable future. - The accrual concept requires that revenues and expenses are recognized when earned or incurred, regardless of when the cash is received or paid. - The consistency concept ensures that accounting policies and methods are applied consistently from one period to another. - The prudence concept suggests that uncertainties and risks should be considered, and conservative estimates should be made while preparing financial statements.
3. How does the theory base of accounting help in decision-making?
Ans. The theory base of accounting provides a systematic and standardized approach to record and report financial information. This helps in providing reliable and relevant information to users, such as investors, creditors, and managers, for making informed decisions. By following the principles and concepts of the theory base of accounting, financial statements become more comparable, allowing users to analyze the financial performance and position of an entity. It also helps in identifying trends, evaluating profitability, and assessing the financial health of a business.
4. Why is it important to have a theory base of accounting?
Ans. Having a theory base of accounting is important for several reasons: - It provides a common framework: The theory base of accounting ensures that financial information is prepared and presented in a consistent and standardized manner. This allows for comparability of financial statements across different entities and periods. - Enhances reliability and relevance: The theory base of accounting helps in producing reliable and relevant financial information. This is important for users to make informed decisions based on accurate and trustworthy data. - Facilitates regulation and compliance: A theory base of accounting provides a foundation for accounting standards and regulations. It helps in setting guidelines and ensuring compliance with reporting requirements. - Supports accountability and transparency: By following the principles and concepts of the theory base of accounting, entities can demonstrate their accountability and transparency in financial reporting. This builds trust among stakeholders and promotes good corporate governance.
5. How does the theory base of accounting evolve over time?
Ans. The theory base of accounting is not static and evolves over time to adapt to changing business practices, economic conditions, and user needs. It is influenced by various factors such as advancements in technology, globalization, and regulatory changes. The evolution of the theory base of accounting is driven by research, discussions, and feedback from accounting professionals, standard-setting bodies, and users of financial statements. New concepts and principles are developed, existing ones are refined, and accounting standards are updated to ensure that the theory base of accounting remains relevant and effective in capturing and communicating financial information.
82 videos|167 docs|42 tests
Download as PDF
Explore Courses for Commerce exam

Top Courses for Commerce

Signup for Free!
Signup to see your scores go up within 7 days! Learn & Practice with 1000+ FREE Notes, Videos & Tests.
10M+ students study on EduRev
Related Searches

Important questions

,

NCERT Textbook - Theory Base of Accounting | Accountancy Class 11 - Commerce

,

video lectures

,

Summary

,

shortcuts and tricks

,

practice quizzes

,

Sample Paper

,

mock tests for examination

,

Semester Notes

,

NCERT Textbook - Theory Base of Accounting | Accountancy Class 11 - Commerce

,

ppt

,

NCERT Textbook - Theory Base of Accounting | Accountancy Class 11 - Commerce

,

Free

,

Extra Questions

,

pdf

,

Viva Questions

,

Previous Year Questions with Solutions

,

past year papers

,

study material

,

Objective type Questions

,

MCQs

,

Exam

;