Accounting is concerned with recording, classifying, and summarising financial transactions and events, and interpreting their results. To make this financial information meaningful, reliable, and comparable for both internal and external users, a consistent theory base of accounting is essential.
Comparability is required for:
Generally Accepted Accounting Principles (GAAP) refer to the rules, guidelines, and conventions adopted for recording and reporting business transactions to bring uniformity and consistency in financial statements.
These are the fundamental ideas or basic assumptions underlying the theory and practice of financial accounting.
This concept assumes that a business has a distinct and separate entity from its owners. For accounting purposes, the business and its owners are treated as two separate entities.
Only those transactions and events that can be expressed in terms of money are recorded in the books of accounts.
It is assumed that a business firm will continue its operations indefinitely and will not be liquidated or wound up in the foreseeable future. This provides the basis for showing the value of assets in the balance sheet rather than their current market realizable value.
The life of an enterprise is divided into smaller, regular intervals (usually one year) called the Accounting Period to ascertain its financial performance and position at regular intervals.
Assets are recorded in the books of accounts at their purchase price (historical cost), which includes cost of acquisition, transportation, installation, and making the asset ready for use.
Every business transaction has a dual or two-fold effect and must be recorded in at least two accounts. This forms the foundation of the Double Entry System.
The fundamental accounting equation is:
Revenue is assumed to be realized when a legal right to receive it arises, i.e., when goods are sold or services are rendered, regardless of when the actual cash is received.
Expenses incurred in an accounting period must be matched with the revenues earned during that same period to determine the true profit or loss.
All material and relevant facts concerning the financial performance and position of an enterprise must be fully and completely disclosed in the financial statements and accompanying footnotes.
Accounting policies and practices should remain uniform and consistent from one period to another to ensure comparability of financial statements.
This concept follows the policy of "playing safe". It states that all anticipated losses should be recorded, but all unrealized gains or profits should be ignored.
Accounting should focus on material facts. An item is considered material if its knowledge would influence the decision of an informed user of financial statements.
Transactions should be recorded in an objective manner, free from the personal bias of accountants. This is achieved by supporting every transaction with verifiable documents or vouchers (e.g., cash receipts, invoices).
There are two primary systems of recording transactions:
There are two main approaches to the timing of recognition of revenues and costs:
Accounting Standards are written policy documents covering the aspects of recognition, measurement, treatment, presentation, and disclosure of accounting transactions in financial statements, issued by an authoritative body like the ICAI.
Benefits:
Limitations:
Goods and Services Tax (GST) is a destination-based tax on the consumption of goods and services, levied at all stages from manufacture to final consumption, with the benefit of input tax credit.
Components of GST:
| Component | Full Form | Levied By | Applicability |
|---|---|---|---|
| CGST | Central Goods and Services Tax | Central Government | Intra-State transactions (within the same state) |
| SGST | State Goods and Services Tax | State Government | Intra-State transactions (within the same state) |
| IGST | Integrated Goods and Services Tax | Central Government | Inter-State transactions (between different states) |
Key Characteristics of GST: