THEORY BASE OF ACCOUNTING

According to this Principle, an assets is recorded in the books of accounts at its original cost comprising cost of acquisition and all expenditure incurred for making the assets ready to use. This cost becomes the basis of all subsequent accounting transactions for the asset, since the acquisition cost relates to the past, it is referred to as Historical cost.

Example :

Machinery purchased for ` 1,50,000 in cash and ` 5,000 was spent for installation of machine and ` 15,000 spent on carriage of machine. Then the cost of machine ` 1,70,000 will be in the books and depreciation will be charged on this cost. If market value of machine due to inflation has gone up to ` 2,00,000, then the increased value will not be recorded.
This cost is systematically reduced from year after year by charging depreciation and the assets are shown in the balance sheet at book value (cost-dep.). This principle brings objectivity into the accounts.

According to this principle, all expenses incurred by any enterprise during an accounting period are matched with the revenue recognized during the same period.
The matching principle facilitates to ascertain the amount of profit / loss incurred in a particular period by deducting the related expenses from the revenue recognized that period. The following treatment of expenses and revenue are done due to matching principle :

Ascertainment of Prepaid Expenses
Ascertainment of income received in advance.
Accounting of closing stock.
Depreciation charged on fixed assets.

According to this principle, every business transaction has two aspects- a debit and a credit of equal amount. In other words, for every debit there is a credit of equal amount in one or more accounts and vice- versa.

The system of recording transaction based on this principle is called as “Double Entry System”.

Due to this principle the two sides of Balance Sheet are always equal and the following accounting equation will always hold good at any point of time.

Total Assets = External Liabilities + Capital

Example :

Ram started business with cash ` 1,00,000. It increase cash in assets side and capital in liabilities side by ` 1,00,000.

Total assets ` 1,00,000 = External liabilities + Capital ` 1,00,000 + ` 1,00,000 = ` 1,00,0000

Double Entry System :

Concept :

According to this system every business transaction affects at least two accounts in opposite directions. e.g. if machinery is purchased for cash, machinery is increased whereas the cash is decreased. The amount of every transaction is written twice, once as a debit and again as a credit. The person or the account receiving a benefit is debited and the person or the account who gives something to the business is credited.

Bases of Accounting :

There are two bases of ascertaining profit or loss, namely (1) Cash Basis, and (2) Accrual Basis.

1. Cash Basis of Accounting : Under this system of accounting transactions is recorded in the books of accounts on the receipt/ payment of cash. Entry is not recorded when a payment or receipt merely due i.e. outstanding expenses, Accrued income are not treated. This method is contrary to the matching principle.


2. Accrual Basis of Accounting : Under this system of accounting, revenue and expenses are recorded when they are recognized i.e. Income is recorded as income when it is accrued (when transaction take place) irrespective of fact whether cash is received or not. Similarly expenses are recorded when they are incurred or become due and not when the cash is paid for them Under these system outstanding expenses, prepaid expenses, accrued income and income received in advance are identified. Under the companies Act 1956, all companies are required to maintain their accounts according to accrual basis of accounting. Difference between Accrual Basis of Accounting and Cash Basis of Accounting.



Basis	Accrual Basis of Accounting	Cash Basis of Accounting
Recording of transactions	Both cash and credit transactions are recorded	Only cash transactions are recorded
Profit or Loss	Corrected profit or loss is ascertained due the complete of record of transactions.	Correct profit of loss is not ascertained because it records only cash transaction
distinction between capital and revenue item	This method makes a distinction between capital and revenue nature	This method does not make a distinction between capital item and revenue nature item
Legal position	This basis is recognized under the companies Act 1956	This basis is not recognized under the companies Act 1956

Accounting Standard : Concept and Objectives -

The accounting principles or GAAP in the form of concepts and conventions have been developed to bring comparability and uniformity in the financial statements. But GAAP also allow a large number of alternative treatments for the same item. Different organizations may adopt different accounting policies for the same transaction or an organization may follow different accounting policies for the same item over different accounting period. As a result, the financial statements become inconsistence and incomparable.

As result it was felt that certain minimum standards should be universally applicable, so that the accounting statements have the qualitative characteristics of reliability, relevance, understandability and comparability. International Accounting Standard committee (IASC) was set up in 1973. (Now renamed as International Financial Reporting Committee IFRC). The Institute of Chartered Accountants of India (ICAI) and the Institute of Cost and Works Accountants of India ( ICWAI) are members of this committee. ICAI set up the Accounting Standard Board (ASB) in 1977 to identify the areas in which uniformity in accounting required.

ASB prepare and submit a draft accounting standard to the Council ICAI. The Council ICAI issue the draft for the comments of the Govt., industry and professionals etc. After due consideration fo comments received, the Council ICAI notify it for its use in financial statements.
Concept of Accounting Standard: Accounting standards are written statements, issued from time to time by institutions of accounting professional, specifying uniform rules or practices for drawing the financial statements.

Objectives of Accounting Standard :

1. Accounting standards are required to bring uniformity in accounting practices and policies- by proposing standard treatment in preparation of financial statements.
2. To improve reliability of the financial statement-accounts prepared by using accounting standard are reliable for various users, because these standard create a sense of confidence among the users.
3. To prevent frauds and manipulation- by codifying the accounting methods and practice.
4. To help auditors- accounting standard provide uniformity in accounting practice, so it help auditors to audit the books of accounts.

IFRS- International Financial Reporting Standard :

Concept - this term refers to the financial standard issued by International Accounting Standard Board (IASB). Numbers of IFRS issued so far is 8. GAAP is being replaced by the use of IFRS.

Applicability of IFRS in India :

Govt. of India opted for a stage implementation:

stages	Date of implementation	To be adopted by
1st stage	1st April 2011	companies that are listed in Nifty/SENSEX/Over seas/or net worth of over ` 1,000 crores.
2nd stage	1st April 2012	Insurance companies
3rd stage	1st April 2013	Listed companies with net worth of  over ` 500 crore. Banks and large Non-Banking Finance Companies (NBFC)
4th stage	1st April 2014	Listed companies over ` 500 crore, NBFC with net worth of over ` 500 crore. Urban co-opera tive Bank with net worth of over ` 200 crore

Note : The following organizations won’t be required to adopt IFRS :

1. Unlisted companies with a net worth under 500 crore and ;
2. Urban co-operative Bank with a net worth of under 200 crore.
3. Rural co-operative Bank.

CBSE Accountancy Class XI ( By Mr. Kailash Gururani )
Email Id : [email protected]