📝 Chapter Notes & Revision

Theory Base of Accounting

🏫 MP BoardClass 11Accountancy

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Quick Revision Notes

Class 11 Accountancy - Chapter: Theory Base of Accounting

Madhya Pradesh Board (MPBSE)

1. Introduction to Theory Base of Accounting

To make accounting information meaningful, understandable, and comparable across different businesses and periods, it must follow certain uniform rules, principles, and standards. The Theory Base of Accounting refers to the framework of assumptions, principles, conventions, and standards that form the basis of recording business transactions and preparing financial statements.

2. Generally Accepted Accounting Principles (GAAP)

GAAP refers to the rules, concepts, and conventions that are adopted globally while recording and reporting accounting transactions.

Characteristics of GAAP:

  • Uniformity (एकरूपता)
  • Objectivity (वस्तुनिष्ठता)
  • Relevance (प्रासंगिकता)

3. Fundamental Accounting Assumptions (as per AS-1)

According to Accounting Standard-1 (AS-1), there are three fundamental accounting assumptions:

  1. Going Concern Assumption (चालू व्यवसाय की अवधारणा):
    • It is assumed that the business will continue to exist for a long period in the near future. There is no intention to close down or scale down the business significantly.
  2. Consistency Assumption (एकरूपता की अवधारणा):
    • Accounting policies and methods once adopted should be followed consistently from year to year to enable comparison.
  3. Accrual Assumption (उपार्जन की अवधारणा):
    • Revenues and costs are recognized when they occur (earned or incurred), not when cash is received or paid.

4. Accounting Principles / Concepts (लेखांकन सिद्धांत)

  • Business Entity Concept (व्यापक पृथकता का सिद्धांत):
    • The business and its owner are treated as two separate and distinct entities. Personal transactions of the owner are not mixed with business transactions.
  • Money Measurement Concept (मुद्रा मापन का सिद्धांत):
    • Only those transactions and events are recorded in accounting which can be expressed in terms of money. (e.g., employee skill or strike is not recorded directly).
  • Accounting Period Concept (लेखांकन अवधि का सिद्धांत):
    • The entire life of the business is divided into small time intervals (usually 12 months, known as a Financial Year, from 1st April to 31st March in India) to measure financial performance.
  • Historical Cost Concept (ऐतिहासिक लागत का सिद्धांत):
    • Assets are recorded in the books of accounts at the price paid to acquire them (purchase price), not at their current market value.
  • Dual Aspect Concept (द्वि-पहलू सिद्धांत):
    • Every business transaction has a two-fold effect: Debit and Credit of equal amount.
    • Formula/Equation: Assets = Liabilities + Capital (संपत्तियाँ = दायित्व + पूँजी)
  • Revenue Recognition / Realization Concept (आगम प्राप्ति सिद्धांत):
    • Revenue is considered to be earned on the date when the property in goods passes to the buyer or services are rendered, and the right to receive money arises.
  • Matching Concept (मिलान सिद्धांत):
    • Expenses incurred in an accounting period must be matched with the revenues recognized during that same period to calculate correct net profit or loss.
  • Full Disclosure Concept (पूर्ण प्रकटीकरण का सिद्धांत):
    • All significant and material financial information relating to the business must be fully and clearly disclosed in the financial statements.
  • Materiality Concept (सारहीनता का सिद्धांत):
    • Items of small significance or immaterial details need not be strictly handled as per accounting principles if it saves time and effort. It focuses only on relevant details important to users.
  • Conservatism / Prudence Concept (रूढ़िवादिता का सिद्धांत):
    • "Anticipate no profits, but provide for all possible losses." (भविष्य के सभी संभावित लाभों को छोड़ो, लेकिन सभी संभावित हानियों के लिए प्रावधान करो।)

5. Accounting Standards (AS) & IFRS

  • Accounting Standards (लेखांकन मानक): Written policy documents issued by expert accounting bodies (like ICAI in India) covering aspects of recognition, measurement, treatment, presentation, and disclosure of accounting transactions.
    • Total AS in India: Currently, there are 32 Accounting Standards issued by ICAI.
  • IFRS (International Financial Reporting Standards): Globally accepted high-quality accounting standards issued by the International Accounting Standards Board (IASB) to ensure transparency and comparability worldwide.

6. Goods and Services Tax (GST - वस्तु एवं सेवा कर)

GST is a comprehensive indirect tax levied on the supply of goods and services across India on a destination-based consumption principle.

Key Types of GST:

  1. CGST (Central GST): Collected by the Central Government on intra-state sales.
  2. SGST / UTGST (State / Union Territory GST): Collected by the State Government on intra-state sales.
  3. IGST (Integrated GST): Collected by the Central Government on inter-state sales (sales between two different states).

Important GST Formulas:

  • Intra-State Sale/Purchase:
    • Total GST = CGST + SGST
    • CGST Rate = SGST Rate = Total GST Rate / 2
  • Inter-State Sale/Purchase:
    • Total IGST = (Goods Value × IGST Rate) / 100

7. Quick Check Key Terms (परिभाषाएँ)

  • Voucher (प्रमाणक): A written document in support of a business transaction (e.g., cash receipt, cash memo, invoice).
  • Transaction (व्यवहार): An economic activity of a business that changes its financial position and can be measured in terms of money.