LEARNING OBJECTIVES
After studying this chapter,
you will be able to:
• identify the need for
theory base of acco-
unting;
• explain the nature of
Generally Accepted
Accounting Principles
(GAAP);
• describe the meaning
and purpose of the basic
accounting concepts;
• enumerate the accounting
standards issued by
Institute of Chartered
Accountants of India;
• describe the systems
of accounting; and
• describe various basis
of accounting.
As discussed in the previous chapter, accounting
is concerned with the recording, classifying and
summarising of financial transactions and events
and interpreting the results thereof. It aims at
providing information about the financial
performance of a firm to its various users such as
owners, managers employees, investors, creditors,
suppliers of goods and services and tax authorities
and help them in taking important decisions. The
investors, for example, may be interested in
knowing the extent of profit or loss earned by the
firm during a given period and compare it with the
performance of other similar enterprises. The
suppliers of credit, say a banker, may, in addition,
be interested in liquidity position of the enterprise.
All these people look forward to accounting for
appropriate, useful and reliable information.
For making the accounting information
meaningful to its internal and external users, it is
important that such information is reliable as well
as comparable. The comparability of information is
required both to make inter-firm comparisons, i.e.
to see how a firm has performed as compared to
the other firms, as well as to make inter-period
comparison, i.e. how it has performed as compared
to the previous years. This becomes possible only
if the information provided by the financial
statements is based on consistent accounting
policies, principles and practices. Such consistency
is required throughout the process of identifying
Theory Base of Accounting
2
2 3
Theory base of Accounting
the events and transactions to be accounted for, measuring them,
communicating the