Plus One ACC Chapter 2 Theory Base of Accounting _Capsule Notes

CHAPTER 2: THEORY BASE OF ACCOUNTING – MICRO NOTES
GAAP (GENERALLY ACCEPTED ACCOUNTING PRINCIPLES)
Meaning: Common set of accounting rules, standards & procedures for uniform financial statements (grammar of accounting).
Necessity: Ensures uniformity, comparability, reliability. Investors & banks can trust & compare statements.
BASIC ACCOUNTING CONCEPTS (13)
1. Business Entity Concept: Business & owner are separate. Owner's investment = Capital (liability). Drawings reduce capital.
2. Money Measurement Concept: Only transactions measurable in money are recorded (sale of goods – yes; talented CEO – no).
3. Going Concern Concept: Business will continue indefinitely. Assets depreciated over life, not expensed fully in purchase year.
4. Accounting Period Concept: Life divided into artificial periods (usually 1 year) to know periodic profit/loss.
5. Cost Concept (Historical Cost): Assets recorded at purchase price, not market value. Land bought for ₹10L shown at ₹10L even if value rises to ₹50L.
6. Dual Aspect Concept: Every transaction has two aspects (Debit & Credit). Accounting Equation: Assets = Liabilities + Capital.
7. Revenue Recognition (Realisation) Concept: Revenue recorded when legal right to receive arises (on sale), not when cash received.
8. Matching Concept: Expenses of a period matched with revenues of that same period (salary paid in April for March's work – recorded in March).
9. Full Disclosure Concept: All material & relevant facts must be fully disclosed (in statements or footnotes).
10. Consistency Concept: Accounting policies & practices must be uniform year after year for comparability.
11. Conservatism (Prudence) Concept: "Do not anticipate profits, provide for all losses." Record possible losses, profits only when realised. Stock valued at cost or market price whichever is lower.
12. Materiality Concept: Focus on material facts; insignificant items can be merged/ignored (₹100 stapler expensed, not treated as asset).
13. Objectivity (Verifiability) Concept: Transactions must be objective, free from bias, supported by verifiable documents (invoice for machinery).
SYSTEMS OF ACCOUNTING
Double Entry System: Based on Dual Aspect – every debit has corresponding credit. Scientific, complete, ensures arithmetical accuracy (Trial Balance).
Single Entry System: Incomplete – mixture of double, one & no entry. Only personal accounts & cash book. Simple but unreliable; for small businesses.
BASIS OF ACCOUNTING
Cash Basis: Entries only when cash received/paid. Credit sale in March, cash in April → recorded in April.
Accrual Basis: Revenue/expense recognised when earned/incurred, regardless of cash movement. Credit sale in March → recorded in March. Scientific, matches revenues & expenses.
ACCOUNTING STANDARDS
Meaning: Written policy documents (by ICAI) on recognition, measurement, presentation & disclosure of transactions. Reduces diversity, enhances comparability.
IFRS: International standards by IASB for global consistency.
Ind-AS: India's version of IFRS (converged with carve-outs).
Applicability: All business types (sole prop, partnership, companies, etc.). Mandatory applicability varies.
IMPORTANT EXAM QUESTIONS
1. What is GAAP? Why is it necessary? (2 marks)
2. Explain any five accounting concepts with suitable examples (6 marks – VERY COMMON).
3. Distinguish between Double Entry and Single Entry System (3 marks).
4. Distinguish between Cash Basis and Accrual Basis of Accounting (2 marks).
5. Explain Business Entity Concept with an example (2 marks).
6. "Do not anticipate profits but provide for all losses." Which concept? (Conservatism).
7. Assets recorded at purchase price, not market value – which concept? (Cost Concept).
8. Why is a talented CEO not recorded as an asset? (Money Measurement Concept).