RBSE Class 11 Accountancy Notes Chapter 2 Theory Base of Accounting

These comprehensive RBSE Class 11 Accountancy Notes Chapter 2 Theory Base of Accounting will give a brief overview of all the concepts.

RBSE Class 11 Accountancy Chapter 2 Notes Theory Base of Accounting

Fundamental Accounting Assumptions:
(a) Going Concern Assumption: Going concern concept assumes that the firm will carry out its operations for the indefinite period of time. This concept assumes that firm will not liquidate its operations in the future.
(b) Consistency Assumption: According to this assumption, accounting policies, techniques and procedures to prepare accounts should remain consistent every year so that the financial results can be compared and rational decisions be made by the stakeholders.
(c) Accrual Assumption: According to this assumption, the incomes are said to be realised in the year of occurrence when the sales are made or services are rendered and not when the cash is received. Similarly, expenses are said to be paid when the goods are bought or services availed and not when actual payment is made.

 

Accounting Principles
Generally Accepted Accounting Principles (GAAP): General Accepted Accounting Principles refer to the rules and regulations which are followed by the accountants to maintain uniformity in the preparation and presentation of financial statements.
(а) Business/Accounting Entity Principle: Business entity principle assumes that the business and owners have a distinct entity from each other. When a person brings in the capital in to the business it became the liability of the business. Similarly, when the owner withdraws money from the business for his personal expenses it is treated as drawings (asset) of the business. The accounting entries are made in the books of accounts from the point of view of business and not from the point of view of businessman.

(b) Money Measurement Principle: According to money measurement principle, accounting records only those transactions which can be expressed in terms of money. Events or transactions which cannot be measured in monetary terms do not find place in accounting.

(c) Accounting Period Principle: According to accounting period principle, the life of a business is divided into several accounting periods. Generally, this accounting period is of one year. At the end of each accounting period an income statement in the form of profit and loss account to disclose profit or loss and a position statement in the form of a Balance Sheet is prepared to know financial position of the business.

(d) Full Disclosure: The principle of full disclosure requires that all relevant facts related to the financial performance of the business must be fully disclosed in the financial statement. These disclosures enable the various users of accounts to make the assumption about the profitability and financial soundness of the enterprise.

(e) Materiality Concept: It is based on the fact which information should be disclosed in detail and which information should be disclosed m the notes or summary. An information which may affect the decision of a stakeholder is material.
It explains that Business should record the material facts which are necessary to determine the income. The material facts depend upon its nature and amount involved. Example: Money spent on diversification of a project is a material fact whereas money spent on stationery is immaterial fact.

(f) Conservatism: The principle of conservatism requires that profit should not be recorded in the books of accounts until realised but all losses, even those which may have a remote possibility, are to be provided in the books.

(g) Cost Concept- According to this principle, every asset of the business is recorded at the actual cost borne at the time of its purchase. Such cost is also known as historical cost. The asset continue to appear at the cost price and don’t get change with the market price of such assets. But the cost price continue to reduce by the way of depreciation due to its normal wear and tear and thus book value of assets are arrived.

(h) Matching Principle: According to this principle, the expenses incurred must match with the incomes of a particular s
period. Inis principle is based on accrual assumption. Any expense or income relating to any period other than the period for which accounts are being prepared must not be considered.

(I) Dual Aspect Concept- According to this principle, every transaction has two fold effect as our system of accounting is based on double entry book keeping. Every amount is shown at two places. Example: Harsh started business with ₹ 2,00,000, this will increase the cash balance of the business. At the same time, this will also increase the owner’s equity with the same amount.

Accounting Standards and Ind AS
Meaning of Accounting Standards:
These are the written statements of the uniform accounting rules and guidelines to prepare consistent and uniform accounting records and statements.
Accounting standards are prepared by Accounting Standard Board of India and are issued by Institute of Chartered Accountants of India. It has pronounced 32 AS of which majority of them are mandatory for comparing of company law 2013. The main objective of accounting standards is to harmonise the diverse accounting policies and practices at present use in India.

Objectives of Accounting Standards
(a) Adaptation to Change: The accounting standards are subject to change whenever there is change in the business environment and help the companies to adapt to changes.
(b) Guidelines for Accounting Professionals: Accounting standards guide the accountants how to prepare the accounting records of a company so that they become reliable for the users.
(c) Uniformity- purpose of recommendation of accounting standards for the company to enable them to bring uniformity in accounts so such records can easily be compared.

Nature of Accounting Standards

• Accounting standards are mandatory in nature.
• Accounting Standards are flexible in nature as free to adapt any of the practices.
• Accounting Standards are prepared as per business environment and laws of country as these are revised time , to time.
• Accounting Standards are guidelines for preparing financial statements.
• Accounting Standards ensures transparency, consistency and comparability.
• Accounting Standards create sense of confidence among the users of accounting information.

Introduction to Ind AS
Ind AS stands for Indian Accounting Standard. These are basically the converged standards for IFRS (International Financial Reporting Standards). Ind AS are the documents and policies that provide presentation and disclosures of accounting transactions in the Ind AS financial statements.

Objective of Indian Accounting Standards:
The financial statements prepared based on Accounting Standards (AS) would not in line with the standards and principles applicable globally (IFRS). Before the introduction of Ind AS, financial statements were prepared on the basis of Accounting Standards (AS) which were not in line with the standards and principles applicable globally (IFRS). Investors would find it difficult to compare the financial statements of Indian companies with the financial statements of global companies. To overcome such problems, Ind AS were introduced which are converged form of IFRS (global standards). 

Benefits of Ind AS
(a) Wider acceptability: ind AS are converged form of IFRS which are widely acceptable. So, Introduction of Ind AS would help the investors across the glob to accept the financial statements prepared under Ind As.
(b) Comparability of financial statements: Since Ind AS are converged form of IFRS, financial statements prepared
under Ind AS would help the investors to compare the financial statements of other companies.  
(c) Changes in standards as per economic situations: ind AS are revised/modified in case if there are changes in the law and economy. For example, AS 29 deals with the situations related to inflation.
(d) Attracts Foreign Investment: Adoption of Ind AS may attract foreign investors as they can easily compare the financial results of Indian companies with the financial statements across the globe.
(e) Saves financial statement preparation cost: Multinational companies can easily compare the financial statements of their subsidiary operating in India with those operating at the in the other countries.

Indian Accounting Standards (Ind ASs)
Volume-1

• Ind AS 101 First-time Adoption of Indian Accounting Standards
• Ind AS 102 Share-based Payment
• Ind AS 103 Business Combinations
• Ind AS 104 Insurance Contracts
• Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations
• Ind AS 106 Exploration for and Evaluation of Mineral Resources
• Ind AS 107 Financial Instruments: Disclosures
• Ind AS 108 Operating Segments
• Ind AS 109 Financial Instruments
• Ind AS 110 Consolidated Financial Statements
• Ind AS 111 Joint Arrangements
• Ind AS 112 Disclosure of Interests in Other Entities
• Ind AS 113 Fair Value Measurement
• Ind AS 114 Regulatory Deferral Accounts
• Ind AS 115 Revenue from Contracts with Customers

Volume-II

• Ind AS 1 Presentation of Financial Statements
• Ind AS 2 Inventories
• Ind AS 7 Statement of Cash Flows
• Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors
• Ind AS 10 Events after the Reporting Period
• Ind AS 12 Income Taxes
• Ind AS 16 Property, Plant and Equipment
• Ind AS 17 Leases
• Ind AS 19 Employee Benefits
• Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance
• Ind AS 21 The Effects of Changes in Foreign Exchange Rates
• Ind AS 23 Borrowing Costs
• Ind AS 24 Related Party Disclosures
• Ind AS 27 Separate Financial Statements
• Ind AS 28 Investments in Associates and Joint Ventures
• Ind AS 29 Financial Reporting in Hyperinflationary Economies
• Ind AS 32 Financial Instruments: Presentation
• Ind AS 33 Earnings per Share
• Ind AS 34 Interim Financial Reporting
• Ind AS 36 Impairment of Assets sum
• Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
• Ind AS 38 Intangible Assets
• Ind AS 40 Investment Property
• Ind AS 41 Agriculture

Phases of adoption
MCA has notified a phase-wise convergence to IND AS from current accounting standards.

Phase I: Mandatory applicability of IND AS to all companies from 1st April 2016, provided:

• It is a listed or unlisted company
• Its Net worth is greater than or equal to ₹ 500 crore

*Net worth shall be checked for the previous three Financial Years (2013-14,2014-15, and 2015-16).

Phase II: Mandatory applicability of IND AS to all companies from 1st April 2017, provided:

• It is a listed company or is in the process of being listed
• Its Net worth is greater than or equal to ₹ 250 crore but less than ₹ 500 crore (for any of the below mentioned periods).

Net worth shall be checked for the previous four Financial Years (2014-14,2014-15,2015-16, and 2016-17)

Phase III: Mandatory applicability of IND AS to all Banks, NBFCs, and Insurance companies from 1st April 2018, whose:
Net worth is more than or equal to INR 500 crore with effect from 1st April 2018.

Phase IV
All NBFCs whose Net worth is more than or equal to INR 250 crore but less than INR 500 crore shall have IND AS mandatorily applicable to them with effect from 1 st April 2019.

System of Accounting
There are two system of recording the transactions in the system of accounting '
(a) Double Entry System: It is the system which is based on dual aspect principle. Under this system, every transaction has two aspects. Every amount is shown on the left side of one account and right side of another account. The basic principle followed here is that every debit must have a corresponding credit. It is a complete, rational, scientific, accurate and reliable system of accounting. It is adopted by big business organisations.

(b)  Single Entry System: It is system which is incomplete in itself as it records some transactions on both side of accounts affected, some on the one side and some transactions are completely ignored. Under this system, only personal accounts and cash book are prepared. In fact, it is not a system of account but a lack of system as not uniformity is maintained in recording of transactions. It is adopted by small business organisations.

Basis of Accounting
There are two types of accounting system:
(1) Cash System of Accounting: It is a system in which accounting entries are made only when cash is received or paid. No entry is made when a payment or receipt is merely due. It's very simple method of recording the financial transactions and it is adopted by small business entrepreneurs.

(2) Mercantile or Accrual System of Accounting: It is a system in which accounting entries are made on the basis of amounts having become due for payment or receipt This system recognizes the fact that if a transaction or an event has occurred, its consequences cannot be avoided and, therefore, should be brought into books in order to present a meaningful picture of profit earned or loss suffered and also of the financial position of the firm concerned.

(3) Hybrid System of Accounting: It is type of accounting in which both cash as well as accrual basis of accounting is mixed together. A business enterprise records revenues and assets on the cash basis of accounting whereas expenses and liabilities on the accrual basis of accounting.

In simple terms, we record all payable expenses but do not record all receivables incomes. Under this system, we need not show outstanding incomes but to show only outstanding expenses for more deduction out of income tax. By doing so, this system of accounting becomes mixed system of accounting, known as hybrid system of accounting. A person is allowed to follow hybrid system of accounting for different nature of transactions provided the same is followed consistently and income can be deduced from such accounting. 

(4) Difference between cash system of accounting and mercantile system of accounting:

Basis of Difference	Cash System	Mercantile System
1. Period	It record the receipts and payment made during the year whether these relate to current, past, future years.	It record the receipt and payment made and to be made for current year only. Whether these paid in the past, current or future years.
2. Simplicity	This method is simple to understand and practices.	This method is based on accounting policies.
3. True and fair view	True and fair position of business can not be ascertained under this system.	This system meets the requirement of company law. It gives true and fair view of books of accounts.
4. Users of System	This system is follows by doctors, clubs, societies.	This method is followed by business houses.