Theory Base of Accounting Class 11 Notes: All 13 Concepts

These are the revision notes for Chapter 2, “Theory Base of Accounting”, from the NCERT Class 11 Accountancy textbook (Financial Accounting-I). The whole chapter is condensed here into its exam-ready core: GAAP, the 13 basic accounting concepts, the accounting equation, systems and basis of accounting, accounting standards and GST.

These notes follow the 2026-27 session and are complete enough to revise from on their own.

Read the chapter map first, drill the 13-concept definitions table, then work through the three numeric examples. Finish with the one-minute recap and the FAQs — that sequence covers everything the chapter expects you to know. For the rest of the subject, the Class 11 Accountancy notes hub holds every chapter.

Theory Base of Accounting at a Glance

This chapter answers one question: what rules make accounting information trustworthy? The answer flows in a fixed order, and that order is the map of the chapter.

• Reliability and comparability — users (owners, investors, creditors, bankers, tax authorities) need information that is reliable and comparable: inter-firm (this firm vs other firms) and inter-period (this year vs last year) (NCERT, p. 25).
• GAAP — Generally Accepted Accounting Principles, the rules and guidelines that bring uniformity to recording and reporting.
• 13 basic accounting concepts — the working rules of accounting, from business entity to objectivity.
• Systems of accounting — double entry vs single entry.
• Basis of accounting — cash basis vs accrual basis.
• Accounting standards — written rules issued by the ICAI for uniformity.
• GST — the tax that applies the dual-aspect idea to real transactions.

By the end you should be able to state the meaning and purpose of every basic concept, describe the two systems and two bases, list the accounting standards issued by the ICAI — the learning objectives the chapter sets (NCERT, p. 25).

This chapter builds directly on Introduction to Accounting (Chapter 1) and leads into Recording of Transactions – I (Chapter 3), which shows the double entry system in detail. If you need another subject or class, the CBSE notes library and the Class 11 revision hub are one click away.

For the textbook’s exact wording of any definition, open the official NCERT PDF of Financial Accounting-I, Chapter 2 on ncert.nic.in.

Why Accounting Needs a Theory Base (GAAP, Concepts and Conventions)

Accounting serves many users: investors want profit and comparability with other firms; a banker wants the liquidity position. Neither gets useful information unless the data is reliable and comparable — which is why a shared set of rules exists (NCERT, p. 25).

GAAP (Generally Accepted Accounting Principles) is the set of rules or guidelines adopted for recording and reporting business transactions, adopted to bring uniformity to the preparation and presentation of financial statements (NCERT, p. 26). One working rule inside it is to record transactions at historical cost, verifiable from documents such as cash receipts — a rule that keeps recording objective.

The term “principle” was defined by the AICPA as “a general law or rule adopted or professed as a guide to action, a settled ground or basis of conduct or practice” (NCERT, p. 26). Two more facts matter for answers:

• Principles are not static — they constantly evolve with changes in the legal, social and economic environment (NCERT, p. 26).
• Principles, concepts, conventions, postulates and assumptions are practically the same thing; the textbook uses them interchangeably and calls them all basic accounting concepts (NCERT, p. 27).

Analogy: GAAP is the grammar of accounting. Grammar makes very different sentences understandable to a reader, and two texts written under the same grammar can be compared. Accounting principles do the same for the financial statements of different firms — without shared rules, “profit” would mean whatever each firm chose to report.

The 13 Basic Accounting Concepts at a Glance

This table is the quick-recall backbone of the chapter. For each concept, learn the name, the meaning and one trigger example; the two breakdown sections below explain the accounting logic behind each.

Concept Breakdown: Entity, Money, Going Concern, Period, Cost and Dual Aspect

Business entity concept

The assumption: the business has a distinct, separate existence from its owners. When an owner brings capital in, accounting treats it as a liability of the business to the owner; when the owner withdraws money for personal use (drawings), that is a reduction of the owner’s capital, not an expense of the business (NCERT, p. 27).

The owner’s personal assets and liabilities never appear in the business books unless business funds actually flow into or out of them.

Wallet analogy: think of the business as a separate person carrying its own purse. The owner puts money into the purse (capital — a claim the owner holds against the business), and drawings are withdrawals from that purse, not business expenses. The books are always written from the business person’s point of view, never the owner’s.

Money measurement concept

The assumption: only transactions and events that can be expressed in money are recorded. The appointment of a manager, the creativity of a research team, the firm’s image among people — none of these find a place in the books.

Records are kept in the monetary unit (rupees), not in physical units: acres, rooms, tonnes and cartons cannot be added together, but their rupee costs can (NCERT, p. 28).

The limitation: money itself changes value. A building bought ten years ago and a plant bought last year are added together at their historical rupee values, even though the purchasing power of the rupee has changed in between.

Because this change is not reflected in the books, the accounting data does not show a true and fair view of the enterprise (NCERT, p. 28).

Going concern concept

The assumption: the business will carry on its operations indefinitely and will not be liquidated in the foreseeable future (NCERT, p. 28). This assumption is the very basis for how assets appear in the balance sheet: an asset is treated as a bundle of services to be received over its useful life.

The treatment it causes: only the part of the asset consumed in a period is charged to that period’s revenue (this is depreciation); the rest is carried forward.

If continuity were not assumed, the whole cost of an asset would have to be charged in the year of purchase, which would be unfair to that year’s revenue (NCERT, p. 29).

Accounting period concept

The assumption: financial statements are prepared at regular intervals — normally one year — because users need timely information and no firm can wait until the business ends to know its results. That interval is the accounting period (NCERT, p. 29).

Legal anchors and exceptions: the Companies Act 2013 and the Income Tax Act require annual income statements. But a partner’s retirement can make the accounting period differ from twelve months, and companies whose shares are listed on the stock exchange must publish quarterly results to report profitability and financial position every three months.

Cost concept

The rule: all assets are recorded in the books at their purchase price, which includes acquisition cost, transportation, installation and everything spent to make the asset ready for use. The recorded cost is historical — paid on the date of acquisition — and it stays unchanged year after year, whatever the market value does (NCERT, p. 30).

Why cost and not market value: historical cost is objective and verifiable from purchase documents, while market value changes constantly and is difficult to ascertain until the asset is sold. The limitation of cost is that during rising prices the book value lags the replacement value, creating hidden profits and failing to show the true worth of the business.

Dual aspect concept

The rule: every transaction has a two-fold effect and is recorded in at least two accounts. Cash brought in increases the asset cash and increases capital; a cash purchase of goods increases stock and reduces cash; a credit purchase of machinery increases machinery and increases creditors. This is the duality principle, the core of the double entry system (NCERT, p. 31).

The duality principle is expressed in the fundamental accounting equation:

\[ \text{Assets} = \text{Liabilities} + \text{Capital} \]

Assets are the economic resources of the business; liabilities are the claims of outsiders (creditors’ equity); capital is the owner’s claim (owners’ equity). The two-fold effect of every transaction is designed so that this equality never breaks (NCERT, p. 31).

Concept Breakdown: Revenue Recognition, Matching, Disclosure, Consistency, Conservatism, Materiality and Objectivity

Revenue recognition (realisation) concept

What revenue is: the gross inflow of cash arising from (i) the sale of goods and services by the enterprise, and (ii) the use by others of the enterprise’s resources, yielding interest, royalties and dividends.

When it is realised: when a legal right to receive it arises — that is, when the goods have been sold or the service rendered (NCERT, p. 31).

The treatment it causes: credit sales are revenue on the day of sale, not when money is collected. Rent, commission and interest are recognised on a time basis — March rent received in April belongs to March’s profit.

Two exceptions are built into the rule: long-term construction contracts recognise a proportionate amount of revenue based on the part of the contract completed by period-end, and hire purchase sales treat each installment collected as realised (NCERT, p. 32).

Matching concept

The rule: expenses incurred in an accounting period are matched with the revenues of that period. The revenue of a period and the expenses incurred to earn it must belong to the same accounting period (NCERT, p. 32).

The treatment it causes: salaries, rent and insurance are recognised on the basis of the period they relate to, not the date they are paid, and depreciation of a fixed asset is spread over the periods in which the asset is used.

When computing profit, only the cost of goods sold is deducted — the cost of unsold goods is deducted from the cost of goods produced or purchased and carried forward as stock (NCERT, p. 33).

Full disclosure concept

The rule: all material and relevant facts about the financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes, so users can assess profitability and financial soundness and take informed decisions (NCERT, p. 33).

The enforcement: the Companies Act 1956 prescribes a format for the profit and loss account and balance sheet of a company, and SEBI mandates complete disclosures to give a true and fair view of profitability and the state of affairs.

Consistency concept

The rule: the same accounting policies and practices are followed year after year so that inter-firm and inter-period comparisons are meaningful. If depreciation or stock valuation methods changed between years, the profit figures would not be comparable — consistency removes personal bias from the results (NCERT, p. 33-34).

The exception to remember: consistency does not forbid change. A required change is allowed, but it must be disclosed in the financial statements together with its probable effect on results (NCERT, p. 34).

Conservatism (prudence) concept

The rule: play safe. Do not record profits until they are realised, but provide for all losses — even those with only a remote possibility. This stops profits from being overstated, which in turn stops dividend being paid out of capital (NCERT, p. 34).

Applications: valuing closing stock at cost or market value, whichever is lower; creating provisions for doubtful debts and discount on debtors; writing off intangible assets like goodwill and patents. If market value falls, stock is shown lower; if market value rises, the gain is not recorded until the stock is sold.

The misconception guard: conservatism is not a licence to understate everything. Deliberate undervaluation of assets creates hidden profits called secret reserves, and the textbook explicitly discourages it (NCERT, p. 34).

Materiality concept

The rule: accounting should focus on material facts — facts whose knowledge would influence the decision of an informed user of financial statements. Materiality depends on both the nature and the amount of the fact (NCERT, p. 34-35).

The treatment it causes: when the amount involved is very small, strict adherence to accounting principles is not required. Stock of erasers, pencils and scales is not shown as an asset; whatever amount of stationery is bought in a period is treated as the expense of that period, whether consumed or not.

Objectivity concept

The rule: accounting transactions must be recorded objectively, free from the bias of accountants and others. This is possible only when every transaction is supported by verifiable documents or vouchers — a cash receipt for a cash purchase, an invoice and delivery challan for a credit purchase (NCERT, p. 35).

Why it supports historical cost: the cost actually paid can be verified from documents, while market value is hard to ascertain until an asset is actually sold and varies from person to person and place to place. Using historical cost is therefore one practical way of maintaining objectivity.

Revision tip: these seven concepts are exactly the ones that appear in the chapter’s fill-in-the-blank exercise style (NCERT, p. 35-36) — matching, conservatism, revenue realisation, consistency and objectivity each fit a gap. Learn their precise definitions from this page and you can fill those gaps without seeing the exercise.

The Two Formulas That Matter: Accounting Equation and GST

This chapter has essentially two sets of formulas. The accounting equation is the base; the GST split is the calculation. Both are given below with symbol meanings and the unit (rupees).

\[ \text{Assets} = \text{Liabilities} + \text{Capital} \]

• Assets — the economic resources of the business.
• Liabilities — the claims of outsiders (creditors’ equity).
• Capital — the claim of the owner (owners’ equity).

Both sides stay equal after every transaction because of the dual aspect concept; the amounts are expressed in rupees (NCERT, p. 31).

The 18% rate used in the textbook splits into 9% CGST plus 9% SGST for intra-state sales, while inter-state sales and imports carry a single 18% IGST (NCERT, p. 38-39).

Systems of Accounting: Double Entry vs Single Entry

There are two systems of recording transactions in the books: double entry and single entry (NCERT, p. 36).

Notice the chain in the chapter: dual aspect concept → double entry system. The concept is the why; the system is the how.

Basis of Accounting: Cash Basis vs Accrual Basis

The cash basis and accrual basis differ only in the timing of revenue and expense recognition (NCERT, p. 36).

Original mini-example (credit sale): goods sold on credit in March for Rs 80,000, with cash received in May. Under the cash basis the sale is May revenue; under the accrual basis it is March revenue — the month of sale.

Original mini-example (rent): December rent paid in January is recorded in January under the cash basis, but under the accrual basis it is a December expense, because that is the period it relates to even though the cash payment came later (NCERT, p. 37).

That is why the accrual basis is the appropriate method for profit calculation: it follows the matching concept. The cash basis, however simple, is inappropriate for most organisations.

Accounting Standards: Need, Benefits and Limitations

Accounting standards are written policy documents covering the recognition, measurement, treatment, presentation and disclosure of accounting transactions in financial statements. In India they are issued by the ICAI — the Institute of Chartered Accountants of India, the professional body of accounting (NCERT, p. 37).

Objective: to bring uniformity in accounting policies, eliminate the non-comparability of financial statements and enhance their reliability. Standards also provide a set of standard accounting policies, valuation norms and disclosure requirements (NCERT, p. 37).

Benefits (NCERT, p. 38)

• Eliminate variations in accounting treatment while preparing financial statements.
• Call for disclosures that the law may not require but that are useful to the general public, investors and creditors.
• Facilitate comparability between the financial statements of inter- and intra-companies.

Limitations (NCERT, p. 38)

• Make the choice between different alternative accounting treatments difficult to apply.
• Are rigidly followed and fail to extend flexibility in applying accounting standards.
• Cannot override the statute — standards must be framed within the ambit of prevailing law. In any conflict, the legal requirement wins.

GST: One Country One Tax (CGST, SGST, IGST)

GST (Goods and Services Tax) is a destination-based tax on the consumption of goods and services. It is levied at all stages, from manufacture up to final consumption, with credit for taxes paid at earlier stages (input tax credit) available as setoff.

The net effect: only the value addition is taxed, and the burden of tax is borne by the final consumer (NCERT, p. 38).

“Destination-based” means the tax accrues to the taxing authority that has jurisdiction over the place of consumption, also termed the place of supply. GST is called “One Country One Tax” because it brings one law and one procedure to the whole country under a single administration.

GST itself has a dual aspect: the Centre and the States levy simultaneously on a common tax base, which is why CGST and SGST are charged together on the same transaction (NCERT, p. 38).

Worked mini-example (original figures): an intra-state sale of Rs 50,000 at 18% produces CGST Rs 4,500 and SGST Rs 4,500 — each is \( 9\% \times \text{Rs } 50,000 \). An inter-state sale of Rs 1,00,000 at 18% produces IGST \( 18\% \times \text{Rs } 1,00,000 = \text{Rs } 18,000 \).

A dual GST also fits the Constitution’s requirement of fiscal federalism: the Centre levies and administers CGST and IGST, while the respective States levy and administer SGST (NCERT, p. 39).

Characteristics and advantages (NCERT, p. 40-41)

• Single administration — common law and procedure throughout the country.
• Abolition of multiple taxes on goods and services (sales tax, entry tax, octroi, entertainment tax, luxury tax, etc.).
• Wider tax base and increased revenue for Centre and State, reducing administrative cost for the government.
• Removal of the cascading effect on taxation — tax is no longer levied on tax.
• Reduced compliance cost and increased voluntary compliance.
• Neutral to business processes, models and locations, promoting efficiency and sustainable long-term growth.

Worked Examples: Applying the Concepts to Numbers

Each example below names the concept first, then solves it in numbered steps. The unit is Rs at every entry.

Example 1: Cost concept — what goes into the recorded cost of an asset

Example 2: Dual aspect and the accounting equation — before and after a credit purchase

Example 3: Revenue recognition — a dated credit sale

Common Mistakes in Theory Base of Accounting (and the Correct Logic)

Each confusion below is a real trap in this chapter. Read the mistake, then the correction, and connect it to its concept.

How to Write Complete Answers From This Chapter

Pages 43-45 of the textbook carry four shapes of questions — short-answer definitions, why questions, long “comment” questions, and scenario activities. One reusable structure handles each shape.

• Definition-type: give the one-line definition, then the accounting treatment it causes, then one example, and finally the purpose. Those four parts make a complete definition answer.
• Why-type: answer the question directly, then state the consequence if the concept were not followed. For example, without the going concern concept, the full cost of an asset would be charged to the year of purchase instead of being spread over its useful life.
• Comment-type (long answers): treat as two parts — the conceptual framework (what the concepts or standards contribute) and the mechanisms that enforce it (for standards: the ICAI, disclosure requirements, and the fact that standards cannot override statute).
• Scenario questions: work concept by concept — name the concept, identify the wrong treatment in the scenario, then state the correct treatment and why.

The Ruchica’s-father scenario (NCERT, p. 44) is the chapter’s real-life application: a banker rejects financial statements where a building is shown at market value instead of cost, the stock valuation method was changed from the previous year, and a computer’s full cost was charged to one year instead of its expected life.

The three errors violate the cost, consistency and going concern/matching concepts — which is exactly why lenders distrust such statements.

These notes do not reproduce the exercise answers. The structures above are the complete-answer templates; apply them to the textbook questions on pages 43-45 to practise.

One-Minute Revision Recap (Memory Device Included)

The chapter in one table

Memory device: all 13 concepts in order

“Big Mangoes Give A Cool Drink; Really Mango Farmers Can’t Control Money Orders.”

The mnemonic recalls names only — the definitions come from the 13-concepts table above.

Key-terms checklist (NCERT, p. 41)

Tick each term you can define without looking: cost, matching, materiality, objectivity, consistency, dual aspect, conservatism (prudence), going concern, comparability, full disclosure, revenue realisation, accounting period, money measurement, accounting concept, GAAP, operating guidelines, GST.

Two links that recur in the chapter

• The double entry system grows out of the dual aspect concept — the concept is the why, the system is the how.
• The accrual basis is preferred for profit calculation because it follows the matching concept.

FAQ: Theory Base of Accounting Class 11 – Common Revision Doubts

Why is the going concern concept important for preparing a balance sheet?

Going concern decides how assets are valued and depreciated. Because the business is assumed to continue indefinitely, an asset is treated as a bundle of future services; only the consumed part is charged to each year’s revenue, and the unconsumed part stays on the balance sheet (NCERT, p. 28-29).

If continuity were not assumed, the whole cost would be charged in the purchase year, and the balance sheet would lose its meaning as a statement of the enterprise’s future service potential.

What is the difference between cash basis and accrual basis of accounting?

The two bases differ in the timing of recognising revenue and expenses. The cash basis records revenue only when cash is received and expenses only when cash is paid; the accrual basis records revenue when the right to receive it arises and expenses when the obligation arises (NCERT, p. 36-37).

For example, a credit sale in March with cash received in May is March revenue under the accrual basis but May revenue under the cash basis. The accrual basis is appropriate for profit calculation because it follows the matching concept.

When is revenue recognised under the realisation concept, and what are the exceptions?

Revenue is recognised when a legal right to receive it arises — the point at which goods are sold or a service is rendered. Credit sales are therefore revenue on the sale date, not on the date of collection (NCERT, p. 31).

The exceptions are long-term construction contracts, where a proportionate amount of revenue based on the part of the contract completed is treated as realised, and hire purchase sales, where the amount collected in installments is treated as realised (NCERT, p. 32).

Why must the accounting equation Assets = Liabilities + Capital always balance?

Because of the dual aspect concept: every transaction has two effects recorded in at least two accounts, and the two effects are arranged so that the change on the assets side is matched by an equal change on the liabilities + capital side (NCERT, p. 31).

A credit purchase of furniture increases assets and liabilities equally; a cash purchase increases one asset and reduces another. If the equation broke, an effect would have been missed — which is precisely the error the double entry system prevents.

What is the difference between GAAP and accounting standards?

GAAP is the broad set of rules and guidelines generally accepted by the accounting profession for recording and reporting business transactions (NCERT, p. 26). Accounting standards are specific written policy documents issued by the ICAI, covering the recognition, measurement, treatment, presentation and disclosure of transactions (NCERT, p. 37).

GAAP is the umbrella of accepted principles; standards are the authoritative written rules that enforce uniformity — and unlike GAAP’s flexible evolution, standards are rigid and cannot override statute.

What are CGST, SGST and IGST, and when is each charged?

All three are components of GST. CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax) are charged together on intra-state sales — sales within the same state — splitting the 18% rate into \( 9\% \) each, with the proceeds going respectively to the Central and the State Government.

IGST (Integrated Goods and Services Tax) is charged at \( 18\% \) on inter-state transfers and on imports, and its revenue is divided between the Central and State Governments as per rates specified by the government (NCERT, p. 38-39).

Reference: NCERT Class 11 Accountancy (Financial Accounting-I) textbook, chapter ‘Theory Base of Accounting’.