accounting concepts & principles3,4

Financial Accounting Financial Accounting J S Matharu J S Matharu

Basic Accounting Concepts & Basic Accounting Concepts & PrinciplesPrinciples


GAAPGAAP

GENERALLY ACCEPTED ACCOUNTING GENERALLY ACCEPTED ACCOUNTING PRINCIPLESPRINCIPLES

Ground rules which define the Ground rules which define the parameters and constraints within parameters and constraints within which accounting reports are which accounting reports are generated.generated.


GAAPGAAP

It is a combination of authoritative It is a combination of authoritative standards set by policy boards and the standards set by policy boards and the accepted ways of doing accountingaccepted ways of doing accounting

In India, it is set by the Accounting In India, it is set by the Accounting Standards Board (ASB) of the Institute Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI)of Chartered Accountants of India (ICAI)


Accounting Concepts / Accounting Concepts / ConventionsConventions

Business EntityBusiness Entity Separate ExistenceSeparate Existence Distinct Legal IdentityDistinct Legal Identity

Going ConcernGoing Concern Life of infinite durationLife of infinite duration Profits measured for accounting periods as a Profits measured for accounting periods as a

segment of infinite lifesegment of infinite life

Periodicity conceptPeriodicity concept One year period is taken up for measuring One year period is taken up for measuring

performance and appraisal of financial positionperformance and appraisal of financial position



Money MeasurementMoney Measurement Money is common denominatorMoney is common denominator Helps in aggregation and summarisationHelps in aggregation and summarisation Human resources are assets but not Human resources are assets but not

recordedrecorded

MatchingMatching Matching of income with expenses of the Matching of income with expenses of the

same periodsame period



Cost conceptCost concept Generally all transactions recorded at Generally all transactions recorded at

cost and not market valuecost and not market value

RealisationRealisation Change in value of an asset is recorded Change in value of an asset is recorded

only when business realises itonly when business realises it



ConservatismConservatism Selecting the method of measurement which Selecting the method of measurement which

yields the gloomiest immediate resultsyields the gloomiest immediate results Anticipate no immediate gains but provide Anticipate no immediate gains but provide

for all possible lossesfor all possible losses If in doubt, write it offIf in doubt, write it off Lower of cost or market priceLower of cost or market price



MaterialityMateriality Trivial assets of small value may be written off Trivial assets of small value may be written off

as expensesas expenses

AccrualAccrual Income is recognised when the right to receive Income is recognised when the right to receive

cash arises without waiting for actual receiptcash arises without waiting for actual receipt Expenditure is recognised when the obligation Expenditure is recognised when the obligation

to pay cash arises without waiting for actual to pay cash arises without waiting for actual paymentpayment



ConsistencyConsistency Similar treatment of transaction e.g. Similar treatment of transaction e.g.

depreciation methods, inventory valuation etc.depreciation methods, inventory valuation etc. Changes can be made but should be disclosed Changes can be made but should be disclosed

with their effectswith their effects

Dual AspectDual Aspect Every transaction has two aspectsEvery transaction has two aspects E.g. increase in one asset & decrease in E.g. increase in one asset & decrease in

anotheranother E.g. increase in one asset increases a liabilityE.g. increase in one asset increases a liability


Qualitative Characteristics of Qualitative Characteristics of Financial StatementsFinancial Statements

UnderstandabilityUnderstandability Structured presentationStructured presentation Adequate disclosureAdequate disclosure

RelevanceRelevance Helping to evaluate past, present and Helping to evaluate past, present and

future eventsfuture events Helping to confirm or correct the past Helping to confirm or correct the past

evaluationsevaluations


Qualitative Characteristics Qualitative Characteristics of Financial Statementsof Financial Statements

ReliabilityReliability Faithful representation according to GAAPFaithful representation according to GAAP Free from material error or biasFree from material error or bias Transactions to be presented according to Transactions to be presented according to

economic substance and not legal formeconomic substance and not legal form Prudence i.e. allowing understatement of Prudence i.e. allowing understatement of

profits under uncertainty but cannot be profits under uncertainty but cannot be willfulwillful

Transparency (more information like Transparency (more information like segment reporting)segment reporting)


Qualitative Characteristics of Qualitative Characteristics of Financial StatementsFinancial Statements

ComparabilityComparability ConsistencyConsistency Disclosure regarding policiesDisclosure regarding policies Corresponding information for the Corresponding information for the

preceding periodspreceding periods


True and fair viewTrue and fair view Financial statements must meet the Financial statements must meet the

minimum threshold of all qualities minimum threshold of all qualities mentioned before. If so, they give a true mentioned before. If so, they give a true and fair view of the financial statementsand fair view of the financial statements

An adequate and effective internal control An adequate and effective internal control system helps to ensure that financial system helps to ensure that financial statements are free from any material statements are free from any material error or biaserror or bias


True and fair viewTrue and fair view Internal audit helps to identify Internal audit helps to identify

weaknesses of the internal control weaknesses of the internal control system. It is carried out by internal staff.system. It is carried out by internal staff.

External Audit is audit of financial External Audit is audit of financial statements by external auditors. They statements by external auditors. They provide reasonable assurance that the provide reasonable assurance that the statements provide true and fair view of statements provide true and fair view of the financial position and operating the financial position and operating resultsresults


Accounting StandardsAccounting Standards

They codify acceptable accounting They codify acceptable accounting practicespractices

They suggest the rules for They suggest the rules for recognition, measurement, recognition, measurement, treatment, presentation and treatment, presentation and disclosure of accounting transactions disclosure of accounting transactions in the financial statements of an in the financial statements of an organisation.organisation.


Importance of Accounting Importance of Accounting Standards in IndiaStandards in India

Accounting Standards (AS) in India are Accounting Standards (AS) in India are legislated by the Companies Act, 1956 and legislated by the Companies Act, 1956 and so have the weight of law.so have the weight of law.

The balance sheet and the P & L Account The balance sheet and the P & L Account should be prepared as per the ASshould be prepared as per the AS

The Directors and the Auditors should The Directors and the Auditors should mention that the annual accounts have mention that the annual accounts have been prepared as per the ASbeen prepared as per the AS


List of existing AS issued by List of existing AS issued by ICAIICAI

AS 1 Disclosure of Accounting Policies AS 1 Disclosure of Accounting Policies AS 2 Valuation of Inventories AS 2 Valuation of Inventories AS 3 Cash Flow Statements AS 3 Cash Flow Statements AS 4 Contingencies and Events Occurring after AS 4 Contingencies and Events Occurring after

the Balance Sheet Date the Balance Sheet Date AS 5 Net Profit or Loss for the period, Prior Period AS 5 Net Profit or Loss for the period, Prior Period

Items and Changes in Accounting Policies Items and Changes in Accounting Policies AS 6 Depreciation Accounting AS 6 Depreciation Accounting AS 7 Construction Contracts (revised 2002) AS 7 Construction Contracts (revised 2002) AS 8 Accounting for Research and Development AS 8 Accounting for Research and Development AS 9 Revenue Recognition AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets AS 10 Accounting for Fixed Assets


List of existing AS issued by List of existing AS issued by ICAIICAI AS 11 The Effects of Changes in Foreign AS 11 The Effects of Changes in Foreign

Exchange Rates (revised 2003), Exchange Rates (revised 2003), AS 12 Accounting for Government Grants AS 12 Accounting for Government Grants AS 13 Accounting for Investments AS 13 Accounting for Investments AS 14 Accounting for Amalgamations AS 14 Accounting for Amalgamations AS 15 (revised 2005) Employee Benefits including AS 15 (revised 2005) Employee Benefits including

treatment of Retirement Benefits treatment of Retirement Benefits AS 16 Borrowing Costs AS 16 Borrowing Costs AS 17 Segment Reporting AS 17 Segment Reporting AS 18 Related Party Disclosures AS 18 Related Party Disclosures AS 19 Leases AS 19 Leases AS 20 Earnings Per Share AS 20 Earnings Per Share


List of existing AS issued by List of existing AS issued by ICAIICAI

AS 21 Consolidated Financial Statements AS 21 Consolidated Financial Statements AS 22 Accounting for Taxes on Income. AS 22 Accounting for Taxes on Income. AS 23 Accounting for Investments in Associates in AS 23 Accounting for Investments in Associates in

Consolidated Financial Statements Consolidated Financial Statements AS 24 Discontinuing Operations AS 24 Discontinuing Operations AS 25 Interim Financial Reporting AS 25 Interim Financial Reporting AS 26 Intangible Assets AS 26 Intangible Assets AS 27 Financial Reporting of Interests in Joint Ventures AS 27 Financial Reporting of Interests in Joint Ventures AS 28 Impairment of Assets AS 28 Impairment of Assets AS 29 Provisions, Contingent Liabilities and Contingent AS 29 Provisions, Contingent Liabilities and Contingent

Assets Assets AS 30 Financial Instruments: Recognition and AS 30 Financial Instruments: Recognition and

Measurement Measurement and Limited Revisions to AS 2, AS and Limited Revisions to AS 2, AS 11 (revised 2003), 11 (revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28 AS 21, AS 23, AS 26, AS 27, AS 28 and AS 29 and AS 29

AS 31, Financial Instruments: Presentation AS 31, Financial Instruments: Presentation

accounting concepts & principles3,4

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