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.