Theory Base of Accounting Class 11: Concepts, Standards and GST Explained

What Theory Base of Accounting is about

Weightage: This chapter is part of Unit 1, Theoretical Framework (Part A: Financial Accounting-I), which carries 12 of the 80 theory marks in the school annual exam together with Introduction to Accounting.Source: CBSE Accountancy (055) syllabus 2026-27, Class XI course structure, Unit 1 Theoretical Framework

Key concepts

GAAP: meaning and need

NCERT section 2.1

Generally Accepted Accounting Principles (GAAP) are the rules and guidelines that accountants commonly use to record transactions and prepare financial statements. They are not laws of nature; they have grown from practice, logic and the recommendations of professional bodies such as the Institute of Chartered Accountants of India (ICAI), and are shaped by legal requirements.

A principle becomes "generally accepted" when it is:

• relevant: it gives information useful to users;
• objective: it rests on facts, not personal bias;
• feasible: it can be applied without too much cost or difficulty.

GAAP give uniformity (everyone records the same event the same way), comparability (between years and between firms) and reliability. The terms principles, concepts, conventions, assumptions and postulates are often used for the same idea in practice.

Worked example

Two firms in the same trade value their closing stock by completely different private rules. What problem does this cause and how does GAAP help?

Try it first, then show the solutionSolution

1. Profits of the two firms cannot be compared, and users cannot rely on either figure
2. GAAP set common rules for valuing stock, so both firms report on the same basis

Answer: Lack of comparability and reliability; GAAP give uniform rules that remove it.

Business entity, money measurement, going concern and accounting period

NCERT section 2.2.1 to 2.2.4

• Business entity concept: the business is treated as separate from its owner. Capital brought in is a liability of the business to the owner; the owner's personal expenses paid from business cash are drawings, not business expenses. This is why we can talk about the business's profit at all.
• Money measurement concept: only events that can be expressed in money are recorded, and all of them in one unit (₹ in India). Quantities (200 kg of rice) are recorded through their money value. Limitation: non-money facts (a skilled team, a strike) and changes in the value of money are left out.
• Going concern concept: we assume the business will continue for the foreseeable future and is not about to close. This is why fixed assets are shown at cost less depreciation, not at what they would fetch in a forced sale, and why prepaid expenses are shown as assets.
• Accounting period concept: the indefinite life of the business is split into short equal periods (usually 12 months; in India 1st April to 31st March) so that profit can be measured and reported regularly, taxes paid and results compared.

Worked example

The owner of a sweet shop pays her son's school fees of ₹45,000 from the shop's bank account. How will this be recorded and which concept applies?

Try it first, then show the solutionSolution

1. The payment is for a personal purpose of the owner
2. The business is separate from the owner, so it is not a business expense
3. It is recorded as drawings, reducing her capital

Answer: Drawings of ₹45,000; business entity concept.

Cost concept and dual aspect concept

NCERT section 2.2.5 and 2.2.6

• Cost concept (historical cost): an asset is recorded at the price paid to acquire it, including all costs of getting it ready for use (freight, installation, registration). Later changes in market value are ignored. The figure is objective because it is backed by a bill. Over time the asset is shown at cost less depreciation (book value). Limitation: the Balance Sheet does not show current values.
• Dual aspect concept: every transaction has two equal effects: one account receives a benefit and another gives it. This gives the accounting equation:

Assets = Liabilities + Capital

It holds after every transaction and is the basis of the double entry system (every debit has an equal credit). For example, if the owner starts a business with ₹5,00,000 cash, assets (cash) rise by ₹5,00,000 and capital rises by ₹5,00,000.

Worked example

Suppose a firm buys a machine for ₹4,50,000, pays freight ₹12,000 and installation ₹18,000. A year later its market price is ₹5,10,000. At what amount is it first recorded?

Try it first, then show the solutionSolution

1. Cost = price + freight + installation = 4,50,000 + 12,000 + 18,000
2. = ₹4,80,000; the later market price is ignored

Answer: ₹4,80,000 (cost concept).

Revenue recognition and matching concepts

NCERT section 2.2.7 and 2.2.8

• Revenue recognition (realisation) concept: revenue is recorded when it is earned, that is when goods are sold or a service is rendered and the right to receive payment arises, not when cash is received. A credit sale in March is March's revenue even if cash comes in May. Cash received in advance for goods to be supplied next year is not this year's revenue. Interest, rent and commission are recognised as time passes.
• Matching concept: expenses of a period are matched with the revenue of that same period. To find the true profit of 2025-26, we take the revenue earned in 2025-26 and deduct the expenses incurred to earn it, whether paid or not. So:
• outstanding expenses (incurred, not paid) are added,
• prepaid expenses (paid for next year) are deducted,
• closing stock is carried to next year, since those goods have not yet earned revenue,
• depreciation spreads the cost of a fixed asset over the years it is used.

Matching depends on the accounting period and revenue recognition concepts.

Worked example

Goods were sold on credit for ₹70,000 on 25th March 2026; payment was received on 10th May 2026. In which year is the revenue recorded?

Try it first, then show the solutionSolution

1. The sale took place and the right to payment arose on 25th March 2026
2. Revenue is recognised when earned, not when cash comes in

Answer: 2025-26 (the year ending 31st March 2026).

Full disclosure, consistency, conservatism, materiality and objectivity

NCERT section 2.2.9 to 2.2.13

• Full disclosure: financial statements must reveal all material facts that users need, either in the statements or in notes: the method of valuing stock, contingent liabilities (a pending lawsuit), changes in policy. The Companies Act prescribes formats partly for this reason.
• Consistency: once a method is chosen (say, straight line depreciation or a stock valuation method), it is used year after year, so that results can be compared. A change is allowed only for a good reason (law, a standard, better presentation), and its effect must be disclosed.
• Conservatism (prudence): "anticipate no profit, but provide for all possible losses". Stock is valued at cost or net realisable value, whichever is lower; a provision is made for doubtful debts; but an expected profit is not recorded until it is earned. It guards against overstating profit, but overdone it creates secret reserves.
• Materiality: an item is material if knowing it would influence a user's decision. Immaterial items can be treated simply: a ₹200 stapler that lasts years is written off as an expense, not shown as an asset. Materiality depends on the size of the item relative to the business and on its nature.
• Objectivity: transactions are recorded on the basis of verifiable evidence (invoices, receipts, vouchers), free from personal bias, so that two accountants would arrive at the same figure.

Worked example

A firm expects to sell its stock at a big profit next month. The accountant does not record that profit now but makes a provision for doubtful debts on its customers. Which concept is being followed?

Try it first, then show the solutionSolution

1. Expected profit is not recorded before it is earned
2. A likely loss (bad debts) is provided for in advance

Answer: Conservatism (prudence).

Systems of accounting: double entry and single entry

NCERT section 2.3

Double entry system: every transaction is recorded in two accounts, one debited and one credited with the same amount, following the dual aspect concept.

• Complete: both sides of every transaction are recorded.
• Accurate and reliable: arithmetical accuracy can be checked by a trial balance; fraud is harder.
• Gives full information: profit through the Profit and Loss Account and position through the Balance Sheet.
• Used by all companies and most firms; it is required for companies.

Single entry system: an incomplete system in which usually only cash and personal accounts (debtors and creditors) are kept; some transactions are recorded on one side only.

• Simple and cheap; used by small traders.
• Not reliable; a trial balance cannot be prepared; true profit and position cannot be found directly (only estimated by comparing capital at two dates, which you will study in Accounts from Incomplete Records).
• Often called a "lack of system" rather than a system.

Worked example

Why can a trial balance not be prepared under the single entry system?

Try it first, then show the solutionSolution

1. A trial balance lists the debit and credit balances of all ledger accounts
2. Under single entry, real and nominal accounts are not kept and many entries have only one side, so debits and credits do not match

Answer: Because the dual aspect of every transaction is not recorded, so all accounts with equal debits and credits do not exist.

Basis of accounting: cash basis and accrual basis

NCERT section 2.4

The basis decides when a revenue or expense is recorded.

Cash basis: entries are made only when cash is received or paid. Rent of March paid in April is April's expense; a credit sale is recorded only when the customer pays. Profit = cash receipts − cash payments of the period. It is simple, but it ignores the matching concept, so profit can be misleading. Some professionals (doctors, lawyers) and small non-business bodies use it.

Accrual basis: revenue is recorded when earned and expenses when incurred, whatever the date of cash. It makes a distinction between receiving cash and the right to receive it, and between paying cash and the obligation to pay it. It follows matching, so it shows the true profit. The Companies Act, 2013 requires companies to keep accounts on the accrual basis.

Basis	Cash basis	Accrual basis
When recorded	When cash moves	When earned or incurred
Outstanding and prepaid items	Ignored	Adjusted
Profit	Receipts − payments	Revenue earned − expenses incurred
Matching	Not followed	Followed

Worked example

Rent of ₹12,000 for March 2026 is paid on 5th April 2026. In which year is it an expense under (a) cash basis, (b) accrual basis?

Try it first, then show the solutionSolution

1. Cash basis records it when paid: April 2026, i.e. 2026-27
2. Accrual basis records it when incurred: March 2026, i.e. 2025-26

Answer: (a) 2026-27; (b) 2025-26.

Accounting standards: AS and Ind AS and their applicability

NCERT section 2.5

Accounting standards are written statements of accounting rules on how to recognise, measure, treat, present and disclose transactions in financial statements. In India the ICAI prepares them, and for companies the Central Government notifies them under the Companies Act, 2013.

Need and benefits: they reduce the choice of methods, so statements become uniform and comparable between years and firms; they require useful disclosures beyond the law; they make statements more reliable.
Limitations: they reduce flexibility; choosing between alternatives can still be hard; and a standard cannot override the law (a statute prevails).

Two sets in India and where they apply:

• Ind AS (Indian Accounting Standards): aligned with international standards and notified for companies through the Companies (Indian Accounting Standards) Rules, 2015. They are compulsory for listed companies (and those in the process of listing), for unlisted companies with a net worth of ₹250 crore or more, and for their holding, subsidiary, joint venture and associate companies. Other companies may adopt them voluntarily, but cannot go back once they do. Banks, insurance companies and NBFCs follow timelines set by their regulators.
• AS (Accounting Standards): apply to companies that do not have to follow Ind AS (mostly smaller companies, notified under the Companies (Accounting Standards) Rules, 2021), and the ICAI's AS apply to non-company entities such as sole proprietors, partnership firms and trusts where an audit or reporting is needed.

So a small sole proprietor follows AS (to the extent applicable), while a large listed company follows Ind AS.

Worked example

Which set of standards will each follow: (a) a listed company; (b) an unlisted company with a net worth of ₹40 crore that has not opted for Ind AS; (c) a partnership firm?

Try it first, then show the solutionSolution

1. (a) Listed companies must follow Ind AS
2. (b) Net worth below ₹250 crore and not opted: AS
3. (c) Non-company entity: AS issued by ICAI

Answer: (a) Ind AS; (b) AS; (c) AS.

Goods and Services Tax: components, characteristics and advantages

NCERT section 2.5

GST is a destination-based tax on consumption of goods and services, levied at every stage of supply from manufacturer to final consumer. At each stage the tax paid at the earlier stage is set off as input tax credit (ITC), so only the value added is taxed and the full burden falls on the final consumer. It replaced many separate taxes (central excise, VAT, entry tax, entertainment tax and others): "one nation, one tax".

Components:

• CGST (Central GST) and SGST (State GST, or UTGST in a Union Territory): both charged, in equal halves, on a supply within one state (intra-state). CGST goes to the Centre, SGST to that state.
• IGST (Integrated GST): charged on a supply from one state to another (inter-state) and on imports; collected by the Centre and shared with the destination state.

Characteristics: one common law and procedure across the country; destination based; covers both goods and services; tax at each stage with input tax credit; few tax rates; no separate cascading levies such as octroi or entry tax.

Advantages: removes the cascading effect (tax on tax); fewer taxes and lower compliance cost; widens the tax base and revenue; a common national market; neutral to business location and structure, which improves efficiency; Indian goods become more competitive in exports.

Worked example

Suppose a dealer in Pune sells goods for ₹40,000 to a shop in Nagpur, and ₹75,000 to a shop in Indore. GST is 18%. Show the tax on each sale.

Try it first, then show the solutionSolution

1. Pune to Nagpur is within Maharashtra: CGST 9% = ₹3,600 and SGST 9% = ₹3,600
2. Pune to Indore crosses into Madhya Pradesh: IGST 18% = ₹13,500

Answer: Intra-state: CGST ₹3,600 + SGST ₹3,600; inter-state: IGST ₹13,500.

Theory Base of Accounting in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Basic Accounting Concepts: Entity, Money Measurement, Going Concern, Cost and Dual Aspect
• Cash Basis and Accrual Basis of Accounting with Profit Calculation

Theory Base of Accounting: key facts

Accounting equation (dual aspect)

Assets = Liabilities + Capital

Holds after every transaction.

Cost of a fixed asset (cost concept)

Cost = Purchase price + Freight + Installation + Other costs to make it ready for use

Later market values are ignored.

Profit on cash basis

Profit = Cash receipts − Cash payments of the period

Ignores outstanding, prepaid and accrued items.

Profit on accrual basis

Profit = Revenue earned − Expenses incurred for the period

Add outstanding expenses and accrued income; deduct prepaid expenses and income received in advance.

Stock valuation (conservatism)

Closing stock = Lower of cost and net realisable value

Applied item by item in exam questions unless told otherwise.

GST on intra-state supply

CGST = SGST = Rate/2 × Taxable value

Example: 18% = 9% CGST + 9% SGST.

GST on inter-state supply

IGST = Rate × Taxable value

Also on imports.

Net GST payable at a stage

Output GST − Input tax credit

The total of net GST over all stages equals the GST on the final sale.

How the school exam asks Theory Base of Accounting

The question patterns to expect, and the method that works for each.

Tricks to remember Theory Base of Accounting

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Order of the 13 concepts

  "Big Mangoes Grow And Can Delight Really Many Fans Coming Cold Mornings Often": Business entity, Money measurement, Going concern, Accounting period, Cost, Dual aspect, Revenue recognition, Matching, Full disclosure, Consistency, Conservatism, Materiality, Objectivity.

  Use it when: Listing all the concepts in NCERT order.

• Conservatism rule

  "Pessimist on profit, realist on loss": no profit until earned, every likely loss provided.

  Use it when: Stock valuation and provision questions.

• GST split

  Same State: CGST + SGST (two S's together); Inter-state: IGST (I for Inter).

  Use it when: Choosing the GST component.

• Accrual basis

  Earned or incurred, not paid or received.

  Use it when: Any cash vs accrual question.

Theory Base of Accounting: exam-level solved questions

Ordered from exam level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section E style)

Read the situation, then answer every part. In a school exam set on the board pattern this is a 4-mark question split into 1 + 1 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Theory Base of Accounting

The slips examiners see most often, and what to write instead.

• ✗Mistake: Naming conservatism when the item is just recorded at cost

  Both conservatism and cost concept deal with "value".

  Wrong working

  Machine shown at purchase price though its market value rose: conservatism

  Right working

  Machine shown at purchase price: cost concept

  ✓Do this: Conservatism is about choosing the lower value or providing for losses; the cost concept is about recording at acquisition price.

  Usually costs: 1 mark per item.

• ✗Mistake: Leaving freight and installation out of the cost of an asset

  They are paid separately and look like expenses.

  Wrong working

  Machine ₹4,50,000; freight and installation ₹30,000 charged to the P&L Account

  Right working

  Machine ₹4,80,000 (price + freight + installation)

  ✓Do this: Every cost needed to bring the asset into working condition is part of its cost.

  Usually costs: 1-2 marks.

• ✗Mistake: Charging CGST and SGST on an inter-state sale

  Students split 18% by habit.

  Wrong working

  Delhi to Haryana sale of ₹10,000: CGST ₹900 + SGST ₹900

  Right working

  Delhi to Haryana: IGST 18% = ₹1,800

  ✓Do this: Check the two states first; different states always mean IGST.

  Usually costs: 1 mark per sale.

• ✗Mistake: Treating advance receipts as this year's revenue on the accrual basis

  The cash is in hand.

  Wrong working

  Fees earned = cash received ₹5,40,000

  Right working

  Fees earned = 5,40,000 − 30,000 (advance) + 60,000 (due) = ₹5,70,000

  ✓Do this: Revenue is what is earned in the year; advances belong to next year.

  Usually costs: 2 marks in a 6-mark profit question.

• ✗Mistake: Writing the IFRS history instead of AS and Ind AS applicability

  Older guides discuss IFRS at length.

  ✓Do this: The 2026-27 syllabus asks for the applicability of AS and Ind AS; answer with who follows which set.

  Usually costs: Most of a 3-mark answer.

• ✗Mistake: Calling single entry a complete system

  It is called a "system".

  ✓Do this: Say it is incomplete: both aspects are not recorded, no trial balance, profit can only be estimated.

  Usually costs: 1 mark in an MCQ or distinction.

NCERT exercise guide: Theory Base of Accounting

What each exercise in the NCERT chapter tests, how to approach it, and a question of the same kind solved step by step. Questions here are written in our own words.

Practice questions on Theory Base of Accounting

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQExam level

   The concept that requires the owner's personal expenses to be treated as drawings is:
   (a) money measurement
   (b) business entity
   (c) dual aspect
   (d) materiality

   Hint

   Separate the owner from the business.

   Answer

   (b) business entity

2. Q2 · 1 mark · Very short answerExam level

   Which basis of accounting does the Companies Act, 2013 require companies to follow?

   Hint

   It follows matching.

   Answer

   Accrual basis.

3. Q3 · 1 mark · MCQExam level

   On a sale from Rajasthan to Punjab, which GST is charged?
   (a) CGST only
   (b) SGST only
   (c) CGST and SGST
   (d) IGST

   Hint

   Two different states.

   Answer

   (d) IGST

4. Q4 · 3 marks · Short answerExam level

   Distinguish between the double entry system and the single entry system on three bases.

   Hint

   Both aspects; trial balance; reliability.

   Answer

   Recording: both aspects of every transaction against one aspect for many. Accounts: personal, real and nominal accounts against mainly cash and personal accounts. Trial balance: can be prepared against cannot. Reliability: reliable and suits all against unreliable, used by small traders.

5. Q5 · 4 marks · Short answerHarder exam level

   Suppose a consultant receives ₹4,80,000 in fees in 2025-26, of which ₹40,000 relates to 2024-25 work. Fees of ₹55,000 for 2025-26 work are still due. She pays expenses of ₹2,10,000, of which ₹15,000 is for 2024-25, and ₹18,000 of 2025-26 expenses are unpaid. Find her profit on cash and accrual bases.

   Hint

   Remove items of other years; add items of this year still due.

   Answer

   Cash: 4,80,000 − 2,10,000 = ₹2,70,000. Accrual: fees 4,80,000 − 40,000 + 55,000 = ₹4,95,000; expenses 2,10,000 − 15,000 + 18,000 = ₹2,13,000; profit ₹2,82,000.

6. Q6 · 3 marks · Short answerHarder exam level

   Explain the going concern concept and give two accounting practices that depend on it.

   Hint

   What would change if the business were closing?

   Answer

   The business is assumed to continue for the foreseeable future. Because of it, (1) fixed assets are shown at cost less depreciation, not at break-up value; (2) prepaid expenses are shown as assets and long-term liabilities as non-current, since they will be used or paid in the normal course.

7. Q7 · 3 marks · Short answerHarder exam level

   Suppose a dealer in Chennai sells goods for ₹60,000 to a dealer in Chennai and ₹90,000 to a dealer in Hyderabad. GST is 12%. Find the CGST, SGST and IGST collected.

   Hint

   Tamil Nadu to Telangana is inter-state.

   Answer

   Chennai sale: CGST 6% = ₹3,600, SGST 6% = ₹3,600. Hyderabad sale: IGST 12% = ₹10,800.

8. Q8 · 4 marks · Short answerHarder exam level

   State the meaning of accounting standards. Give two benefits and two limitations.

   Hint

   Uniformity vs flexibility.

   Answer

   Written rules on recognition, measurement, presentation and disclosure of transactions. Benefits: uniform and comparable statements; extra useful disclosures. Limitations: less flexibility; cannot override the law (and choice between alternatives remains hard).

9. Q9 · 4 marks · Short answerHarder exam level

   Which standards will each follow: (a) an unlisted company with net worth ₹300 crore; (b) a company that is about to list on a stock exchange; (c) a sole trader; (d) a subsidiary of a listed company?

   Hint

   Listing, net worth ₹250 crore, group links.

   Answer

   (a) Ind AS (net worth above ₹250 crore); (b) Ind AS (in the process of listing); (c) AS issued by ICAI; (d) Ind AS (subsidiary of a company that follows Ind AS).

10. Q10 · 4 marks · Long answerHarder exam level

    Explain any four characteristics of GST.

    Hint

    Common law, destination, goods and services, credit.

    Answer

    (1) One common law and procedure across the country. (2) Destination based: tax goes to the state where goods are consumed. (3) Covers both goods and services, with input tax credit so only value added is taxed. (4) Few rates and no separate cascading levies such as octroi or entry tax.

11. Q11 · 6 marks · Long answerHarder exam level

    Explain, with an example each, the conservatism and materiality concepts. Can both apply to the same item?

    Hint

    Lower of cost or market; small items.

    Answer

    Conservatism: provide for all possible losses but not anticipated profits, e.g. stock at lower of cost or NRV, provision for doubtful debts. Materiality: items too small to influence decisions may be treated simply, e.g. a ₹300 stapler written off. Yes: a small likely loss may be ignored on materiality grounds, while a large one must be provided for under conservatism; materiality decides whether the item matters at all.

12. Q12 · 6 marks · Long answerHOTS / competency

    Suppose a start-up founder argues: "Cash basis is better for us because cash is what really matters." As her accountant, give three reasons why the accrual basis gives better information, using an example.

    Hint

    Matching; credit sales; obligations.

    Answer

    (1) It follows matching: revenue of a year is set against the expenses of that year, so profit is true. Example: a ₹2 lakh credit sale in March counts as March revenue, not when paid in May. (2) It shows what is owed and what is due (outstanding and prepaid items, debtors and creditors), so the Balance Sheet is complete. (3) It is required by the Companies Act and by accounting standards, and allows comparison with other firms. Cash flow can still be tracked separately through a cash budget.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.What does GAAP stand for?Show answer

   Generally Accepted Accounting Principles.

2. 2.Which concept gives the accounting equation?Show answer

   Dual aspect concept.

3. 3.What is the usual accounting period in India?Show answer

   12 months, 1st April to 31st March.

4. 4.Which concept requires the same method every year?Show answer

   Consistency.

5. 5.Which concept says record transactions on the basis of documents?Show answer

   Objectivity.

6. 6.Who issues accounting standards in India?Show answer

   The ICAI prepares them; the Central Government notifies them for companies.

7. 7.Which companies must follow Ind AS?Show answer

   Listed companies, unlisted companies with net worth of ₹250 crore or more, and their group companies.

8. 8.Which GST is charged on imports?Show answer

   IGST.

9. 9.Name the two bases of accounting.Show answer

   Cash basis and accrual basis.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Can you explain GAAP and why they must be relevant, objective and feasible?
• ☐Can you name the 13 basic concepts in order?
• ☐Can you say which concept applies when the owner pays personal bills from business cash?
• ☐Can you value stock at the lower of cost and NRV item by item?
• ☐Can you explain why fixed assets are not shown at market value?
• ☐Can you find profit on cash and accrual bases from the same data?
• ☐Can you distinguish double and single entry systems on three bases?
• ☐Can you say who must follow Ind AS and who follows AS?
• ☐Can you split GST into CGST, SGST or IGST for a given sale?
• ☐Can you show how input tax credit removes the cascading effect?

Theory Base of Accounting: frequently asked questions