Theory Base of Accounting

GAAP and the basic accounting concepts, the cash and accrual bases, accounting standards, and GST charged as CGST and SGST or as IGST.

Key ideas

• GAAP and accounting standards are the agreed rules that keep the accounts of different firms uniform and comparable.
• Business entity: the business is separate from its owner, so the owner’s personal bills paid by the business are drawings and capital is owed to the owner.
• Money measurement records only what can be valued in money; going concern assumes the business carries on, so assets are shown at cost less depreciation.
• Cost concept: an asset is recorded at what was paid for it, including carriage and installation, not at its market value.
• Dual aspect: every transaction has two equal effects, which is why assets always equal liabilities plus capital.
• Revenue is recorded when earned, and the expenses of the same period are matched against it, whether paid or not.
• Conservatism provides for every likely loss but records no expected profit, so stock is valued at cost or market price, whichever is lower.
• GST on a sale within a state is split equally into CGST and SGST; on a sale to another state the full rate is charged as IGST.

Remember

Watch out

• Recording an asset at its market value instead of its cost.
• Splitting IGST into halves, or charging IGST on a sale within the same state.
• Counting only the cash received as income under the accrual basis.

Worked example