Accounting Concepts & Principles3,4
Transcript of Accounting Concepts & Principles3,4
Financial Accounting Financial Accounting J S Matharu J S Matharu
Basic Accounting Concepts & Basic Accounting Concepts & PrinciplesPrinciples
Financial Accounting Financial Accounting J S Matharu J S Matharu
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.
Financial Accounting Financial Accounting J S Matharu J S Matharu
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)
Financial Accounting Financial Accounting J S Matharu J S Matharu
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
Accounting Concepts / Accounting Concepts / ConventionsConventions
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
Accounting Concepts / Accounting Concepts / ConventionsConventions
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
Accounting Concepts / Accounting Concepts / ConventionsConventions
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
Accounting Concepts / Accounting Concepts / ConventionsConventions
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
Accounting Concepts / Accounting Concepts / ConventionsConventions
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
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)
Financial Accounting Financial Accounting J S Matharu J S Matharu
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
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.
Financial Accounting Financial Accounting J S Matharu J S Matharu
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
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
Financial Accounting Financial Accounting J S Matharu J S Matharu
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