Accounts - U1 L2, L3 accounting principles and standards.pdf

Accounting standards

1. Master of Business Administration
Maharaja SurajmalInstitute
(Affiliated to GGSIP University & NAAC 'A' grade accredited)
Rated as Category 'A+' by SFRC & 'A' by JAC Govt. of NCT of Delhi
Approved by BCI & AICTE And RecognisedU/s 2(f) of UGC Act
Accounting for Management
Paper Code: MS-107
Subject Faculty: Chanchal Phore
Department of Management Studies

2. Master of Business Administration
Semester
Unit
Topic
Lecture No.
Course Credit
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:
:
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I
I
Accounting Concepts, Principles & Standards
02-03
03

3. Master of Business Administration
ACCOUNTING PRINCIPLES
•Financial accounting is information that must be processed and
reported objectively.
•Third parties, who must rely on such information, have a right to be
assured that the data is free from bias and inconsistency, whether
deliberate or not.
•For this reason, financial accounting relies on certain standards or
guides that are called 'Generally Accepted Accounting Principles'
(GAAP).

4. Master of Business Administration
CHARACTERISTICS OF ACCOUNTING
PRINCIPLES
•Accounting principles have been developed to ensure uniformity and easy
understanding of the accounting information
•Accounting principles are man-made in the sense that like that of principles
of physical science such as chemistry, physics etc are not laboratory tested
principles. They are simple guidelines based on usage, reason and
observations over a period of time
•Accounting principles are not final statements. They are subject to
modifications depending upon the changes in business practices,
government policies and requirements of the users of accounting
information.
•The general acceptance of accounting principles depends upon how well
these principles meet or satisfy three conditions, namely: 1, Relevance, 2.
Objectivity and 3. Feasibility

5. Master of Business Administration
(a)Relevance : A principle is relevant if it results in information that is
meaningful and useful to the users of the financial statements
(b)Objectivity : Similarly a principle is objective to the extent that
accounting information is free from personal bias or judgements of
those who provide it. Objectivity means verifiability, that is, there is
someway of finding out the correctness of the information reported.
(c)Feasibility : A principle is feasible if it can be used without much
complexity or cost. It applies to time, labour and cost of providing
accounting information and its accuracy in relation to probable use
and resulting benefits. For example it is easy to record an asset at
cost price since it saves time and labour in obtaining market price of
the asset at different times.

6. Master of Business Administration
•Accounting concepts are ideas or notions that have a universal
application. They are widely accepted in accounting to give a unifying
structure and logic to the accounting process. Financial transactions
are interpreted in the light of accounting concepts.
•On the other hand, accounting conventions denote customs or
traditions followed in accounting. These are guidelines that support
accountants in the preparation and reporting of financial statements.
ACCOUNTING CONCEPTS AND
CONVENTIONS

7. Master of Business Administration
ACCOUNTING CONCEPTS
1. Entity Concept
•The entity concept assumes that the firm or enterprise and its owner(s)
are two separate entities for accounting purposes.
•For examples, when the owner invests or introduces money (the
capital) in the business, the capital of the business is treated as a
liability of the business entity towards its owner. Similarly, when the
owner withdraws the cash for his personal use the accounts would
show that cash in the business is reduced and so too his capital though
his personal cash has increased.
•In this way the business and personal transactions are not mixed up.

8. Master of Business Administration
Effects of the entity concept
•Only the transactions of the business are recorded and not the personal
transactions of the owner(s).
•Income or profit is the property of the business entity unless it is distributed
to the owner(s).
•The personal assets of the owner(s) are not taken into consideration while
calculating the value of the assets of the business enterprise.
•The capital of the proprietor is considered as a liability of the business to its
owner(s); the drawings and losses are regarded as reductions of this liability
while profits and additional capital introduced are treated as an increase in
this liability.
•The profit or loss of the business entity can be easily and correctly
calculated.
•The financial position of the firm can be easily and correctly calculated.

9. Master of Business Administration
2. Dual Aspect Concept
•According to this concept, every business transaction involves two
aspects, namely, for every receiving of benefit, there is a
corresponding giving of benefit.
•The dual aspect concept is the basis of the double entry book keeping.
Accordingly for every debit there is an equal and corresponding credit.
The accounting equation of the dual aspect concept is:
Capital + Liabilities = Assets
(or)
Assets = Equities (Capital)

10. Master of Business Administration
•The term Capital refers to funds provide by the proprietor of the
business concern.
•On the other hand, the term liability denotes the funds provided by the
creditors and debenture holders against the assets of the business.
•The term assets represents the resources owned by the business.

11. Master of Business Administration
3. Accounting Period Concept/ Periodicity Concept
The accounting period concept is related to going concern concept
which presumes that a business is likely to continue for an indefinite
period of time. The true income or loss can be ascertained only on the
closure of the business by comparing the capital at the end arrived after
adjustments for drawings in cash and goods and introduction of
additional capital by the owner(s)with the capital at the start of business.
But the owners cannot wait until the business is closed to know how
much income has been earned or loss incurred. It will not serve any
useful purpose. The owners or investors want to know periodical
progress or performance of the business enterprise because it will be
helpful to take corrective steps if the performance is not successful or up
to the mark.

12. Master of Business Administration
•Accounting period means that the working life of the business firm should be split (or
divided) into convenient short periods of time or regular intervals called accounting
periods and net profit (or loss) and the financial position should be ascertained at the
end of each accounting period by preparing profit and loss account and the balance
sheet.
Benefits of accounting period concept:
1.The concept enables the preparation of financial statements- the profit and loss
account and balance sheet and cash flow statement- of an enterprise annually.
2. This concept has enabled preparation of income statement on accrual basis in the
sense that matching of expenses and revenue is taken into consideration by making
these items belong to the same accounting period.
3.This concept enables the business firms to distribute their income at regular
intervals
4.This concept facilitates the comparison of net income and financial position of one
year with that of another year. This is useful to management for planning and in
improving the efficiency of the business.
5.Inter-firm comparison, that is, comparison between other firms is also possible.

13. Master of Business Administration
4. Going Concern Concept
•This concept assumes that business concern will continue for a long
period to exit.
•In other words, under this assumption, the enterprise is normally
viewed as a going concern and it is not likely to be liquidated in the
near future.
•This assumption implies that while valuing the assets of the business
on the basis of productivity and not on the basis of their realizable
value or the present market value, at cost less depreciation till date for
the purpose of balance sheet.
•It is useful in valuation of assets and liabilities, depreciation of fixed
assets and treatment of prepaid expenses.

14. Master of Business Administration
5. Cost Concept
•Cost Concept implies that assets acquired are recorded in the accounting
books at the cost or price paid to acquire it. And this cost is the basis for
subsequent accounting for the asset.
•For accounting purpose the market value of assets are not taken into account
either for valuation or charging depreciation of such assets.
•Cost Concept has the advantage of bringing objectivity in the preparation
and presentation of financial statements.
•In the absence of cost concept, figures shown in accounting records would
be subjective and questionable.
•But due to inflationary tendencies, the preparation of financial statements
on the basis of cost concept has become irrelevant for judging the true
financial position of the business.

15. Master of Business Administration
6. Money Measurement Concept
•According to this concept, accounting transactions are measured,
expressed and recorded in terms of money.
•This concept excludes those transactions or events which cannot be
expressed in terms of money.
•For example, factors such as the skill of the supervisor, product
policies, planning, employer-employee relationship cannot be recorded
in accounts in spite of their importance to the business.
•This makes the financial statements incomplete.

16. Master of Business Administration
7. Realisation Concept/ Revenue Recognition Concept
Realisation means as to when a business transaction such as sale of
goods or service etc., gives legal right to the receipt of money or money'
worth. It means realization concept is related to the point of time at
which revenues is to be recognized. Thus the essence of the
realization concept is the timing of revenue recognition. For
example, Maruti-Suzuki Ltd. produces a Motor vehicle in 2013,keeps it
throughout 2014 and sells it 2015 for ₹ 3,50,000 and collects cash in
2016.The problem is as to when revenue should be recognized in the
books of account. According to realization or revenue recognition
concept, the revenue of ₹ 3,50,000 is realized in the year 2015.

17. Master of Business Administration
Benefits of Realisation Concept
•The realization concept ensures that there can be no profit without the sale
of goods or performance of service and use of firm's resources by others. It
is because of this concept that unrealized profits resulting from valuation of
assets are ignored. Thus profit is not earned on the basis of an order just
received from a customer. Revenue is earned only when the order is
executed and the customer becomes legally liable to pay for the goods sold
to him or service performed for him.
•This concept ensures that an advance payment for goods received from a
customer is not treated as revenue.
•This concept is a check on the management intending to inflate the profit by
recording the income not realized (or earned)
•The realization concept provides verifiable evidence for revenue
recognition.
•This concept ensures the determination or calculation of correct profit or
loss.

18. Master of Business Administration
8. Matching Concept
The matching concept in financial accounting is the process of matching
(relating) accomplishments or revenues (as measured by the selling prices of
goods and services delivered) with efforts or expenses (as measured by the
cost of goods and services used)to a particular period for which the income is
being determined. This concept emphasises which items of cost are expenses
in a given accounting period. That is, costs are reported as expenses in the
accounting period in which the revenue associated with those costs is
reported.
For example, when the sales value of some goods is reported as revenue in a
year, the cost of those goods would be reported as expenses in the same year.
Matching concepts need to be fulfilled only after realisation concept has been
completed by the accountant: first revenues are measured in accordance with
the realisation concept and then costs are associated with these revenues.
Costs are matched with revenues, not the other way around

19. Master of Business Administration
9. Accrual Concept
The accrual concept is applicable to the recognition of both the revenues
and expenses. According to this concept, revenues are recognised when
they simply become receivable though cash is not received, and the
expenses are recognised when they simply become payable though no
cash is paid immediately and both are recorded in the accounting period
to which they are related.
Example: A firm sells goods for Rs.45,000 on 25
th
March 2021 and the
payment is not received until 10
th
April, 2021, the amount due and
payable to the firm on the date of sale, i.e., 25
th
March 2021 and must be
included in the revenue for the year ending 31
st
March, 2021 though not
received on this date.

20. Master of Business Administration
ACCOUNTING CONVENTIONS
CONSISTENCY CONVENTION
It means that the same accounting practices
will be used for similar items from one
accounting period to another
PRUDENCE CONVENTION
It means that while recording the business
transactions and preparing financial
statements, the accountant should take into
consideration all prospective or future losses
and risks and make adequate provisions for
them but the prospective profits should not
be taken into consideration, that is, they
should be ignored
MATERIALITY CONVENTION
It means that in accounting only important
and relevant information should be provided
to the users of financial information.
FULL DISCLOSURE CONVENTION
It suggests that every financial statement
should fully disclose all relevant information
that affects average investor

21. Master of Business Administration
ACCOUNTING STANDARDS
Accounting standards provide framework and standard accounting policies
for treatment of transactions and events so that the financial statements of
different enterprises become comparable.
FORMULATION OF ACCOUNTING STANDARDS
•Institute of Chartered Accountants of India (ICAI), took upon itself the
leadership role by constituting the Accounting Standards Board in 1977
•ASB considers International Financial Reporting Standards while framing
Indian Accounting Standards in India and try to integrate them, in the light
of the applicable laws, customs, usages and business environment
•The composition of ASB includes, representatives of industries (namely
ASSOCHAM, CII, FICCI), regulators, academicians, government
departments etc

22. Master of Business Administration
ISSUE OF ACCOUNTING STANDARDS
The ASB has so far issued 32 accounting standards out of which five
(AS6, AS8, AS 30, AS 31 and AS 32) have been withdrawn. Hence, the
effective Ass are only 27 today.

23. Master of Business Administration
ADVANTAGES OF ACCOUNTING
STANDARDS
•Standards reduce to a reasonable extent or eliminate altogether
confusing variations in the accounting treatments used to prepare
financial statements
•It assists in improving quality of work performed by accountant. It
provides the accountancy profession with useful working rules
•It strengthens the account’s resistances against the pressure from
directors to use accounting policy which may be suspect in that
situation in which they perform their work
•It ensures the various users of financial statements to get complete
crystal information on more consistencies

24. Master of Business Administration
AS 1- Accounting disclosure policies
Simply put, this standards list contains all significant accounting policies disclosures
to be followed whenever a financial statement is presented or prepared.
AS 2- Inventories Valuation (Revised)
This standard provides accounting standards in brief and the guidelines for
determining the value of the inventories reported in financial statements. They also
include the process of deciding the inventory cost, the Written Down Value (WDV)
and more.
AS 3- Cash Flow Statements
In these accounting standards with explanation, an enterprise's changes in the cash
values or historical value changes are covered. The process of preparing the Cash
Flow Statement or its changes from financing, investing, and operations are detailed
here.
AS 4- Balance Sheet Date, events and contingencies thereafter
This standard cover the treatment of events and contingencies that occur post the
date of drawing up the balance sheet.

25. Master of Business Administration
AS 5- Prior Period Items, Net profit & Loss in the period, and Accounting Policy
changes
This standard applies to organisations when preparing the profit or loss statement occurring
in the firm’s normal activities. It also includes recording prior changes or extraordinary
items and the changes in accounting policies and estimates.
AS 6- Depreciation Accounting
This standard is withdrawn, and matters related to depreciation are included in AS 10.
AS 7- Accounting of Construction Contracts
Construction contracts are covered in theseaccounting standards.
AS 8- Accounting for Research and Development
This standard stands withdrawn after AS-26 came
AS 9- Revenue Recognition
This standard lists how to recognise revenue in the entity’s Profit & Loss Statement. For
example, the rendering of services, the sale of goods, the interest charged or paid for,
dividends, royalties etc.
AS10- Plant, Property and Equipment
Theaccounting standardlists the accounting treatment for equipment, plant, and property,
also called PPE standards.

26. Master of Business Administration
AS 11- Changes in rates of Foreign Exchange Rates
The standard deals withaccounting principles of transactions in foreign
currency and the financial impact of rate changes in foreign exchange on
operations and transactions.
AS 12- Government Grants
Government grants are covered by this accounting standard, also called the
standards for duty drawbacks, subsidies, cash incentives etc.
AS 13- Investments Accounting
This accounting standard list is for investment accounting in the enterprise’s
financial statements and mandatory disclosures.
AS 14- Amalgamations Accounting
The standard deals with the accounting of reserves, goodwill etc., occurring
in the amalgamation of firms.
AS 15- Employee Benefits
The standard prescribes the accounting disclosures and treatment of employee
share-based payments/ benefits, not employee benefit plans.

27. Master of Business Administration
AS 16- Borrowing Costs
The borrowing costs applied are dealt with here, and it does not cover the owner’s
equity costs like preference share capital which is not a liability.
AS 17- Financial segments reporting
Thislist of accounting standardsestablishes reporting principles for different
financial information types, products, segments, services, enterprise produce etc.
AS 18- Related party transactions disclosures
The disclosure standard is used in reporting related parties and applies to financial
statements of both reporting enterprises.
AS 19- Lease transactions disclosures and accounting policies
This standard prescribes financial and operating leases' disclosures and accounting
policies.
AS 20- Earnings per share
This standard deals with principles used in preparing and presenting the EPS or
earnings per share on a uniform scale between enterprises for the same accounting
period or for a single firm during different accounting periods.

28. Master of Business Administration
AS 21- Consolidated Statements principles
These accounting standardsare about the procedures and regulations used in
presenting and preparing consolidated financial statements. Consolidated accounting
statements are prepared wherein the subsidiary and parent companies financial
information is presented as a single economic entity.
AS 22- Taxable Income Accounting
This standard is about accounting for the treatment of income taxes which may
differ from the income in the financial statements.
AS 23- Investments in Associates Accounting
The standard for the presentation and preparation of an investor's Consolidated
Financial Statements(CFS) covers the investments in associates accounting
principles.
AS 24- Discontinuing Operations
This standard deals with the accounting principles when reporting the
discontinuation of operations. This helps estimate the earnings-generating capacity,
financial position, cash flows etc., by differentiating between continuing and
discontinuing operations of an enterprise.

29. Master of Business Administration
AS 25- Interim Financial Reporting
The standard is applicable when a firm elects to or is required to publish its interim
financial report. It helps with prescribing the principles for the measurement and
recognition of interim financial statements.
AS 26- Intangible Assets Accounting
AS 26 list of accounting standards deals with the intangible assets accounting
treatment and refer to an organisation’s identifiable assets that are non-monetary and
used or held in the supply or production of services, goods, for administrative
purposes and more.
AS 27- Reporting of interest in joint ventures
The AS 27 sets out the procedures and principles when accounting for a firm’s
interest in joint ventures and reports liabilities, venture assets, expenses and income
in the investor’s or venture’s financial statements.
AS 28- Assets Impairment
The AS 28 deals with procedures that a firm applies to ensure its reported assets are
not more significant than the recoverable amount. If the carrying amount is greater
than the amount to be recovered by sale or use of the asset, it is considered an
impaired loss/asset.

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AS 29- Contingent Assets and Liabilities Provision
This standard lays out the measurement and recognition criteria/ bases
for provisions applicable to contingent assets or liabilities.
AS 30 – Financial Instruments: Recognition and Measurement
AS 31 – Financial Instruments: Presentations
AS 32 – Financial Instruments: Disclosure
AS 30, 31, 32 stand withdrawn.

31. Master of Business Administration
LIMITATIONS OF ACCOUNTING
STANDARDS
•Alternative solutions to certain accounting problems may each have
arguments to recommend them, therefore, the choice between different
alternative accounting treatments may become difficult
•Accounting standards cannot override the statute
•Users are likely to think that said statements prepared using
accounting standard are infallible
•The working rules may bring rigidity to some user of financial
statements