INTRODUCTION

Theory Base of Accounting consists of accounting concepts,

principles, rules, guidelines, and standards that help an individual in
understanding the basics of accounting. These Concepts are developed
over time to bring consistency and uniformity to the accounting
process.
GAAP or Generally Accepted Accounting Principles are the
rules and procedures defined and developed by the Financial
Accounting Standards Board (FASB) that an organization has to follow
for the proper creation of financial statements consistent with the
industry standards. The General Accepted Accounting Principles are
also known as Accounting Concepts. The primary objective of GAAP
is to ensure a basic level of consistency in the accounting statements of
an organization. Financial statements prepared with the help of GAAP
can be easily used by the external users of the accounts of a company.
Accounting standards are a set of guidelines and rules
established to ensure consistency, comparability, and transparency in
financial reporting. These standards dictate how financial transactions
and events should be recorded, summarized, and disclosed in financial
statements. They are essential for maintaining the integrity and
reliability of financial information, thereby facilitating informed
decision-making by users.

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ACCOUNTING CONCEPTS
Accounting concepts are fundamental principles that guide the
preparation, presentation, and interpretation of financial statements.
These concepts ensure consistency, relevance, and reliability in
accounting practices.

IMPORTANCE
1.Consistency
Accounting concepts help to ensure that financial statements are
prepared in a consistent manner from period to period. This makes it
easier for users to compare financial statements over time and to
identify trends.
2.Comparability
Accounting concepts help to make financial statements more
comparable between different companies. This allows users to compare
the financial performance of different companies and to make informed
investment decisions.
3.Transparency
Accounting concepts require companies to disclose all relevant
financial information in their financial statements. This helps to
improve the transparency of financial reporting and to reduce the risk
of fraud and financial abuse.
4.Accountability
Accounting concepts help to hold companies accountable for their
financial performance. By providing accurate and reliable financial
information, accounting concepts help to ensure that companies are
managed in a responsible and ethical manner.
5.Informed Decision-making

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 Accounting concepts help users interpret financial statements
accurately and assess an entity's financial health and performance.
Whether making investment decisions, extending credit, or evaluating
managerial performance, stakeholders rely on accounting concepts to
make informed decisions that affect their interests.

BASIC ACCOUNTING CONCEPTS

These are the basic ideas or assumptions under the theory base of
accounting that provide certain working rules for the accounting
activities of an organization. There are 13 important Accounting
Concepts that are to be followed by companies to prepare true and fair
financial statements.

1.Business Entity Concept

The business entity concept states that the business enterprise is
separate from its owner. In simple terms, for accounting purposes, the
business and its owners are treated separately. If an owner invests
money in the business, it will be treated as a liability for the business.
However, if the owner takes out some money from the business for
personal use, it will be considered drawings. Therefore, assets and
liabilities of a business are the business’s assets and liabilities, not the
owner’s. Hence, the books of accounts include the accounting records
from the point of view of the business instead of the owner.

2.The money measurement concept

The money measurement concept states that only transactions and
events that can be measured in monetary terms should be recorded in
the accounting records. This means that qualitative factors, such as
employee satisfaction and customer loyalty, cannot be recorded in the
accounting records. The money measurement concept is important
because it ensures that financial statements are reliable and comparable.

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If accountants were allowed to record qualitative factors in the
accounting records, financial statements would be difficult to interpret
and compare.

3.Conservatism Concept
The conservatism or prudence concept believes in playing safely, while
recording the transactions in the book of accounts. According to this
concept, an organization should adopt a conscious approach and should
not record its profits until they are realized. However, it states that the
organization should realize any loss even if the company has not
incurred it yet, or if there is a slight possibility of loss to occurring in
the future. No matter how pessimist attitude this concept shows, it is
essential for an organization to deal with uncertainty and allows them
to protect the interest of creditors against any unwanted distribution of
its assets.
4.Materiality Concept
The materiality concept suggests that an organization should focus on
material facts only. In simple words, an organization should not waste
its time on immaterial facts that do not help in determining its income
for the period. In order to differentiate a fact as material or immaterial,
one should consider its nature and the amount involved. Therefore, a
fact will be considered material if the accountant believes that the
information can influence the decisions of a user of the financial
statements.

5.Objectivity Concept
The objectivity concept of accounting states that an organization should
record transactions in an objective manner. It means that the recording
should be free from any kind of biasness by accountants and other
people. Objectivity in the recording of transactions is possible when the
transactions of the firm are supported by verifiable vouchers or

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documents. The purpose of the objectivity concept is that it does not let
the firm’s management and accountants’ opinions impact the financial
statements and provide a false image. The concept can be helpful for
an organization in creation of its goodwill. Besides, it warns the
companies about the penalties if there is any sort of misinterpretation
in the financial statements.

6.Going Concern Concept

The going concern concept assumes that an organization would
continue its business operations indefinitely. It means that it is assumed
that the business will run for a long period of time, and will not liquidate
in the foreseeable future. It is one of the most important assumptions or
concepts of accounting. It is because the going concern concept
provides the firm with the basis to show its assets’ value in the balance
sheet.

7.Cost Concept
The cost concept of accounting states that an organization should
record all of its assets at their purchase price in the books of accounts.
This amount also includes any transportation cost, acquisition cost,
installation cost, and any other cost spent by the firm for making the
asset ready to use.
Therefore, the cost concept or historical cost concept states that since
the company is not going to sell the assets as per the going concern
concept, there is no point in revaluing the assets and showing their
current value. Besides, for practical reasons also, the accountants of an
organization prefer to report the actual costs to its market values.
However, the asset amount listed in the books of accounts of the firm
does not indicate the value at which it can sell the asset.

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8.Dual Aspect or Duality Concept
The dual aspect or duality concept is the foundation of any business.
The concept describes the basis of recording business transactions in
the books of accounts. According to the concept, every transaction of
the business has a two-fold effect. Hence, it should record every
transaction in two places. In simple words, two accounts will be
affected by a single transaction. This concept can be expressed as the
Accounting Equation:
Assets = Liabilities + Capital
The accounting equation states that the total of assets of an organization
is always equal to the total of its owners’ and outsiders’ claims. These
claims or equity of the firm’s owners is also known as Capital or
Owner’s Equity, and the outsiders’ claims are known as Liabilities or
Creditors’ Equity.

9.Revenue Recognition Concept

The revenue recognition concept, also known as the realization
concept, as the name suggests, defines that an organization should
record its revenue from business only when it is realized, not when the
firm has received the cash. This principle helps to ensure that the
company's financial statements accurately reflect its performance.

10.Matching Concept
The matching concept states that an organization should recognize its
expenses in the same financial year if the expense is related to the
revenue of that year. In simple words, if a firm is earning revenue in an
accounting period, even though it incurs the expenses related to that
revenue in the next accounting year, the expense will be realized in the
same accounting year when the revenue has been realized by the firm.

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11.Full Disclosure Concept
As the name suggests, the full disclosure concept states that an
organization should disclose all the facts regarding its financial
performance. It is because the information mentioned in the financial
statements is used by different internal and external users, like
investors, banks, creditors, management, employees, financial
institutions, etc., for making financial decisions. Hence, the concept
says that all relevant and material facts or figures about an organization
must be disclosed in its financial statements. To fully ensure this
concept, an organization has to prepare its Balance Sheet and Profit &
Loss Account based on the format provided by the Indian Companies
Act 1956. Besides, different regulatory bodies, like SEBI, also make it
compulsory for companies to completely disclose the true and fair
picture of their state of affairs and profitability.

12.Consistency Concept
The consistency concept states that there should be consistency or
uniformity in the accounting practices and policies followed by an
organization. It is because the accounting information provided by an
organization through its financial statements would be beneficial only
when it allows its users in making a comparison between the statements
of different years or with statements of other firms. However, it does
not mean that the organization cannot change its accounting policies
when necessary. The firm can make required changes in its policies by
properly indicating the probable effect of the changes on its financial
results. For example, if a company’s management wants to compare the
net profit of the current year with the previous year, it can do so only
when the accounting policies followed by the company in both years
are the same. For example, if a company has used the SLM depreciation
method in the previous year and the WDV method of depreciation in
the current year; it would not be able to compare the figures.

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13.Accounting Period Concept
The accounting period concept defines the time span at the end of
which an organization has to prepare its financial statements to
determine whether they have earned profits or incurred losses during a
specified time span. It also states the exact position of the firm’s assets
and liabilities at the end of the specified time span. This information is
used by different internal and external users of the organization for
various purposes regularly. The normal interval for the preparation of
the financial statements is one year.

ACCOUNTING STANDARDS
Accounting standards refer to a set of guidelines, rules, and principles
established to regulate and standardize the preparation, presentation,
and disclosure of financial statements. These standards ensure
consistency, comparability, transparency, and reliability in financial
reporting across different entities and industries. Accounting standards
dictate how various financial transactions and events should be
recognized, measured, recorded, and disclosed in financial statements,
such as the income statement, balance sheet, and statement of cash
flows.
Generally Accepted Accounting Principles
Generally accepted accounting principles (GAAP) refer to a common
set of accepted accounting principles, standards, and procedures that
business reporting entity must follow when it prepares and present its
financial statements. GAAP is a combination of authoritative standards
(set by policy boards) and the commonly accepted ways of recording
and reporting accounting information. At international level such
authoritative standards are known as International Financial Reporting
Standards (IFRS) and in India we have authoritative standards named
as AS and IND-AS. Accounting Standards (ASs) are written policy
documents issued by the Government with the support of other
regulatory bodies (e.g., Ministry of Corporate Affairs (MCA) issuing

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Accounting Standards for corporates in consultation with National
Financial Reporting Authority (NFRA) covering the following aspects
of accounting transaction in financial statements
recognition,
measurement,
presentation,
disclosure.
The ostensible purpose of the standard setting bodies is to promote the
dissemination of timely and useful financial information to investors
and certain. other stakeholders, having an interest in the company's
economic performance.
Accounting Standards reduce the accounting alternatives in the
preparation of financial statements within the bounds of rationality,
thereby, ensuring comparability of financial statements of different
enterprises.
Accounting Standards deal with the following:
(i) recognition of events and transactions in the financial statements,
(ii) measurement of these transactions and events.
(iii) presentation of these transactions and events in the financial
statements in a manner that is meaningful and understandable to the
reader, and
(iv) the disclosure relating to these transactions and events to enable
the public at large and the stakeholders and the potential investors in
particular, to get an insight into what these financial statements are
trying to reflect and thereby facilitating them to take prudent and
informed business decisions.

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BENEFITS
The following are the benefits of Accounting Standards:
(i) Standardisation of alternative accounting treatments:
Accounting Standards reduce to a reasonable extent or eliminate
altogether confusing variations in the accounting treatment followed
for the purpose of preparation of financial statements. The standard
policies are intended to reflect a consensus on accounting policies to be
used in different identified area, e.g. inventory valuation, capitalisation
of costs, depreciation and amortisation, etc. Since it is not possible to
prescribe a single set of policies for any specific area that would be
appropriate for all enterprises, it is not enough to comply with the
standards and state that they have been followed. In other words, one
must also disclose the accounting policies used in preparation of
financial statements. (Refer AS 1, Disclosure of Accounting Policies
given in Accounting Pronouncements). For example, an enterprise
should disclose which of the permitted cost formula (FIFO, Weighted
Average, etc.) has actually been used for ascertaining inventory costs.
(ii) Requirements for additional disclosures:
There are certain areas where important is not statutorily required to be
disclosed. Standards may call for disclosure beyond that required by
law.
(iii) Comparability of financial statements:
In addition to improving credibility of accounting data, standardisation
of accounting procedures improves comparability of financial
statements, both intra-enterprise and inter- enterprise. Such
comparisons are very effective and most widely used tools for
assessment of enterprise's financial health and performance by users of
financial statements for taking economic decisions, e.g., whether or not
to invest, whether or not to lend and so on.
The intra-enterprise comparison involves comparison of financial
statements of same enterprise over number of years. The intra-

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enterprise comparison is possible if the enterprise uses same accounting
policies every year in drawing up. its financial statements.
The inter-enterprise comparison involves comparison of financial
statements. of different enterprises for same accounting period. This is
possible only when comparable enterprises use similar accounting
policies in preparation of respective financial statements (or in case the
policies are slightly different, the same is disclosed in the financial
statements). The disclosure of accounting policies allows. a user to
make appropriate adjustments while comparing the financial
statements of comparable enterprises.

List of accounting standards

IFRS standards
International Financial Reporting Standards (IFRSs) are international
accounting standards issued by the IASB.
IFRS 1 First-time Adoption of IFRS
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration For and Evaluation of Mineral Resources
IFRS 7 Financial Instruments: Disclosures
IFRS 8 Operating Segments
IFRS 9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in Other Entities

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IFRS 13 Fair Value Measurement
IFRS 14 Regulatory Deferral Accounts
IFRS 15 Revenue from Contracts with Customers
IFRS 16 Leases
IFRS 17 Insurance Contracts

IAS standards
International Accounting Standards (IASs) are international accounting
standards issued by the International Accounting Standards Committee
(IASC). The IASC was replaced by the IASB in 2001.
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 7 Statement of Cash Flows (previously Cash Flow Statements)
IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors
IAS 10 Events after the Reporting Period
IAS 12 Income Taxes
IAS 16 Property, Plant and Equipment
IAS 19 Employee Benefits
IAS 20 Government Grants and Disclosure of Government Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures
IAS 26 Accounting and Reporting by Retirement Benefit Plans
IAS 27 Separate Financial Statements
IAS 28 Investments in Associates and Joint Ventures
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IAS 29 Financial Reporting in Hyperinflationary Economies
IAS 32 Financial Instruments: Presentation
IAS 33 Earnings Per Share
IAS 34 Interim Financial Reporting
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property
IAS 41 Agriculture

INDIAN ACCOUNTING STANDARD

Indian Accounting Standards (Ind AS) are IFRS converged standards
issued by the Central Government of India under the supervision and
control of Accounting Standards Board (ASB) of ICAI and in
consultation with NFRA. ASB is a committee under Institute of
Chartered Accountants of India (ICAI) which consists of
representatives from government department, academicians, other
professional bodies viz. ICSI, ICAI, representatives from
ASSOCHAM, CII, FICCI, etc. NFRA recommend these standards to
the Ministry of Corporate Affairs (MCA). MCA has to spell out the
Accounting Standards applicable for companies in India. Ind AS are
named and numbered in the same way as the corresponding
International Financial Reporting Standards (IFRS).
The process of formulating Accounting Standards in India is very
detailed and comprehensive. Following are the steps in formulating
IAS:
• The setting process of Accounting Standards has the following
steps.

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 • Identifying broad matters of ASB and preparing preliminary
drafts.
• Constituting study groups by ASB to prepare for preliminary
drafts.
• Considering preliminary drafts that are prepared by a study group
involving ASB.
• Circulating drafts among ICAI council members and within some
outside bodies such as Indian banks association, SEBI, DCA,
CAG, etc.
• Meeting with representatives of outside bodies for their opinion
on the proposed Accounting Standards draft.
• Finalizing the draft for proposed Accounting Standards based on
the comments received from various bodies.
• Issuing the invite for exposure draft for public opinion.
• Finalizing the draft for Accounting Standards and submitting to
the ICAI council for consideration and then approving it for
issuance.
• Considering Accounting Standards drafts from institute council
and modifications to be done in the drafts if necessary, in
consultation with the ASB.
• The finalized Accounting Standards are issued under the council
authority

Objectives of the Indian Accounting Standards

There is always a reason for any mission. Similarly, there are certain
objectives for having accounting standards. Let us take a look at the
objectives of accounting standards so that we understand in depth the
deeper aim of it.
The main objective of Indian accounting standards is to bring in
more transparency of annual financial statements in company accounts.
Ensure companies in India adopt these standards to implement
internationally recognized best practices.

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 One systematic, single accounting system common for all the
companies. Cutting out confusions and frauds.
The Indian accounting standards are so simplified that they can
be understood worldwide, globally.
There are several global requirements and the Indian accounting
standards are designed to match the global requirements.
To increase the reliability of the financial statements.

CONCLUSION

Accounting concepts form the fundamental principles that underpin the

practice of accounting, providing a solid framework for the preparation,
presentation, and interpretation of financial information. These
concepts are essential for ensuring consistency, relevance,
transparency, and reliability in financial reporting, thereby facilitating
informed decision-making by users.
The significance of accounting concepts lies in their ability to guide
accounting practices and standards, ensuring that financial information
accurately reflects the economic reality of transactions and events. By
adhering to these concepts, financial statements present a true and fair
view of an entity's financial position, performance, and cash flows.
Accounting concepts serve as the cornerstone of accounting theory and
practice, guiding the preparation, presentation, and interpretation of
financial information. By upholding these concepts, accounting
professionals ensure the integrity and accuracy of financial reporting,
ultimately fostering trust and confidence among stakeholders in the
reliability of financial information.

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