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Chapter -2

Theory Base of Accounting

 Generally accepted accounting principles(GAAP)

Generally accepted accounting

principle are rules or guidelines

-
- -

developed for uniformity and

-
--

consistency while recording And

--

reporting business transactions

-

↓
- -

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 Generally Accepted Accounting Principles(GAAP)
Assumptions
-
-

Principles or Modifying Accounting

or Concepts conventions principles Standards
1. Accounting 1. Revenue 1. Materiality Issued by
entity Realisation Accounting
2. Consistency Standards
2. Going 2. Verifiability board
concern 3. Conservatism
3. Matching (prudence)
3. Money
measurement 4. Full 4. Timeliness
disclosure
4. Accounting 5. Substance over
period 5. Dual aspect legal form

6. Historical 6. Practice in
cost Industries
-
Accounting, assumptions or concepts

Bringemo
Accounting concepts include certain basic assumptions, principles or conditions
---

on which The accounting system is based. These assumptions are most natural

and are not forced ones.

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1. Accounting/Business entity concept
-

2. Going concern concept

3. Money measurement concept

4. Accounting period conceptE

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1. Accounting/Business entity concept
- -
- -

The business and the owner of the business are two separate entities
-

(separate existence). Capital is treated as liability as per this concept. In

-
case this concept is not followed, affairs of the business will be mixed up
with the private affairs of the proprietor and the true picture of the
business will not be available.

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2. Going concern concept

It is assumed that the business will last for a long time. On the basis
-

of this assumption business firm purchase fixed assets. proportionate

amount of asset utilised every year will be charged to profit and loss
account as depreciation. similarly prepaid expenses, outstanding
income etc.., are treated as assets on the assumption that the
business will continue.
3. Money measurement concept

As per this concept transactions involving money or money is 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, though they may be very useful for the business.
For example, if a business has got a team of qualified experiencing and dedicated
employees. It is definitely an asset to the business but since the value cannot be
monetarily expressed. They are not shown in the book of accounts.
4. Accounting period concept

The business is supposed to continue for longer period of time(going concern). The
measurement of income and studying of financial position after a very long period will not be
helpful in taking appropriate steps in right time. The period of interval for which accounts are
-

prepared and presented for ascertaining, the result and the financial position of the business
-

is called accounting period. Usually financial year begins with 1st of April and it ends with
-

31st March of the next year. But certain cases accounting period may be different from
-
financial year. According to the needs of the business a calendar year which begins on 1st
January and ends with 31st December may be considered as the accounting period.

April - I march- 31

2023 2024
PART-2
 -

Accounting principles or conventions

1. Revenue realisation Concept.

2. Verifiability or objectivity Concept.

3. Matching Concept.

4. Full disclosure Concept.

5. Dual aspect Concept.

6. Historical cost concept

 agamolows
1. Revenue realisation Concept.
income
This Concept deals with the point of time at which the revenue is earned. (eg:
-

Revenue from sale is realized when sale is made.)

Rent received, Interest received, Commission received etc. is recognized on

time basis.

Eg. Commission for month of December 2019 received in 2020 January will be
treated as revenue of FY 2019 itself.
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 2. Verifiability or objectivity Concept.

Also known as ‘ objective Evidence concept’

-

According to this principle, a business transaction should be supported by

-

documentary evidence. No entry shall be passed without its supporting

-

-
documents. Trai
Examples: Invoice, Voucher, Cash memo, Debit note, Credit note etc.

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 3. Matching Concept.

Matching principle suggests that we must match the revenue of a particular

- - - -

period with expenses of that particular period only to get correct profits.
- - - -
-

Examples: outstanding expenses, prepaid expenses, accrued income and

- --
prereceived income etc..,
-

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current
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 4. Full disclosure Concept.

This principle implies that all material information and relevant facts related to
-

financial performance of a business are to be disclosed completely in the

- -

financial statement.
-

Eg. Method of valuation of stock

cash
5. Dual aspect Concept.

↑
-

This principle is the backbone of accounting

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Every business transaction has a dual

---
effect, giving aspect and receiving
-
aspect.
-

For every debit, there is a corresponding credit

- -

this principle is commonly expressed in terms of fundamental accounting

-

equation
- -

#set
-
Asset = liability + capital

= Liability + Capital
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> 6. Historical cost concept

This means that all the assets purchased will who be recorded at their cost
- -

price or purchase price. Such cost price will include cost of acquisition,
- -

transportation, installation, etc. ↓

-

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Example: purchased a land for Rs.50,000 and its value increase to
-
Gr
Rs.80,000 by the next year. On this situation, the purchase price should
- - -

record in the books will continue to remain the same year after year.
-
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Fitting large
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25000
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Modifying principles
1. Materiality.

2. Consistency

3. Conservatism (prudence)

4. Timeliness

5. Substance over legal form

6. Practice in Industries
-
1. Materiality.

This principle states that -

importance should be attached only to material
facts,
-
ignoring insignificant details, otherwise accounting will be
unnecessarily overloaded with minute details.

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Eg; purchase of a pencil is treated as an expense, not an asset, but

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purchase of machine is treated as purchase of asset note and expense

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2. Consistency

The accounting practice should remain the same from one year to
-

another. For example, if depreciation is charged on fixer instalment

-

system, it should be done year after year. This is necessary for making
comparison because comparibility is one of the important characteristics
of accounting.

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Depreciation -

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& 3. Conservatism (prudence)

This principle states that anticipated profits are not to be considered but
-

only possible losses while recording business transactions. This is the

-
policy of ‘playing safe’.
-

Eg: the inventory is valued at ‘cost or market price, whichever is lower’. a

provision is made for possible, bad and doubtful debts against current is
profit.
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4. Timeliness
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Accounting information can be useful to the users only when it is made
available to them in time. In case late and obsolete information is
-

presented, Appropriate, timely and a rational decisions cannot be taken by

the management.

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 5. Substance over legal form

As per this principle, transactions and events are recorded in the books of
accounts and presented in financial statements in accordance with the
substance and not legality.

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 6. Practice in industries

The practice and method prevailing in a particular industry has to

be kept in mind while recording and presenting accounting
information. This facilitates, inter-firm comparison and increase
the reliability of accounting information to the end users.
Accounting/Business entity concept
-
-

Going concern concept

-

Money measurement concept

-

Accounting period concept

-

&
Revenue realisation Concept.
-
-

Verifiability or objectivity Concept.

--

Matching Concept.
-

Full disclosure Concept.

-

Dual aspect Concept.

-
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-

Accounting fo
Historical cost concept
-

24k + 1k = 25k
Materiality.

1000
-

Consistency
-

Conservatism (prudence)
-
- ↑

Timeliness
-

Substance over legal form

-

Practice in Industries
-
 Gross profit/loss
-
Which accounting concept specifies trading account?
-
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-

a) Cost concept
c) Going concern concept
b) Revenue realisation
-
d) Matching concept
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money measurement concept

Dual Aspect
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matching
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Going concern

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 Generally accepted accounting principles(GAAP)

Generally accepted accounting principle are rules or guidelines

-

developed for uniformity and consistency while recording And

-- -

reporting business transactions

-
 Asset
Arun constructed a- building for ₹ 5,00,000 for his new business concern. After
2 years the market value of the building is enhanced to ₹ 8,00,000.
- -

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a) If you are the accountant, which amount appear in the books? 5L
- -
- -

b) What is the accounting principle support your recording?

-

Historialcost concept
-
-
-
System of Accounting
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Double entry system
-

Single entry system

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=
Double entry system eswegan mero
It’s states that for every transaction, there are two aspects. One side is
- -

receiving aspect (debit aspect) and other is the giving aspect (credit aspect)
-
-
-

=
Single entry system

It is not a complete system of maintaining records of business transaction.

-- -

This system is incomplete since under it, there is no particular system which
has to be followed.

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Basis of accounting

Cash basis approach

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Entries in the books of accounts are made only when cash is received
or paid and not when The receipt or payment becomes due.

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Accrual basis
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Cost and revenue are recognised in the period in which they occur
rather than they are paid or received.
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 Accounting Standards

Accounting standards are certain set of rules and guidelines based on

- -

the principles and methods of accounting to be followed to have

-

uniformity in terminology, approach and presentation of results.

-
എടാ േമാേന…. നമുk്
തുട+ിയായാേലാ?
Goods and Services Tax ast
-

GST is an indirect tax which has replaced many taxes in India. It is

one indirect tax for the entire country. It is an indirect tax levied on
the supply of goods and services. The final consumer bears the
whole burden.

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Direct In clivect
Components of GST

Central GST Last

State GST Susi

Integrated GST last
Central GST

Tax collected under CGST will be the revenue of central government

at present The taxes collected by the centre are
Central excise duty, additional excise duty and central sales tax etc.
State GST

Tax collected as SGST will be the income of the state government.

Entertainment tax, luxury tax, Entry tax etc. will come under SGST
Integrated GST

Tax Collected through IGST is shared by the Central and state

government. IGST applicable on transfer of goods from one state to
another, IGST also cover import of goods and services.
 guese
Advantages of GST

1. GST led to the abolition of different types of taxes on goods and

services.

2. By widening the tax base GST has handsomely contributed to the

revenue of both central and state governments.

1. GST reduced administrative expenses.

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3. GST has done away with the cascading effect of taxation.
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5. GST will enhance manufacturing and distribution system, thereby
-
-

increasing demand and production of goods and services.

-
-
-
Write the Full form of GST

Write any 3 advantages of Goods and Service Tax.

What are the components of GST

1. Identify the concepts. Entity Dual Aspect
(a) A business is separate from its owner
-
(b) Assets = liability + capital
-

2. Expand the following:

(i) GAAP (ii) GST
- -

3. State which principles / concepts are applicable in the following cases.

- -

a) Creation of provision for doubtful debts. conservatism/poudenceconcept

b) Capital brought by the owner is treated as a liability. Business Entity
c) Method of calculation of depreciation is not changing year after year.
d) Accounting should focus on material facts.
consistenc
- - materiality

-
4. Which accounting concept specifies trading account?
- -

a) Cost concept b) Revenue realisation c) Going concern concept d)Matching concept

5. Identify the relevant principles and concepts associated with Following:

1. The quality of manpower is not recorded in the books of Accounts money measuremen
-
--
2. For every debit there is an equal credit
-

--
-

Dual Aspect -

3. Treatment of Outstanding salary.

-
-

matching concept
4. Business have got indefinite life.
-

5. Stock is valued at a cost price or market price whichever is Less.

-

Going concern
↓conservatism/
prudence