[Class 11 Accountancy Notes, AHSEC, CBSE, Chapter Wise Notes, Theory Base of Accounting]
Class 11 Accountancy Notes
AHSEC Class 11 Notes
Unit – 2: Theory Base
of Accounting
Q.1.
What is Generally Accepted Accounting Principles? Mention its features. 2010, 2016
Ans:
Generally Accepted Accounting Principles (GAAP): Generally
Accepted Accounting Principles are the rules and concepts which have been
accepted by accounting community for sound accounting practice. Their
usefulness depends on ‘general acceptability’ rather than ‘individual
acceptability’ of accounting concepts. They (GAAP) have been
formalised on the basis of usage, reason and experience.
Simply, Generally Accepted Accounting
Principles (GAAP) comprises a set of rules, concept and Conventions used in
preparing financial accounting reports.
Essential
features of Accounting Principles
(i) Man made:
Accounting principles are manmade. They are not tested in a laboratory.
(ii) Objectivity:
It means accounting principles must be based on facts and free from personal
bias or judgment of the individuals who prepares the statements.
(iii) Usefulness/relevance:
Accounting principles must be relevant and useful to the person who is using
financial statements.
(iv) Feasibility:
The accounting principles should be practicable or feasible.
(v) Axiom: It
denotes a statement of truth which cannot be questioned by anyone.
Q.2. What is accounting concepts and
conventions? Mention the various types of concepts and conventions adopted by
business concern. Very
Very Important
Ans: Accounting concepts: The term
‘concept’ is used to denote accounting postulates, i.e., basic assumptions or
conditions upon which the accounting structure is based. The following are the
common accounting concepts adopted by many business concerns.
i.
Business Entity Concept 2016
ii.
Money Measurement Concept 2015, 2018, 2019
iii.
Going Concern Concept 2015, 2018
iv.
Dual Aspect Concept 2017
v.
Periodicity Concept
vi.
Historical Cost Concept
vii.
Matching Concept
viii.
Realisation Concept
ix.
Accrual Concept
i)
Business Entity Concept: Business entity concept implies that the
business unit is separate and distinct from the persons who provide the
required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that
the business itself owns the assets and in turn owes to various claimants.
ii) Money
Measurement Concept: According to this concept, only those events
and transactions are recorded in accounts which can be expressed in terms of
money. Facts, events and transactions which cannot be expressed in monetary
terms are not recorded in accounting. Hence, the accounting does not give a
complete picture of all the transactions of a business unit. 2006
iii) Going
Concern Concept: Under this concept, the transactions are
recorded assuming that the business will exist for a longer period of time.
Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of
valuing the assets at historical cost or replacement cost.
iv) Dual
Aspect Concept: According to this basic concept of accounting, every transaction
has a two-fold aspect, Viz., 1.giving certain benefits and 2. Receiving certain
benefits. The basic principle of double entry system is that every debit has a
corresponding and equal amount of credit. This is the underlying assumption of
this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets – Liabilities, will further clarify this concept, i.e., at any
point of time the total assets of the business unit are equal to its total
liabilities.
V)
Periodicity Concept: Under this concept, the life of the business
is segmented into different periods and accordingly the result of each period
is ascertained. Though the business is assumed to be continuing in future, the
measurement of income and studying the financial position of the business for a
shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called “accounting period” and the
same is normally a year.
vi)
Historical Cost Concept: According to this concept, the transactions
are recorded in the books of account with the respective amounts involved. For
example, if an asset is purchases, it is entered in the accounting record at
the price paid to acquire the same and that cost is considered to be the base
for all future accounting.
vii)
Matching Concept: The essence of the matching concept lies in
the view that all costs which are associated to a particular period should be
compared with the revenues associated to the same period to obtain the net
income of the business.
viii)
Realisation Concept: This concept assumes or recognizes revenue
when a sale is made. Sale is considered to be complete when the ownership and
property are transferred from the seller to the buyer and the consideration is
paid in full.
ix)
Accrual Concept: According to this concept the revenue is
recognized on its realization and not on its actual receipt. Similarly the
costs are recognized when they are incurred and not when payment is made. This
assumption makes it necessary to give certain adjustments in the preparation of
income statement regarding revenues and costs.
Accounting
Conventions: Accounting
conventions are common practices, which are followed in recording and
presenting accounting information of a business. They are followed like customs
in a society. The following conventions are to be followed to have a clear and
meaningful information and data in accounting:
i)
Consistency: The convention of consistency implies that the same accounting
procedures should be used for similar items over periods. It is essential for
clear and correct understanding and interpretation of the financial statements.
It is also important for inter-period comparison. 2006
ii) Full
Disclosure: According to this principle, all accounting statements should be
honestly prepared and all information of material interest to proprietors,
creditors, investors, etc. should be disclosed in the accounting statements.
Moreover, books of accounts should be prepared in such a way that they become
reliable, informative and transparent.
iii)
Conservatism or Prudence: This convention follows the policy of caution
or playing safe. It takes into account” all possible losses but not the
possible profits or gains”. The implication of this principle is to give a
pessimistic view of the financial position of the business. 2006, 2010, 2016
iv)
Materiality: Materiality deals with the relative importance of accounting
information. In order to make financial statements more meaningful and to
economize costs, accountants should incorporate in the financial statements
only that information which is material and useful to users. They should ignore
insignificant details.
Q.3. What is Accounting Standard?
Mention its objectives. 2007, 2009,
2015, 2017, 2018, 2019
Ans: ACCOUNTING STANDARDS: Accounting
Standards are the policy documents or written statements issued, from time to
time, by an apex expert accounting body in relation to various aspects of
measurement, treatment and disclosure of accounting transactions for ensuring
uniformity in accounting practices and reporting. These standards are prepared
by Accounting Standard Board (ASB).
Objectives
or Purposes of Accounting Standards:
a.
To provide information to the users as to the
basis on which the accounts have been prepared and the financial statements
have been presented.
b.
To harmonize the diverse accounting policies
& practices which are in use the preparation & presentation of
financial statements.
c.
To make the financial statements more
meaningful and comparable and to make people place more reliance on financial
statements prepared in conformity with the accounting standards.
d.
To guide the judgment of professional
accountants in dealing with those items, which are to be followed consistently
from year to year.
e.
To provide
a set of
standard accounting policies, valuation norms
and disclosure requirements.
Q.4. Write a brief note on benefits
and Limitations of Accounting Standard. 2007
Ans: By setting the accounting
standards, the accountant has following benefits:
a. Standards reduce
to a reasonable extent or eliminate
altogether confusing variations
in the accounting
treatments used to prepare
financial statements.
b. There are
certain areas where important information is not statutorily required to be
disclosed. standards may call for disclosure beyond that required by law.
c. The application
of accounting standards would ,to
a limited extent, facilitate comparison
of financial statements
of companies situated in
different parts of the
world and also of different
companies situated in the same
country.
However, there are some
limitations of setting of accounting
standards:
(i)Alternative solution to
certain accounting problems may each have
arguments to recommend them. Therefore, the choice between different alternative accounting
treatments may become difficult.
(ii)there may be
a trend towards
rigidity and away
from flexibility in applying
the accounting standards.
(iii)Accounting standards cannot
override the statute. The standards are
required to be framed
within the ambit
of prevailing statutes.
Q. 5. Give the list of accounting
standards followed in our country.
Ans: LIST OF ACCOUNTING STANDARDS
|
AS
1 |
Disclosure
of Accounting Policies |
|
AS
2 |
Valuation
of Inventories |
|
AS
3 |
Cash
Flow Statement |
|
AS
4 |
Contingencies
& Events occurring after Balance Sheet date |
|
AS
5 |
Net
profit or Loss for the Period, Prior period items & changes in accounting
policies |
|
AS
6 |
Depreciation
Accounting |
|
AS
7 |
Accounting
for Construction Contracts |
|
AS
8 |
Accounting
for Research & Development |
|
AS
9 |
Revenue
Recognition |
|
AS
10 |
Accounting
for Fixed Assets |
|
AS11 |
Accounting
for effects in changes in Foreign Exchange Rates |
|
AS
12 |
Accounting
for Government Grants |
|
AS
13 |
Accounting
for Investments |
|
AS
14 |
Accounting
for Amalgamations |
|
AS
15 |
Accounting
for Retirement benefits in the Financial Statements of employers |
|
AS
16 |
Borrowing
Cost |
|
AS
17 |
Segment
Reporting |
|
AS
18 |
Related
Party Disclosure |
|
AS
19 |
Leases |
|
AS
20 |
Earnings
Per Share |
|
AS
21 |
Consolidated
Financial Statements |
|
AS
22 |
Accounting
for taxes on income |
|
AS
23 |
Accounting
for Investments in Associates in consolidated financial statements |
|
AS
24 |
Discontinuing
Operations |
|
AS
25 |
Interim
Financial Reporting |
|
AS
26 |
Intangible
Assets |
|
AS
27 |
Financial
Reporting of Interests in Joint Ventures |
|
AS
28 |
Impairment
of Assets |
|
AS
29 |
Provisions,
Contingent Liabilities and Contingent assets |
|
AS
30 |
Financial
Instruments: Recognition and Measurement |
|
AS
31 |
Financial
Instruments: Presentation |
|
AS
32 |
Financial
Instruments: Disclosures |
Q.6. Mention double entry system and
single entry system of accounting. 1998,
2002, 2005
Ans: Business
transactions are recorded in two different ways.
1. Single Entry 2. Double Entry
1.
Single Entry: It is incomplete system of recording business transactions. The
business organization maintains only cash book and personal accounts of debtors
and creditors. So the complete recording of transactions cannot be made and
trail balance cannot be prepared.
2.
Double Entry: Double Entry is an accounting system that records the effects of
transactions and other events in at least two accounts with equal debits and
credits. Under this system all accounts i.e., Personal, real and nominal accounts
are maintained. It is a complete system of recording business transactions.
Q.7. Mention various steps involved in
double entry system. 1998
Ans: Steps involved in Double entry
system
a. Preparation of Journal: Journal is called the book of original entry.
It records the effect of all transactions for the first time. Here the job of
recording takes place.
b. Preparation of Ledger: Ledger is the collection of all accounts used
by a business. Here the grouping of accounts is performed. Journal is posted to
ledger.
c. Trial Balance preparation: Summarizing. It is a summary of ledge balances
prepared in the form of a list.
d. Preparation of Final Account: At the end of the accounting period to
know the achievements of the organization and its financial state of affairs,
the final accounts are prepared.
Q.8. Mention various advantages and
disadvantages of double entry system. 1998,
02, 03, 05, 06
Ans: Advantages of Double Entry System
a)
Scientific system: This system is the only
scientific system of recording business transactions. It helps to attain the
objectives of accounting.
b)
Complete record of transactions: This system
maintains a complete record of all business transactions.
c)
A check on the accuracy of accounts: By the
use of this system the accuracy of accounting book can be established through
Trail balance.
d)
Ascertainment of profit or loss by the
preparation of Profit and Loss Account.
e)
Knowledge of the financial position of the
business through the preparation of balance sheet.
Disadvantages of Double Entry System
a) It
requires expert knowledge: Book-keeping requires specialized knowledge, so it
cannot be prepared by a layman.
b) It is a
very lengthy process: As it record transactions in two stage viz. journalizing
and ledger posting, it requires a larger number of books.
c) It is
expensive: It is expensive because an expert is to be employed for this
Purpose. It, therefore, involves additional expense.
d) Errors of
omission: If a transaction is omitted to be recorded in the books of accounts,
it cannot be detected by double entry system because they do not affect a trial
balance.
Q.9. What
are three bases of accounting? Explain them briefly.
Ans: BASES
OF ACCOUNTING: There are
three bases of accounting in common usage which are:
1.
Cash basis
2.
Accrual or Mercantile basis
3.
Mixed or Hybrid basis.
Accounting on ‘Cash basis’: Under cash
basis of accounting, entries are recorded only when cash is received or paid.
No entry is passed when a payment or receipt becomes due. Government system of
accounting is mostly on cash basis.
Accrual Basis of Accounting or Mercantile
System: Under accrual basis of accounting, accounting entries are made on
the basis of amounts having become due for payment or receipt. Incomes are
credited to the period in which they are earned whether cash is received or
not. Similarly, expenses and losses are detailed to the period in which, they
are incurred, whether cash is paid or not. The profit or loss of any accounting
period is the difference between incomes earned and expenses incurred,
irrespective of cash payment or receipt.
Mixed or Hybrid Basis of Accounting: When
certain items of revenue or expenditure are recorded in the books of account on
cash basis and certain items on mercantile basis, the basis of accounting so
employed is called ‘hybrid basis of accounting’.
Q.10. What are general considerations
in selection of accounting policies?
Ans: Considerations in the Selection
of Accounting Policies:
a. Prudence.
b. Substance over
Form.
c. Materiality.
Q.11. Mention three assumptions of accounting. 2010
Ans: The
following have been generally accepted as fundamental accounting assumptions:
a.
Going Concern Concept.
b.
Accrual Concept.
c.
Consistency Concept.