Theory Base of Accounting Class 11 Notes

GAAP is the body of common and widely accepted principles, standards, rules and conventions that governs how financial statements are prepared. It is not codified in a single law, but it exists so that the books of two different firms can be read and compared without ambiguity. Full disclosure is what makes GAAP binding: silence on a material item is itself a breach.

• Prudence or conservatism: anticipate no profit but provide for all known losses.
• Consistency: the same accounting methods from year to year, so the figures remain comparable.
• Going concern: the business is assumed to continue for the foreseeable future, so assets are not sold off to raise cash.
• Materiality: matters that could influence a user's decision must be disclosed; immaterial items need not clutter the statements.
• Full disclosure: all relevant information is given, including contingent liabilities and unusual items.
• Objectivity: transactions are recorded on the basis of evidence rather than personal opinion.

Concepts are the underlying ideas that give accounting principles their force. The following are the ones the rationalised syllabus retains, and each is a routine 1-mark question or an option in a 3-mark question.

• Business entity: the business is separate from its owner, so the owner's drawings are distinguished from expenses and personal payments.
• Money measurement: only events that can be expressed in money are recorded, which is why a factory's quality improvement is absent from the books.
• Going concern: the firm is expected to continue indefinitely, so assets are valued on a going-concern basis rather than at a forced-sale price.
• Accounting period: reporting is broken into equal intervals so that performance over a period can be compared.
• Cost concept: assets are recorded at the price paid, not at the current market value, and this is why land bought years ago rarely appears at today's worth.
• Dual aspect: every transaction has two aspects, a debit and a credit of equal amount, so the total of every account and of the trial balance is equal.
• Revenue recognition: revenue is recognised when it is earned and is realised, whether cash has moved or not.
• Matching: expenses are charged against the revenue of the same period, which is the reason an outstanding expense is adjusted for before the profit is declared.
• Conservatism: anticipated profits are not recognised but anticipated losses are provided for, so the reported figure is the more cautious of the possibilities.
• Full disclosure: nothing material is withheld from the user of the statements.
• Consistency: the same principles and methods period after period.
• Materiality: detail is given wherever it could change a decision.
• Objectivity: figures come from evidence, not estimation, wherever evidence exists.

The system of accounting is the set of rules and procedures followed to record transactions. It operates on one of two bases, and choosing the basis changes when revenue and expense appear in the profit and loss account.

• Cash basis: revenue and expenses are recognised only on receipt or payment of cash. It suits a small service firm and a non-going concern.
• Accrual basis: revenue is recognised when earned and expenses when incurred, with adjustments for outstanding expenses, prepaid expenses, accrued income and income received in advance.
• Accrual basis is more reliable because it matches activity to period, and it is the basis CBSE requires for a sole proprietorship in Chapter 9.

Take a trader whose year closes on 31 March. In the year he sold Rs. 4,00,000 of goods on credit, of which Rs. 3,20,000 was collected, and he bought Rs. 2,50,000 of goods on credit, of which Rs. 2,30,000 was paid. Rent of Rs. 36,000 was paid, none of it belonging to the next year. Every figure here is the same; only the basis of recognition differs.

• Business entity — the owner takes Rs. 20,000 for personal use. It is drawings, not salary, so it reduces capital and never appears in the profit and loss account.
• Money measurement — the factory trains its workers and the employees work hard. The improvement is real but has no rupee value, so the books cannot record it.
• Going concern — a machine is recorded at Rs. 3,00,000 and used for ten years, not at the Rs. 1,00,000 it would fetch if the firm closed tomorrow.
• Cost concept — land bought in 2015 for Rs. 8,00,000 still appears at Rs. 8,00,000 in 2026, whatever the market has done.
• Dual aspect — cash deposited into the bank is one transaction with two aspects: the cash account is credited and the bank account is debited, and the trial balance therefore agrees.
• Revenue recognition — a consultancy bills a client in March for work completed in March, collects in June. Under accrual the revenue belongs to March; under cash it appears in June.
• Matching — a fire insurance premium of Rs. 18,000 paid in April covers the year from April to the following March, so only Rs. 9,000 is charged this year and Rs. 9,000 is carried as a prepaid expense.
• Conservatism — a debtor of Rs. 2,00,000 is of doubtful recovery. The possible loss is provided for; a possible gain on a contract not yet earned is not recorded.
• Full disclosure — a suit is pending against the firm. The contingent liability is disclosed in the notes even though no provision is made.

Accounting standards are the written statements of the principles that produce the figures in the financial statements. They exist so that the same transaction is treated the same way in every firm and in every country, which is what makes a comparison of two balance sheets meaningful.

• AS are issued by the ICAI for Indian entities; Ind AS are the standards converged with IFRS and apply to listed companies.
• The applicability of a standard is decided by the body's form, size and the type of industry, so a small enterprise and a listed company do not follow an identical set.
• Standards are applied as a package: a disclosure required by one is not optional because another is inconvenient.