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CBSE NOTES ⇒ Class 11th ⇒ Accounts ⇒ 2. Theory Base of Accounting

2. Theory Base of Accounting

International financial reporting standards (IFRS)

Characteristics of a Business Transaction :

1. It is concerned with money or money’s worth of goods or services.

2. It arises out of the transfer of exchange of goods or services.

3. It brings about a change in the financial position (assets and liabilities).

4. It has an effect on the accounting equation.

5. It has dual aspects or sides- ‘ receiving’ (Debit) and ‘giving’ (Credit) of the benefit.​

Basis of Accounting:

(1) Cash basis

Under this entries in the books of accounts are made when cash id received or paid and not when the receipt or payment becomes due. For example, if salary Rs. 7,000 of January 2010 paid in February 2010 it would be recorded in the books of accounts only in February, 2010.

(2) Accrual basis

Under this however, revenues and costs are recognized in the period in which they occur rather when they are paid. It means it record the effect of transaction is taken into book in the when they are earned rather than in the period in which cash is actually received or paid by the enterprise. It is more appropriate basis for calculation of profits as expenses are matched against revenue earned in the relation thereto. For example, raw materials consumed are matched against the cost of goods sold for the accounting period.

Accounting Standards (AS):

    “A mode of conduct imposed on an accountant by custom, law and a professional body.” – By Kohler

Nature of accounting standards:

  1. Accounting standards are guidelines which provide the framework credible financial statement can be produced.
  2. According to change in business environment accounting standards are being changed  or revised from time to time
  3. To bring uniformity in accounting practices and to ensure consistency and comparability is the main objective of accounting standards.
  4. Where the alternative accounting practice is available, an enterprise is free to adopt. So accounting standards are flexible.
  5. Accounting standards are amendatory in nature.

Utility of accounting standards:

  1. They provide the norms on the basis of which financial statements should be prepared.
  2. It creates the confidence among the users of accounting information because they are reliable.
  3. It helps accountants to follow the uniform accounting practices and helps auditors in auditing.
  4. It ensures the uniformity in preparation and presentation of financial statements by following the uniform practices.

International Financial Reporting Standards (IFRS):

To maintain uniformity and use of same or single accounting standards, International Financial Reporting Standards (IFRS) are developed by International Accounting Standards board (IASB).

Objectives of IASB:

(i) To develop the single set of high quality global accounting standards so users of information can make good decisions and the information can be comparable globally.

(ii) To promote the use of these high quality standards.

(iii) To fulfill the special needs of small and medium size entity by following above objectives.

Meaning of IFRS:

IFRS is a principle based accounting standards. IFRS are a single set of high quality accounting Standards developed by IASB, recommended to be used by the enterprises globally to produce financial statements.

Benefits of IFRS:

(i) Global comparison of financial statements of any companies is possible

(ii) Financial statements prepared by using IFRS shall be better understood with financial statements prepared by the country specific accounting standards. So the investors can make better decision about their investments.

(iii) Industry can raise or invest their funds by better understanding if financial statements are there with IFRS.

(iv) Accountants and auditors are in a position to render their services in countries adopting IFRS.

(v) By implementation of IFRS accountants and auditors can save the time and money.

(vi) Firm using IFRS can have better planning and execution. It will help the management to execute their plans globally.

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