Accounting Principles Class 11 Notes

Accounting Principles Class 11 Notes: Accounting statements disclose the profitability and solvency of the business to various parties.

It is, therefore, necessary that such statements should be prepared according to some standard language and set rules. These rules are usually called ‘Generally accepted accounting principles’ (GAAP).

Features of Accounting Principles

1) Accounting Principles are Uniform set of Rules

Accounting principles are a uniform set of rules or guidelines developed to ensure uniformity and easy understanding of the accounting information.

2) Accounting Principles are Man-made

Accounting principles are not right but flexible. They are bound to change with time in response to the changes in business practices.

3) Accounting Principles are Generally Accepted

Accounting principles are bases and guidelines for accounting and are generally accepted. The general acceptance of an accounting principle depends upon how well it satisfies the following three criteria:

• Relevance: A principle is relevant if it results in information that is useful to the user of the accounting information.
• Objectivity: A principle is objective if it is free from personal bias or judgments of those who furnish the information.
• Feasibility: A principle is feasible if it can be applied without undue complexity or cost.

Kinds of Accounting Principles

Accounting Principles are described by various terms such as assumptions, conventions, concepts, doctrines, postulates, etc. These principles can be classified mainly into two categories:

1. Accounting Concepts or Assumptions
2. Accounting Conventions

1) Accounting Concepts or Conventions

As per Accounting Standard (AS-1), issued by the Institute of Chartered Accountants of India, there are three fundamental accounting concepts or assumptions:

a) Going Concern Concept

As per this concept, it is assumed that the business will continue to exist for a long period in the future. The transactions are recorded in the books of the business on the assumption that it is a continuing enterprise.

It is on this concept that we record fixed assets at their original cost and depreciation is charged on these assets without reference to their market value.

Because of the concept of going concern, the full cost of the machine would not be treated as an expense in the year of its purchase itself.

It is also because of the going concern concept that outside parties enter into long-term contracts with the enterprise.

Without this concept, the classification of current and fixed assets and short and long-term liabilities cannot be made and such classification would be difficult to justify.

b) Consistency Concept

This concept states that accounting principles and methods should remain consistent from one year to another. These should not be changed from year to year, to enable the management to compare the Profit & Loss Account and Balance Sheet of the different periods and draw important conclusions about the working of the enterprise.

If a firm adopts different accounting principles in two accounting periods, the profits of the current period will not be comparable with the profits of the preceding period.

However, the consistency concept should not be taken to mean that it does not allow a firm to change the accounting methods according to the changed circumstances of the business.

Otherwise, the accounting will become non-flexible and the improved techniques of accounting will not be used.

c) Accrual Concept

In accounting, an accrual basis is used for recording transactions. It provides more appropriate information about the performance of business enterprises as compared to a cash basis.
The accrual concept applies equally to revenues and expenses.

In the accrual concept, revenue is recorded when sales are made or services are rendered and it is immaterial whether cash is received or not.

Similarly, according to this concept, expenses are recorded in the accounting period in which they exist in earning the revenues whether the cash is paid for them or not. The accrual concept is often described as a matching concept

d) Business Entity Concept

According to this concept, a business is treated as a unit separate and distinct from its owners, creditors, managers, and others. In other words, the owner of a business is always considered distinct and separate from the business he/she owns.

The business unit should have a completely separate set of books and we have to record business transactions from the firm’s point of view and not from the point of view of the proprietor.

The proprietor is treated as a creditor of the business to the extent of capital invested by him in the business.

The amount withdrawn by the proprietor from the business for his/her personal use is treated as his/her drawings.

e) Money Measurement Concept

Only those transactions and events are recorded in accounting which are capable of being expressed in terms of money. An event, even though it may be very important for the business, will not be recorded in the books of the business unless its effect can be measured in terms of money with a fair degree of accuracy.

The following are not recorded in the books due to Money Measurement Concept:

• Calibre or Quality of the management
• Image of the enterprise among people
• Loss of profit due to labor strike
• Capabilities of human resources

However, the money measurement concept suffers from the following limitations:

1. Transactions and events that are not capable of being measured in terms of money are not recorded even though they may be very important for the enterprise. For example, the human resources of the enterprise are very important to the enterprise.
2. Due to the changes in price level, the value of money does not remain the same over some time. On account of rises in prices, the value of the rupee today is much less than what it was.

Accounting Standards Class 11 Notes

f) Accounting Period Concept

As the business is intended to continue indefinitely for a long period, the true results of the business operations can be ascertained only when the business is completely up.

Thus, the entire life of the firm is divided into time intervals for the measurement of the profits of the business. The period of 12 months is usually adopted for this purpose.

g) Historical Cost Concept or Cost Concept

According to this concept, an asset is ordinarily recorded in the books of accounts at the price at which it was acquired. This cost becomes the basis of all subsequent accounting for the asset. Since the acquisition cost relates to the past, it is referred to as historical cost.

The justification for the historical cost concept lies in the following arguments:

• This cost is objectively verifiable.
• It is justified by the going concern concept which assumes that the enterprise will continue its activities indefinitely and thus there is no need to use the current values.
• Market values or current values of assets are difficult to determine.

Drawbacks of the historical concept are:

• Assets for which nothing is paid will not be recorded
• During periods of inflation, the figure of net profit disclosed by the profit and loss account will be seriously distorted because depreciation based on historical costs will be charged against revenues at current prices.
• Information based on historical cost may not be useful to management, investors, creditors, etc.

h) Dual Aspect Concept

According to this concept, every business transaction is recorded as having a dual aspect. In other words, every transaction affects at least two accounts.

If one account is debited, any other account must be credited. The system of recording transactions based on this principle is called a ‘Double Entry System’.

i) Revenue Recognition (Realization) Concept

Revenue means the amount which is added to the capital as a result of business operations. Revenue is earned by the sale of goods or by providing a service.

Concept or revenue recognition determines the time or the particular period in which the revenue is realized. Revenue is deemed to be realized when the title or the ownership of the goods has been transferred to the purchase.

It should be remembered that revenue recognition is not related to the receipt of cash.

Revenues in case of income such as rent, interest, commission, etc. are recognized on a time basis. For example, rent for March 2024, even if received on April 2024 will be treated as revenue for the financial year ending 31 March 2024.

As per the Revenue Recognition Concept:

• Advance received against sales is not recorded as sales.
• Credit sales are treated as revenue on the day sales are made and not when the amount is received from the buyer.

j) Matching Concept

This concept is very important for the correct determination of net profit. According to this concept, in determining the net profit from business operations, all costs that apply to the period’s revenue should be charged against that revenue.

Based on this principle, outstanding expenses, though not paid in cash are shown in the profit and loss account.

When some expense, say insurance premium is paid partly for the next year also, the part relating to next year will be shown as an expense only next year and not this year.

k) Objectivity Concept

This concept requires that accounting transactions should be recorded objectively, free from the personal bias of either management or the accountant who prepares the accounts.

It is possible only when each transaction is supported by verifiable documents and vouchers such as cash memos, invoices, sales bills, pay-in-slip, correspondence, agreements, etc.

Objectivity is one of the reasons for adopting the ‘Historical Cost’ as the basis of recording accounting transactions because the cost paid for an asset (i.e. historical cost) can be verified from the documents.

Difference between Accounting Concepts and Accounting Conventions

Accounting Conventions

The following are the main accounting conventions:

1. Full Disclosure
2. Materiality
3. Prudence/Conservatism

1) Full Disclosure Convention

This convention requires that all significant information relating to the economic affairs of the enterprise should be completely disclosed.

This convention is so important that the Companies Act makes ample provisions for the disclosure of essential information in the financial statements of a company like contingent liabilities, important information related to stocks in the footnote, etc.

2) Materiality Convention

This convention is an exception to the convention of full disclosure. According to this convention, items having an insignificant effect or being irrelevant to the user need not be disclosed.

3) Prudence/Conservatism Convention

According to this convention, all anticipated losses should be recorded in the books of accounts, but all anticipated or unrealized gains should be ignored.

Following are the examples of the application of this convention:

• Closing stock is valued at cost price or realizable value whichever is less.
• Provision for doubtful debts is created in anticipation of actual bad debts.
• A joint life insurance policy is shown only at surrender value or against the amount paid.
• Provision for a pending lawsuit against the firm, which may be decided in its favor.

These were the accounting principles class 11 notes. If you have any doubts regarding any topic written above, you can ask that in the comment section.