Theory Base of Accounting
Generally Accepted Accounting Principles (GAAPs) are the basic rules which have been generally accepted by accountants all over the world as general guidelines for preparing the accounting statements. Accounting principles are man-made and are flexible. Accounting principles include accounting concepts and accounting convention. Accounting concepts include money measurement concept, accounting period concept, business entity concept, going concern aspect, dual concept, historical cost concept, matching concept, revenue recognition concept, objectivity concept, etc. Business entity concept means that for the purposes of accounting, the business and its owners are to be treated as two separate entities and business transactions are recorded from firm’s point of view and not from that of the owner. Money Measurement Concept states that only those transactions are to be recorded in the books of accounts that can be expressed in terms of money. Accounting conventions include convention of full disclosure, convention of consistency, convention of conservatism and convention of materiality.
Accounting standards are set of guidelines issued by the accounting body of the country like ‘The Institute of Chartered Accountants of India’, followed for preparation and presentation of financial statements. Advantages of accounting standards are that they are the guidelines providing the framework so that credible financial statements can be produced etc. International Financial Reporting Standards are used as, without a common set of accounting and financial reporting standards, it is difficult to understand and compare worldwide financial information. IFRS based financial statements include statement of financial position, statement of comprehensive income, statement of changes in equity, cash flow etc. IFRS is beneficial for Investors, industry and accounting professionals. Two important basis of accounting are cash basis of accounting and accrual basis of accounting. Double entry system of accounting is based on the principle that every business transaction is recorded in at least two accounts. Trial Balance can be prepared with this system of accounting.