Notes : Theory Base of Accounting - 2 Class 11 Notes | EduRev

Class 11 : Notes : Theory Base of Accounting - 2 Class 11 Notes | EduRev

 Page 1


8 
 
UNIT- 02 
THEORY BASE OF ACCOUNTING 
 
Unit at a glance: 
? Introduction  
? Meaning of accounting principles 
? Features of accounting principles 
? Necessity of accounting principles 
? Basic accounting concepts 
? Basis of accounting  
? Nature of accounting standards 
? Utility of accounting standards 
?    International Financial Reporting Standards (IFRS)  
?   Meaning and benefits of IFRS  
 
“A mode of conduct imposed on an accountant by custom, law and professional body.” – Kohler 
 
Introduction: 
To maintain uniformity in recording transactions and preparing financial statements, accountants 
should follow Generally Accepted Accounting Principles. 
 
Meaning of Accounting Principles: 
Accounting principles are the rules of action or conduct adopted by accountants universally while 
recording accounting transactions. 
GAAP refers to the rules or guidelines adopted for recording and reporting of business transactions, 
in order to bring uniformity in the preparation and presentation of financial statements. 
 
Features of accounting principles: 
(1) Accounting principles are manmade. 
(2) Accounting principles are flexible in nature 
(3) Accounting principles are generally accepted. 
 
Necessity of accounting principles: 
Accounting information is meaningful and useful for users if the accounting records and financial 
statements are prepared following generally accepted accounting information in standard forms 
which are understood. 
 
 
 
 
Page 2


8 
 
UNIT- 02 
THEORY BASE OF ACCOUNTING 
 
Unit at a glance: 
? Introduction  
? Meaning of accounting principles 
? Features of accounting principles 
? Necessity of accounting principles 
? Basic accounting concepts 
? Basis of accounting  
? Nature of accounting standards 
? Utility of accounting standards 
?    International Financial Reporting Standards (IFRS)  
?   Meaning and benefits of IFRS  
 
“A mode of conduct imposed on an accountant by custom, law and professional body.” – Kohler 
 
Introduction: 
To maintain uniformity in recording transactions and preparing financial statements, accountants 
should follow Generally Accepted Accounting Principles. 
 
Meaning of Accounting Principles: 
Accounting principles are the rules of action or conduct adopted by accountants universally while 
recording accounting transactions. 
GAAP refers to the rules or guidelines adopted for recording and reporting of business transactions, 
in order to bring uniformity in the preparation and presentation of financial statements. 
 
Features of accounting principles: 
(1) Accounting principles are manmade. 
(2) Accounting principles are flexible in nature 
(3) Accounting principles are generally accepted. 
 
Necessity of accounting principles: 
Accounting information is meaningful and useful for users if the accounting records and financial 
statements are prepared following generally accepted accounting information in standard forms 
which are understood. 
 
 
 
 
9 
 
Basic accounting concepts 
(1) Business entity concepts 
This concept assumes that business has a distinct and separate entity from its owners. 
Therefore business transactions are recorded in the books of accounts from the business point 
of view and not owners. For example, If owner bring Rs. 1,00,000 as capital in business. It is 
treated as liability of business to owner. Similarly if owner withdrew Rs. 5,000 from business 
for personal use, it is treated as reduction of owner?s capital and consequently reduction in 
liability of business towards owner. 
 
(2)Money measurement concept 
This concept states that transactions and events that can be expressed in money terms are 
recorded in the books of accounts. Non monetary transactions cannot be recorded in the books 
like appointment of manager, capabilities of human resources etc. 
Another aspect is the records of transactions are to be kept not in physical unit but in 
monetary unit. For example, an organisation has 2 buildings, 15 computers, 20 office tables 
are not recorded because they are physical unit and not in monetary unit. 
Limitation of this concept is the value of rupee does not remain same over a period of time. 
As changes in the value of money is not reflected in books does not reflect fair view of 
business affairs. 
 
(3) Going concern concept 
This concept assumes that business shall continue to carry out its operations indefinitely for a 
long period of time and would not be liquidated in the foreseeable future. It provides the very 
basis for showing the value of assets in the balance sheet. 
An asset may be defined as a bundle of services. For example, a machine purchased for Rs. 
2,00,000 and its estimated useful life say 10 years. The cost of machinery is spread on 
suitable basis over next 10 years for ascertaining the profit or loss for each year. The total cost 
of the machine is not treated as an expense in the year of purchase itself. 
 
(4) Accounting period concept 
Accounting period refers to span of time at the end of which financial statements are prepared 
to know the profits or loss and financial position of business. Information is required to by 
different users at regular intervals for decision making. For example, bankers require 
information periodically because they want to ensure safety and returns of their investments. 
Similarly management requires information at regular interval to assess the performance and 
funds requirement. Therefore they are prepared at regular interval, normally a period of one 
year. This interval of time is called accounting period. 
 
 
 
Page 3


8 
 
UNIT- 02 
THEORY BASE OF ACCOUNTING 
 
Unit at a glance: 
? Introduction  
? Meaning of accounting principles 
? Features of accounting principles 
? Necessity of accounting principles 
? Basic accounting concepts 
? Basis of accounting  
? Nature of accounting standards 
? Utility of accounting standards 
?    International Financial Reporting Standards (IFRS)  
?   Meaning and benefits of IFRS  
 
“A mode of conduct imposed on an accountant by custom, law and professional body.” – Kohler 
 
Introduction: 
To maintain uniformity in recording transactions and preparing financial statements, accountants 
should follow Generally Accepted Accounting Principles. 
 
Meaning of Accounting Principles: 
Accounting principles are the rules of action or conduct adopted by accountants universally while 
recording accounting transactions. 
GAAP refers to the rules or guidelines adopted for recording and reporting of business transactions, 
in order to bring uniformity in the preparation and presentation of financial statements. 
 
Features of accounting principles: 
(1) Accounting principles are manmade. 
(2) Accounting principles are flexible in nature 
(3) Accounting principles are generally accepted. 
 
Necessity of accounting principles: 
Accounting information is meaningful and useful for users if the accounting records and financial 
statements are prepared following generally accepted accounting information in standard forms 
which are understood. 
 
 
 
 
9 
 
Basic accounting concepts 
(1) Business entity concepts 
This concept assumes that business has a distinct and separate entity from its owners. 
Therefore business transactions are recorded in the books of accounts from the business point 
of view and not owners. For example, If owner bring Rs. 1,00,000 as capital in business. It is 
treated as liability of business to owner. Similarly if owner withdrew Rs. 5,000 from business 
for personal use, it is treated as reduction of owner?s capital and consequently reduction in 
liability of business towards owner. 
 
(2)Money measurement concept 
This concept states that transactions and events that can be expressed in money terms are 
recorded in the books of accounts. Non monetary transactions cannot be recorded in the books 
like appointment of manager, capabilities of human resources etc. 
Another aspect is the records of transactions are to be kept not in physical unit but in 
monetary unit. For example, an organisation has 2 buildings, 15 computers, 20 office tables 
are not recorded because they are physical unit and not in monetary unit. 
Limitation of this concept is the value of rupee does not remain same over a period of time. 
As changes in the value of money is not reflected in books does not reflect fair view of 
business affairs. 
 
(3) Going concern concept 
This concept assumes that business shall continue to carry out its operations indefinitely for a 
long period of time and would not be liquidated in the foreseeable future. It provides the very 
basis for showing the value of assets in the balance sheet. 
An asset may be defined as a bundle of services. For example, a machine purchased for Rs. 
2,00,000 and its estimated useful life say 10 years. The cost of machinery is spread on 
suitable basis over next 10 years for ascertaining the profit or loss for each year. The total cost 
of the machine is not treated as an expense in the year of purchase itself. 
 
(4) Accounting period concept 
Accounting period refers to span of time at the end of which financial statements are prepared 
to know the profits or loss and financial position of business. Information is required to by 
different users at regular intervals for decision making. For example, bankers require 
information periodically because they want to ensure safety and returns of their investments. 
Similarly management requires information at regular interval to assess the performance and 
funds requirement. Therefore they are prepared at regular interval, normally a period of one 
year. This interval of time is called accounting period. 
 
 
 
10 
 
(5) Cost concept 
According to this concept all assets are recorded in the books of accounts at the purchase 
price which includes the purchase price, cost of acquisition, transportation and installation. 
For example, if an asset purchased for Rs. 1,00,000 and spent Rs. 10,000 on its installation. 
Therefore asset will be recorded in the books of accounts at Rs. 1,10,000. 
This concept is historical in nature. For example, if machine purchased for Rs. 75,000, the 
purchase or acquisition price will remain same for all years to come, though its market value 
may change. The main limitation of this concept is that it does not show the true value of 
asset and may lead to hidden profits. 
 
(6) Dual aspect concept 
This concept provides the very basis for recording the transaction in the books of accounts. It 
states that every transaction entered in the books has two aspects. For example, Man as started 
business with cash Rs. 50,000. In this transaction asset (cash) increases and liability (capital 
of owner) also increases. This principle is also known as duality principle. This principle is 
commonly expressed in fundamental accounting equation given below. 
Assets = Liabilities + Capital 
This equation states that assets of business are always equal to the claims of owners and 
outsiders. 
 
(7) Revenue recognition concept ( Realisation concept) 
According to this principle revenue is considered to have been realised when a transaction has 
been entered and obligation to receive the amount has been established. In other words when 
we receive right to receive revenue than it is called revenue is realised. For example, sales 
made in March, 2010 and receives amount in April, 2010. Revenue of these sales should be 
recognised in February month, when the goods sold. For example commission for the March, 
2010 even if received in April 2010 will be taken into profit and loss A/c of March, 2010. 
Similarly if rent for the April, 2010 is received in advance in March, 2010 it will be taken the 
profit and loss A/c of the financial year of March, 2011. 
 
(8) Matching concept 
The matching concept states that expense incurred in an accounting period should be matched 
with revenues during that period. It follows from this that revenue and expenses incurred to 
earn these revenues must belong to the same accounting period. 
For example, salary for the month of March, 2010 paid in April, 2010 is recorded in the profit 
and loss A/c of financial year ending March, 2010 and not in the year when it realized. 
Similarly we records cost of goods sold and not the goods purchased or produced. So the cost 
of unsold goods should be deducted from the cost of goods produced or purchased. 
 
 
Page 4


8 
 
UNIT- 02 
THEORY BASE OF ACCOUNTING 
 
Unit at a glance: 
? Introduction  
? Meaning of accounting principles 
? Features of accounting principles 
? Necessity of accounting principles 
? Basic accounting concepts 
? Basis of accounting  
? Nature of accounting standards 
? Utility of accounting standards 
?    International Financial Reporting Standards (IFRS)  
?   Meaning and benefits of IFRS  
 
“A mode of conduct imposed on an accountant by custom, law and professional body.” – Kohler 
 
Introduction: 
To maintain uniformity in recording transactions and preparing financial statements, accountants 
should follow Generally Accepted Accounting Principles. 
 
Meaning of Accounting Principles: 
Accounting principles are the rules of action or conduct adopted by accountants universally while 
recording accounting transactions. 
GAAP refers to the rules or guidelines adopted for recording and reporting of business transactions, 
in order to bring uniformity in the preparation and presentation of financial statements. 
 
Features of accounting principles: 
(1) Accounting principles are manmade. 
(2) Accounting principles are flexible in nature 
(3) Accounting principles are generally accepted. 
 
Necessity of accounting principles: 
Accounting information is meaningful and useful for users if the accounting records and financial 
statements are prepared following generally accepted accounting information in standard forms 
which are understood. 
 
 
 
 
9 
 
Basic accounting concepts 
(1) Business entity concepts 
This concept assumes that business has a distinct and separate entity from its owners. 
Therefore business transactions are recorded in the books of accounts from the business point 
of view and not owners. For example, If owner bring Rs. 1,00,000 as capital in business. It is 
treated as liability of business to owner. Similarly if owner withdrew Rs. 5,000 from business 
for personal use, it is treated as reduction of owner?s capital and consequently reduction in 
liability of business towards owner. 
 
(2)Money measurement concept 
This concept states that transactions and events that can be expressed in money terms are 
recorded in the books of accounts. Non monetary transactions cannot be recorded in the books 
like appointment of manager, capabilities of human resources etc. 
Another aspect is the records of transactions are to be kept not in physical unit but in 
monetary unit. For example, an organisation has 2 buildings, 15 computers, 20 office tables 
are not recorded because they are physical unit and not in monetary unit. 
Limitation of this concept is the value of rupee does not remain same over a period of time. 
As changes in the value of money is not reflected in books does not reflect fair view of 
business affairs. 
 
(3) Going concern concept 
This concept assumes that business shall continue to carry out its operations indefinitely for a 
long period of time and would not be liquidated in the foreseeable future. It provides the very 
basis for showing the value of assets in the balance sheet. 
An asset may be defined as a bundle of services. For example, a machine purchased for Rs. 
2,00,000 and its estimated useful life say 10 years. The cost of machinery is spread on 
suitable basis over next 10 years for ascertaining the profit or loss for each year. The total cost 
of the machine is not treated as an expense in the year of purchase itself. 
 
(4) Accounting period concept 
Accounting period refers to span of time at the end of which financial statements are prepared 
to know the profits or loss and financial position of business. Information is required to by 
different users at regular intervals for decision making. For example, bankers require 
information periodically because they want to ensure safety and returns of their investments. 
Similarly management requires information at regular interval to assess the performance and 
funds requirement. Therefore they are prepared at regular interval, normally a period of one 
year. This interval of time is called accounting period. 
 
 
 
10 
 
(5) Cost concept 
According to this concept all assets are recorded in the books of accounts at the purchase 
price which includes the purchase price, cost of acquisition, transportation and installation. 
For example, if an asset purchased for Rs. 1,00,000 and spent Rs. 10,000 on its installation. 
Therefore asset will be recorded in the books of accounts at Rs. 1,10,000. 
This concept is historical in nature. For example, if machine purchased for Rs. 75,000, the 
purchase or acquisition price will remain same for all years to come, though its market value 
may change. The main limitation of this concept is that it does not show the true value of 
asset and may lead to hidden profits. 
 
(6) Dual aspect concept 
This concept provides the very basis for recording the transaction in the books of accounts. It 
states that every transaction entered in the books has two aspects. For example, Man as started 
business with cash Rs. 50,000. In this transaction asset (cash) increases and liability (capital 
of owner) also increases. This principle is also known as duality principle. This principle is 
commonly expressed in fundamental accounting equation given below. 
Assets = Liabilities + Capital 
This equation states that assets of business are always equal to the claims of owners and 
outsiders. 
 
(7) Revenue recognition concept ( Realisation concept) 
According to this principle revenue is considered to have been realised when a transaction has 
been entered and obligation to receive the amount has been established. In other words when 
we receive right to receive revenue than it is called revenue is realised. For example, sales 
made in March, 2010 and receives amount in April, 2010. Revenue of these sales should be 
recognised in February month, when the goods sold. For example commission for the March, 
2010 even if received in April 2010 will be taken into profit and loss A/c of March, 2010. 
Similarly if rent for the April, 2010 is received in advance in March, 2010 it will be taken the 
profit and loss A/c of the financial year of March, 2011. 
 
(8) Matching concept 
The matching concept states that expense incurred in an accounting period should be matched 
with revenues during that period. It follows from this that revenue and expenses incurred to 
earn these revenues must belong to the same accounting period. 
For example, salary for the month of March, 2010 paid in April, 2010 is recorded in the profit 
and loss A/c of financial year ending March, 2010 and not in the year when it realized. 
Similarly we records cost of goods sold and not the goods purchased or produced. So the cost 
of unsold goods should be deducted from the cost of goods produced or purchased. 
 
 
11 
 
(9) Full disclosure concept 
Apart from legal requirement good accounting practice require all material and significant 
information must be disclosed. Financial statements are the basic means of communicating 
financial information to its users for taking useful financial decisions. This concept states that 
all material and relevant fact and financial performance must be fully disclosed in financial 
statement of the business. Company?s act 1956 has provided a format for making profit and 
loss A/c and balance sheet, which needs to be compulsorily adhered to for preparation of 
financial statement. Disclosure of material information results in better understanding. For 
example, the reasons for low turnover should be disclosed. 
 
(10)Consistency concept 
This concept states that accounting practices followed by an enterprise should be uniform and 
consistent over a period of time. For example if an enterprise has adopted straight line method 
of charging depreciation then it has to be followed year after year. If we adopt written down 
value method from second year for charging depreciation than the financial information will 
not be comparable. Consistency eliminates the personal bias helps in achieving the results that 
are comparable. However consistency does not prohibits the change accounting policies. 
Necessary changes can be adopted and should be disclosed. 
 
(11) Conservatism concept (Prudence concept) 
This concept takes into consideration all prospective losses but not the prospective profit. It 
means profit should not be recorded until it realised but all losses, even those which have 
remote possibility are to be recorded in the books. For example, valuing closing stock at cost 
or market value whichever is lower, creating provision for doubtful debts etc. This concept 
ensures that the financial statements provide the real picture of the enterprise. 
 
(12) Materiality concept 
This concept states that accounting should focus on material fact. Whether the item is material 
or not shall depend upon nature and amount involved in it.  For example, amount spent of 
repair of building Rs. 4,00,000 is material for enterprise having the sales turnover of 
Rs.1,50,000 but not material for enterprise having turnover of Rs. 25,00,000. Similarly 
closure of one plant material but stock eraser and pencils are not shown at the asset side but 
treated as expenses of that period, whether consumed or not because the amount involved in it 
are low. 
 
(13) Objectivity concept 
This concept states that accounting should be free from personal bias. This can be possible 
when every transaction is supported by verifiable documents. For example, purchase of 
machinery for Rs. 30,000 should be supported by the voucher and should be recorded in the 
Page 5


8 
 
UNIT- 02 
THEORY BASE OF ACCOUNTING 
 
Unit at a glance: 
? Introduction  
? Meaning of accounting principles 
? Features of accounting principles 
? Necessity of accounting principles 
? Basic accounting concepts 
? Basis of accounting  
? Nature of accounting standards 
? Utility of accounting standards 
?    International Financial Reporting Standards (IFRS)  
?   Meaning and benefits of IFRS  
 
“A mode of conduct imposed on an accountant by custom, law and professional body.” – Kohler 
 
Introduction: 
To maintain uniformity in recording transactions and preparing financial statements, accountants 
should follow Generally Accepted Accounting Principles. 
 
Meaning of Accounting Principles: 
Accounting principles are the rules of action or conduct adopted by accountants universally while 
recording accounting transactions. 
GAAP refers to the rules or guidelines adopted for recording and reporting of business transactions, 
in order to bring uniformity in the preparation and presentation of financial statements. 
 
Features of accounting principles: 
(1) Accounting principles are manmade. 
(2) Accounting principles are flexible in nature 
(3) Accounting principles are generally accepted. 
 
Necessity of accounting principles: 
Accounting information is meaningful and useful for users if the accounting records and financial 
statements are prepared following generally accepted accounting information in standard forms 
which are understood. 
 
 
 
 
9 
 
Basic accounting concepts 
(1) Business entity concepts 
This concept assumes that business has a distinct and separate entity from its owners. 
Therefore business transactions are recorded in the books of accounts from the business point 
of view and not owners. For example, If owner bring Rs. 1,00,000 as capital in business. It is 
treated as liability of business to owner. Similarly if owner withdrew Rs. 5,000 from business 
for personal use, it is treated as reduction of owner?s capital and consequently reduction in 
liability of business towards owner. 
 
(2)Money measurement concept 
This concept states that transactions and events that can be expressed in money terms are 
recorded in the books of accounts. Non monetary transactions cannot be recorded in the books 
like appointment of manager, capabilities of human resources etc. 
Another aspect is the records of transactions are to be kept not in physical unit but in 
monetary unit. For example, an organisation has 2 buildings, 15 computers, 20 office tables 
are not recorded because they are physical unit and not in monetary unit. 
Limitation of this concept is the value of rupee does not remain same over a period of time. 
As changes in the value of money is not reflected in books does not reflect fair view of 
business affairs. 
 
(3) Going concern concept 
This concept assumes that business shall continue to carry out its operations indefinitely for a 
long period of time and would not be liquidated in the foreseeable future. It provides the very 
basis for showing the value of assets in the balance sheet. 
An asset may be defined as a bundle of services. For example, a machine purchased for Rs. 
2,00,000 and its estimated useful life say 10 years. The cost of machinery is spread on 
suitable basis over next 10 years for ascertaining the profit or loss for each year. The total cost 
of the machine is not treated as an expense in the year of purchase itself. 
 
(4) Accounting period concept 
Accounting period refers to span of time at the end of which financial statements are prepared 
to know the profits or loss and financial position of business. Information is required to by 
different users at regular intervals for decision making. For example, bankers require 
information periodically because they want to ensure safety and returns of their investments. 
Similarly management requires information at regular interval to assess the performance and 
funds requirement. Therefore they are prepared at regular interval, normally a period of one 
year. This interval of time is called accounting period. 
 
 
 
10 
 
(5) Cost concept 
According to this concept all assets are recorded in the books of accounts at the purchase 
price which includes the purchase price, cost of acquisition, transportation and installation. 
For example, if an asset purchased for Rs. 1,00,000 and spent Rs. 10,000 on its installation. 
Therefore asset will be recorded in the books of accounts at Rs. 1,10,000. 
This concept is historical in nature. For example, if machine purchased for Rs. 75,000, the 
purchase or acquisition price will remain same for all years to come, though its market value 
may change. The main limitation of this concept is that it does not show the true value of 
asset and may lead to hidden profits. 
 
(6) Dual aspect concept 
This concept provides the very basis for recording the transaction in the books of accounts. It 
states that every transaction entered in the books has two aspects. For example, Man as started 
business with cash Rs. 50,000. In this transaction asset (cash) increases and liability (capital 
of owner) also increases. This principle is also known as duality principle. This principle is 
commonly expressed in fundamental accounting equation given below. 
Assets = Liabilities + Capital 
This equation states that assets of business are always equal to the claims of owners and 
outsiders. 
 
(7) Revenue recognition concept ( Realisation concept) 
According to this principle revenue is considered to have been realised when a transaction has 
been entered and obligation to receive the amount has been established. In other words when 
we receive right to receive revenue than it is called revenue is realised. For example, sales 
made in March, 2010 and receives amount in April, 2010. Revenue of these sales should be 
recognised in February month, when the goods sold. For example commission for the March, 
2010 even if received in April 2010 will be taken into profit and loss A/c of March, 2010. 
Similarly if rent for the April, 2010 is received in advance in March, 2010 it will be taken the 
profit and loss A/c of the financial year of March, 2011. 
 
(8) Matching concept 
The matching concept states that expense incurred in an accounting period should be matched 
with revenues during that period. It follows from this that revenue and expenses incurred to 
earn these revenues must belong to the same accounting period. 
For example, salary for the month of March, 2010 paid in April, 2010 is recorded in the profit 
and loss A/c of financial year ending March, 2010 and not in the year when it realized. 
Similarly we records cost of goods sold and not the goods purchased or produced. So the cost 
of unsold goods should be deducted from the cost of goods produced or purchased. 
 
 
11 
 
(9) Full disclosure concept 
Apart from legal requirement good accounting practice require all material and significant 
information must be disclosed. Financial statements are the basic means of communicating 
financial information to its users for taking useful financial decisions. This concept states that 
all material and relevant fact and financial performance must be fully disclosed in financial 
statement of the business. Company?s act 1956 has provided a format for making profit and 
loss A/c and balance sheet, which needs to be compulsorily adhered to for preparation of 
financial statement. Disclosure of material information results in better understanding. For 
example, the reasons for low turnover should be disclosed. 
 
(10)Consistency concept 
This concept states that accounting practices followed by an enterprise should be uniform and 
consistent over a period of time. For example if an enterprise has adopted straight line method 
of charging depreciation then it has to be followed year after year. If we adopt written down 
value method from second year for charging depreciation than the financial information will 
not be comparable. Consistency eliminates the personal bias helps in achieving the results that 
are comparable. However consistency does not prohibits the change accounting policies. 
Necessary changes can be adopted and should be disclosed. 
 
(11) Conservatism concept (Prudence concept) 
This concept takes into consideration all prospective losses but not the prospective profit. It 
means profit should not be recorded until it realised but all losses, even those which have 
remote possibility are to be recorded in the books. For example, valuing closing stock at cost 
or market value whichever is lower, creating provision for doubtful debts etc. This concept 
ensures that the financial statements provide the real picture of the enterprise. 
 
(12) Materiality concept 
This concept states that accounting should focus on material fact. Whether the item is material 
or not shall depend upon nature and amount involved in it.  For example, amount spent of 
repair of building Rs. 4,00,000 is material for enterprise having the sales turnover of 
Rs.1,50,000 but not material for enterprise having turnover of Rs. 25,00,000. Similarly 
closure of one plant material but stock eraser and pencils are not shown at the asset side but 
treated as expenses of that period, whether consumed or not because the amount involved in it 
are low. 
 
(13) Objectivity concept 
This concept states that accounting should be free from personal bias. This can be possible 
when every transaction is supported by verifiable documents. For example, purchase of 
machinery for Rs. 30,000 should be supported by the voucher and should be recorded in the 
12 
 
books of accounts. Similarly other supporting documents are cash memo, invoices, receipts 
provides the basis for accounting and auditing. 
 
Basis of Accounting: 
(1) Cash basis  
Under this entries in the books of accounts are made when cash id received or paid and not 
when the receipt or payment becomes due. For example, if salary Rs. 7,000 of January 2010 
paid in February 2010 it would be recorded in the books of accounts only in February, 2010. 
 
(2) Accrual basis 
Under this however, revenues and costs are recognized in the period in which they occur 
rather when they are paid. It means it record the effect of transaction is taken into book in the 
when they are earned rather than in the period in which cash is actually received or paid by 
the enterprise. It is more appropriate basis for calculation of profits as expenses are matched 
against revenue earned in the relation thereto. For example, raw materials consumed are 
matched against the cost of goods sold for the accounting period. 
 
Accounting Standards (AS): 
             “A mode of conduct imposed on an accountant by custom, law and a professional body.” – 
By Kohler 
 
Nature of accounting standards: 
(1) Accounting standards are guidelines which provide the framework credible financial 
statement can be produced. 
(2) According to change in business environment accounting standards are being changed  or 
revised from time to time 
(3) To bring uniformity in accounting practices and to ensure consistency and comparability is 
the main objective of accounting standards. 
(4) Where the alternative accounting practice is available, an enterprise is free to adopt. So 
accounting standards are flexible. 
(5) Accounting standards are amendatory in nature. 
 
Utility of accounting standards: 
(1) They provide the norms on the basis of which financial statements should be prepared. 
(2) It creates the confidence among the users of accounting information because they are reliable. 
(3) It helps accountants to follow the uniform accounting practices and helps auditors in auditing. 
(4) It ensures the uniformity in preparation and presentation of financial statements by following 
the uniform practices. 
 
 
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