Learn CBSE Accountancy Index Terms for Class 11, Chapter 2 Theory Base of Accounting
1. GAAP – Generally Accepted Accounting Principles (GAAP) is a defined set of rules and procedures that needs to be followed in order to create financial statements, which are consistent with the industry standards. GAAP is developed by the Financial Accounting Standards Board (FASB)
GAAP helps in ensuring that financial reporting is transparent and uniform across industries. As financial information is based on historical data, in order to facilitate comparison between data from various sources, GAAP must be followed.
2. Accounting Concepts – Accounting concepts are the establishments to place an interrelated bookkeeping structure in an organisation. Accounting ideas or concepts are exceptionally essential for each organisation, as this helps with staying in check with synchronisation and harmony with the businesses, concerning utilising a homogenous accounting concept. Each and every one of these additionally helps in better analysis. The ideas give the management a bird’s eye view and assist with handling the accounting framework with a similar tone to the executives.
3. Business Entity Concept – The business entity concept is one of the accounting concepts that states that the business and the owner are two separate entities and therefore, should be considered separate from each other. As per this concept, the financial transactions pertaining to the business entity should be recorded separately from the business owners’ transactions.
This concept is also known as the Economic Entity Concept, which means that the owner of the business and the business itself are considered two separate entities. Therefore, any transactions or events that impact the business will be recorded and events that impact any other entities apart from the business will be considered as irrelevant and not be entertained. If the transactions are not recorded in a mixed manner (involving both business and business owners in one statement), it will make the accounting information less usable.
4. Money Measurement Concept – The concept of money measurement is associated with such transactions of a business, which can be recorded in terms of money in the books of accounts. The records are to be kept in monetary units alone and not in physical units. All the assets are consequently shown in monetary terms for accounting purposes.
5. Going Concern Concept – Going concern concept is one of the accounting principles that states that a business entity will continue running its operations in the foreseeable future and will not be liquidated or forced to discontinue operations for any reason.
In other words, a going concern is a business that is capable of running the daily operations and has the capital and raw materials to do so. A business has the ability to pay off the debt during the accounting period. There should be demand in the market for the products or services offered by the company. There should be no changes in the law governing the business.
6. Accounting Period Concept – The accounting period concept is based on the theory that all accounting transactions of a business should be divided into equal time periods, which are referred to as accounting periods. The purpose of such a time period is that financial statements can be prepared and presented to the investors and also help in comparing the performance of the business with each time period.
By preparing financial statements within a particular time period, a company is able to determine the profit and loss that occurred during the period for the business. The lack of a proper accounting period will result in variation in results and makes it difficult to determine the financial position of the company at that time.
Generally, an accounting period is of 12 months (1 year). While the time period is fixed, the month can vary from company to company.
7. Cost Concept – The cost concept requires that all the assets must be recorded in the books of accounts at the price at which they were bought, which involves the cost incurred for transportation, installation, and acquisition. The cost concept is traditional in nature as a particular amount concerning the asset is paid on the date of purchase and does not change year after year.
8. Dual Aspect Concept – The dual aspect concept indicates that each transaction made by a business impacts the business in two different aspects which are equal and opposite in nature. This concept forms the basis of double-entry accounting and is used by all accounting frameworks for generating accurate and reliable financial statements.
9. Revenue Recognition/Realisation Concept – According to this principle, income is treated as being earned on the date on which it is realised, i.e. the date on which goods or services are transferred to the customers. Since this exchange of goods or services may be for cash or on credit, it is not important whether cash has actually been received or not.
10. Matching Concept – The matching concept states that expenses that are incurred in an accounting period should be matching with the revenue earned during that period. Thus all expenses for that accounting period whether or not paid during that year and all revenue whether earned or not during the period should be considered to calculate profit or loss. Hence, depreciation of the current year is charged against the current year’s revenue. In other words, the full cost of the asset is not treated as an expense in the year of its purchase itself rather it is spread over its useful life.
11. Full Disclosure Concept – Full disclosure principle refers to the concept that suggests that a business should report all the necessary information in their financial statements so that the users who are able to read the financial information are in a better position to make important decisions regarding the company.
A company can have various stakeholders which include creditors, suppliers, customers, investors, etc. who use the financial information for deciding on the course of action to be taken regarding their stance in the business. Since the external users of financial information lack any kind of information on how a business is run, the full disclosure principle makes it easier to determine how a company is functioning.
12. Consistency Concept – The consistency principle states that businesses should maintain the same accounting methods or principles throughout the accounting periods so that users of the financial statements or information are able to make meaningful conclusions from the data.
The consistency principle is useful for measuring trends in the business which is spread across many accounting periods. If the business keeps on changing accounting methods, it will create confusion and the financial statements will not be comparable across accounting periods.
13. Conservatism Concept – The conservatism concept is a concept in accounting that refers to the idea that expenses and liabilities should be recognised as soon as possible in a situation where there is uncertainty about the possible outcome and in contrast record assets and revenues only when they are assured to be received.
In other words, the principle of conservatism states that, if an accountant has two possible outcomes for any accounting issue, then he must choose the outcome which is most conservative or has the least possible chance of profit.
14. Materiality Concept – The materiality concept in accounting refers to the concept that all the material items should be reported properly in the financial statements. Material items are considered as those items whose inclusion or exclusion results in significant changes in the decision-making for the users of business information. The information present in the financial statements must be complete in terms of all material aspects so that it is able to present an accurate picture of the business.
15. Objectivity Concept – The objectivity concept in accounting is referred to as the principle that states that financial statements should be objective in nature. In other words, the financial information should be unbiased and free from any kind of internal and external influence.
The financial information presented in financial statements should be based on solid evidence and not just recorded based on some kind of opinion. The purpose served by this principle is that it does not let the opinions of management and accountants impact the preparation of financial statements at any given point in time.
16. Double Entry System – Double entry accounting is a form of accounting that records both debit and credit transactions. There are two facets of any transaction: debit and credit. Each transaction is recorded on both the debit and credit sides.
17. Dual Aspect – As per double-entry accounting, it is known that any transaction of a business is recorded in two separate accounts. The dual aspect concept indicates that each transaction made by a business impacts the business in two different aspects which are equal and opposite in nature. This concept forms the basis of double-entry accounting and is used by all accounting frameworks for generating accurate and reliable financial statements.
18. Single Entry System – A single entry system records each bookkeeping exchange with a single entry section to the bookkeeping records, as opposed to the more normal double-entry system.
In this case, a firm keeps up with just the cash account and the records of the debt holders account and the creditors account appropriately and it doesn’t keep up with the records of costs, wages, resources, and liabilities accounts, respectively.
19. Cash Basis of Accounting – The cash basis of accounting is referred to as that method of accounting where the accounting system recognises revenues and expenses only when there is inflow and outflow of cash.
In other words, the cash basis of accounting recognises the expenses incurred and revenues earned immediately when money changes hands between two parties involved in the transaction. In the cash basis of the accounting system, there is no consideration for income that is obtained from the credit accounts.
20. Accrual Basis of Accounting – The accrual basis is based on the concept that transactions are recorded as and when they occur. In other words, businesses that follow the accrual basis of accounting need to record revenues and expenses when a transaction occurs regardless of when payment for the same is received or made.
The accrual basis of accounting follows the matching principle, which states that expenses and revenues should be recognised in the same accounting period. The accrual basis of accounting is the preferred choice of accounting for large businesses and those businesses that deal mostly in credit.
21. Accounting Standards – Accounting standards may be defined as codified generally accel accounting principles. According to Kohler, “Accounting standard is a mode of conduct imposed on accountants by custom, law or professional body”. The following points highlight the need for accounting standards: Accounting standards make accounting procedures universally acceptable by removing the effect of diverse accounting practices and policies. Accounting standards serve as guides for solving one or more accounting problems. Accounting standards provide the basis upon which financial statements are prepared.
22. Sole Proprietorship Unit – A sole proprietorship can be explained as a kind of business or an organisation that is owned, controlled, and operated by a single individual who is the sole beneficiary of all profits or losses, and responsible for all risks. It is a popular kind of business, especially suitable for small businesses at least for their initial years of operation. This type of business is usually a specialised service such as hair salons, beauty parlours, or small retail shops.
23. Partnership Firm – A partnership firm is a type of business entity that is formed by the association of two or more members who have agreed to share the profits of the business, which is carried on by all partners or one partner acting for all.
According to the Indian Partnership Act, 1932, Section 4 defines Partnership as – “An agreement between persons who have agreed to share profits of the business carried on by all or any one of them acting for all.”
The members involved in the partnership are known as partners individually, while they are jointly known as a firm. The agreement on which terms and conditions of a partnership are written is known as Partnership Deed.
24. Societies – A society is a group of people participating in continuous social connection, or a broad social group occupying the same social or spatial territory, normally exposed to the same political power and cultural standards that are dominant. Society consists of people who have decided to work together through mutual advantage.
25. Trusts – Trust is a special form of organisation that emerges out of a will. The will maker exclusively transfers the ownership of a property to be used for a particular purpose. If the purpose is to benefit particular individuals, it becomes a ‘Private Trust’ and if it concerns some purpose of the common public or the community at large, it is called a ‘Public Trust’.
26. Hindu Undivided Family – Hindu Undivided Family business is a precise kind of business structure found only in India. This is one of the classical methods of business structure in the nation. It is administered by the Hindu Law. The source of membership in the company is birth in a family and 3 consecutive generations can be members of the company.
The business is managed by the head of the family (eldest member) and he is called Karta. However, all the members hold equal ownership over the property of an ancestor, and they are called co-parceners.
26. Association of Persons – Association of Persons (AOP) is a group of persons who come together for achieving a common goal and common objective, they have the same mindsets towards running a company. Members of the AOP can be natural or artificial persons.
27. Cooperative Societies – Cooperative societies are formed with the aim of helping their members. This type of business organisation is formed mainly by weaker sections of the society in order to prevent any type of exploitation from the economically stronger sections of the society.
Cooperative societies need to be registered under the Cooperative Societies Act, 1912 in order to function as a legal entity. Members of the society raise the capital within themselves.
28. Companies – A company is a legal entity established by a group of individuals to employ and regulate a business firm. A company may be coordinated in different ways for financial liability and tax purposes, relying upon the corporate law of its administration. The line of a business concern in an enterprise is in, will normally ascertain which business substructure it picks, for instance, a partnership, a corporation, or a proprietorship. In such a case, a company may be contemplated as a business kind. Hence, companies can be classified either on the basis of the liability of their core members or on the ground of the total number of members.
29. International Financial Reporting System (IFRS) – IFRS refers to the international financial reporting standards that are followed globally and includes instructions on how certain transactions should be reported in financial statements. IFRS is issued by the International Accounting Standards Board (IASB).
30. Goods and Service Tax (GST) – GST is a tax levied when a consumer buys a good or service. It is meant to be a single, comprehensive tax that will subsume all the other smaller indirect taxes on consumption like service tax, etc. It subsumed 17 large taxes and 13 cesses. It is a single tax on the supply of goods and services, right from the manufacturer to the end consumer. This is how it is done in most developed countries. More than 160 countries have implemented this system of taxation. GST does not tax or get into specific commodities.
31. Direct Tax – A direct tax can be defined as a tax that is paid directly by an individual or organisation to the imposing entity (generally the government). A direct tax cannot be shifted to another individual or entity. The individual or organisation upon which the tax is levied is responsible for the fulfilment of the tax payment.
The Central Board of Direct Taxes deals with matters related to levying and collecting Direct Taxes and the formulation of various policies related to direct taxes. A taxpayer pays a direct tax to a government for different purposes, including real property tax, personal property tax, income tax or taxes on assets, FBT, Gift Tax, Capital Gains Tax, etc.
32. Indirect Tax – The term indirect tax has more than one meaning. In the colloquial sense, an indirect tax such as sales tax, a specific tax, value-added tax (VAT), or goods and services tax (GST) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer).
The intermediary later files a tax return and forwards the tax proceeds to the government with the return. In this sense, the term indirect tax is contrasted with a direct tax which is collected directly by the government from the persons (legal or natural) on which it is imposed.
We hope that the offered Accountancy Index Terms for Class 11 with respect to Chapter 2: Theory Base of Accounting, will help you.
Related Links:
- Class 11 Accountancy Terms Part I – Chapter 1: Introduction to Accounting
- Class 11 Accountancy Terms Part I – Chapter 3: Recording of transactions – I
- Class 11 Accountancy Terms Part I – Chapter 4: Recording of Transactions – II
- Class 11 Accountancy Terms Part I – Chapter 5: Bank Reconciliation Statement
- Class 11 Accountancy Terms Part I – Chapter 6: Trial Balance and Rectification of Errors
- Class 11 Accountancy Terms Part I – Chapter 7: Depreciations, Provisions, and Reserves
- Class 11 Accountancy Terms Part II – Chapter 1: Financial Statements I
- Class 11 Accountancy Terms Part II – Chapter 2: Financial Statements II
- Class 11 Accountancy Terms Part II – Chapter 3: Accounts from Incomplete Records
- Class 11 Accountancy Terms Part II – Chapter 4: Applications of Computers in Accounting
