Although Financial Accounting is a practical subject, the basic concept and the theory base of accounting class 11 cannot be ignored as it provides the whole framework and introduction to accounting. The chapter consists of some important principles and standards that act as a foundation for this entire subject of study. Theory-based is built on some accounting principles. There are some accounting equations that support these too. Know more about the theory base of accounting class 11 in this blog.
Must Read: Class 11 Computerised Accounting System
Accounting Concepts And Conventions
Let us first understand the basic concepts and conventions in the theory base of accounting class 11.
|Accounting Concepts and Principles||Description|
|Business Entity Concept||According to this accounting concept, the business is a separate entity that has its own separate identity and existence from its owner. This will assist the accountant in identifying business or commercial transactions from personal transactions. All forms of commercial organisation (sole proprietorship, partnership, enterprise, AOP, etc.) must follow this assumption.|
|Going Concern Concept||The going concern concept or assumption in the theory base of accounting class 11 states that a business will continue to run and perform all the operations indefinitely. It is therefore assumed that, in the foreseeable future, the enterprise will not be closed. This leads to the hypothesis that the company will not have to sell its assets anytime soon and that it will also fulfil all its obligations.|
|Money Measurement Concept||According to this accounting concept in the theory base of accounting class 11 chapter, only the financial transactions will be noted or recorded in the books of accounts. Business entries or transactions that can be entered or expressed in monetary terms will be recorded in the books of accounts.|
|Accounting Period Concept||As per the theory base of accounting class 11 chapter, the accounting period concept states that every organisation or business chooses a specific period of time to complete an accounting cycle. Generally, a company prefer to choose a standard accounting period which we call it as accounting year (April-March).|
|Cost Concept||The cost concept or assumption in accounting states that all the assets of the firm are entered into the books of accounts at their purchase price. In the following years, the price remains the same and depreciation is deducted annually. The market price of the assets is not taken into consideration.|
|Dual Aspect Concept||This concept or assumption is the heart and soul of the theory base of accounting and accounting conventions. It is one of the golden rules of accounting which states that for every credit entry, there must be correspondence and equal debit entry too. So every transaction that is recorded in the books of account must have a two-fold effect and is recorded in two places i.e., debit and credit.|
|Realisation Concept||This accounting concept of the theory base of accounting class 11 chapter states that the revenue is only recognized when it is realized. Hence, in much simpler words, the profit earned will be recorded when it is actually earned.|
|Full Disclosure Concept||One of the most important concepts in the theory base of accounting class 11 chapter, the full disclosure concept of accounting states that all the relevant and important information must be disclosed in the books of accounts and other financial statements by the organisation. Therefore, no financial or business transactions shall be omitted from these statements for the benefit of the company.|
|Matching Concept||The matching concept of the theory base of accounting states that the revenue and the expenses of a transaction must be included in the same accounting period. Therefore, to determine the income of a period, all revenues and expenses (whether paid or not) should be included.|
|Consistency Concept||According to this concept, once the company decides on a certain accounting policy or standards, it should not be frequently changed until or unless there is a statutory requirement to present the financial records in a better manner. Once any policy or standard is adopted, it should be followed for a long period of time.|
|Conservatism Concept||This accounting concept fosters prudent accounting practices. It stipulates that profit must not be included it is realized. However, losses, even those that are not realized, but are unlikely to occur, should be reported in the financial statements. As such, all losses are recorded – those that have occurred or are likely to occur. However, only those profits which are realized are recognized.|
|Materiality Concept||This principle or concept of accounting states that all material facts should be included in the accounting process and the immaterial factors or facts which are insignificant in nature should be left out. The materiality of a transaction will depend on its nature, value and importance to the outside user.|
Systems Of Accounting
According to the theory base of accounting class 11 chapter, there are two basic systems of accounting which deals with recording transactions in the books of accounts. These systems of accounting are mentioned below.
- Single entry system of accounting: also known as the pure entry system of accounting, in the single entry system only a cash book is maintained by the business. All the cash related entries or transactions are recorded in the cash book. The system doesn’t follow a double-entry system and no other ledgers are maintained. The transactions are personal in nature and are simply recorded in a rough book. A few other prominent features of the single input system are,
- As a single cash book is held, personal and business transactions will be recorded together.
- This system will disregard both real and nominal accounts.
- Profits and losses can be determined, but we cannot represent the financial state or position of the organization.
- As no trial balance is prepared, the arithmetic accuracy of the accounts may not be verified.
- Double-entry system of accounting: this is the most followed, traditional and conventionally accepted system of accounting across the globe. In this accounting system, the financial transactions are recorded in the books of accounts and they always affect dual accounts i.e., debit and credit. It is also known as the debit and credit rule. Some features of the system are as follows:
- The three types of accounts are kept in this system – real accounts, nominal accounts and personal accounts.
- The mathematical correctness of the financial statements is verified by preparing the trial balance.
- The system does not involve a lot of changes.
- It prepares the balance sheet which will reflect the financial situation of the organization.
- Ease of detecting fraud and errors in this dual entry system.
Also Read: Class 11 Applications of Computers in Accounting
Basis Of Accounting
The chapter theory base of accounting class 11 talks about the basics of accounting. The basis of accounting solves the problem of time, that is when should be the revenue recognised (revenue recognition) in the books of accounts. In the basis of accounting, there are 2 approaches to this namely:
- Cash basis of accounting – Which is a simpler and uncomplicated approach of the basis of accounting. In this system, the income shall only be recorded when it comes in and in a similar manner, all the expenses will also be recorded only when they are actually made.
- Accrual basis of accounting – Which is a more logical and scientific approach to the basis of accounting. This basis of accounting gives a more representation of the financial position and the financial status of the business. In the accrual basis of accounting, the revenues and expenses are recognized in the time period in which they occur, not when the money actually comes in.
Classification Of Accounts/ Types Of Accounts
Business transactions are recorded under different accounts. Thus, an account is an individual and a formal record of a person, firm, assets, liabilities, goods, incomes, company and expenses. However, we need to classify accounts for better understanding and differentiation. Accounts can be classified as per the traditional approach as follows:
- Personal Accounts
- Natural personal accounts: example- Capital A/c, Debtors A/c, Creditors A/c
- Artificial personal accounts: example- Axis Bank, ICICI Bank, Maruti Suzuki Co., Shyam Enterprise Pvt. Ltd.
- Representative personal accounts: Example- Outstanding Salary A/c, Pre-paid Rent A/c.
- Impersonal Accounts
- Real Accounts
- Tangible real accounts such as Plant A/c, Furniture and Fixtures A/c
- Intangible real account such as Goodwill, patents, copyrights
- Nominal Accounts: related to expenses, losses, incomes and gains.
- Real Accounts
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Rules For Debit And Credit
There are certain rules which need to be followed for the process of debit and credit. They are mentioned below.
- Personal Account
Debit the Reciever
Credit the Giver
- Real Account
Debit what Comes in
Credit what Goes out
- Nominal Account
Debit all Expenses and Losses
Credit all Incomes and Gains
- Representative Personal Account
Debit the Debtor
Credit the Creditor
Generally Accepted Accounting Principles
Generally Accepted Accounting Principles, also known as GAAP, are some commonly followed principles of accounting that have earned global level of acceptance. GAAP set out some definitions, the accounting treatment of confusing entries, and even some industry-specific rules and procedures. The goal of GAAP is to provide a certain level of basic uniformity in the accounting statements of all organizations. This allows external users of financial statements to easily decipher and understand the company’s accounts. GAAP will also enable comparisons between firms, which will help these users make investment decisions. Another objective of GAAP is to ensure that financial statement representation is true and equitable.
Accounting Standards or AS in the theory base of accounting class 11 chapter refers to certain accounting rules, regulations and directiveness that are issued by the accounting and concerned governing bodies of the world. The purpose of AS is to make sure that all companies and organisations around the world must follow the same rules for accounting and have the same or similar format for their financial statements. These accounting standards are adopted by the country and then are being implemented in the whole economy. This means that same accounting standards have to be adopted by all the organisations and businesses in the country to have precise, accurate and uniform financial records.
For example, the Indian Accounting Standards (IAS) are issued by the Institute Of Chartered Accountants of India (ICAI). Such accounting standards are named and numbered in the same way as IFRSs. They are based on and adapted from GAAP with the necessary adjustments to the Indian economy. In total there are some 32 Indian Accounting Standards which deal with conflicting accounting issues, detailing the accounting treatment, rules, and directives.
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This brings us to the end of this blog on Theory Base of Accounting Class 11 chapter. We hope that the blog would be helpful for you all and prove to be an asset during your final exams for quick revision purposes. Are you confused about which stream to choose after class 12th? connect with our experts on Leverage Edu so that they can guide you every step of the way. Sign up for a free session today!