Accounting

Basics
SEMESTER: I
MARKS: 100
Marks breakup

Total 100

50 term end
50 internals
exam

40 online
10 project/
tests
assignment
&quizzes
What is
accounting?
Rs. 2000
• What about the money I
gave you?
• Where did you spend it?
• How much of it is left?
• Please give an account
of it.

This Photo by Unknown Author is licensed under CC BY

Movie Ticket - 300
Cab - 100
Coke – 80
Popcorn treat- 300
Shirt – 500

Total = 1200
 Basically, it is Process of
identifying, measuring,
recording and
communicating the
What is required information
Accounting?
relating to economic
transactions to the
to the
interested users to help them
them make decisions.
ACCOUNTING
• Journal
Recording

• It is the objective medium through

which business organizations find
out and communicate their Classifying
• Ledger
financial performance and financial
position to the outside world
• TB, P&L, BS
Summarising

• It is also defined as the process of

recording, classifying, • Ratios and reading the financial info. For
summarizing, analysing and Analysing
judgment about financial condition and
profitability.
interpreting the financial & Interpreting

transactions and communicating

the results thereof to the persons • Accounting reports
interested in such information. Communicating
 Branches of Accounting

Financial Cost Accounting Management

Accounting Accounting

While Management Accounting and Cost accounting aims at assisting managers in

their functions, Financial Accounting aims at meeting the information needs of both
external and internal users. While Management Accounting information is privileged
and personalized, Financial Accounting information needs to be more accurate and in
standardized formats to enable use by external users and easy comparability.
Users of Accounting
Information

Internal Users External Users

Internal Users
 Owner
Performance Risk Profit

 Managers

Plan Decisions Monitor

 Employees
Security Reporting
External Users
 Investors
Performance Risk Profit Worth

 Lenders and Suppliers Credit worthiness

and Research and Rating Agencies

Continuity of supply
 Customers

 Tax Authorities and Government Accuracy of Tax Return Monitor Compliances

 Auditor
Inspect Accounting Records

 Competitor
Check strategies and pricing policies

 Public
Journalists Analysts Academicians
Regulatory
Bodies
Accounting and
disclosure practices
are greatly influenced
by the regulatory
requirements in a
country.
 FINANCIAL STATEMENT:
A complete set of financial statements comprises:
• Balance Sheet;
• Statement of Profit & Loss / Profit & Loss account/ Income
statement;
Output of • Cash flow statement; and
• Notes to Accounts
Financial
Accounts As per Ind-AS -1, the following are also included:
• Bifurcation of Profit & Loss Account into Other
Comprehensive Income;
• Statement of changes in equity/net worth;

• For a sole proprietor generally only first two are prepared.

 Generally
Accepted
Accounting
Principles
What is GAAP ?
(GAAP)
 • GAAP – Generally Accepted Accounting Principles (GAAP)
• GAAP – COMMON SET OF conventions, rules, standards
and procedures that constitute accepted accounting
practices at any given time
• GAAP differ from country to country because of the
Generally legislative requirements of each country, local accounting
practices, customs, usage and business environment
Accepted peculiar to each country
• Each country has set up its own professional accounting
Accounting body to frame, implement and regulate the application of
the GAAPs in the country.
Principles • Example:
(GAAP) • In USA – FASB – Financial Accounting Standard Board – set
up in 1973
• In UK – ASB – Accounting Standard Board – set up in 1990
issues Financial reporting standards
• In India – ASB – Accounting Standard Board - set up in
1977 by ICAI issues Accounting Standards (AS)
 •These accounting Principles can be divided into two categories:
- Accounting concepts
- Accounting convention
Generally
•Accounting concepts: Those basic assumptions or conditions
Accepted upon which the science of accounting is based. They are like the
foundation or pillars of accounting.
Accounting
Principles •Accounting conventions: Those customs or traditions which
over period have been found to yield better results and so those
(GAAP) have been established as guidelines for accountants to follow
while preparing the financial statements.

•Use of GAAP make Financial Statements more meaningful,

reliable and comparable.
Generally Accepted Accounting Principles (GAAP)
Accounting concepts: Accounting conventions:
•Separate entity concept •Conservatism
•Money Measurement concept •Materiality
•Going concern* •Full disclosure
•Cost concept (this have been widely •Consistency*
challenged by IFRS by introducing Fair
Value concept)
* : The ones marked in red are
•Accounting period Fundamental Accounting
•Dual aspect concept Assumptions.
•Accrual concept*
•Matching concept
Accounting Concepts

Separate entity concept/ Business Entity concept :

• For accounting purposes, the business enterprise and its

owners are two separate and independent entities. Accounting
records are made in the books of accounts from the point of
view of the business and not of the owner.

• Eg. If Star International UK set up Star Trek India as captive

BPO and invested $ 50 million, how will the transaction be
recorded in accounts?
• As investment in books of Star International UK and as
capital in the books of Star Trek India
Accounting Concepts

Money Measurement concept :

•As per this concept, only those transactions which

can be expressed in terms of money are subject
matter of accounting.
•Also, record of the transactions will be kept in
monetary terms and not in physical units enabling it
to be aggregated and objectively measured.

•Eg. Sale transaction whether big or small is

recorded. But appointment of a new M.D. is not
recorded. Also, sale is recorded in terms of money
and in reporting currency and not units.
Accounting Concepts

Going Concern concept :

•Unless there is substantial evidence to the contrary, this

concept assumes that there is neither any intention
nor any necessity to liquidate the business in the
foreseeable future and it will continue to carry on its
activities for a long period of time.
•Eg. A business purchases machinery of Rs. 100,000 and
Rs. 10,000 is decided to be charged as depreciation
every year in Profit & Loss Account. Without going
concern concept, asset would be shown at market
value and the differential expensed off.
Accounting Concepts
Cost concept:
•This concept states that all assets (except stock and short-term
investments) are recorded in the books of accounts at their purchase
price, which includes cost of acquisition, transportation and
installation and not at its market value as business is a going
concern.
•Eg. if a business purchases a plot of land for Rs. 50,00,000 and incurs a
legal fees of Rs. 50,000. It will be recorded at Rs. 50,50,000
irrespective of whether market value has become 60,00,000 or
40,00,000.

•However, it should be noted that under the new era of accounting and
presentation and disclosure of financial transactions , the concept of
Fair value of accounting is introduced. As per this concept, Assets can
be valued at their fair value in contrast to historical cost concept
(referred to as revaluation model). Since we are in the transition
phase, both the concepts are currently in practice.
Accounting Concepts
Accounting period:

• As per this concept, the activities of the enterprise

is divided into artificial time periods and results
seen after each period. The period covered by the
Financials is called accounting period and is
conventionally for one year. However, it can be
shorter or longer but max period allowed by
Companies Act is up to 15 months.
• Suppose a company starts operations from Feb
2018, what accounting period it can opt for in its
first reporting?
• 2 months or 14 months
Accounting Concepts
 Accounting Concepts
Matching concept
• This concept states that the revenue
and the expenses incurred to earn
REVENUE ASSOCIATED EXPENSES that revenue must be ‘matched’ to
determine the correct profit and
loss.

SAME
ACCOUNTING • Eg. Closing stock remaining at the
PERIOD end of the year should be valued
and subtracted from purchases and
opening stock to know the ‘cost of
goods sold’ during the year.
Accounting Concepts
Dual Aspect concept :
•According to this concept, every business transaction
has a dual & opposite effect and both the aspects should
be recorded.
Eg. If a capital of Rs. 10,000 is invested in business, it will
be recorded in two accounts – cash received of Rs.
10,000 and Capital introduced of Rs. 10,000.
Now, if machinery is purchased for Rs. 5,000, it will be
recorded in two accounts again– machinery increase by
Rs.5,000, cash balance decrease by Rs. 5,000
•It is because of dual aspect that the fundamental
accounting equation always balances
Assets = Capital + Liabilities
(+Income – Expenses)
 Accounting Convention
Convention of Conservatism:

• In the initial stages of accounting, certain anticipated profits were recorded but did not
materialize. This led to low acceptability of accounting figures by the end-users.
• Therefore, the accountant now follows the rule ‘anticipate no profit but provide for all
losses. This is called the principle of ‘conservatism’ or policy of ‘playing safe’.

• Eg. Inventories are valued at cost or NRV whichever is less

Accounting
Convention
Convention of Consistency:

•According to this convention, the same accounting

principles, procedures and policies should be used
consistently on a period to period basis for
preparing financial statements. If change is
inevitable due to legal necessity or to improve
accounting, a note to that effect and the amount of
effect should be given.

•Eg. If depreciation on fixed assets is charged

according to diminishing balance method and at a
particular rate, it should be followed year after year
unless there is a necessity to change the same. If
changed, the impact of such change and the reason
for change should be duly disclosed.
Accounting
Convention
Convention of Materiality:

•According to this convention, the accountant should

attach more importance to material details, otherwise
accounting will be unnecessarily overburdened with
minute details.
•This concepts gives way to subjectivity. However the
criteria to decide materiality is: an item would be
material if it influences the judgement of the end user.
•Eg. Any item of income or expenditure which exceeds 1
percent of the revenue from operations or Rs. 100,000,
whichever is higher, is shown as a separate item against
appropriate account head in the P&L and is not combined
with any other items shown under misc.
expenses/income.
Accounting Convention
Convention of Full Disclosure:

•According to this convention, accounting

statements should disclose fully & fairly the
information they purport to represent and which
can be of material interest to the users of
financial statement.
•Eg. Notes to Accounts appended to financial
statements (giving information on contingent
liabilities, managerial remuneration etc.) is in
pursuance of this convention.
Accounting Concepts ….. some
questions
• Mediclaim Pharma Ltd. Is facing a law suit wherein it may
be liable to pay a fine of Rs. 10 lakhs. The lawyer of the
company has advised that there is high probability of loosing
the law suit. How should the company record the transaction
in its books of accounts?

• Shivam Ltd. borrowed a sum of Rs. 50 lakhs from ICICI on

July 1, 2017 for one year. The loan matured on June 30, 2018
and was duly repaid with interest of 5 lakhs. The company
maintains books on financial year basis. In which accounting
year should the interest expense be recorded?

• A businessman purchased goods for rs. 25,00,000 and sold

80% of such goods during the accounting year ended 31st
March, 2018. The net realisable value of the remaining goods
was Rs. 4,00,000. He valued the closing inventory at cost. He
violated the concept of ?
 Accounting Concepts ….. some
questions
1.__________ concept states that business firm
will continue to carry on its activities for an
indefinite period of time.

2.The goods drawn from business for owner’s

personal use is treated as reduction in __________

3.Inventories are shown in the financial

statements at ________

4.Recording of transactions in the books of

accounts with a definite period is called _______
concept.
 •Accounting Principles (concepts and conventions) that have
evolved over a period of time as general rules for accounting
transactions do not cover specific situations. Also they do not
have backing of law.
•Accounting Standards reduce these general principles to
Meaning & specific rules covering specific accounting events or
transactions and have the backing of law.
Relevance of
Accounting •Eg. AS- 2 states that inventory should be valued at ‘lower of
cost or net realizable value’
Standards •AS-13 states that short-term investments should be shown at
‘lower of cost or market value’[conservatism principle applied]
•Accounting Standards thus reduce management discretion in
choosing accounting policies.
•They also lay down disclosure requirements in order to
provide more meaningful information to various users of FS.
Accounting Standards in India (AS)
•ICAI established an Accounting Standards Board on 22nd April, 1977 to formulate AS.
•ASB has so far issued 32 definitive standards out of which AS - 6, 8, 30, 31 and 32 are withdrawn.
Thus the total number of active AS is 27.
•For detailed list refer: https://www.icai.org/post.html?post_id=8660
ACCOUNTING
STANDARDS/IND-AS/ IFRS
Introduction to •Meaning: IFRS refers to a single set of high-
quality, understandable, enforceable and
International globally accepted accounting standards.
Financial
Reporting •IFRS Standards are set by International
Standards (IFRS): Accounting Standards Board (IASB).
 •The term IFRS includes IFRS & International Accounting
Standards (IAS)

•IASB has issued 17 IFRS so far. There were 41 International

Accounting Standards issued by IASC out of which 13 have
Introduction to been withdrawn/replaced or superseded. For complete
International list refer: https://www.ifrs.org/issued-standards/list-of-
standards/
Financial
Reporting •Thus the total number of International Standards stand as
Standards (IFRS): follows = 17 IFRS + 28 IAS = 45

•Collectively these 45 standards are referred to as IFRS and

recognized by more then 130+ countries
Need for International Financial Reporting
Standards (IFRS):
•Global standards for global markets
•Modern economies rely on cross-border transactions and the free
flow of international capital. More than a third of all financial
transactions occur across borders, and that number is expected to
grow.
•Investors seek diversification and investment opportunities across the
world, while companies raise capital, undertake transactions or have
international operations and subsidiaries in multiple countries.
•In the past, such cross-border activities were complicated by different
countries maintaining their own sets of national accounting standards.
Such different sets of accounting requirements often added cost,
complexity and ultimately risk both to companies preparing financial
statements and investors and others using those financial statements to
make economic decisions.
Need for International Financial Reporting
Standards (IFRS):
• Applying national accounting standards meant amounts
reported in financial statements might be calculated on a
different basis. Analysing such information involved studying
the technicalities of national accounting standards, because
even a small difference in requirements could have a major
impact on a company’s reported financial performance and
financial position.
• IFRS Standards address this challenge by providing a high
quality, internationally recognised set of accounting standards
that bring transparency, accountability and efficiency to
financial markets around the world.
• Homogenous Accounting standards will facilitate the stake
holders all over the globe to understand accounting
information before taking any investment decision.
Benefits of
IFRS Standards:
•IFRS Standards bring transparency by enhancing the international
comparability and quality of financial information, enabling investors
and other market participants to make informed economic decisions.
•IFRS Standards strengthen accountability by reducing the
information gap between the providers of capital and the people to
whom they have entrusted their money. IFRS Standards provide
information that is needed to hold management to account. As a
source of globally comparable information, IFRS Standards are also of
vital importance to regulators around the world.
•And IFRS Standards contribute to economic efficiency by helping
investors to identify opportunities and risks across the world, thus
improving capital allocation. For businesses, the use of a single,
trusted accounting language lowers the cost of capital and reduces
international reporting costs
•Source: https://www.ifrs.org/use-around-the-world/why-global-
accounting-standards/
 IFRS – CONVERGENCE IN INDIA- Ind AS:
Convergence vs. adoption: Instead of adopting IFRS whereby Indian accounting Standards would have
ceased to exist, India has opted for convergence route for transition. In this route, a new set of AS are
issued substantially in line with IFRS but by the Indian authorities. Also, these IFRS are slightly
modified in light of usage and business environment prevailing in the country (termed as ‘carve-outs).
In view of demand by global investors, in 2011, Ministry of Corporate Affairs (MCA), in
consultation with ICAI, decided to converge Indian Accounting Standards with IFRS to improve
credibility and bring Indian financial information in line with global best practices.
•These converged Accounting standards are referred to as Ind AS. It should be noted that Ind AS are
different from AS issued by ICAI.
•Thus in India, currently there are two sets of Accounting Standards:
–First, existing AS issued by ICAI
–Second, Ind AS formulated by ICAI and notified by Ministry of Corporate Affairs (MCA).
•ICAI has so far formulated 41 Ind AS. Ind AS 42 is under formulation. These standards are converged
with IFRS. The nomenclatures, paragraph numbers etc. have all been kept similar to the IFRS version.
For detailed list of notified Ind AS refer: www.mca.gov.in/MinistryV2/Stand.html
Countries
that have
adopted
IFRS
Applicability of Ind AS:
•Implemented on voluntary basis from 1st April, 2015 and in phased manner it will be mandatory as follows:
–from 1st April, 2016 for companies (listed and unlisted) with net worth >= ₹ 500 crores including
their associates
–From 1st April, 2017 for all listed companies and unlisted companies with net worth >= ₹ 250 crores
including their associates (However companies listed on SME exchanges are exempted)
–From 1st April, 2018 for all Scheduled Commercial Banks, Insurance companies and NBFCs. However for
Banks and insurance sector it has been deferred till further notice.
•Thus there are two separate sets of Accounting Standards in India.
–One set comprises of Ind AS which are converged with IFRS. These shall be applicable to specified class of
companies as notified by the Government.
–The second set would comprise the existing Accounting Standards (AS’s). These would be applicable to all
other companies including Small and Medium Companies (SMCs)
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