Theory Base of Accounting and Accounting Standards

Flashcards covering the fundamental accounting assumptions, concepts, principles, and the nature of Accounting Standards (AS) and Indian Accounting Standards (Ind-AS).

Generally Accepted Accounting Principles (GAAP)

A set of rules, concepts, and guidelines that define the accounting parameters and constraints within which accounting operates and financial statements are prepared.

Accounting Concepts

The fundamental propositions and basic assumptions based on which transactions are recorded in the books of account and financial statements are prepared.

Accounting Conventions

The outcome of accounting practices or principles being followed by enterprises over a period of time, which may undergo changes to improve account quality.

Going Concern Assumption

Prescribes that transactions should be recorded on the basis that the business shall continue for a foreseeable period and has no intention to close or significantly scale down operations.

Consistency Assumption

Prescribes that accounting practices, once selected and adopted, should be applied year after year to ensure the qualitative characteristic of comparability.

Accrual Assumption

Prescribes that a transaction is recorded in the books of account at the time it is entered into and not when the final settlement takes place.

Accounting Entity (Business Entity) Principle

The principle that a business is considered separate from its owners, and transactions are recorded from the business's point of view rather than the owners'.

Money Measurement Principle

States that only transactions and events that can be measured in money terms are recorded in the books of account, using money as the common denominator.

Accounting Period Principle

The practice of breaking the life of an enterprise into smaller intervals, usually of $12$ months, so that performance can be measured at regular intervals.

Full Disclosure Principle

Requires complete and understandable reporting in the financial statements of all significant information relating to the economic affairs of the entity.

Materiality Principle

An item or disclosure is considered material if its omission or misstatement can influence the decision of an informed user of financial statements.

Prudence (Conservatism) Principle

A practice often stated as 'Do not anticipate profit, but provide for all possible losses,' ensuring financial statements do not paint an overly optimistic picture.

Cost Concept (Historical Cost Principle)

An asset is recorded in the books of account at the price paid to acquire it, and this cost remains the basis for all subsequent accounting, reduced by depreciation.

Matching Principle

States that expenses incurred to earn revenue should be recognized as an expense in the same accounting period in which the associated revenue is recognized.

Dual Aspect (Duality) Principle

States that every transaction has two aspects, a debit and a credit of equal amount, forming the basis of the equation: $\text{Assets} = \text{Owner's Equity} + \text{Claims of Outsiders}$.

Revenue Recognition (Realisation) Concept

Revenue is considered realized when a transaction has been entered into and the legal obligation to receive the amount is established, regardless of when cash is received.

Verifiable Objective Concept

Holds that accounting should be free from personal bias and all transactions should be supported by verifiable business documents like invoices and cash memos.

Accounting Standards (AS)

A set of guidelines, rules, and procedures relating to the measurement, recognition, treatment, and disclosure of accounting transactions issued by the Institute of Chartered Accountants of India (ICAI).

Indian Accounting Standards (Ind-AS)

Accounting standards notified under the Companies Act, 2013, which are converged with International Financial Reporting Standards (IFRS).

Ind-AS Net Worth Threshold

Ind-AS is mandatory for listed companies and companies having a net worth of $250$ crores or more.

Fair Value Concept

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Principle-based vs. Rule-based Standards

Ind-AS is characterized as principle-based because it relies on sound concepts, whereas traditional Accounting Standards (AS) are considered rule-based.

Accounting Standards Board (ASB)

A body set up by the ICAI in April 1977 to identify areas of diverse accounting practices and develop draft Accounting Standards to bring uniformity.