chapter 2 Theory Base of Accounting Free CBSE NCERT solution for class 11 Accountancy chapter 2 16th August

Accounting conventions are guidelines used to help companies determine how to record business transactions not yet fully covered by accounting standards. For further updates on accounting concepts and accounting principles keep visiting auditorforum.com. We are keen to know your feedback on this topic at auditor forum. Since the going concern concept postulates that the business will keep functioning continuously, accountants choose some convenient segment of time to ascertain income for that period. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgement. The concept of «materiality» is an important issue for auditors of financial accounts. Transactions Of The BusinessA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.).

The term objectivity refers to being free from bias or free from subjectivity. Accounting measurements are to be unbiased and verifiable independently. For this purpose all accounting transactions should be evidenced and supported by documents such as invoices, receipts, cash memos etc. These supporting documents form the basis for making entries in the books of account and for their verification by auditors. As per the items like depreciation and the provision for doubtful debts where no documentary evidence is available, the policy statements made by the management are treated as the necessary evidence. GAAP specifications include definitions of concepts and principles, as well as industry-specific rules. The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one public organization to another, and from one accounting period to another.

History of GAAP

Following laid down rules makes the job of an accountant easier. He is saved the trouble of making subjective decisions. For example, having a laid down policy on what is considered material for the purpose of recording expenses or capitalization can save a lot of hassle for the accounting staff.

There is an expectation of honesty and completeness in financial data collection and reporting. Financial data collection and asset valuations should not disrupt normal business operations. The business and accounting staff apply GAAP rules as standard practice.

Dual Aspect Concept

Explain how common size statements are prepared giving an example. Explain the usefulness of trend percentages in interpretation of financial performance of a company. Explain the qualitative characteristics of accounting information. B) In case of long term construction contracts, proportionate amount of revenue, based on part of the contract completed https://accounting-services.net/ by the end of the financial year is treated as realised. A) In case of sales on installment basis, only the amount collected in installments is treated as revenue. When you access this website or use any of our mobile applications we may automatically collect information such as standard details and identifiers for statistics or marketing purposes.

Q2 Explain in detail about the significance of the financial statements. Q4 Prepare the format of statement of profit and loss and explain its items. Q5 Prepare the format of balance sheet and explain the various elements of balance sheet. Q6 Explain how financial statements are useful to the various parties who are interested in the affairs of an undert… Q7 ‘Financial statements reflect a combination of recorded facts, accounting conventions and personal judgeme…

Objective Evidence Concept

For example, an item with a 10-year life is accounted for at 10% for 10 years. The concept ensures that each and every business entity is taxed separately. In law there is a doctrine called de minimis non curat lex, which means that the court will not consider trivial matters. Similarly, the accountant does not attempt to record events so insignificant that the work of recording them is not justified by the usefulness of the results. However, the concept does clearly allow for the amount of revenue recognized to be less than the selling price of the goods and services sold. The obvious situation is the sale of merchandise at a discount—at an amount less than its normal selling price. In such cases, revenue is recorded at the lower amount, not the normal price.

Thus, what is commonly called cash-basis accounting is actually a mixture of cash basis for some items and accrual basis for other items (especially product costs and long-lived assets). This mixture is also sometimes called modified cash-basis accounting to distinguish it from a pure cash-basis method. GAAP serves as a common language among accounting and finance professionals, thereby allowing stakeholders to compare financial statements across corporations and vast time spans.

Money Measurement Concept

Realization refers to inflows of cash or claims to cash (e.g., accounts, receivable) arising from the sale of goods or services. Thus, if a customer buys Rs. 500 worth of items at a grocery store, paying cash, the store realizes Rs. 500 from the sale. The example given above illustrates category since the commencing transaction for the entity results in the source of wealth, and form of wealth, cash, both increasing from zero to Rs. 1,00,000. By contrast, X might decide to withdraw Rs. 20,000 cash from the business. While the United States does not require IFRS, over 500 international SEC registrants follow these standards. The IFRS began almost 50 years ago under a different name.

Accounting concepts are the basic rules, assumptions, and conditions that define the parameters and constraints within which accounting operates. In other words, accounting concepts are generally accepted accounting principles, which form the fundamental basis of consistently preparing the universal form of financial statements. Q 8 The accounting entity concept recognizes a specific business enterprise as one accounting entity, separate and distinct from the owners, managers, and employees Q. Explain the various accounting concepts? of that business. The going concern principle, also known as continuing concern concept or continuity assumption, means that a business entity will continue to operate indefinitely, or at least for another twelve months. Financial statements are prepared with the assumption that the entity will continue to exist in the future, unless otherwise stated. The going concern assumption is the reason assets are generally presented in the balance sheet at cost rather that at fair market value.