Class 11 Accountancy Chapter 2 Theory base of accounting
NCERT Notes for Class 11 Accountancy Chapter 2 Theory base of accounting, (Accountancy) exam are Students are taught thru NCERT books in some of state board and CBSE Schools. As the chapter involves an end, there is an exercise provided to assist students prepare for evaluation. Students need to clear up those exercises very well because the questions with inside the very last asked from those.
Sometimes, students get stuck with inside the exercises and are not able to clear up all of the questions. To assist students, solve all of the questions and maintain their studies without a doubt, we have provided step by step NCERT Notes for the students for all classes. These answers will similarly help students in scoring better marks with the assist of properly illustrated Notes as a way to similarly assist the students and answering the questions right.
NCERT Notes for Class 11 Accountancy Chapter 2 Theory base of accounting
Class 11 Accountancy Chapter 2 Theory base of accounting
Theory base of accounting
- Accounting is considered as the language of business.
- To make the language convey the same meaning to all people there are certain guidelines and practices that are followed while recording transactions and in preparing financial statements.
- Such principles and guidelines are called GAAP.
- The Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines adopted for recording and reporting of business transactions.
- These principles are also referred as concepts or conventions.
- The term concepts refers to the necessary assumptions and ideas which are fundamental to accounting practice and the term convention denotes customs or traditions as a guide to the preparation of accounting statements.
- From the practicability view point, it is observed that the various terms such as principles, conventions, modifying principles, assumptions, etc. have been used interchangeably and are referred to as Basic Accounting Concepts.
- So GAAP include accounting concepts, accounting conventions and accounting standards.
Basic accounting concepts
1- Business entity concept
According to this concept the entity of business is different from its owners. It means that for the purpose of accounting business and its owners are to be treated as two separate entities. This principle states that the affairs of business will not be mixed up with the private affairs of the owner. According to this principle capital is treated as a liability of business towards owners.
2- Money measurement concept
As per this concept transactions involving money or money’s worth will be recorded in the books of the business. Events or transactions which cannot be expressed in terms of money will not be recorded in the books.
3- Going concern concept
According to this concept it is assumed that the business will last for a long time. There is no intention to close the business in the immediate future. It is based on this assumption that the suppliers deliver goods on credit, fixed assets are recorded at original cost and are depreciated in a systematic manner, prepaid expense, outstanding income etc. are treated.
4- Accounting period concept
According to going concern concept the business is supposed to continue for longer period of time. The true result of the business can be ascertained through the preparation of financial statements only after the closure of the business unit. But information made available to the users after closure of the business will not serve its purpose. So the accounts are prepared periodically. The period of interval for which accounts are prepared and presented for ascertaining the result and financial position of business is called accounting period.
5- Cost Concept
This principle requires that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use.
6- Dual aspect or duality Concept
This is the basic principle of accounting. As per this principle every transaction has two aspects, i.e. receiving aspects and giving aspect. Accounting equation is developed on the basis of this principle. The double entry system of book keeping is also based on this principle.
7- Revenue recognition/realisation Concept
The concept of revenue recognition requires that the revenue for a business transaction should be included in the accounting records only when it is realised. Revenue is assumed to be realised when a legal right to receive it arises or it is realised in money. On the basis of this principle credit sales are treated as revenue and accrued income, income received in advance, outstanding expenses, prepaid expenses are recorded in the particular accounting year.
8- Matching Concept
These principles states that expenses incurred in an accounting period should be matched with revenues during that period in order to ascertain the profit or loss. It is because of this principle the adjustment are made for outstanding expense, accrued income, prepaid expenses etc.
9- Full disclosure Concept
This principle demands that accounting statement should disclose all material facts for the benefit of the users. Full discloser does not mean that irrelevant information should be disclosed but all important information should be shown fully.
10- Consistency Concept
Accounting policies and practices adopted must be same for a reasonable period of time. The frequent changes in such policies will adversely affect the reliability and comparability of financial information. Thus comparison is possible only if there is consistency in accounting.
11- Conservatism/prudence Concept
This principle states that while recording accounting information anticipated profits are not to be considered but only possible losses are considered. According to this principle a reasonable provisions are made for anticipated losses. It is because of this principle stock are valued at market price or cost price whichever is less, creating provision for doubtful debts, discount on debtors, writing of intangible asset like goodwill patent etc.
12- Materiality Concept
This principle states that important should be given only to material facts, ignoring insignificant details. Otherwise accounting will be overloaded.
13- Objectivity Concept
This principle states that the accounting data provided in the books of accounts should be verifiable the figures recorded in the financial statements should have supportive evidence such as bills, vouchers etc. These are called source document. It ensures the credibility and dependability of the recorded data.
Accounting standards are written statements of uniform accounting rules and guidelines or practices for preparing the uniform and consistent financial statement in order to eliminate non comparability of financial statements for enhancing reliability of financial statements.
The Institute of Chartered Accountants of India (ICAI) constituted an Accounting Standard Board (ASB) in April 1977for developing accounting standards in India.
International Financial Reporting Standards (IFRS) are globally accepted accounting standards developed by International Accounting Standard Board (IASB). The objective of IFRS is to facilitate international comparison for true and fair valuation of business enterprises.
Need for Accounting Standards
Accounting information can serve the interest of different users only if it possesses uniformity and full disclosure of relevant information. There can be alternate accounting treatment and valuation norms which may be used by any business entity. Accounting standard facilitate the scope of those alternatives which fulfil the basic qualitative characteristics of true and fair financial statement.
Benefits of Accounting Standards
- Accounting standard helps in eliminating variations in accounting treatment to prepare financial statements.
- Accounting standard may call for disclosures of certain information which may not be required by law,
- Accounting standard facilitate comparability between financial statements of inter and intra companies.
Limitations of Accounting Standards
- Accounting standard makes choice between different alternate accounting treatments difficult to apply.
- It is rigidly followed and fails to extend flexibility in applying accounting standards.
- Accounting standard cannot override the statute. The standards are required to be farmed within the ambit of prevailing status.
Applicability of Accounting Standards
Except the purely charitable organisation which does not have any commercial, industrial and business activity, accounting standard is applicable to:
- Sole proprietorship unit
- Partnership firm
- Hindu undivided family
- Association of persons
- Cooperative societies
International Financial Reporting System
There have been vast changes in the global economic scenario with the emergence of globalisation, liberalisation and privatization. In order to make economy more dynamic, competitive and to boost confidence amongst international analysts and investors, it is important that the financial statements put forward by the business organisations across the countries are comparable on similar parameters, investor friendly, fair, transparent and decisions worthy. In view of this, a trend towards global convergence of accounting standards is seeking momentum for international financial reporting.
Systems of accounting
The systems of recording transactions in the books of accounts are generally classified in to two double entry system and single entry system.
1-Double entry system of accounting
The double entry system of accounting or double entry book keeping is that system of accounting which records both the aspect of a transaction i.e. receiving aspect and giving aspect. This system is a complete system accurate and more reliable. This system can be implemented by big as well as small business organisation mainly profit making organisations.
2-Single entry system of accounting
An accounting system not based on double entry is known as single entry system. It is not a complete system of maintaining records of financial transaction. Under this system only personal and cash aspect of each transaction are recorded. This system is incomplete unsystematic and not reliable.
Basis of accounting
From the point of view the timing of recognition of revenue and costs, there can be two approaches to accounting cash basis and accrual basis.
1-Cash basis of accounting
Under this system only actual cash receipts and payments are recorded no credit transactions. This system is followed by government organisations and non-trading concerns. This system is incompatible with the matching principle, which states that the revenue of a period is matched with the cost of the same period.
2-Accrual basis of accounting
Under the accrual basis, revenues and costs are recognised in the period in which they occur rather when they are paid. This is a more appropriate basis for the calculation of profits as expenses are matched against revenue earned in relation thereto.
Goods and Service Tax
GST is a destination based tax on consumption of goods and services. It is proposed to be levied at all stages from manufacture to final consumption with credit of taxes paid at previous stages available as set off. That means only value addition will be taxed and burden of tax is to be borne by the final consumer. The concept of destination based tax on consumption implies that the tax would accrue to the taxing authority which has jurisdiction over the place of consumption.
Components of GST
- There are three main components of GST which are CGST, SGST and IGST.
- CGST means Central Goods and Services Tax.
- Taxes collected under CGST will constitute the revenues of the Central Government.
- The present central taxes like central excise duty, additional excise duty, special excise duty, central sales tax etc., will be subsumed under CGST.
- SGST means State Goods and Services Tax. A collection of SGST is the revenue of the State Government.
- With GST all state taxes like VAT, entertainment tax, luxury tax, entry tax etc, will be merged with GST.
- IGST means Integrated Goods and Services Tax.
- Revenue collected under IGST is divided between Central and State Government as per the rates specified by the Government.
- IGST is charged on transfer of goods and services from one state to another.
- Import of goods and services are also covered under IGST
Characteristics of Goods and Services Tax
- GST is a common law and procedure throughout the country under single administration (One Nation One Tax).
- GST is a destination based tax and levied at a single point at the time of consumption of goods and services by the end consumer.
- GST is charged on both goods and services with the benefit of input tax credit.
- There is no scope for levy of ces, resale tax, additional tax, turnover tax etc. 5. There is no multiple levy of tax on goods and services, such as sales tax, entry tax, octroi, entertainment tax or luxury tax etc.
- Introduction of GST has resulted in the abolition of multiple types of taxes in goods and services.
- GST widens the tax base and increased revenue to Centre and State Governments.
- GST has removed the cascading effect on taxation (tax on tax). 4. It reduces the cost of production.
- It will promote the economic efficiency of the nation.
- GST would help to extend competitive edge in international market for goods and services produced in the country leading to increased exports.