📑 Topics on this page (Jump to Topic):
📌 1. Basic Accounting Concepts
| Concept | Meaning | Example |
|---|---|---|
| Business entity | Business is separate from its owner | Capital is a liability of the business |
| Money measurement | Only items measurable in money are recorded | Staff morale not recorded |
| Going concern | Business will continue indefinitely | Fixed assets at cost less depreciation, not market value |
| Accounting period | Life split into periods (usually 1 year) | 1 April–31 March |
| Cost (historical cost) | Assets recorded at purchase price | Land bought for ₹5 lakh stays at ₹5 lakh |
| Dual aspect | Every transaction has two sides; Assets = Liabilities + Capital | Basis of double entry |
| Revenue recognition (realisation) | Revenue recorded when earned/realisable | Sale on delivery of goods |
| Matching | Match a period's expenses with its revenue | Adjusting outstanding and prepaid expenses |
| Accrual | Recorded when earned/incurred, not when cash moves | Accrued interest |
| Objectivity | Entries backed by verifiable evidence (vouchers) | Invoice, receipt |
📌 2. Accounting Conventions
| Convention | Meaning | Example |
|---|---|---|
| Full disclosure | Disclose all material information | Contingent liabilities in footnotes |
| Consistency | Same method year after year | Same depreciation method |
| Conservatism / prudence | Provide for probable losses, ignore anticipated profits | Stock at lower of cost or NRV; provision for doubtful debts |
| Materiality | Only significant items shown separately | Small items like pencils treated as expense |
⚠️ Exam Traps:
- AS-1 has three fundamental assumptions: going concern, consistency and accrual — no disclosure needed if followed; disclosure needed if not followed.
- Conservatism can create secret reserves — its main criticism.
- The historical cost concept rests on the going concern concept.
📌 3. GAAP & Bases of Accounting
- GAAP (Generally Accepted Accounting Principles) = the commonly accepted rules, concepts and conventions used to prepare financial statements; they evolve from practice and change over time.
- Qualities aimed at: reliability, relevance, understandability, comparability.
| Basis | Meaning | Used by |
|---|---|---|
| Cash basis | Entry only on cash receipt/payment | Professionals (doctors, lawyers), small bodies |
| Accrual basis | Entry when earned/incurred | Companies (compulsory under Section 128, Companies Act 2013) |
| Hybrid basis | Income on cash basis, expenses on accrual basis | Some professionals |
📌 4. Accounting Standards (AS) & Ind AS
- ICAI set up the Accounting Standards Board (ASB) in 1977; it frames the AS.
- Ind AS = Indian Accounting Standards converged with IFRS; notified by the Ministry of Corporate Affairs (MCA) and applied in phases from 1 April 2016.
- National Financial Reporting Authority (NFRA) — set up in 2018 under Section 132 of the Companies Act 2013; recommends and monitors accounting and auditing standards.
- IFRS are issued by the IASB (London).
| Standard | Subject |
|---|---|
| AS 1 | Disclosure of Accounting Policies |
| AS 2 | Valuation of Inventories |
| AS 3 | Cash Flow Statements |
| AS 9 | Revenue Recognition |
| AS 10 | Property, Plant & Equipment — includes depreciation (old AS 6 merged) |
| AS 26 | Intangible Assets |
💡 Memory Tip: Remember the fundamental assumptions: "GCA" — Going concern, Consistency, Accrual.
📌 5. Worked Examples
Example: applying the concepts to numbers
| Situation | Concept | Solution |
|---|---|---|
| Stock cost ₹50,000, NRV ₹46,000 | Conservatism (AS 2) | Stock at ₹46,000; ₹4,000 loss recognised now |
| Rent for the year ₹24,000, paid ₹20,000 | Accrual / matching | Expense ₹24,000; outstanding rent ₹4,000 is a liability |
| Insurance ₹12,000 paid on 1 October for one year; year ends 31 March | Matching | Expense ₹6,000 (6 months); prepaid ₹6,000 is an asset |
| Land bought for ₹10 lakh, market value now ₹14 lakh | Historical cost | Books keep it at ₹10 lakh |
| Owner took goods worth ₹5,000 for home | Business entity | Drawings ₹5,000 — not a business expense |
📌 6. Practice MCQs
📝 Practice MCQs (prepared by SF Prep — not PYQs)
Q1. Valuing stock at "cost or net realisable value, whichever is lower" follows: Practice
Correct answer: (A)
Providing for probable loss and ignoring anticipated profit is conservatism.
Providing for probable loss and ignoring anticipated profit is conservatism.
Q2. The accounting equation is based on the: Practice
Correct answer: (B)
Every transaction has two sides: Assets = Liabilities + Capital.
Every transaction has two sides: Assets = Liabilities + Capital.
Q3. Showing fixed assets at cost less depreciation rather than market value is due to the: Practice
Correct answer: (A)
The business will continue and assets are not for sale, so market value is irrelevant.
The business will continue and assets are not for sale, so market value is irrelevant.
Q4. As per AS-1, which of the following is NOT a fundamental accounting assumption? Practice
Correct answer: (C)
AS-1 assumptions: going concern, consistency and accrual.
AS-1 assumptions: going concern, consistency and accrual.
Q5. Creating a provision for doubtful debts is an example of: Practice
Correct answer: (D)
It provides in advance for a probable loss.
It provides in advance for a probable loss.
Q6. Not changing the depreciation method every year follows the convention of: Practice
Correct answer: (B)
The same method keeps results comparable across years.
The same method keeps results comparable across years.
Q7. Showing contingent liabilities as footnotes follows the convention of: Practice
Correct answer: (B)
All material information should reach users.
All material information should reach users.
Q8. Recording a period's expenses against that period's revenue is the: Practice
Correct answer: (C)
Matching is needed to find the correct profit.
Matching is needed to find the correct profit.
Q9. Treating small items like pencils and staplers as expenses, not assets, is based on: Practice
Correct answer: (D)
Immaterial items need not be accounted separately.
Immaterial items need not be accounted separately.
Q10. When did ICAI set up the Accounting Standards Board (ASB)? Practice
Correct answer: (A)
ASB was set up on 21 April 1977.
ASB was set up on 21 April 1977.
Q11. Ind AS are converged with: Practice
Correct answer: (D)
Ind AS are based on the IFRS issued by the IASB.
Ind AS are based on the IFRS issued by the IASB.
Q12. The accounting standard on valuation of inventories is: Practice
Correct answer: (A)
AS 2 — Valuation of Inventories.
AS 2 — Valuation of Inventories.
Q13. Which basis of accounting is compulsory for companies? Practice
Correct answer: (B)
Section 128 of the Companies Act 2013 requires the accrual basis and double entry.
Section 128 of the Companies Act 2013 requires the accrual basis and double entry.
Q14. "The business and its owner are two separate entities" — this is the: Practice
Correct answer: (C)
That is why the owner's capital is a liability of the business.
That is why the owner's capital is a liability of the business.
Q15. The cash basis of accounting is usually followed by: Practice
Correct answer: (C)
Their fee collection is uncertain, so they record on receipt.
Their fee collection is uncertain, so they record on receipt.
Q16. AS 10 (revised) deals with: Practice
Correct answer: (D)
The old depreciation standard AS 6 is now part of AS 10.
The old depreciation standard AS 6 is now part of AS 10.
Q17. The main criticism of the conservatism convention is that it may create: Practice
Correct answer: (A)
Understating profit builds hidden reserves.
Understating profit builds hidden reserves.
Q18. NFRA was set up under: Practice
Correct answer: (B)
NFRA was set up in 2018 under Section 132.
NFRA was set up in 2018 under Section 132.
Q19. Recording entries on verifiable evidence such as vouchers relates to: Practice
Correct answer: (A)
Objective evidence removes personal bias.
Objective evidence removes personal bias.
Q20. A feature of GAAP is that they: Practice
Correct answer: (C)
GAAP rest on general acceptance and change over time.
GAAP rest on general acceptance and change over time.