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Theory Base of Accounting Textbook With Solution PDF Free Download
Chapter 2: Theory Base of Accounting
A s discussed in the previous chapter, accounting is concerned with the recording, classifying and summarising of financial transactions and events and interpreting the results thereof.
It aims at providing information about the financial performance of a firm to its various users such as owners, managers employees, investors, creditors, suppliers of goods and services and tax authorities and help them in taking important decisions.
The investors, for example, may be interested in knowing the extent of profit or loss earned by the firm during a given period and compare it with the performance of other similar enterprises.
The suppliers of credit, say a banker, may, in addition, be interested in liquidity position of the enterprise.
All these people look forward to accounting for appropriate, useful and reliable information. For making the accounting information meaningful to its internal and external users, it is important that such information is reliable as well as comparable.
The comparability of information is required both to make inter-firm comparisons, i.e. to see how a firm has performed as compared to the other firms, as well as to make inter-period comparison, i.e. how it has performed as compared to the previous years.
This becomes possible only if the information provided by the financial statements is based on consistent accounting policies, principles and practices.
Such consistency is required throughout the process of identifying the events and transactions to be accounted for, measuring them, communicating them in the book of accounts, summarising the results thereof and reporting them to the interested parties.
This calls for developing a proper theory base of accounting. The importance of accounting theory need not be over-emphasised as no discipline can develop without a sound theoretical base.
The theory base of accounting consists of principles, concepts, rules and guidelines developed over a period of time to bring uniformity and consistency to the process of accounting and enhance its utility to different users of accounting information.
Apart from these, the Institute of Chartered Accountants of India, (ICAI), which is the regulatory body for standardisation of accounting policies in the country has issued Accounting Standards which are expected to be uniformly adhered to, in order to bring consistency in the accounting practices.
These are discussed in the sections to follow. 2.1 Generally Accepted Accounting Principles In order to maintain uniformity and consistency in accounting records, certain rules or principles have been developed which are generally accepted by the accounting profession.
These rules are called by different names such as principles, concepts, conventions, postulates, assumptions and modifying principles.
The term ‘principle’ has been defined by AICPA as ‘A general law or rule adopted or professed as a guide to action, a settled ground or basis of conduct or practice’.
The word ‘generally’ means ‘in a general manner’, i.e., pertaining to many persons or cases or occasions.
Thus, Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity in the preparation and the presentation of financial statements.
For example, one of the important rule is to record all transactions on the basis of historical cost, which is verifiable from the documents such as cash receipt for the money paid.
This brings in objectivity in the process of recording and makes the accounting statements more acceptable to various users.
The Generally Accepted Accounting Principles have evolved over a long period of time on the basis of past experiences, usages or customs, statements by individuals and professional bodies and regulations by government agencies and have general acceptability among most accounting professionals. However, the principles of accounting are not static in nature.
These are constantly influenced by changes in the legal, social and economic environment as well as the needs of the users.
These principles are also referred as concepts and conventions.
The term concept refers to the necessary assumptions and ideas which are fundamental to accounting practice, and the term convention connotes customs or traditions as a guide to the preparation of accounting statements.
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NCERT Solutions Class 11 Accountancy Chapter 2 Theory Base of Accounting
1. Why it is necessary for accountants to assume that business entity will remain a going concern?
It is necessary for accountants to consider that a business entity will remain a going concern as an asset will be calculated for the profit it earns along with the depreciation it is charged, both of which are not restricted only for one accounting period. Hence, it indicates continuity in business.
2. When should revenue be recognized? Are there exceptions to the general rule?
Revenue is recognised if right to receive income is established. It can also be said to have established when a sale takes place in cash or in credit.
Following exceptions can be seen:
1. Goods that are sold on hire purchase, the amount thus collected in instalments will be accounted as revenue realized.
2. Projects related to the construction of buildings etc. are projects of long duration, revenue is realized periodically that is in proportion to the part of work that is completed.
The assets of a business are equal to the claims of its owners and the creditors as per the basic accounting equation. Liabilities are known as Creditors’ Equity and Capital is known as Owner’s Equity. It is represented as Assets = Capital + Liabilities
NCERT Class 11 Accountancy Textbook Chapter 2 Theory Base of Accounting With Answer PDF Free Download