Dear Teachers,
These slides have been prepared based on the NCERT syllabus to support you in teaching Plus One and Plus Two Accountancy and Computerised Accounting.
Please review and verify the content before using it in your classrooms. If you find any errors or have feedback, please let me know.
Mujeeb Rahiman C
HSST Commerce
GHSS Pattikkad
Malappuram Dt.
✉️ mujeebchemmala@gmail.com
9995983075 �
Chapter - 2
Theory Base of Accounting
(അക്കൗണ്ടിംഗിന്റെ സൈദ്ധാന്തിക അടിത്തറ)
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
Generally Accepted Accounting Principles
GAAP
GAAP
Generally Accepted Accounting
GAAP
Generally Accepted Accounting Principles
1. Accounting
Assumptions or Concepts
2. Accounting
Principles or conventions
3. Modifying
Principles
4. Accounting
Standards
From the practicability view point, it is observed that the various terms such as assumptions, concepts, principles, conventions, modifying principles etc. have been used inter-changeably and are referred to as Basic Accounting Concepts.
Basic Accounting Concepts
Basic Accounting Concepts
1. Business Entity Concept
2. Money Measurement Concept
3. Going Concern Concept
4. Accounting Period Concept
5. Cost Concept
6. Dual Aspect Concept
7. Revenue Recognition Concept
8. Matching Concept
9. Full Disclosure Concept
10. Consistency Concept
11. Conservatism / Prudence Concept
12. Materiality Concept
13. Objectivity Concept
1. Business entity concept
or Accounting entity concept
It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities.
when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner.
when the owner withdraws any money from the business for his personal use (drawings), it is treated as reduction in the liabilities of the business.
1. Business Entity Concept
2. Money measurement concept
2. Money Measurement Concept
This concept states that only those transactions which can be expressed in terms of money are to be recorded in the book of accounts.
Sale of goods or payment of expenses or receipt of income, etc. are recorded.
Appointment of a manager, capabilities of its human resources etc. are do not find a place in the accounting records of a firm.
3. Going concern concept
Asset Value
Rs. 50,000
Asset Value
Rs. 40,000
Asset Value
Rs. 30,000
Asset Value
Rs. 20,000
Asset Value
Rs. 10,000
Depreciation
3. Going Concern Concept
The concept of going concern assumes that a business firm would continue to carry out its operations for a long period of time.
This assumption allows us to charge depreciation on fixed assets and carry forward the remaining amount to the next years.
It is also because of the going concern concept that outside parties enter into long term contracts with the business, give loans etc.
Also without this concept the classification of current and fixed assets and short and long term liabilities cannot be made.
4. Accounting period
April 1, 2019 to March 31, 2020
4. Accounting Period Concept
No firm can wait for long to know its financial results as various decisions are to be taken on the basis of such information.
The financial statements are, therefore, prepared at regular interval, normally after a period of one year, so that timely information is made available to the users.
This interval of time is called accounting period.
Basic Accounting Concepts
1. Business Entity Concept
2. Money Measurement Concept
3. Going Concern Concept
4. Accounting Period Concept
MUJEEB RAHIMAN C
HSST COMMERCE
GHSS PATTIKKAD
MALAPPURAM DT
Basic Accounting Concepts
1. Business Entity Concept
2. Money Measurement Concept
3. Going Concern Concept
4. Accounting Period Concept
5. Cost Concept
6. Dual Aspect Concept
7. Revenue Recognition Concept
8. Matching Concept
5. Cost Concept
Or Historical Cost Concept
5. Cost Concept
The cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation and installation.
A machinery was purchased for ₹ 2,00,000. An amount of ₹ 5,000 was spent on transporting the machinery to the factory site. In addition, ₹ 3,000 was spent on its installation. The total amount at which the machinery will be recorded in the books of account would be the sum of all these, that is ₹ 2,08,000.
6. Dual Aspect Concept
Giving aspect
Receiving aspect
Debit
Credit
Example :- Sold goods to a customer for cash ₹ 10,000
6. Dual Aspect Concept
Dual aspect is the basic principle of accounting. This concept states that every transaction has a dual effect and should therefore be recorded at two places.
In other words, at least two accounts will be involved in recording a transaction.
eg. 1) Purchased furniture worth Rs. 10,000/- on credit from
Royal Furniture Mart
2) Mohan invested Rs. 1,00,000/- to his business.
Double Entry System of Accounting
The duality principle is commonly expressed in terms of fundamental Accounting Equation, which is as follows
Assets = Liabilities + Capital
The equation states that the assets of a business are always equal to the claims of owners (owners’ equity) and the outsiders (creditors equity). The two-fold effect of each transaction affects in such a manner that the equality of both sides of equation is maintained.
Assets = Liabilities + Capital
For example Sunil Commences a business with ₹ 10,00,000 in cash and takes a loan of ₹ 5,00,000 from the bank and these 15 lakhs used to buy some assets.
The equation will be as follows
₹ 10 lakh
₹ 15 lakh
=
₹ 5 lakh
+
7. Revenue Recognition (Realisation) Concept
7. Revenue Recognition Concept
This concept requires that the revenue for a business transaction should be included in the accounting records only when it is realised.
Revenue is assumed to be realised when goods have been sold or service has been rendered.
For example, if a firm gets an order of goods on 1st Jan 2020, supplies the goods on 5th January and receives the cash on 15th January, the revenue will be deemed to have been earned on 5th January as the goods was transferred that day.
Revenues in case of incomes such as rent, interest, commission etc are recognised on a time basis
If commission for April 2020 is received in advance in March 2020, it will be treated as revenue of the Month of April 2020.
For example, rent for the month of March 2020, even if received in April 2020 will be treated as revenue of the Month of March 2020.
8. Matching Concept
Same
Accounting Period
To Calculate Profit/Loss
Revenue (December)
Expenses (December)
December
Revenue (2020)
Expenses (2020)
Year 2020
Compare / Match
8. Matching Concept
It states that expenses incurred in an accounting period should be matched with revenues during that period.
Revenue is recognised when a sale is complete or service is rendered rather when cash is received. Similarly, an expense is recognised not when cash is paid but when an asset or service has been used to generate revenue.
Basic Accounting Concepts
5. Cost Concept
6. Dual Aspect Concept
7. Revenue Recognition Concept
8. Matching Concept
MUJEEB RAHIMAN C
HSST COMMERCE
GHSS PATTIKKAD
MALAPPURAM DT
Basic Accounting Concepts
1. Business Entity Concept
2. Money Measurement Concept
3. Going Concern Concept
4. Accounting Period Concept
5. Cost Concept
6. Dual Aspect Concept
7. Revenue Recognition Concept
8. Matching Concept
9. Full Disclosure Concept
10. Consistency Concept
11. Conservatism / Prudence Concept
12. Materiality Concept
13. Objectivity Concept
9. Full disclosure concept
9. Full Disclosure Concept
The concept requires that all material and relevant facts concerning financial performance of an enterprise must be completely disclosed in the financial statements and their accompanying footnotes.
This is to enable the users to make correct assessment about the profitability and financial soundness of the enterprise and help them to take correct decisions.
10. Consistency concept
10. Consistency Concept
Inter-firm and inter-period comparisons are required. This can be possible only when accounting policies and practices followed by enterprises are uniform and are consistent over the period of time.
11. Prudence or conservatism concept
COST
PRICE
MARKET
PRICE
11. Conservatism / Prudence Concept
The concept of conservatism requires that profits should not to be recorded until realised. But all losses, even those which may have a remote possibility, are to be provided for in the books of account.
eg. 1) valuing closing stock at cost or market value
whichever is lower;
2) creating provision for doubtful debts
12. Materiality concept
12. Materiality Concept
The concept of materiality requires that accounting should focus on material facts. The materiality of a fact depends on its nature and the amount involved.
A difference of ₹ 500 in the valuation of stock may be regarded as immaterial, but the difference of ₹ 500 in cash should be termed as material.
When the amount involved is very small, strict adherence to accounting principles is not required. For example, stock of erasers, pencils, scales, etc. are not shown as assets
13. Objectivity Concept
13. Objectivity Concept
The concept of objectivity requires that accounting transaction should be recorded in an objective manner, free from the bias of accountants and others. This can be possible when each of the transaction is supported by verifiable documents or vouchers.
Basic Accounting Concepts
9. Full Disclosure Concept
10. Consistency Concept
11. Conservatism / Prudence Concept
12. Materiality Concept
13. Objectivity Concept
MUJEEB RAHIMAN C
HSST COMMERCE
GHSS PATTIKKAD
MALAPPURAM DT
Systems of Accounting
1. Double entry system
1. Double entry system
2. Single entry system
2. Single entry system
1. Double entry system
1. Double entry system
For example :- Purchased Computer for cash Rs. 40,000
1. Double entry system
1. Double entry system
This system is based on the 'Dual Aspect Concept' which states that for every transaction, there are two aspects. One receiving (Debit) aspect and one giving (Credit) aspect. Both aspects are recorded.
2. Single entry system
2. Single entry system
2. Single entry system
2. Single entry system
Single entry system is incomplete since under this method there is no particular system which has to be followed.
Basis of Accounting
Cash Basis
Accrual Basis
Cash Basis
Recording of transaction is made only when cash received or paid
For example,
If Rent for the month of December 2019, is paid in January 2020, it would be recorded in the book of account only in January 2020.
Similarly sale of goods on credit in the month of January 2020 would not be recorded in January but recorded when the payment for the same is received.
Thus profit is merely the excess of actual cash receipts over payments.
Accrual Basis
Recording of transaction in the same period whether paid or not
For example,
Sale of goods on credit in the month of January 2020 would be recorded in January. Rent payable for an accounting period is recorded in the same accounting period.
Under this system, the monitory effect of a transaction is taken into account in the period in which they are earned rather than in the period in which cash is actually received or paid by the enterprise.
This is a more appropriate basis for the calculation of profits as expenses are matched against revenue earned in relation thereto.
Accounting Standards
Accounting standard is an authoritative statement issued by ICAI (Institute of Chartered Accountants of India), a professional body of accounting in our country.
The objective of accounting standard is to bring uniformity in different accounting policies in order to eliminate non comparability of financial statements for enhancing reliability of financial statements.
International Financial Reporting System (IFRS)
IFRS are a set of accounting standards developed by International Accounting Standards Board (IASB) on the basis of which financial statements of enterprises are prepared and presented to its users.
Goods and Services Tax (GST)
It is a nation wide tax seeking to unify several indirect taxes and is based on the principle of ‘One Nation one Tax’
GST Act was passed in the Parliament on 24th March, 2017 and came into effect from 1st July, 2017.
Taxes Merged into GST
Central Level Taxes
Excise Duty
Service Tax
Central Sales Tax
State Level Taxes
Octroi and Entry Tax
Entertainment Tax
Value Added Tax (VAT)
Luxury Tax
Characteristics of Goods and Services Tax (GST)
1. GST is a common law and procedure throughout the country
2. GST is a destination based tax and levied at a single point at the
time of consumption of goods and services by the end consumer.
3. There is no multiple levy of tax on goods and services, such as
sales tax, entry tax, octroi, entertainment tax or luxury tax etc.
Advantages of Goods and Services Tax (GST)
1. Introduction of GST has resulted in the abolition of multiple
types of taxes
2. GST has removed the cascading effect on taxation
3. GST widens the tax base and increased revenue to Centre and
State Government
Goods and Services Tax (GST)
Intra-State Movement
Inter-State Movement
CGST
SGST
IGST
GST levied by the Centre
GST levied by the State
GST levied
by the State and Centre Concurrently
CGST – Central Goods and Services Tax
SGST – State Goods and Services Tax
IGST – Integrated Goods and Services Tax
MUJEEB RAHIMAN C
HSST COMMERCE
GHSS PATTIKKAD
MALAPPURAM DT