Page 1 : Chapter = 02, Theory Base of Accounting, , Meaning of Theory Base of accounting, , The thoery 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., , Need for theory base of accounting., , Theory base of accounting or accounting principles, rules and guidelines are required, (l.e.needed) to make the accounting information reliable as well as comparable, so that it, becomes useful to it's users., , Generally accepted accounting principles (GAAP), , Generally accepted accounting principles refers to the rules or guidelines adopted for recording, and reporting of business transactions. The purpose is to bring uniformity in the preparation, and the presentation of financial statements., , EXPAND GAAP = Generally accepted accounting principles, , Basic accounting concepts, , Meaning of accounting concepts, , Accounting concepts refers to the necessary assumptions and ideas which are fundamental to, accounting practice., , 1) Business entity concept:, , In accounting, we distinguish between the business and it's proprietors. Business is assumed to, have district entity and we have to record business transactions from business point of view, and never from the viewpoint of proprietors., , In other words, the business and it's owners are to be treated as two separate entities., Example: in proprietary concern, the business is different from its owner., 2) Money measurement concept:, , It means only those transactions which can be expressed in terms of money (I.e.monetary, transactions) such as sale of goods for cash, payment of salary etc, are to be recorded in the, books of accounts., , Transactions which cannot be expressed in monetary terms such as appointment of a manager,, , V7 | Edit with WPS Office

Page 2 : the retirement of an accountant etc. Are not recorded in the books of accounts., , Thus, according to this concept, transactions are recorded not in the physical units but in, monetary unit., , 3) Going Concern concept:, , It means in accounting, a business firm is regarded as a going concern, in other words,, according to this concept, a enterprise will continue to operate for a fairly lo g period of time., , This concept provides the very basis for showing the value of assets in the balance sheet with, proper classification as fixed assets and current assets., , 4) Accounting period concept:, , It means, for measuring the financial results of a business, financial statements are prepared, for a financial period or accounting period, which is normally a year., , Example: Calender year, i.e from 01-01-2016 to 31-12-2016 (or any calender year), Financial year, |. e from 01-04-2016 to 31-03-2017 (or any financial year), , In our country, the companies Act, 2013 and the income tax act require that the income, statements should be prepared annually., , 5) Cost concept:, , Cost concept means that an asset (I.e fixed assets) acquired by a concern is recorded in the, books of accounts at its cost or purchase price at the time of acquisition. The cost price, includes cost of acquisition, transportation, installation and making the asset ready to use., , 6) Dual aspect concept (Accounting equation concept) :, , Every business transaction always results in receiving of some benefit of some value and giving, if some other benefit of equal value., , Example: when a business concern sells Rs.1,000 worth goods for cash, it receives cash of Rs., 1000 and gives goods worth Rs. 1000., , Thus, every business transaction involves 2 aspects of equal value., , Dual aspect means every transaction has a dual or two aspects and she be recorded in two, places., , The duality principle is commonly expressed in terms of fundamental accounting equation,, which is as follows:, , Assets = liabilities+ capital, , V7 | Edit with WPS Office

Page 3 : From the above equation, if follows that,, , Liabilities = Assets - capital, and, , Capital = Assets - liabilities, , 7) Revenue Recognition concept or Realization concept:, , The concept of revenue recognition requires that the revenue from a business transaction, should be included in the accounting records onlybwhen it is realised. And revenue is to be, recognized or considered to be realised only when goods or services are transferred to a, customer and the customer becomes legally liable to pay for them., , 8) Matching concept:, , It means, you measure the profit or loss of the business for an accounting period, all the, expenses incurred should be matched (deducted from) with the revenues (income) earned, during that accounting period., , 9) Accrual concept:, , It means that revenue accrues in the year in which they are earned and not in the year in which, they are actually received; and expenses accrue in the year in which they are incurred., , 10) Objectivity concept:, , It means, all accounting entries should be based on objective evidence, |. e supported by, verifiable documents such as vouchers, invoices, receipts etc., , The evidence must be objective, |. e free from the bias of accountants or others and must be, subject to verification by auditors., , Important Accounting Conventions: (in NCERT text book, these are treated as ' Accounting, , concepts’)., 1) Convention of materiality (or materiality concept) :, , It means in accounting, a detailed record is made only of those business transactions which are, material (I.e significant) to the users of accounting information. No detailed record is made of, transactions which are not material (I.e.insignificant)., , 2) Convention of conservatism (or conservatism concept) :, , It means in accounting records and in the financial statements of a business, all prospective, losses should be considered and provided for but prospective profits she be ignored., , In short, according to this convention, "provide for all possible losses, but anticipate no profits"., , V7 | Edit with WPS Office

Page 4 : 3) Convention of consistency (or consistency concept) :, , It means the accounting policies and practices should remain consistent (l.e uniform or, unchanged) from one accounting year to another., , 4) Convention of full disclosure (or Full disclosure concept) :, , It means all material facts relating to accounts must be disclosed in the financial statements, with sufficient details. The idea behind this convention is to enable the users of financial, statements to make proper decisions., , Systems of accounting:, , The system of recording the financial transactions in the books of accounts is generally known, as book- keeping. It can be divided into two types, namely, single entry system of book -keeping, and Double entry system of book-keeping., , 1) Single Entry system of Book-keeping:, , Single entry system of book-keeping refers to any system of book -keeping, which is not a, complete double entry system. It is a system of book-keeping under which a complete record, (l.e a record of both the aspects) of each and every transactions is not kept., , This is an inaccurate, incomplete and unscientific method, as it does not record two fold effect, of transactions. Instead of maintaining all accounts, only cash and personal accounts of, debtors and creditors are usually maintained., , 2) Double entry system of Book - keeping:, , Double entry system of book -keeping is a method, where both aspects of a transaction are, considered and recorded., , As per this system, a financial transaction affects two aspects, I. e. Of receiving the values and, giving the values, or debit aspect as well as credit aspect of it., , Double entry system is a complete system as both the aspects of transactions are recorded in, the books of accounts., , Basis Accounting:, , There are two important basis for recognising revenue in accounting from the view point of the, timing of recognition of income and expenditure. These approaches are cash basis and Accrual, basis., , 1) Cash basis: entries are made when cash is received or paid, , 2) Accrual basis: Revenues or costs are recognised when they occur (Accrue)., , V7 | Edit with WPS Office

Page 5 : Accounting standards:, , The uniform, definite and universally accepted accounting rules developed by international, accounting standards committee (IASC) are known as accounting standards., , The following Accounting standards (AS) are issued by the Institute of chartered accountants of, India (ICAI) on February 8, 2002:, , As -1 Disclosure of accounting policies., , As- 2 Valuation Of Inventories., , As -3 Cash Flow Statements., , As-4 Contingencies and events Occurring after the Balance sheet Date., As-5 Net Profit or loss for the period, Prior period items and Changes in accounting Policies., As-6 Depreciation accounting., , As-7 Construction Contracts., , As-8 Research and development, , As -9 Revenue Recognition., , As- 10 Accounting For Fixed Assets., , As-11 The Effect of Changes in Foreign Exchange Rates., , As-12 Accounting For Government Grants., , As-13 Accounting For Investments., , As-14 Accounting For Amalgamation., , As-15 Employee Benefits., , As-16 Borrowing Cost., , As-17 Segment Reporting., , As-18 Related Party Disclosures., , As-19 Accounting For Leases., , As-20 Earnings per Share., , As - 21 Consolidated Financial Statement., , V7 | Edit with WPS Office