Class 11 Accountancy Theory Base of Accounting Notes

Class 11 Accountancy Theory Base of Accounting Notes

Chapter 2: Theory Base of Accounting

1. Meaning of Theory Base of Accounting

Accounting provides financial information to owners, investors, creditors, managers, and government authorities.

To make accounting information:

  • Reliable
  • Comparable
  • Consistent
  • Useful for decision-making

certain principles and concepts are followed. These form the Theory Base of Accounting.

2. Generally Accepted Accounting Principles (GAAP)

Meaning

GAAP refers to the accepted rules and guidelines used for recording and reporting business transactions.

Objectives of GAAP

  • Maintain uniformity in accounting.
  • Improve reliability of financial statements.
  • Make comparisons easier.
  • Provide accurate financial information.

Features

  • Developed through experience and practice.
  • Accepted by accounting professionals.
  • Changes with business and economic conditions.

3. Basic Accounting Concepts

These are the fundamental assumptions on which accounting is based.

List of Important 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 Concept
  12. Materiality Concept
  13. Objectivity Concept

4. Business Entity Concept

Meaning

Business and owner are treated as separate entities.

Example

If the owner introduces ₹1,00,000 as capital:

  • Business receives cash.
  • Business owes ₹1,00,000 to the owner.

Importance

  • Personal transactions are kept separate.
  • Helps determine true business profit.

5. Money Measurement Concept

Meaning

Only those transactions that can be expressed in money are recorded.

Recorded

✅ Sale of goods
✅ Purchase of machinery
✅ Salary paid

Not Recorded

❌ Manager’s efficiency
❌ Employee skills
❌ Company’s reputation

Limitation

Changes in the value of money due to inflation are ignored.

6. Going Concern Concept

Meaning

Business is assumed to continue for a long period and will not close soon.

Importance

Assets are recorded at cost and used over their useful life.

Example

Computer purchased for ₹50,000 with a life of 5 years.

Depreciation per year:

₹50,000 ÷ 5 = ₹10,000

Only ₹10,000 is charged each year.

7. Accounting Period Concept

Meaning

The life of a business is divided into fixed periods for reporting profits and losses.

Usually

  • One year
  • Financial Year: 1 April to 31 March

Purpose

  • Regular reporting
  • Better decision-making
  • Performance evaluation

8. Cost Concept

Meaning

Assets are recorded at their purchase cost.

Cost Includes

  • Purchase price
  • Transportation
  • Installation
  • Expenses to make asset ready for use

Example

Machine Price = ₹50,00,000

Transport = ₹10,000

Repairs = ₹15,000

Installation = ₹25,000

Total Cost = ₹50,50,000

Advantage

Provides objective and verifiable records.

Limitation

Market value changes are ignored.

9. Dual Aspect Concept

Meaning

Every transaction has two effects.

Accounting Equation

Assets = Liabilities + Capital

Example

Owner invests ₹50,000:

AssetsLiabilities + Capital
Cash +50,000Capital +50,000

Importance

Forms the basis of Double Entry System.

10. Revenue Recognition Concept

Meaning

Revenue is recorded when the right to receive it arises.

Example

Goods sold on credit in March:

Revenue is recognized in March, not when cash is received.

Important Rule

Revenue is recognized:

  • When goods are sold
  • When services are provided

11. Matching Concept

Meaning

Expenses should be matched with the revenues earned during the same accounting period.

Example

Revenue earned in 2025 = ₹1,00,000

Related expenses = ₹70,000

Profit = ₹30,000

Importance

Helps calculate correct profit or loss.

12. Full Disclosure Concept

Meaning

All important information should be disclosed in financial statements.

Examples

  • Pending lawsuits
  • Change in accounting policy
  • Important liabilities

Purpose

Helps users make informed decisions.

13. Consistency Concept

Meaning

Same accounting methods should be used every year.

Example

If Straight Line Method of depreciation is used this year, it should continue next year.

Benefit

Makes comparison between years easier.

Note

Changes are allowed if properly disclosed.

14. Conservatism Concept (Prudence)

Meaning

“Anticipate no profit but provide for all possible losses.”

Rules

  • Expected losses → Record
  • Expected gains → Ignore until realized

Examples

  • Provision for doubtful debts
  • Stock valued at Cost or Market Price, whichever is lower

Purpose

Avoids overstatement of profits.

15. Materiality Concept

Meaning

Only significant information should receive special attention.

Example

A new building is material because it affects business decisions.

Small stationery items may be treated as expenses directly.

Purpose

Avoid unnecessary details.

16. Objectivity Concept

Meaning

Transactions must be supported by evidence and should be free from personal bias.

Examples of Evidence

  • Bills
  • Invoices
  • Cash receipts
  • Vouchers

Importance

Makes accounting reliable and verifiable.

17. Systems of Accounting

A. Double Entry System

Features

  • Every transaction has two aspects.
  • One account is debited.
  • Another account is credited.

Advantages

  • Complete records
  • Greater accuracy
  • Easier error detection

B. Single Entry System

Features

  • Incomplete records
  • Mostly personal accounts and cash book maintained

Disadvantages

  • Less reliable
  • Difficult to determine exact profit

18. Basis of Accounting

A. Cash Basis

Meaning

Transactions are recorded only when cash is received or paid.

Example

Rent paid in January is recorded in January only.

Limitation

Does not follow matching concept.

B. Accrual Basis

Meaning

Transactions are recorded when they occur, regardless of cash payment.

Example

Credit sales are recorded on the date of sale.

Advantages

  • More accurate profit calculation
  • Matches income and expenses properly

19. Accounting Standards

Meaning

Written rules issued to ensure uniform accounting practices.

Objectives

  • Uniformity
  • Comparability
  • Reliability
  • Transparency

Issued By

Institute of Chartered Accountants of India (ICAI)

Need for Accounting Standards

  • Reduce differences in accounting practices.
  • Improve quality of financial statements.
  • Ensure proper disclosure.

Benefits of Accounting Standards

  1. Uniform accounting treatment.
  2. Better disclosure.
  3. Easy comparison among companies.
  4. Increased reliability.

Limitations of Accounting Standards

  1. Reduce flexibility.
  2. Difficult to apply in some situations.
  3. Cannot override laws.

20. GST (Goods and Services Tax)

Meaning

GST is a destination-based tax on the consumption of goods and services.

Main Components

CGST

  • Collected by Central Government.

SGST

  • Collected by State Government.

IGST

  • Applied on interstate transactions.

Characteristics of GST

  • Uniform tax system across India.
  • Destination-based tax.
  • Tax on both goods and services.
  • Input tax credit available.
  • Reduces multiple taxation.

Advantages of GST

  1. Removes multiple taxes.
  2. Reduces tax burden.
  3. Simplifies compliance.
  4. Eliminates cascading effect.
  5. Encourages business growth.
  6. Improves economic efficiency.
  7. Promotes exports.

Important One-Line Definitions (Exam Revision)

ConceptShort Definition
Business EntityBusiness and owner are separate.
Money MeasurementOnly monetary transactions are recorded.
Going ConcernBusiness will continue in future.
Accounting PeriodBusiness life divided into accounting years.
Cost ConceptAssets recorded at purchase cost.
Dual AspectEvery transaction has two effects.
Revenue RecognitionRevenue recorded when earned.
MatchingExpenses matched with revenue.
Full DisclosureAll relevant information disclosed.
ConsistencySame accounting methods used regularly.
ConservatismRecord losses, not unrealized profits.
MaterialityFocus on important information.
ObjectivityTransactions must be verifiable.

Most Important Exam Questions

2 Marks

  • Define GAAP.
  • What is Accounting Period Concept?
  • State the Accounting Equation.
  • What is Conservatism Concept?

3 Marks

  • Explain Business Entity Concept with example.
  • Explain Money Measurement Concept.
  • Explain Cost Concept.

5 Marks

  • Explain Dual Aspect Concept with accounting equation.
  • Explain Matching Concept.
  • Explain Revenue Recognition Concept.
  • Explain Consistency and Conservatism Concepts.

Long Answer

  • Discuss the Basic Accounting Concepts.
  • Explain the need and benefits of Accounting Standards.
  • Differentiate between Cash Basis and Accrual Basis of Accounting.

Question Bank

PART A: VERY SHORT ANSWER QUESTIONS (1 MARK)

  1. What is accounting?
  2. Define accounting theory.
  3. What is GAAP?
  4. Expand GAAP.
  5. What is an accounting concept?
  6. What is an accounting convention?
  7. Define Business Entity Concept.
  8. Define Money Measurement Concept.
  9. Define Going Concern Concept.
  10. Define Accounting Period Concept.
  11. Define Cost Concept.
  12. Define Dual Aspect Concept.
  13. Define Revenue Recognition Concept.
  14. Define Matching Concept.
  15. Define Full Disclosure Concept.
  16. Define Consistency Concept.
  17. Define Conservatism Concept.
  18. Define Materiality Concept.
  19. Define Objectivity Concept.
  20. What is Double Entry System?
  21. What is Single Entry System?
  22. What is Cash Basis of Accounting?
  23. What is Accrual Basis of Accounting?
  24. What are Accounting Standards?
  25. Who issues Accounting Standards in India?
  26. What is GST?
  27. Expand GST.
  28. What is CGST?
  29. What is SGST?
  30. What is IGST?

PART B: FILL IN THE BLANKS

  1. Accounting records transactions in ______ terms.
  2. Business and owner are treated as ______ entities.
  3. The assumption of continuity is called ______ Concept.
  4. Assets are recorded at their ______ cost.
  5. Every transaction has ______ aspects.
  6. Revenue is recognized when it is ______.
  7. Expenses are matched against ______.
  8. Significant information is disclosed under ______ Concept.
  9. The principle of caution is known as ______.
  10. Accounting methods should remain ______ over time.
  11. Accounting statements should be supported by ______ evidence.
  12. Cash Basis records transactions only when ______ is received or paid.
  13. Accrual Basis records transactions when they are ______.
  14. GST stands for ______.
  15. Interstate supplies attract ______.

Answers: Monetary, Separate, Going Concern, Historical, Two, Earned, Revenue, Materiality, Conservatism, Consistent, Objective, Cash, Incurred/Earned, Goods and Services Tax, IGST

PART C: TRUE/FALSE

  1. Accounting records non-monetary events.
  2. Business Entity Concept separates owner and business.
  3. Going Concern assumes business will close soon.
  4. Cost Concept records assets at market value.
  5. Double Entry is based on Dual Aspect Concept.
  6. Revenue should be recorded when earned.
  7. Expenses are matched with revenues.
  8. Consistency improves comparability.
  9. Conservatism anticipates profits.
  10. Materiality ignores significant items.
  11. Objectivity requires documentary evidence.
  12. Cash Basis follows accrual principle.
  13. Accrual Basis provides better profit measurement.
  14. Accounting Standards improve uniformity.
  15. GST is an indirect tax.

PART D: MULTIPLE CHOICE QUESTIONS

Business Entity Concept

  1. Personal expenses paid from business cash are treated as:
    • A. Revenue
    • B. Drawings
    • C. Expense
    • D. Liability

Answer: B

  1. Which concept separates owner from business?
    • A. Cost
    • B. Matching
    • C. Business Entity
    • D. Materiality

Answer: C

Money Measurement Concept

  1. Which of the following can be recorded?
    • A. Employee honesty
    • B. Customer satisfaction
    • C. Building purchased
    • D. Staff loyalty

Answer: C

  1. Accounting records:
    • A. Physical units only
    • B. Monetary transactions
    • C. Social activities
    • D. Moral values

Answer: B

Going Concern Concept

  1. Which assumption allows depreciation?
    • A. Conservatism
    • B. Going Concern
    • C. Materiality
    • D. Objectivity

Answer: B

  1. Going Concern means:
    • A. Business will close shortly
    • B. Business will continue
    • C. Business has losses
    • D. Business is profitable

Answer: B

Cost Concept

  1. Machinery purchased for ₹1,00,000 should be recorded at:
    • A. ₹1,00,000
    • B. Market Value
    • C. Replacement Cost
    • D. Estimated Value

Answer: A

  1. Cost Concept is also known as:
    • A. Historical Cost Concept
    • B. Current Value Concept
    • C. Market Value Concept
    • D. Revenue Concept

Answer: A

Dual Aspect Concept

  1. Every transaction affects:
    • A. One account
    • B. Two accounts
    • C. Three accounts
    • D. Four accounts

Answer: B

  1. Dual Aspect forms the basis of:
  • A. GST
  • B. Costing
  • C. Double Entry
  • D. Auditing

Answer: C

Revenue Recognition

  1. Revenue is generally recognized when:
  • A. Cash received
  • B. Goods sold
  • C. Loan obtained
  • D. Capital introduced

Answer: B

  1. Commission earned but not received is recorded under:
  • A. Cash Basis
  • B. Accrual Basis
  • C. Single Entry
  • D. None

Answer: B

Matching Concept

  1. Salary for current year should be matched with:
  • A. Current year’s revenue
  • B. Next year’s revenue
  • C. Previous year’s revenue
  • D. Capital

Answer: A

  1. Matching Concept helps determine:
  • A. Assets
  • B. Liabilities
  • C. Correct Profit
  • D. Capital

Answer: C

Conservatism

  1. Conservatism requires:
  • A. Anticipate profits
  • B. Ignore losses
  • C. Anticipate losses
  • D. Overstate assets

Answer: C

  1. Stock valuation under conservatism:
  • A. Higher value
  • B. Lower of cost or market value
  • C. Market value
  • D. Selling price

Answer: B

Materiality

  1. Materiality refers to:
  • A. All information
  • B. Significant information
  • C. Irrelevant information
  • D. Personal information

Answer: B

Objectivity

  1. Objectivity requires:
  • A. Personal opinion
  • B. Documentary evidence
  • C. Estimates only
  • D. Assumptions only

Answer: B

Accounting Standards

  1. Accounting Standards aim at:
  • A. Uniformity
  • B. Confusion
  • C. Manipulation
  • D. Tax collection

Answer: A

  1. Accounting Standards are issued by:
  • Institute of Chartered Accountants of India
  • Reserve Bank of India
  • SEBI
  • GST Council

Answer: ICAI

PART E: MATCH THE FOLLOWING

Column AColumn B
Business EntitySeparate identity
Going ConcernContinuity
Cost ConceptHistorical Cost
Revenue RecognitionIncome
MatchingRevenue-Expense
ConservatismPrudence
ConsistencyUniform Methods
MaterialitySignificant Items
ObjectivityEvidence
GSTIndirect Tax

PART F: DIFFERENTIATE BETWEEN

  1. Accounting Concepts and Accounting Conventions
  2. Cash Basis and Accrual Basis
  3. Single Entry and Double Entry
  4. CGST and SGST
  5. Intrastate Supply and Interstate Supply
  6. Historical Cost and Market Value
  7. Revenue Recognition and Matching Concept
  8. Materiality and Full Disclosure

PART G: SHORT ANSWER QUESTIONS (3 MARKS)

  1. Explain Business Entity Concept with example.
  2. Explain Money Measurement Concept.
  3. Explain Going Concern Concept.
  4. Explain Accounting Period Concept.
  5. Explain Cost Concept.
  6. Explain Dual Aspect Concept.
  7. Explain Revenue Recognition Concept.
  8. Explain Matching Concept.
  9. Explain Full Disclosure Concept.
  10. Explain Consistency Concept.
  11. Explain Conservatism Concept.
  12. Explain Materiality Concept.
  13. Explain Objectivity Concept.
  14. Explain Cash Basis Accounting.
  15. Explain Accrual Basis Accounting.
  16. Explain Single Entry System.
  17. Explain Double Entry System.
  18. Explain Accounting Standards.
  19. Explain GST.
  20. Explain Input Tax Credit.

PART H: LONG ANSWER QUESTIONS (5–8 MARKS)

  1. Explain all accounting concepts with examples.
  2. Discuss accounting conventions and their importance.
  3. Explain the role of GAAP in accounting.
  4. Explain advantages and limitations of Accounting Standards.
  5. Distinguish between Cash Basis and Accrual Basis in detail.
  6. Distinguish between Single Entry and Double Entry System.
  7. Explain the need and objectives of Accounting Standards.
  8. Discuss the advantages of GST.
  9. Explain the structure of GST in India.
  10. Explain why accounting concepts are necessary for preparing financial statements.

PART I: ASSERTION–REASON QUESTIONS

  1. Business and owner are separate entities. / Personal expenses are treated as drawings.
  2. Assets are recorded at cost. / Cost Concept is followed.
  3. Revenue is recognized when earned. / Revenue Recognition Concept applies.
  4. Losses are anticipated. / Conservatism Principle is followed.
  5. Accounting methods should remain unchanged. / Consistency improves comparability.
  6. Significant information should be disclosed. / Materiality Concept applies.
  7. Transactions require documentary evidence. / Objectivity Concept applies.
  8. Expenses should be matched with revenues. / Matching Concept applies.
  9. Accounting Standards improve comparability. / Uniform rules are followed.
  10. GST is a destination-based tax. / Tax is collected where goods/services are consumed.

PART J: CASE STUDY QUESTIONS

Case 1: Business Entity + Cost

Aman started business with ₹8,00,000. He purchased furniture for ₹50,000 and withdrew ₹10,000 for personal use.

Questions:

  1. Identify capital introduced.
  2. Which concept separates owner and business?
  3. Are drawings business expenses?
  4. At what value should furniture be recorded?
  5. Which concept applies to furniture valuation?

Case 2: Revenue Recognition + Matching

A firm earned ₹20,000 commission in March but received it in April. Salary of ₹5,000 for March remained unpaid.

Questions:

  1. Which basis records commission in March?
  2. Which concept applies?
  3. Which concept applies to salary?
  4. What profit principle is followed?
  5. Which accounting basis is more appropriate?

Case 3: GST

A dealer in Chhattisgarh sells goods:

  • Within Chhattisgarh
  • To Maharashtra

Questions:

  1. Which GST applies on intrastate supply?
  2. Which GST applies on interstate supply?
  3. Expand CGST.
  4. Expand SGST.
  5. Expand IGST.