Theory Base of Accounting - Class 11 Notes & Quiz

1. Generally Accepted Accounting Principles (GAAP)

GAAP refers to rules, conventions, and guidelines adopted for recording and reporting business transactions in order to bring uniformity in the preparation and presentation of financial statements.

GAAP includes: Basic Accounting Concepts (assumptions/conventions) + Accounting Standards issued by ICAI.

                    Key Point: GAAP ensures consistency, comparability, and reliability of financial
                    statements across different companies and accounting periods.
                

2. Basic Accounting Concepts (12 Concepts)

Business Entity Concept: The business is a separate legal entity from its owner. Owner's personal transactions are NOT recorded in business books. (e.g., Capital introduced is a liability for the business).
Money Measurement Concept: Only transactions expressible in monetary terms are recorded. Non-monetary events (e.g., employee loyalty, management quality) are excluded.
Going Concern Concept: The business is assumed to continue operating indefinitely (not be liquidated in the near future). Assets are recorded at cost, not liquidation value.
Accounting Period Concept (Periodicity): The life of a business is divided into finite accounting periods (usually 1 year = April 1 to March 31) to ascertain profit/loss periodically.
Cost Concept (Historical Cost): Assets are recorded at their original purchase price (acquisition cost) and not at market/current value. This provides objectivity but may not reflect true value.
Dual Aspect Concept: Every transaction has TWO equal aspects — Debit and Credit. This is the foundation of Double Entry system. Assets = Liabilities + Capital.
Revenue Recognition (Realisation) Concept: Revenue is recognised when the right to receive it is established (i.e., when sale is effected/service rendered), NOT necessarily when cash is received.
Matching Concept: Expenses incurred to earn revenue must be matched (recognised) in the same period as that revenue. Outstanding expenses and prepaid expenses arise from this concept.
Full Disclosure Concept: All significant and material information that could influence the decisions of users must be disclosed either in the financial statements or in the notes/footnotes.
Consistency Concept: Once an accounting method is adopted, it should be followed consistently from year to year (e.g., same depreciation method). Changes must be disclosed.
Conservatism (Prudence) Concept: "Anticipate no profit, but provide for all possible losses." Gains are not recorded until realised; anticipated losses are provided immediately.
Materiality Concept: Only transactions and information that are material (significant enough to affect decisions) need to be disclosed. Immaterial items may be treated simply.

3. Systems of Accounting

Basis	Double Entry System	Single Entry System
Coverage	Records BOTH aspects (debit and credit) of every transaction.	Incomplete – usually only cash and personal accounts.
Accuracy	High – internal check through Trial Balance.	Low – prone to errors and frauds.
Suitability	All types and sizes of businesses.	Only small or simple businesses.
P&L ascertainment	Exact P&L through P&L account.	Only approximate (Statement of Affairs method).

4. Basis of Accounting

Basis	Cash Basis	Accrual Basis
Revenue recorded	When cash is actually received.	When earned/right to receive established.
Expenses recorded	When cash is actually paid.	When incurred, regardless of payment.
Outstanding items	NOT recorded.	Recorded (outstanding/prepaid).
Recommended by	Not recommended for companies.	Companies Act (preferred for companies).
Suitability	Professionals (doctors, lawyers), small entities.	All companies, large enterprises.

5. Accounting Standards (AS)

Accounting Standards are written policy documents issued by expert accounting bodies. In India, the ICAI (Institute of Chartered Accountants of India) issues AS.

AS cover aspects of: recognition, measurement, treatment, presentation, and disclosure of accounting transactions and events.

                    AS vs Ind AS: Traditional Accounting Standards (AS) are for domestic companies.
                    Ind AS (Indian Accounting Standards) are converged with International Financial
                    Reporting Standards (IFRS) and are mandatory for listed companies and large companies.
                

Some key AS: AS 1 (Disclosure of Accounting Policies), AS 2 (Valuation of Inventories), AS 6 (Depreciation Accounting), AS 9 (Revenue Recognition).

6. Goods and Services Tax (GST)

GST is a comprehensive, destination-based, multi-stage indirect tax implemented in India from 1st July 2017 on the supply of goods and services. It follows the principle of "One Nation, One Tax."

CGST (Central GST): Levied by the Central Government on intra-state supplies.
SGST (State GST): Levied by State Government on intra-state supplies.
IGST (Integrated GST): Levied by Central Government on inter-state supplies (CGST + SGST combined).
UTGST (Union Territory GST): Applicable to Union Territories without legislature.

                    GST in Accounts: GST collected from customers is a liability (Output GST). GST paid
                    to suppliers is an asset (Input Tax Credit – ITC). Only the net amount is payable to the government.
                