Complete Guide For Class 11 Accountancy Chapter 2: Theory Base Of Accounting

Our learning resources for the chapter, Theory Base of Accounting – Chapter 2 –  Accountancy for Class 11th are designed to ensure that you grasp this concept with clarity and perfection. Whether you’re studying for an upcoming exam or strengthening your concepts, our engaging animated videos, practice questions and notes offer you the best of integrated learning with interesting explanations and examples. 

When it comes to understanding the foundation of accounting, it’s crucial to explore the various principles, concepts, conventions, rules, and guidelines that have been developed over time. These elements ensure that accounting information is reliable and comparable. Let’s delve into some of these key concepts.

Need Of Theory Base Of Accounting

• To ensure comparability in financial records, a set of principles, concepts, conventions, rules, and guidelines have been developed over time.
• The Institute of Chartered Accountants of India (ICAI) issues guidelines periodically to promote uniformity in accounting practices and enhance the utility of accounting information.
• Reliable and comparable accounting information is highly useful for various interested parties.

So, now that we know why these principles are important, let’s look at one of the most fundamental concepts in accounting: Generally Accepted Accounting Principles (GAAP).

Generally Accepted Accounting Principles (GAAP)

According to the chapter Theory Base of Accounting, When it comes to maintaining uniformity and consistency in accounting records, GAAP plays a pivotal role. These rules and principles are widely accepted by the accounting profession and ensure that financial statements are prepared consistently.

• GAAP are rules and principles developed to maintain uniformity and consistency in accounting records.
• These rules and principles are generally accepted by the accounting profession.

Understanding GAAP sets the stage for exploring specific accounting concepts, such as the Business Entity Concept, which is our next topic.

Business Entity Concept

According to the chapter Theory Base of Accounting, it’s important to distinguish the business from its owners. This is where the Business Entity Concept comes into play, ensuring that the business is treated as a separate entity.

• This concept assumes that a business has a distinct entity separate from its owners.
• For example, A & Co. and its sole owner A are treated as different entities from an accounting perspective.

Now that we understand the importance of viewing the business as a separate entity, let’s move on to another fundamental principle of the chapter Theory Base of Accounting,: the Going Concern Concept.

Going Concern Concept

According to the chapter Theory Base of Accounting, the Going Concern Concept assumes that a business will continue its operations indefinitely, which has significant implications for how assets and liabilities are managed.

• This concept assumes that a business will continue its operations indefinitely and will not be liquidated in the foreseeable future.
• Due to this concept, businesses purchase fixed assets rather than renting them.

Next, let’s explore the Money Measurement Concept from the chapter Theory Base of Accounting,, which helps determine what gets recorded in the financial books.

Money Measurement Concept

The Money Measurement Concept dictates that only transactions measurable in monetary terms are recorded in the books of accounts.

• Only transactions that can be expressed in monetary terms are recorded in the books of accounts.
• For instance, if a business purchases 50 kg of material, only the amount paid for the purchase is recorded.

With this understanding, we can now look at the Dual Aspect Concept from the theory base of accounting, which forms the basis of the double-entry system in accounting.

Dual Aspect Concept

The Dual Aspect Concept is fundamental to accounting, as it ensures that every transaction is recorded with equal and opposite effects on the accounts.

• This concept is the basis of recording business transactions in the books of accounts.
• Every debit has an equal and corresponding credit. For example, when a business sells goods for cash, goods are going out, and cash is coming in.

Having grasped the Dual Aspect Concept, let’s move on to the Revenue Realisation Concept, which addresses when revenue should be recognized.

Revenue Realisation Concept

The Revenue Realisation Concept states that revenue is recognized when the ownership of goods changes, regardless of whether the cash has been received.

• Revenue is considered realized when the ownership of goods changes hands, regardless of whether the revenue is received in cash.
• For example, if goods are sold in January and payment is received in April, the income is booked in January.

With the Revenue Realisation Concept in mind, we can now explore the Matching Concept, which deals with matching costs and revenues.

Matching Concept

The Matching Concept ensures that costs are matched with revenues in the same accounting period, providing a clearer picture of financial performance.

• Costs incurred in a particular period should be charged to the revenue of the same period.
• Unsold goods at the end of the year are carried forward as they do not match the current year’s revenue.

Understanding the Matching Concept brings us to the Accounting Period Concept, which defines the time frame for financial reporting.

Accounting Period Concept

The Accounting Period Concept specifies the period for which financial statements are prepared, usually on an annual basis from 1st April to 31st March in India.

• Financial statements are prepared at the end of a specific period, typically from 1st April to 31st March in India, to determine profits or losses.

Next, let’s look at the Full Disclosure Concept, which ensures transparency in financial reporting.

Full Disclosure Concept

The Full Disclosure Concept requires that all material information is disclosed in the financial statements, providing a complete picture to the users.

• Accounts should be prepared to disclose all material information required by users of financial statements.
• For example, if the market value of an investment drops significantly, it must be disclosed as a footnote in the balance sheet.

Moving forward, we’ll explore the Consistency Concept, which emphasizes the need for consistent accounting methods year over year.

Consistency Concept

The Consistency Concept ensures that accounting methods and procedures are applied consistently from one period to another, facilitating comparability.

• Accounting procedures and methods should be consistent from year to year.
• For instance, a chosen method of depreciation should be followed consistently.

Now that we understand consistency, let’s discuss the Conservatism Concept, which advises caution in financial reporting.

Conservatism Concept

The Conservatism Concept advises that all anticipated losses should be recorded, while anticipated gains should be ignored to avoid overstatement of financial health.

• All anticipated losses should be recorded, but anticipated gains should be ignored.
• For example, closing stock is valued at cost or market price, whichever is lower.

Next, we’ll look at the Materiality Concept, which helps determine the significance of financial information.

Materiality Concept

The Materiality Concept suggests that insignificant items need not be disclosed, focusing on information that truly impacts decision-making.

• Insignificant items need not be disclosed to users.
• For example, reporting production as 200 tonnes instead of 1,99,000.90 kilograms.

Understanding materiality brings us to the Objectivity Concept, which emphasizes the unbiased recording of transactions.

Objectivity Concept

The Objectivity Concept ensures that transactions are recorded objectively and without bias, providing reliable financial information.

• Transactions should be recorded objectively, free from bias.
• For example, cash payments are recorded with a receipt from the receiver.

Next, we’ll explore the Cost Concept, which relates to how assets are valued in accounting.

Cost Concept

The Cost Concept states that assets are recorded at their cost price, minus depreciation, regardless of changes in market value.

• Assets are recorded at their cost less depreciation.
• For instance, a building purchased for Rs. 5,00,000 is recorded at that value, even if its market value increases to Rs. 20,00,000.

With a clear understanding of the Cost Concept, let’s discuss Accounting Standards, which aim to standardize financial reporting.

Accounting Standards

Accounting Standards, part of GAAP, aim to bring uniformity and comparability to financial statements, enhancing their utility for users.

• GAAP is accepted by the accounting profession to achieve uniformity and comparability in financial statements.
• These standards aim to increase the utility of financial statements for various users.
• However, GAAP allows for alternative treatments of the same item, which can be challenging.

Understanding Accounting Standards is crucial, so let’s move on to their usefulness in financial reporting.

The Usefulness of Accounting Standards

Accounting Standards provide a foundation for preparing financial statements, ensuring uniformity, consistency, and confidence among users.

• Provides norms for preparing financial statements.
• Ensures uniformity and consistency in financial statement preparation and presentation.
• Builds confidence among users of accounting information.

Next, let’s look at the procedure for formulating these standards.

Procedure for Formulating Accounting Standards

The formulation of Accounting Standards involves a structured process to ensure they meet the needs of all stakeholders.

1. Determine the area needing standards.
2. Dialogue with government, PSUs, industry, and other stakeholders.
3. Draft standards for comments from ICAI members and the public.
4. Finalize the draft based on feedback and submit it to the ICAI council.

With an understanding of how standards are formulated, let’s compare different accounting systems: Double Entry vs Single Entry.

Double Entry vs Single Entry Systems of Accounting

In accounting, there are two primary systems: Double Entry, which is scientific and maintains all types of accounts, and Single Entry, which is simpler and less comprehensive.

• Double Entry System: Scientific, maintains all three types of accounts.
• Single Entry System: Unscientific, maintains only personal accounts and cash book.

Now, let’s compare the Cash Basis and Accrual Basis of accounting, which are two different methods of recording transactions.

Cash Basis vs Accrual Basis of Accounting

The Cash Basis of accounting records only cash transactions, while the Accrual Basis records both credit and cash transactions, providing a more accurate picture of financial performance.

• Accrual Basis: Records credit and cash transactions, and ascertains correct profit or loss.
• Cash Basis: Records only cash transactions, and does not ascertain correct profit or loss.

On Your Fingertips

Here’s a quick recap of some key accounting concepts that we have discussed:

• GAAP: Rules for recording and reporting business transactions to ensure uniformity in financial statements.
• Accounting Period: Preparing financial statements to determine profit or loss.
• Dual Aspect: Every transaction has a dual effect on accounts and is recorded in two places.

These concepts form the accounting foundation and are essential for anyone looking to understand the subject thoroughly.

In conclusion, Chapter 2 of Class 11 Accountancy, titled Theory Base of Accounting, provides an essential foundation for understanding accounting principles and practices. This chapter delves into various concepts, including Generally Accepted Accounting Principles (GAAP), the Business Entity Concept, and the Going Concern Concept, among others. Each principle plays a crucial role in ensuring that accounting records are consistent, reliable, and comparable.

Our comprehensive learning resources for Theory Base of Accounting – Chapter 2 are designed to enhance your understanding and mastery of these fundamental concepts. By engaging with our animated videos, practice questions, and detailed notes, you can grasp the intricacies of accounting theory with clarity. Whether you’re preparing for exams or seeking to solidify your knowledge, the Theory Base of Accounting chapter offers the tools and insights you need.

Remember, a solid grasp of the Theory Base of Accounting is not just about passing exams; it’s about building a strong foundation for your future studies and professional endeavors in accounting. By thoroughly understanding the principles discussed in Theory Base of Accounting, you’ll be well-equipped to tackle more advanced accounting topics with confidence.