Theory base of accounting class 11 notes

Theoretical Base of Accounting
Accounting is often called the language of business, because the main purpose of language is to act as a means of communication. Accounting also communicates the results of business activities to the managers, owners, investors, creditors, bankers, government, etc. Accounting as an information method is a process that identifies, measures, records, summarises, and transmits business information to the interested parties. In every business a number of parties are interested for different purposes. Accounting provides all these parties with the information required by them.

In ancient times, accounting statements were required only by the owner of the business, but now various parties having interest in the business, such as business owners, investors, creditors, government and other parties, require these. Accounting statements reveal the profitability and efficiency of the business to various parties. Therefore, it is necessary to use accounting principles and standards in accounting. Accounting principles and accounting standards have been considered as the theoretical basis of accounting. Therefore, it is necessary that the accountants or accountants establish an interrelationship between the accounting principles, practices, concepts and accounting standards.

Meaning of Accounting Principles
Accounting principles refer to the rules used by an accountant or accountant while preparing financial statements and accounts. The accountant has to follow these rules while preparing proper accounts. Based on years of experience, experiment and need, the accounting profession has evolved certain guidelines or rules which can be used to record business transactions (or transactions) and prepare the income statement / profit and loss account and Their presentation in the form of sheets is done in the form of standards. These instructions and rules are called accounting principles.

Accounting principles are known by many names, different names; Such as Concepts, Traditions, Axioms, Postulates, Assumptions, etc.

Definitions of Accounting Principles

According to R.N. Anthony “The Rules and Conventions of accounting are Commonly referred to as (accounting) principles. “

According to AICPA “The word principle is used to mean a general law of Rule adopted or professed as a guide to action, a settled ground or basis of conduct or practice. “

In short, accounting principles mean all those rules and assumptions which explain the prevailing practices, help in the selection of conventions and methods and which are used in the preparation of financial statements. It is evident. that accounting principles govern the development of accounting techniques, practices and procedures

1. Theorybaseofaccountingclass11notes
TheoreticalBaseofAccounting
Accountingisoftencalledthelanguageofbusiness,becausethemainpurposeoflanguage
istoactasameansofcommunication.Accountingalsocommunicatestheresultsof
businessactivitiestothemanagers,owners,investors,creditors,bankers,government,etc.
Accountingasaninformationmethodisaprocessthatidentifies,measures,records,
summarises,andtransmitsbusinessinformationtotheinterestedparties.Ineverybusiness
anumberofpartiesareinterestedfordifferentpurposes.Accountingprovidesallthese
partieswiththeinformationrequiredbythem.
Inancienttimes,accountingstatementswererequiredonlybytheownerofthebusiness,but
nowvariouspartieshavinginterestinthebusiness,suchasbusinessowners,investors,
creditors,governmentandotherparties,requirethese.Accountingstatementsrevealthe
profitabilityandefficiencyofthebusinesstovariousparties.Therefore,itisnecessarytouse
accountingprinciplesandstandardsinaccounting.Accountingprinciplesandaccounting
standardshavebeenconsideredasthetheoreticalbasisofaccounting.Therefore,itis
necessarythattheaccountantsoraccountantsestablishaninterrelationshipbetweenthe
accountingprinciples,practices,conceptsandaccountingPrinciples
MeaningofAccountingPrinciples
Accountingprinciplesrefertotherulesusedbyanaccountantoraccountantwhilepreparing
financialstatementsandaccounts.Theaccountanthastofollowtheseruleswhilepreparing
properaccounts.Basedonyearsofexperience,experimentandneed,theaccounting
professionhasevolvedcertainguidelinesorruleswhichcanbeusedtorecordbusiness
transactions(ortransactions)andpreparetheincomestatement/profitandlossaccount
andTheirpresentationintheformofsheetsisdoneintheformofstandards.These
instructionsandrulesarecalledaccountingprinciples.
Accountingprinciplesareknownbymanynames,differentnames;SuchasConcepts,
Traditions,Axioms,Postulates,Assumptions,etc.
DefinitionsofAccountingPrinciples

2. AccordingtoR.N.Anthony“TheRulesandConventionsofaccountingareCommonly
referredtoas(accounting)principles.“
AccordingtoAICPA“ThewordprincipleisusedtomeanagenerallawofRuleadoptedor
professedasaguidetoaction,asettledgroundorbasisofconductorpractice.“
Inshort,accountingprinciplesmeanallthoserulesandassumptionswhichexplainthe
prevailingpractices,helpintheselectionofconventionsandmethodsandwhichareusedin
thepreparationoffinancialstatements.Itisevident.thataccountingprinciplesgovernthe
developmentofaccountingtechniques,practicesandprocedures
DifferentTermsusedforAccountingPrinciple
Accountingprinciplesareknownbydifferentnames,suchasConcept,Conventions,
Postulates,Assumptions,ModifyingPrinciples,Standards.)Andsoon.Themeaningsof
someofthesewordsareasfollows:
Concepts–Thetermconceptreferstotheessentialhypothesisorbasictheoreticalidea
thatisfundamentaltoaccountingpractice.
Conventions–Thetermconventionmeanstheconventionsguidingthepresentationof
accountingstatementsorfromcustoms.
MeaningofAccountingPostulates–
Accountingaxiomsrefertosuchassumptionswhichareaxioms,whichareacceptedbyall.
Theydonotrequireprooftobecorrect.Theprinciplesofaccountingarebasedonthese.
Alltheprinciplesofaccounting,theoriginatorofallofthemisconsideredtobetheaxiomatic
principlesofaccounting.Everyoneacceptsthemautomatically.Noinvestigationisdoneto
knowtheirveracity.That’swhytheyarecalledself-evident.
Inpractice,someauthorsinterpretthesamerulesandguidelinesintheformofconcept,
someintheformofconceptandsomeintheformofconvention.Thisisthereasonwhy
studentssometimesgetconfusedbyit.Insteadofgoingintothesemanticsofthese
technicalterms,itismoreimportanttofocusontheirpracticalusage.Inpracticeithasbeen
foundthatthewordsprinciple,concept,convention,modifierprinciple,concept,etc.areused
interchangeably.
Generallyacceptedaccountingprinciples(G.A.A.P)
Accountingprincipleshavebeenconsideredguiding,astheyprovidestandardsorstandards
forsoundaccountingpracticesandprocedures.Onthebasisofthesestandards,the
accountantspresentthetrueandrealstatusofthefinancialpositionandoperatingresultsof
thebusinessenterprise.Themainfeatureofaccountingprinciplesisthattheyarenotasfirm
anduniversalastheprinciplesofnaturalscienceslikechemistryorphysics.Therehasbeen

3. agradualdevelopmentofaccountingprinciples.Theyaretheresultofalongperiodof
experience,usageandneedsandproblems.Theyareevaluatednotonthebasisof
UniversalAcceptabilityorUniversalAcceptabilitybutonthebasisof‘GeneralAcceptability’.
Therefore,thenameGenerallyAcceptedAccountingPrinciples(G.A.A.P.)isusedfor
accountingprinciples.Itisatechnicalconceptthatdescribesthebasicrules,concepts,
practices,conventionsandproceduresthatapplyataparticularpointoftime.Represents
acceptedaccountingpractices.Theserepresenttheviewsofprofessionalaccountants
regardinggoodaccountingpracticesandmethods.
Themeaningof‘generally’isinthegeneralsense,thatis,relatedtomanypersons,
situationsandbehaviours.Therefore,generallyacceptedaccountingprinciples(G.A.A.P.)
referstoallthoserulesandguidelinesusedforthepurposeofbringinguniformityinthe
writingandpreparationandpresentationoffinancialstatements,whichareusedfor
recordingandpresentationofbusinesstransactions.Forexample,animportantruleisthat
alltransactionsintheaccountsarerecordedathistoricalcost,andthesetransactionsmust
beverifiedbycashreceiptsfromcurrencypayments.Doingsomakestherecordingprocess
moreobjectiveandaccountingstatementsmoreacceptabletodifferentusers.
AccountingConventions
TheOxfordAdvancedLearner’sDictionarydefinestraditionas:
(Convention:PracticeorCustombasedonGeneralconstant)
Accountingconvention/practicereferstothegeneralpracticethatisfolloweduniversallyin
therecordingandpresentationoffinancialstatementsofabusinessentity.Accounting
conventionsarefollowedintheformofcustoms,rituals,conventions,etc.Thesemake
accountinginformationmoreuseful.Thesehavebeendevelopedthroughregularand
consistentpracticeovertheyears.
Therearefourtypesofaccountingconventions:
(1)ConventionoffullDisclosure

4. (2)ConventionofConsistency
(3)ConventionofConservatism
(4)ConventionofMateriality
NatureofAccountingPrinciples
(1)ManMade—Accountingprinciplesaremanmade.Theirveracitycannotbetestedin
laboratoriesliketheprinciplesofothersciences.Accountingprinciplesarenotfirm.These
keeponchangingfromtimetotime,astheyarebasedonlogic,experienceandexperiment
andevolveaccordingtothechangingneeds.
(2)BroadGuidelines—Notallbusinessesarethesame,theyhavetheirownaccounting
method.Generallyacceptedaccountingprinciplesarenotapplicabletoanyparticularentity
orsituationbutareuniversallyapplicablebecausetheyarebroadguidelines.Infact,the
meaningof‘generally’isinageneralsense,thatis,itisrelatedtomanypersons,situations
andbehaviours.Accountantsusetheirdiscretionandjudgementwhenapplyingthese
generallyacceptedaccountingprinciples.
(3)NotUniversallyAcceptable—Accountingisasocialscience.Accountingprinciplesare
notstaticinnature,asaretheprinciplesofothernaturalsciences.Accountingprinciplesare
constantlychanging,influencedbytheneedsofusers,legal,socialandeconomic
environments.
(4)Ever–developing—Accountingprinciplesaredevelopingatarapidpace.Theseare
influencedbypractices,customs,environmentalfactors,viewsofprofessionalbodies,
governanceandotherfactors.
(5)LackofVerification—Oneofthenatureofaccountingprinciplesisthattheirtruth
cannotbetestedinthelaboratoryliketheprinciplesofothernaturalsciences.
NeedandImportanceofAccountingPrinciples

5. Accountinghasbeencalledthelanguageofbusiness.Justasknowledgeofgrammaris
necessaryforunderstandingandinterpretinglanguage,inthesamewayaccounting
principlesarerequiredforproperunderstandingandpresentationofaccounting.The
followingfactsarepresentedfortheneedofaccountingprinciples
(1)Essentialfordevelopment—Fortheall-rounddevelopmentofaccounting,itis
necessarythatitshouldhaveastrongfoundationofuniversallyacceptedprinciples.
(2)Foraccountingtreatment—Itisnecessarytohaveconcreterulesforaccounting
practice,sothatthepracticecanbetestedonthebasisofthoserules.
(3)understandingofaccountinginformation—Today,variouspeopleandorganisations
areinterestedinaccountinginformation.Accountinginformationcanbeunderstoodeasily
andcredibilitycanbemaintainedinit,forthisitisnecessarythattherecordingof
transactions,maintenanceofaccountsandpreparationoffinancialstatementsarebasedon
theprescribedrules-conceptsandacceptedpractices.
(4)Accordingtothechangesintheeconomicandsocialenvironment,thereisaneedforthe
developmentofaccountingprinciplesaccordingtothecircumstancesinordertogivea
scientificbasistothechangestakingplaceinthefieldofaccounting.
EssentialFeaturesofAccountingPrinciples
Accountingprincipleshavethefollowingcharacteristics:
(1)AccountingprinciplesareMan–Mad—Accountingprinciplesareman-made,notthe
resultoflaboratorytests.Theseprinciplesarenotfirmanduniversallikephysics,chemistry
andothernaturalsciences.Tomakeaccountingdatamoreuseful,manhasdevelopedthese
principlesinachangingsociety.Theseprinciplesactasgoodguidesforachievingthe
desiredobjectives,astheyarebasedonlogic,experienceandexperiment.
(2)Satisfyingthreeparameters—Therearethreecriteriaforuniversalacceptanceof
theories-(i)(Relevance),(ii)(Objectivity),and(iii)(Feasibility).
(i)Relevancemeansthattheinformationshouldbeusefulandservethepurposesofthose
whoareengagedinaparticularbusiness.Wouldliketogetinformationabout.Ifthisdoes
nothappenthenthereisnosignificanceoftheprinciple.Accountingfulfilsthisprinciple.
Accountinginformationalsoprovesusefulinmanagerialworkordecisionmaking.
(ii)Objectivitymeansthattheaccountinginformationshouldnotbeinfluencedbythe
personalviewsofthepersonsprovidingthatinformation.Therefore,objectivityrefersto
reliability,veracityandfacilityofinvestigationsothatthecorrectnessoftheinformationcan
bechecked.
(3)AccountingPrinciplesarefastDeveloping—Accountingprinciplesareinfluencedby
businesspractice,practices,customsandtheviewsandbeliefsofthoseusingthefinal
accounts.Apartfromthis,theideologyofgovernmentrepresentativesandbusinessclasses
alsohasanimpactonaccountingprinciples.

6. (4)DifferenceintheuseofPrinciple—Differentprinciplesareusedforthesameworkat
differentplaces
(5)LackofListofAccountingPrinciples—Thereisnosuchlistofprinciplesof
accountinginwhichalltheprinciplesofaccountingcanbefoundatoneplace.
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