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1. Theory Base of
Accounting
Chapter 3

2. Meaning of
Accounting
Principles
Fundamental
Accounting
Assumptions
Accounting
principles
Ind AS

4. Accounting Principles

5. Accounting
Concepts
Accounting
Convention
BASIC ASSUMPTION
OR
CONDITIONS
CUSTOMS
AND
TRADITIONS

7. Business would carry out
its operations for
indefinite time period
Examples : Dividing fixed assets into long term assets and
short assets, Taking long term loans, Charging depreciation on
the machinery.

9. A Machinery is purchased for Rs 30,000.
Depreciation to be charged @ 10 % p.a on the
cost. What will be the book value of machinery
after 2 years?
Cost of Machine = Rs 30,000
Less : Dep @ 10 % = 3,000
Book Value at the end of 1st year 27,000
Less : Dep @ 10 % = 3,000
Book Value at the end of 2nd year 24,000

11. • Meaning of Accounting principles
• Accounting concepts and convention
• Fundamental Accounting Assumption
 Going Concern
 Consistency
 Accrual

12. Q: Identify the accounting concepts applicable in the following
cases:
(i) A business enterprise will not be shut down in near future
(ii) Directors are interested to adopt Written Down Value Method
(WDV) of charging depreciation in place of Straight Line Method (
SLM) in the current accounting period to show higher profit
(iii) Outstanding expenses are recorded in the books of accounts.

14. Accounting Principles
Business
Entity
Money
Measurement
Accounting
Period
Full
Disclosure
Materiality Prudence
Historical
Cost
Matching Dual Aspect
Revenue
Recognition
Verifiable
objectives

16. Only those transactions
are recorded in the
books of accounts which
can be expressed in
terms of money.

17. Life of an enterprise is
divided into small periods
in order to measure its
performance on regular
basis
1 April 31st
March

18. Kamal Enterprise is dealing in
manufacturing Computers. It has
installed a vital machinery in the
factory. This Machine has a major role
in the mass production of computers.
After some days, this machine got
stolen from the factory. Now Kamal
Enterprise is hiding this information
from investors.

20. An item is said to be material, if there is
a reason to believe that the knowledge
of which can influence the decision of an
investor

21. Example - Size
A default by a customer who owes only Rs1000 to a company
having a turnover of 10 million is immaterial to the financial
statements of the company.
However, if the amount of default was, say, 2 million, the
information would have been material to the financial
statements omission of which could cause users to make
incorrect business decisions.
Example - Nature
If a company is planning to curtail its operations in a
geographic segment which has traditionally been a major
source of revenue for the company in the past, then this
information should be disclosed in the financial statements as
it is by its nature material to understanding the entity's
scope of operations in the future.

22. A company purchased goods for Rs 10,00,000 and sold 80% of
such goods during the year i.e. Rs 8,00,000. The market value of
remaining goods was Rs 1,80,000. The company valued the closing
stock at Rs 2,00,000 i.e. cost.

23. • Business Entity Principle
• Money Measurement Concept
• Accounting Period Concept
• Full Disclosure Principle
• Materiality Principle
• Prudence or Conservatism

24. Q: Identify the Accounting principles applicable on the following:
(i) Closing stock is valued at lower of cost or market value.
(ii) Capital is treated as liability for the business
(iii)The cost of a small calculator is accounted as an expense and not
shown as a separate asset in financial statements of a business
entity.
(iv)Life of a business is divided into small periods to measure the
performance

25. Ashok purchased a factory building and paid 55 lakhs towards its
cost including registration charges. At the end of the financial
year, the value of building came down to 53 lakhs. Ashok
recorded the building at 55 lakhs.

26. Revenue –
Expenses = Profit

27. 1. Started business with cash Rs 50,000
 Capital increases, Cash increases
2. Purchased goods for cash Rs 10,000
 Stock increases, Cash decreases

28. EXAMPLE
Advance received against the
sale of goods will be treated as
advance and not sales

30. • Historical Cost Principle
• Dual Aspect Principle
• Matching Principle
• Revenue Recognition
• Verifiable objective

32. Mohan is the proprietor of M/s. M.K. & Co. He
purchased a car for his son and made the
payment by issuing a cheque from the account of
M/s. M.K. & Co. The Accountant recorded as
Drawings . But according to Mohan, it should be
recorded as Fixed Assets. Who is correct in your
view and why?

33. The Accountant is correct, because according to the
Business Entity Concept, a business is distinct and
separate from the owners. Since, the car has been
purchased for the personal use of proprietor’s son, it is
drawings by the owner.

34. Production at a factory had to stop for two days
due to sudden electricity failure causing some
technical problem in the production plant. The loss
of production and the likely loss of profit arising
out of the situation was estimated by the owner.
He directed the Accountant to record the loss in
the books of accounts. Is the owner correct in
recording the likely loss? Give reasons.

35. No, the owner is not correct
because transactions and
events are recorded in the
books of accounts if they can
be measured in money terms
and on the basis of evidences.
In the present case, evidence
to the effect of loss or profit
does not exist on the basis of
which the owner can measure
the loss in money terms.

36. An enterprise follows the accrual basis for preparing
its books of accounts. Rent of factory premises
amounting to 20,000 for the month of March, 2020
was not paid. The owner did not want to account it in
the books of accounts for the year 2019-20 on the
ground that the amount was not paid. The enterprise
closes its books of accounts on 31st March every
year. Is he correct?

37. No, the owner is not correct because under
the Accrual Concept, expense should be
accounted at the time when it is incurred and
not when it is paid. Rent for March 2020 have
become due on 31st March, 2020 and
therefore, should be accounted in the books
of accounts for the year ended 31st March,
2020.

39. OBJECTIVES:
1. Minimise diverse
accounting policies
2. Better understanding of
financial statements
3. Facilitate comparison
4. Enhance reliability
5. Bring Uniformity

41. European
Union
Promote
Globalization
Set of Accounting
standards notified by
Companies Act, 2013
that converge with
IFRS

42. Ind AS ( Indian
Accounting Standards)
AS ( Accounting
Standards)
Principle based Rule Based
Fair Value Concept Historical Cost Concept

46. During the financial year 2019-20, Ashok has cash sales of Rs
3,90,000 and credit sales of Rs 1,60,000. His expenses for the year
were Rs 2,70,000, out of which Rs 80,000 is still to be paid. Find the
income of Ashok for 2019- 20, if he follows Cash basis of Accounting.

47. During the financial year 2019-20, Ashok has cash sales of Rs
3,90,000 and credit sales of Rs 1,60,000. His expenses for the year
were Rs 2,70,000, out of which Rs 80,000 is still to be paid. Find the
income of Ashok for 2019- 20, if he follows Accrual basis of
Accounting.

48. • Meaning of Accounting Standards
• IFRS
• Ind AS
• Difference between Ind AS and AS
• Basis of Accounting
• Cash Basis of Accounting
• Accrual Basis of Accounting

50. During the financial year 2019-20, Mohan had cash sales of Rs 90,000 and
credit sales of Rs 60,000. His expenses for the year were Rs 70,000 out of
which Rs 30,000 still to be paid. Find out Mohan’s Income for 2019 – 20 if he
follows:
(i) Cash Basis of Accounting
(ii) Accrual Basis Of Accounting
(i) Cash Basis of Accounting :
Income = Cash sales – Cash Expenses
= 90,000 – 40,000
= Rs 50,000
(ii) Accrual Basis of Accounting :
Income = Total sales – Total Expenses
= 1,50,000 – 70,000
= Rs 80,000

52. Vijay, a consultant, during the financial year 2018-19
earned Rs 4,00,000. Out of which he received Rs 3,50,000.
He incurred an expense of Rs 1,70,000, out of which Rs
40,000 is outstanding. He also received consultancy fee
relating to previous year Rs 45,000 and also paid Rs
20,000 expenses of last year.
You are required to calculate his income if he follows :
(i) Cash Basis of Accounting
(ii) Accrual Basis of Accounting

53. (I)CASH BASIS
Income = Revenue – Expenses
Revenue = 3,50,000 + 45,000 (PY) = Rs
3,95,000
Expenses = 1,70,000 - 40,000
= Rs 1,30,000 + 20,000 ( PY )
= Rs 1,50,000
Income = 3,95,000 – 1,50,000
= Rs 2,45,000

54. (I)ACCRUAL BASIS
INCOME = REVENUE – EXPENSES
= 4,00,000 - 1,70,000
= Rs 2,30,000

56. A large company purchases a Rs
25,000 digital camera and expenses it
immediately instead of recording it as
an asset and depreciating it over its
useful life.

57. A company sold goods of Rs 8,00,000 to a
customer in December. The company's sales
terms require the customer to pay the
company in 30 days. The company's income
statement reported the sale in December.
This is proper under which accounting
principle/guideline?

58. The creative chief executive of a
corporation who is personally responsible
for numerous inventions and innovations
is not reported as an asset on the
corporation's balance sheet. The
accounting principle/guideline that
prevents the corporation for reporting
this person as an asset is

59. The personal assets of the owner of a
company will not appear on the
company's balance sheet because of
which principle/guideline?