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

• Accounting information must be reliable (accurate, trustworthy) and comparable (enables pattern/trend analysis) for internal and external users.
• Comparability: Facilitates better decision-making through inter-firm and inter-period comparisons:
  
• Consistency: Using the same accounting methods over time ensures meaningful comparisons across firms and periods.

Accounting Process and Consistency

1. Identifying transactions (e.g., sales, expenses).
2. Measuring transactions (e.g., valuing inventory at the lower of cost or market price).
3. Recording in books of accounts (e.g., income, assets).
4. Summarising results (e.g., financial statements).
5. Reporting to stakeholders (e.g., investors).

Consistency ensures reliable financial statements for decision-making.

Theory Base of Accounting

• Accounting theory provides a standard framework for recording, measuring, and reporting financial information.
• Comprises principles, concepts, rules, and guidelines for consistency and uniformity.
• The Institute of Chartered Accountants of India (ICAI) sets Accounting Standards to ensure uniform practices.

Generally Accepted Accounting Principles (GAAP)

• GAAP are rules for the consistent recording and reporting of business activities.
• Include principles, concepts, conventions, postulates, and assumptions, often used interchangeably.
• Evolve based on experience, professional standards, and legal/economic changes.
• Example: Recording transactions at historical cost (e.g., using cash receipts) enhances objectivity.

Basic Accounting Concepts

• Business Entity: Business is separate from owner; e.g., owner’s ₹1,00,000 investment recorded as capital.
• Money Measurement: Only monetary transactions recorded; e.g., land valued at ₹2 crore, not physical size.
• Going Concern: Assumes business continues indefinitely; e.g., computer cost (₹50,000) depreciated over 5 years.
• Accounting Period: Financial statements are prepared for specific periods, typically annually.
• Cost: Assets recorded at purchase cost; e.g., plant recorded at ₹50,50,000 including transport/installation.
• Dual Aspect: Every transaction affects two accounts; e.g., ₹50,00,000 investment increases cash and capital.
• Revenue Recognition: Revenue is recorded when earned; e.g., construction contract revenue is recognised proportionately.
• Matching: Expenses matched with revenues; e.g., cost of goods sold matched with sales revenue.
• Full Disclosure: All material facts disclosed; e.g., SEBI mandates complete financial disclosures.
• Consistency: Uniform accounting methods over time; e.g., same depreciation method yearly.
• Conservatism: Record losses, not unrealised gains; e.g., stock valued at the lower of cost/market.
• Materiality: Focus on significant facts; e.g., theatre upgrades disclosed as material.
• Objectivity: Transactions backed by verifiable evidence; e.g., machine purchase recorded via receipt.

Systems of Accounting

• Based on Dual Aspect, every transaction affects two accounts (debit/credit).
• Complete, accurate, reduces fraud; e.g., trial balance checks errors.
• Used by large and small organisations.

• Incomplete, records only one transaction aspect; e.g., only personal accounts/cash book.
• Simple but unreliable, used by small businesses.

Basis of Accounting

• Records transactions when cash is received/paid; e.g., December 2014 rent recorded in January 2015.
• Incompatible with the matching principle, less accurate for profit calculation.

• Records revenues/costs when earned/incurred, not when cash is exchanged.
• Aligns with the matching principle; e.g., raw materials consumed matched with sales revenue.

Accounting Standards

• Guidelines set by ICAI for recognising, measuring, and disclosing transactions.
• Ensure uniformity, comparability, and reliability in financial statements.

• Standardise treatments, enhance credibility.
• Facilitate inter-firm/inter-period comparisons.
• Require beneficial disclosures for stakeholders.

• Reduce flexibility in choosing treatments.
• Must comply with existing laws.

Goods and Services Tax (GST)

• GST is a consumption-based tax on goods/services, applied at each value-added stage with input tax credit.

• CGST: Central government tax, replaces excise/sales tax.
• SGST: State government tax, replaces VAT/entertainment tax.
• IGST: Tax on interstate transactions, shared between central/state governments.

• Example: Punjab dealer sells ₹10,000 goods in Punjab (18% GST): ₹900 CGST, ₹900 SGST; Madhya Pradesh dealer sells ₹1,00,000 goods to Rajasthan: ₹18,000 IGST.

• Uniform law/procedure, destination-based, comprehensive levy.
• Minimal tax rates, no additional levies, and eliminates multiple taxation.

• Abolishes multiple taxes, widens tax base, reduces compliance costs.
• Eliminates cascading effect, boosts manufacturing, enhances exports.