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Key Notes: Theory Base of Accounting | Accountancy Class 11 - Commerce PDF Download

Objective of Accounting:

  • The main objective of accounting is to provide appropriate, useful, and reliable financial information to various users for informed decision-making.
  • This objective is achieved through the maintenance of accounting records based on uniform rules and principles.

Generally Accepted Accounting Principles (GAAP):

  • GAAP includes accounting principles, concepts, and conventions that guide the recording and reporting of business transactions.
  • GAAP ensures uniformity and consistency in financial statement preparation.

Fundamental Accounting Assumptions:

Going Concern Assumption:

  • Assumes that a business will continue to operate indefinitely without significant downsizing or liquidation.
  • Impacts the classification of assets, depreciation, and distinguishing between capital and revenue expenditure.

Consistency Assumption:

  • Requires consistent application of accounting practices year after year.
  • Changes should be disclosed, especially if required by law or accounting standards.

Accrual Assumption:

  • Recognizes revenue and expenses when earned or incurred, regardless of cash transactions.
  • Allows for more accurate matching of revenue and expenses to specific accounting periods.

Accounting Principles:

Accounting Entity:

  • Treats the business as a separate entity from its owner.
  • Owner's investment is considered a liability, and private expenses are treated as drawings.

Money Measurement Principle:

  • Records only transactions measurable in money.
  • Ignores non-monetary events, like employee deaths or strikes.

Accounting Period Principle:

  • Divides the indefinite life of an enterprise into accounting periods.
  • Helps allocate expenses between capital and revenue and manage taxes.

Full Disclosure Principle:

  • Requires disclosure of all significant and material information in financial statements.
  • Ensures transparency and better decision-making.

Materiality Principle:

  • Requires disclosure of material facts but not insignificant or irrelevant items.
  • Materiality is subjective and varies between enterprises.

Prudence Principle:

  • Avoids recognizing anticipated profits but immediately records anticipated losses.
  • Prefers methods with the least favorable immediate effect on profit.

Cost Principle:

  • Records assets at their original cost, including acquisition and preparation expenses.
  • Assets are systematically reduced by depreciation over time.

Matching Principle:

  • Matches expenses with revenue recognized during the same period.
  • Deals with prepaid and accrued expenses, closing stock, and depreciation.

Dual Aspect Principle:

  • Every transaction has equal debit and credit aspects.
  • Forms the basis of the double-entry accounting system.

Bases of Accounting:

Cash Basis of Accounting:

  • Records transactions only when cash is received or paid.
  • Does not conform to the matching principle.

Accrual Basis of Accounting:

  • Records revenue and expenses when recognized, regardless of cash transactions.
  • Consistent with the matching principle.

Accounting Standards:

  • Accounting standards are written statements issued by accounting professionals to provide uniform rules for financial statement preparation.
  • Objectives include uniformity, reliability, fraud prevention, and assistance for auditors.

IFRS (International Financial Reporting Standards):

  • IFRS is a set of global accounting standards issued by the IASB to improve international financial reporting.
  • IFRS-based financial statements include statements of financial position, comprehensive income, changes in equity, cash flow, and notes with significant accounting policies.

Main Differences between IFRS and IAS:

Principles vs. Rules:

  • IFRS is principle-based, while IAS (Indian Accounting Standards) is rule-based.

Fair Value vs. Historical Cost:

  • IFRS is based on fair value, while IAS is based on historical cost.
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