Accounting theory Accounting standards

What is accounting

Accounting is the art of recording , classifying and summarizing in a significant manner, and in terms of money , transactions and events which are , in part at least , of financial character and interpreting the results thereof.

Nature and scope of accounting

Nature and scope of accounting was explained in 1961 by the American institute of certified public accountants (AICPA) in the following definition which is also known as traditional

Features of accounting

Identifying Measuring Recording Classifying Summarizing Significant Interpretation Communication

Real nature of accounting While accounting is many thing to many

people, real nature of accounting is essentially described as :

An intellectual discipline A profession A social force A tool of social welfare An aid or help to resource

Difference between book keeping and accounting

BOOK KEEPING

The process of identifying or recognizing the business transactions

Expression the value of transaction in money terms

Recording of business transaction in books of original entry and

Classifying or grouping business transactions into proper heading and posting them in the ledger

ACCOUNTING

Accounting is concerned not only with the recording of business transactions but also

Summarizing of classified transaction in the form of profit and loss account and balance sheet

Analyzing and interpreting the business transactions

Communicating the results to the ultimate users of accounting information.

Difference between book keeping and accounting

BOOK KEEPING

Book-keeping is the primary or first stage of maintaining the book of account

The main objectives the book-keeping is to maintain records of business transactions a systematic manner

ACCOUNTING

Accounting is secondary or second stage of maintaining the book of account in fact accounting begins where book-keeping ends.

The objectives of accounting is to find out the profit or loss and financial position of the enterprise and communicate the same to users of accounting information

Objectives of accounting

Maintaining proper records of business transactions Ascertaining or knowing the profit or loss of the

business Ascertaining the sources of the item of revenue and

expenses Ascertaining of the financial position of the business Ascertaining the cash flow position Communicating the financial information of various

groups Meeting legal requirements Controlling the performance of the business Ascertaining the position of debtors and creditors Facilitating research in business operations

Functions of accounting

Maintaining systematic records Communicating the financial results Meeting legal needs Protecting business assets Accounting assists the management

in the task Fixing responsibility

Advantages of accounting Maintenance of records rather than

memory Preparation of financial statements Comparison of result Assistance to management As legal evidence Helps in taxation matter Ascertainment of value of business Raising loans Control over assets or properties Prevention of errors and frauds Communication to external users

Limitations of accounting

No recording of non-monetary transactions

No information about the present value of business

Use of estimates or personal judgement Window dressing Unrealistic accounting information Accounting information is not natural or

unbiased Lack of consistency Disclosure of only material items Historical information only

Branches or divisions of accounting

Financial accounting Management accounting Cost accounting Tax accounting Social accounting Human resources accounting National accounting Green accounting Creative accounting Forensic accounting

Bases of accounting

Cash basis of accounting : credit transactions are not considered at all including adjustments for outstanding expenses or accrued income items

Advantages or merits

This basis is simple to use and does not require technical knowledge of accountancy

There is no scope for estimation or personal judgements because cash transactions are recorded only when actual cash is received or paid

This basis is suitable for business firms having most of the transactions in cash

Disadvantages or demerits Cash basis does not give a true and fair

view of profit or loss There is no scope of matching principle There is enough possibility of

manipulating As capital and revenue items are treated

at par there is no consistency in the profit or loss figure of different accounting periods

Cash basis of accounting is not recoganised by the companies act

Accrual basis of accounting

Under accrual basis of accounting , only revenue items are taken into account for income determination and capital expenditure are ignored. Income is recognized when it is earned and not when the money is actually received later on .

Advantages or merits

It is based on all business transactions of the year in respect of income and expense items and not simply relating to cash transactions

This basis of accounting can be used in all types of business enterprises

It is more suitable for the application of matching principle

It is more scientific and rational basis of accounting

There is a consistency in the computation of profit or loss of different years

It is recognized by the companies act

Systems of accounting

Primarily there are two systems of accounting which are used as a basis for recording day – to – day business transactions in a systematic manner they are :single entry system and double entry system

Single entry system: also known as accounts from incomplete records this system ignores the two – fold or dual aspect of recording the transactions

(a) Pure single entry, in which only personal accounts are maintained with the result that no information is available in respect of cash and bank balances, sales and purchases etc. In view of its failure to provide even the basic information regarding cash etc., this method exists only on paper and has no practical application ;

(b) Simple single entry, in which only : (1)personal accounts and (2)cash book are maintained

(c) Quasi single entry is a system in which (1)personal accounts (2) cash book (3) some subsidiary books are maintained

Systems Of Accounting

Double entry: under this system, all transactions relating to persons , goods services, cash or credit are recorded in a scientific manner taking into consideration their two –fold or double effects.

Indian system : system of book keeping which is followed throughout the country for a long time

Accounting principles

Accounting principles are uniform set of rules and guidelines for any accountant to record the business transactions and prepare the financial statements , namely : the income statement , the balance sheet and the cash flow statement.

Accounting principles must satisfy the following conditions , namely :

(1) They must be real assumptions like money concept or entity concept

(2) they must be simple and understandable(3) they must be followed consistently (4) they should be able to provide useful information

to the users.

Characteristics of generally accepted accounting principles

(1) To ensure uniformity (2) simple guidelines(3) Not final statements(4) The general acceptance of accountancy

principles depends upon how well they meet the three criteria or conditions of (a) relevance ; (b) objectivity and (c) feasibility.

Accounting standards

Accounting standards may be defined as written policy documents issued by expert accounting body or by government or its regulatory body covering such aspects as recognition of events , measurements , presentation and disclosure of accounting transactions and events in the financial statements , namely : balance sheet and profit and loss account.

Accounting standards may also be termed as codified forms of generally accepted accounting principles

Issued covered by accounting standards

The accounting standards primarily deal with the following issues :

(a) Recognition or identification of events and transactions in the financial statements

(b) Measurements of these transactions and events in terms of money

(c) Presentation of these transactions and events in the financial statements in a manner that is meaningful and understandable to the users of accounting information

(d) The disclosure requirements to unable the public in general and creditors , owners and potential or future investors in particular to know what is inside the financial statements .

Nature of accounting standards

Accounting standards prescribe a model code or yardstick or benchmark of accounting policies and practices for guidance of the accountants

Accounting standards eliminate or remove the effect of several or various accounting policies and practices so that financial statement of different firms become comparable

Accounting standards provides the most suitable accounting method to solve one or more accounting problems

Accounting standards clearly communicate to the users of the financial information the basis on which financial statements have been prepared

Accounting standards limit the scope of discretion by the accountants in presenting financial information through profit and loss account and balance sheet

Concepts and standards

CONCEPTS

Concept are in the nature of general statement like entity concept etc and do not provide solutions to specific problems

Concept may allow alternative treatments for the same items

They are unwritten general statements about the rules or guidelines for recording business transactions

They do not have legal status

STANDARDS

Accounting standards will aim at specific solution to specific issues such as inventory valuation , revenue recognition etc

Accounting standards on valuation of fixed assets and inventory valuation may limit the number of method of valuation of these items

They are written or codified statements issued by accountant specifying uniform rules

They are legally recognized by government

Classification of accounting standards

We can classify the standards into following categories:

(a) Policy standards which deals with simple concepts and conventions

(b) Standards whish deal with the format of financial statements as prescribed in companies act, insurance companies act , banking companies act and so on

(c) Standards which deals with the measurement of financial events

Significance of accounting standards

(a)Easy intra-firm and inter-firm comparability(b) Reliability and credibility(c) True and fair view of financial position(d) Improve the quality of financial reporting (e) Reduction in alternative accounting

practices (f) Efficiency of management (g) Value of accounting information (h) Useful to accountants and auditors (i) Reduction of manipulation and frauds(j) Resolving conflict of financial interest

The accounting standards issued by the institution of chartered accountants of India

AS 1 Disclosure of Accounting Policies AS 2 Valuation of Inventories AS 3 Cash Flow Statements AS 4 Contingencies and Events Occurring after the Balance Sheet Date AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes

in Accounting Policies AS 6 Depreciation Accounting AS 7 Construction Contracts (revised 2002) AS 8 Accounting for Research and Development (withdrawn pursua

the issuance of AS 26) AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003) AS 12 Accounting for Government Grants AS 13 Accounting for Investments AS 14 Accounting for Amalgamations AS 15 Accounting for Retirement Benefits in the Financial Statements of Employers

The accounting standards issued by the institution of chartered accountants of India

AS 16 Borrowing Costs AS 17 Segment Reporting AS 18 Related Party Disclosures AS 19 Leases AS 20 Earnings Per Share AS 21 Consolidated Financial Statements AS 22 Accounting for Taxes on Income AS 23 Accounting for Investments in Associates in Consolidated financial

statements AS 24 Discontinuing Operations AS 25 Interim Financial Reporting AS 26 Intangible Assets AS 27 Financial Reporting of Interests in Joint Ventures AS 28 Impairment of Assets AS 29 Provisions, Contingent Liabilities and Contingent Assets AS-30 Financial instruments: Recognition and measurement and

limited revision to AS-2, AS-11,AS-21,AS-23,AS-26.AS-27,AS-28. AS-31 Financial instrument – presentation AS-32 Financial instrument – disclosure