CLASSES FOR COMMERCE
133,Panchwati VastraNagar,NearRoshniGhar,Gwalior
CONTACT – SANJAY JOTWANI, MOB. 9630888222,9039415697
ANKIT JOTWANI, MOB. 7566344132,898244132(Economics)
Email: sanjayjtwn3@[Link]
NOTES
CLASS/SEMESTER : CLASS XI
SUBJECT/TOPIC : Theory base of Accountancy
1. BASIC/FUNDAMENTAL ACCOUNTING ASSUMPTIONS
Fundamental accounting assumptions are those assumptions that are presumed to
be followed by every enterprise while preparing their books of accounts.
An enterprise needn’t disclose such assumptions. If an enterprise is not following
the basic assumptions, they have to disclose the same alongwith the reasons.
Following are the fundamental accounting assumptions :
MT- GCA
a. Going Concern:
While preparing books of accounts, an enterprise always assumes that it will
continue its business for a foreseeable future i.e. the enterprise never intends to
shut down the business or reduce down its scale/size.
Due to going concern, clear distinction shall be made between revenue
expenditure & Capital expenditure.
b. Accrual concept:
According to accrual concept, an expense shall be considered as expense even
the same has not been paid yet. Similarly, an income shall be considered as
income even if the amount has not been received yet if the goods / services has
been provided.
Due to accrual concept, prepaid expenses, outstanding expenses, accrued
income, unaccrued income shall be recognized in books of accounts.
Credit Sales & Purchases are also recognized as income & expense respectively
due to accrual concept.
The enterprises that follows CASH CONCEPT records that transactions
only if the cash is received or paid.
c. Consistency concept:
While preparing books of accounts, an enterprise always assumes that
accounting technique \ method once adopted shall be followed by enterprise
over future years too. For example: if an enterprise charging depreciation using
SLM method, it will be assumed that the enterprise will follow the same in
accounting of future years also.
2. Other important accounting concepts:
i)Accounting entity /Business entity concept:
According to this concept, business is considered to be separate and distinct from
its owners. Business transactions are recorded from business point of view and
not owners.
All the transactions related to owner are debited/credited to drawings/capital A/c.
ii)Money Measurement Principle:
According to this principle, only those transactions & events that can be
measured in terms of money shall be recorded in books of accounts. For ex :
experience of manager/employees cannot be expressed in terms of money,
hence shall not be disclosed in books.
iii) Accounting Period Principle:
Although, every enterprise follows the going concern assumption, but it is
necessary for enterprise to get the knowledge of performance of its business
activities. Therefore, to have the knowledge about the performance/profitability
of the business activates, accounts are prepared on a periodic basis & that
accounting period is usually 1 year.
iv) Materiality Principle
According to this principle, all the material items shall be disclosed appropriately
in the books. Material event refers to the events knowledge of which may have
significant effect on the decision of the users of accountancy. Whether an item is
material or not depends upon the nature & size of the entity. An event may be
material for an entity but not for other.
For example: abnormal loss of Rs.1,50,000 is material for an entity having capital
of Rs.5,00,000 but for an entity with capital Rs.5,00,00,000 it may not be material
at all.
vi) Prudence/Conservatism Principle:
According to this principle, one should anticipate possible losses but
shall not anticipate possible or futures incomes at all.
That’s why , we always make provision for discount on debtors but not for
creditors. Also closing to be valued to lower of cost price or market price.
Vii) Cost Concept/ Historical Principle :
According to this concept, an assets shall always be shown at the price at which
it was acquired. It shall be recorded at at its current market price or realisale
value. Only depreciation shall be reduced for the cost of the assets.
For Ex: An assets acquired at Rs.50,000 will always be shown at this value even if
the market price comes to Rs.5,00,000 or Rs.15,000. Only depreciation will be
reduced from its cost every year.
viii) Matching Principle :
According to this principle, all the income of a year shall be matched with the
expenses incurred to earn that income. If an expenses do not relates to the
income of the current year , then it shall not be considered as expenses of
current year.
Because of this concept, closing stock shall not be considered as cost of goods
sold as that goods has not been sold yet.
Similarly, a machine bought shall not be considered as an expense of current
year, because the machine will provide benefits for a number of years &
depreciation shall be charged on it every year.
ix)Dual aspect principle:
According to this principle every transaction/event has two aspects debit &
Credit.
The total of debit will always be equal to the total of credit for every
transaction/event.
This principle gave the origin to the formula:
Assets = Capital + Liabilities
X) Revenue recognition concept:
According to this principle, an entity shall recognize its revenue when it has
performed its obligation i.e. have sold the good or have provided the services & it
have right to receive the payment for the same notwithstanding the fact the
amount has been received or not. Similarly, if an entity receives cash in advance
for goods or services to be provided in future, it shall not treat it as its revenue.
Xi ) Verifiable objectivity principle:
Every truncations in books of accounts shall be based on some evidences i.e. the
shall be supported by source documents such as cash memo, invoice,receipt etc.
the trasaction shall not be based of personal bias of owner.
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