Theory Base Of Accounting Class 11 Notes Accountancy Chapter 2 - CBSE

Chapter : 2

What Are Theory Base of Accounting ?

https://drive.google.com/file/d/1cWsCAfXF3eHsnjmblDsx1ixrbrZ9rQa2/view

Accounting Principles

Accounting Principles refers to the rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity in the preparation and the presentation of financial statements.
Accounting Principles are classified into two categories:

Accounting Concepts: They refer to the necessary assumptions and ideas, which are fundamental to the accounting practice.
Accounting Conventions: They are the customs or traditions guiding the preparation of accounts.

Nature Of Accounting Principles

Accounting Principles are not rigid in nature.
Accounting Principles are man-made.
Accounting Principles act as guide for accounting and are generally accepted

Fundamental Accounting Assumptions

The three basic Accounting Assumptions are:

Going Concern Assumption: According to this assumption, it is assumed that business shall continue for an indefinite period of time and there is neither any intention nor any necessity to close down the business or scale down its operations significantly.
Consistency Assumption: According to this assumption, accounting practices once selected and adopted, should be applied consistently year after year.
Accrual Assumption: According to this assumption, revenue and expenses are recorded in the period in which they become due, rather when they are received or paid.

Accounting Principles

Accounting Entity or Business Entity Principle: According to this principle, business is considered to be a separate and distinct entity from its owners.
Money Measurement Principle: According to this principle, only those transactions and events are recorded in the books of accounts which are capable of being expressed in terms of money.
Accounting Period Principle: According to this principle, the economic life of art enterprise is split into periodic intervals (known as accounting period) so that performance is measured at regular period.
Full Disclosure Principle: According to this principle, the financial statements should Completely disclose at the significant information relating to the economic affairs of the enterprise.
Materiality Principle: According to this principle, all relatively relevant items, the knowledge of which might influence the decision of the users of the financial statements, should be disclosed in the financial statements.
Prudence or Conservatism Principle: According to this principle, all prospective losses should be recorded
in the books of accounts, but all anticipated profits should be ignored.
Cost Concept or Historical Cost Principle: According to this principle, an asset is recorded in the books at
the price paid to acquire it and cost becomes the basis for its accounting in the subsequent accounting periods.
Matching Principle: According to this principle, expenses incurred in an accounting period should be matched with the revenues recognised in that period.
Dual Aspect or Duality Principle: According to this principle, every business transaction has two aspects,
a debit and a credit of equal amount.
Revenue Recognition Principle: According to this principle, revenue must be recognised when a transaction has been entered into and the obligation to receive its payment has been established.

Accounting Standards

Accounting Standards are written policy documents issued by expert accounting body or by government or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements.

International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS) are considered a "Principles-Based" set of standards. IFRS state how the particular type of transactions and other events should be reported in the Financial Statements.

Assumptions In IFRS

The underlying assumptions in IFRS are:

Going Concern Assumption: According to this assumption, it is assumed that business shall continue for an indefinite period of time.
Accrual Assumption: According to this assumption, revenue and expenses are recorded in the period in which they become due.
Measuring Unit Assumption: The measuring unit is the current purchasing power, i.e. assets are shown at their current or fair value and not at the historical cost.

IFRS Based Financial Statements

A complete set of Financial Statements comprises of :

Statement of Financial Position.
Statement of Profit or Loss and Statement of Comprehensive Income.
Statement of Changes in Equity
Statement of Cash Flows
Notes comprising a summary of significant accounting policies and other explanatory information.

Benefits Of IFRS

Benefits to the Economy: Implementation of IFRS will benefit the economy by increasing the growth of its International Business.
Benefits to the Investors: Financial Statements prepared using IFRS help investors better understand the
investment opportunities.
Benefits to the Industry: When financial statements comply with globally accepted accounting standards,
industry would be able to raise capital from foreign markets at a lower cost.

Difference Between IFRS And Indian GAAP Or Accounting Standards

IFRS are based on Principles, while Indian GAAP or Accounting Standards are based on Rules.
IFRS are based on Fair Value Concept, while Indian GAAP or Accounting Standards are based on Historical
Cost concept.