Financial Accounting , Management & Analysis

Unit -A

Definition of Accounting

Definition by the American Institute of Certified Public Accountants (Year

1961):

“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 a financial character, and interpreting the result
thereof”.

Definition by the American Accounting Association (Year 1966):

“The process of identifying, measuring and communicating economic

information to permit informed judgments and decisions by the users of
accounting”.

In 1970, American Institute of Certified Public Accountants changed the

definition and stated, “The function of accounting is to provide quantitative
information, primarily financial in nature, about economic entities, that is
intended to be useful in making economic decisions.”

Need or Objectives of Accounting:

Recording business transactions systematically− It is necessary to

maintain systematic records of every business transaction, as it is beyond
human capacities to remember such large number of transactions. Skipping
the record of any one of the transactions may lead to erroneous and faulty
results.

Determining profit earned or loss incurred− In order to determine the

net result at the end of an accounting period, we need to calculate profit or
loss. For this purpose trading and profit and loss account are prepared. It
gives information regarding how much of goods have been purchased and
sold, expenses incurred and amount earned during a year.

Ascertaining financial position of the firm− Ascertaining profit earned

or loss incurred is not enough; proprietor also interested in knowing the
financial position of his/her firm, i.e. the value of the assets, amount of
liabilities owed, net increase or decrease in his/her capital. This purpose is
served by preparing the balance sheet that facilitates in ascertaining the
true financial position of the business.

Assisting management− Systematic accounting helps the management in

effective decision making, efficient control on cash management policies,
preparing budget and forecasting, etc.

Assessing the progress of the business− Accounting helps in assessing

the progress of business from year to year, as accounting facilitates the
comparison both inter-firm as well as intra-firm.

Detecting and preventing frauds and errors− It is necessary to detect

and prevent fraud and errors, mismanagement and wastage of the finance.
Systematic recording helps in the easy detection and rectification of frauds,
errors and inefficiencies, if any.

Communicating accounting information to various users− The

important step in the accounting process is to communicate financial and
accounting information to various users including both internal and external
users like owners, management, government, labour, tax authorities, etc.
This assists the users to understand and interpret the accounting data in a
meaningful and appropriate manner without any ambiguity.

Accounting Arts V/s Science

Accounting is both an art as well as a science.

Art is the technique of achieving some pre-determined objectives and
accounting is also an art of recording, classifying and summarising financial
transactions.

Science is an organised knowledge based on certain basic principles.

Therefore, accounting is also a science as it is an organised knowledge
based.

Therefore, accounting is also a science as it is an organised knowledge based

on certain principles.

Scope of Accounting

Identifying Accounting is concerned with financial transactions and events

which bring'about a change in the resources (or wealth) position of the
business firm. Such transactions have to be identified first, as and when they
occur. It is not difficult because. There will be proof in the form of a bill or
receipt (called vouchers). With the help of these bills and receipts
identification of a transaction is easy. For example, when you purchase
something you get a bill, when you make payment you get a receipt.

Measuring These transactions are to be measured or expressed in terms of

money, if not done already. Generally, this problem will not arise, because
the statement of proof expresses the transaction in terms of money. For
example, if ten books are purchased at the rate of Rs. 20 each, then the bill
is prepared for Rs. 200. But, if an event cannot be expressed in monetary
terms, it will not come under the scope of accounting.

Recording The transactions which are identified and measured are to be

recorded in a book called journal or in one of its sub-divisions.

Classifying The recorded transactions are to be classified with a view to

group transactions of similar nature at one place. The work of classification is
done in a separate book called ledger. In the ledger, a separate account is
opened for each item so that all transactions relating to it can be brought to
one place. For example, all payments of salaries are brought to salaries
account.

Summarising The recording and classification of many transactions will

result in a mass of financial data. It is, therefore, necessary to summarise
such data periodically (at leyst once a year), in a significant and meaningful
form. The summarisation is done in the form of profit and loss account which
reveals the profit made or loss incurred, and the balance sheet which reveals
the financial position.

Analysing, Interpreting & Communicating The summary results will

have to be analyzed, interpreted (critically explained) and communicated to
interested parties. Accounting information is generally communicated in the
form of a 'report'. Big organizations generally present printed reports, called
published accounts.

RELATIONSHIP OF ACCOUNTING WITH OTHER DISCIPLINES

Accounting is closely related with several other disciplines and the

Accountant should have a working knowledge of the related disciplines so
that he can understand such overlapping areas.

Accounting and Economics

 It is a science of rational decision-making about the use of scarce

resources.
 This may be viewed either from the perspective of a single firm or of
the country as a whole.
 Accounting It provides data to the users to permit informed judgement
and decisions.
 Accountants got the ideas of value, income and capital maintenance
from economists.
  Economists think that value of an asset is the present value of all
future earnings which can be derived from such assets.
 How can you estimate future stream of earnings? So accountants
developed the workable valuation base – the acquisition cost i.e., the
price paid to acquire the assets.
 At the macro-level, accounting provides the database over which the
economic decision models have been developed; micro-level data
arranged by the accounting system is summed up to get macro-level
database.

Accounting and Statistics

 In accountancy, a number of financial and outer ratios are based on

statistical methods, which help in averaging them over a period of
time.
 Statistical methods are helpful in developing accounting data and in
their interpretation.
 In accounts, all values are important individually because they relate to
business transactions.
 Statistics is concerned with typical value over a period of time or
degree of variation over a series of observations.
 Accounting records generally take a short-term view of events (a year)
while statistical analysis is more useful if a longer view is taken for the
purpose
 Accounting records are based on historical costs of fixed assets, while
the current assets are valued at the current values. The new methods
of inflation accounting are an attempt to correct this situation.
 The correction of values is made on the basis of the current purchasing
power of money.
 All this would require the use of price indices or the price deflators
based on statistical data.

Accounting and Mathematics

 Double Entry book-keeping can be converted in algebraic form.
 Knowledge of arithmetic and algebra is a pre-requisite for accounting
computations and measurements. Calculations of interest and annuity
are the examples of such fundamental uses.
 With the advent of the computer, mathematics is becoming a vital part
of accounting. Instead of writing accounts in traditional fashion, the
transactions and events can be recorded in the matrix form for
classifying and summarising data.
 Presently graphs and charts are being extensively used for
communicating accounting information.

Accounting and Law :

 All transactions with suppliers and customers are governed by the

Contract Act, the Sale of Goods Act, the Negotiable Instruments Act,
etc. The entity itself is created and controlled by laws. Every
country has a set of economic, fiscal and labour laws.
 Transactions and events are always guided by laws.
 Very often the accounting system to be followed has been
prescribed by the law. For example, the Companies Act has
prescribed the format of financial statements. Banking, insurance
and electric supply undertakings also have to produce financial
statements as prescribed by the respective legislations.

Accounting and Management:

 Management is a broad occupational field.

 Accountants are well placed in the management and play a key role
in the management team. A large portion of accounting information
is prepared for management decision-making.
 So the accounting system can be moulded to serve the
management purpose.
A History Accounting Systems

The history of accounting dates back to ancient civilizations such as the

Mesopotamians and Egyptians who created basic accounting systems. The
double-entry accounting system was developed in Italy during the
Renaissance period and continues to be used today. In the 20th century,
accounting practices were standardized and regulated in the United States
with the establishment of the Securities and Exchange Commission. With the
advancements in technology, accounting has become more efficient and
accessible. Today, accounting plays a critical role in the management and
growth of businesses and organizations around the world.

4,000 BCE Early Accounting

Accounting can be traced back to the earliest civilizations who used

accounting methods to keep track of their crops and herds. The Sumerians,
Egyptians, and Babylonians all used accounting systems to record their
transactions.

1494 Luca Pacioli's Double-Entry System

Luca Pacioli, an Italian mathematician, is credited with creating the double-

entry accounting system. This system is still used today and is the
foundation for modern accounting practices.

1850s Industrial Revolution and the rise of modern accounting

As the Industrial Revolution took hold, businesses grew larger and more
complex which led to the need for more sophisticated accounting methods.
This led to the development of modern accounting practices that we still use
today.

1930s Introduction of GAAP and the SEC

The Great Depression of the 1930s led to the creation of the Securities and
Exchange Commission (SEC) and the introduction of Generally Accepted
Accounting Principles (GAAP). These regulations standardized accounting
practices and improved transparency in financial reporting.

1970s Computerization of Accounting

With the advent of computers, accounting processes became more

automated and efficient. This led to the development of accounting software
that could handle large amounts of data quickly and accurately.

21st Century - International Financial Reporting Standards (IFRS)

In the 21st century, the International Financial Reporting Standards (IFRS)

were introduced to create a global standard for financial reporting. These
standards are now used in over 100 countries and have helped to improve
transparency and consistency in financial reporting.
UNIT - B

Accounting theory

Accounting theory is set of hypothetical, conceptual and pragmatic principles

forming a general frame of reference for enquiring into the nature of
accounting. It will be seen that accounting theory has been defined as a
coherent set of logical principles that provides for:

 Conceptual framework;
 Better understanding of present accounting practice;
 Evaluation of existing accounting practices; and
 Guideline for future development and research

Accounting theory is that branch of accounting which consists of the

systematic statement of principles and methodology, as distinct from
practice. Moreover, it refers to a generally accepted logical explanation of
Accounting Practices. It is that branch of Accountancy which develops and
inculcates a set of logical principles for the evaluation and development of
effective accounting practices.

Approaches to Accounting Theory

Such intellectual growth of accounting is amply manifested in the numerous

approaches that relate to the attempts to accord theoretical support for this
discipline. The major such approaches, which range from trivial to
sophisticated theories, have been identified to be the traditional approaches,
as comprising:

1. Traditional Approaches

a) Non-theoretical or Pragmatic Approach

b) Theoretical Approaches

o Deductive Approach

o Inductive Approach

o Ethical Approach

o Sociological Approach

o Economic Approach

o Eclectic Approach

2. Modern or New Approaches

a) Events Approach

b) Decision Model Approach

c) Behavioural Approach

d) Predictive Approach

1. Traditional Approaches: The traditional approaches discussed above

mainly aim at construction of theories. These approaches may be divided
into two categories:

a) Non-theoretical or Pragmatic Approach; and b) Theoretical Approach.

(a) Non-theoretical or Pragmatic Approach

The approach that speaks in favour of formulation of theory in conformity

with the real world needs and problems and aims at finding out their
solutions may be identified as pragmatic or non-theoretical approach to
accounting theory.

This is also called need based or practical approach. Here those concepts
and principles are emphasised upon which are effective to meet the practical
problems and useful to the users of accounting information in taking relevant
decisions.

▪ According to this approach, accounting techniques and principles should

be chosen because of

their usefulness to users of accounting information and their relevance to

decision making processes.

▪ This approach takes into consideration not only the interest of the owners
but the need of all the users of accounting information as well.

▪ Besides, it is difficult to determine the yardstick of measuring the utility of

the accepted principles under pragmatic approach due to its non-
dependence on normative theories.

(b) Theoretical Approach

The theory based approaches to the formulation of accounting principles

may be divided into six categories as under -

i) Deductive Approach

▪ This approach is used to construct normative theories.

▪ Normative theory is that theory which consists of principles based on

standard or ideal logic.

▪ So, deductive approach helps formulation of those principles of accounting

that explain the standard or ideal happenings with logic.

▪ In other words deductive approach is that outlook which follows logically

and ideally correct concepts, opinions, bases and principles for formulation of
accounting theory.

▪ The steps required for development of theories under deductive approach

are:
Objectives: to determine the general and specific objectives of financial
statements.

Postulates: to select the basic accounting concepts or postulates relating to

economic, political and sociological environment.

Constraints: to set out the constraints or regulations this will guide the
theory.

Structure: to build up the framework of theoretical ideas.

Definitions: to develop the definitions to explain the related ideas.

Principles: to fix up the accounting principles on the basis of logic.

Application: to develop the process of application or the techniques and

methods of accounting based on the principles framed.

▪ The first step of developing accounting theory following deductive

approach is setting up objectives of accounting. In the deductive process, the
formulation of objectives is most important because different objectives
might require entirely different structures and result in different principles.
Due to this reason deductive approach is also called ‘objectivity approach’.

▪ As deductive approach follows ideally right principles, from the viewpoint

of justification it is identified as the best approach. But if there exists any
defect in the postulates or concepts selected, the theory formulated on the
basis of deductive approach may mislead the accounting activities.

▪ This approach has also been recognised and used by the Financial
Accounting Standards Board (FASB) of AICPA.

ii) Inductive Approach

▪ This approach is used to formulate descriptive theory. The main theme of

inductive theory is to arrive at a generalised decision as to the logic, reasons
and assumptions acting behind the occurrence of events through
observation and analysis.
▪ So, the inductive approach to the formulation of accounting theory may be
defined as that outlook which emphasises upon developing generalised
decisions and principles through observation, measurement and analysis of
the events occurred.

▪ The process of induction consists of drawing generalised conclusions from

detailed observations and measurements. It starts with observation of
financial information of business enterprises and leads to draw, on the basis
of repeated relationships, generalisations and principles of accounting.

▪ The steps required for development of theories under deductive approach

are:

 To observe and to keep records of all observations.

 To find out recurring relationships, similarities and differences among
these observations by analysis and classification.
 To formulate generalised principles of accounting on the basis of
recorded observations.
 To test and apply these generalised principles.

▪ The main advantage of this approach lies in its independence. It is not

influenced by any predetermined norm or standard model. This helps the
researchers to work independently and to arrive at decisions which they
think as the best outcome of their observations and analysis.

▪ The main drawback of the inductive approach is that the researchers in

studying relationship among the data collected from observations may be
influenced by pre-conceived or subconscious notions. Another problem of
inductive approach is that the financial data collected through observations
may vary from firm to firm. This creates difficulty in arriving at meaningful
and generalised principles.

iii) Ethical Approach

▪ D. R. Scott, an eminent scholar of accounting, had used the ethical
approach for the first time.

▪ The approach to the formulation of accounting theory that puts emphasis

on fairness, justice and truth and considers these attributes as centres of
focus for framing the theories is known as ethical approach.

▪ The concept of ethics is also used more or less in all other approaches to
accounting theory. For this reason the ethical approach is not treated as a
separate and independent approach.

▪ The object of this approach is to prepare the accounting statements

accurately and in an unbiased manner not giving any favour to any of the
interested parties.

▪ At present the financial statements must exhibit the true and fair view of
the state of affairs of the concern. This is nothing but the acceptance of
ethical approach. The main drawback of ethical approach is that it does not
provide a sound and independent basis for the development of accounting
principles. It also fails to form the basis for the evaluation of existing
accounting principles.

iv) Sociological Approach

▪ The approach that emphasises on the social aspect of accounting is known

as sociological approach. It is the outcome of ethical approach that takes into
consideration fairness and justice for the construction of accounting theory.

▪ As fairness equates social welfare Glautier and Underdown have identified

this approach as 'welfare approach'.

▪ As per this approach the accounting principles or techniques are to be

evaluated on the basis of their reporting effects on the people of the society.
Here it is assumed that the information supplied by accounting will be useful
for social welfare.
▪ The object of sociological approach is to provide information to make
possible an evaluation of the effect of a firm's activities on society.

▪ For achieving its objective the sociological approach assumes the

existence of certain accepted social values. These social values are used to
regulate the formulation of accounting theory.

▪ However, it is difficult to ascertain those social values which may be

accepted by all concerned.

The sociological approach to accounting theory has helped formulation of a

new branch of accounting known as social or socio-economic accounting.

v) Economic Approach

▪ Two conditions are to be satisfied for formulating accounting theory under

this approach are:

o The principles and methods of accounting should reflect the present

economic situation or 'economic reality'.

o Selection of the accounting techniques should depend on the economic

consequences.

▪ The approach that focuses on the concept of 'national economic welfare'

for formulating accounting principles is termed as economic approach. Under
this approach the impact of national economic welfare is the main
determining factor for formulation of accounting principles and techniques.

▪ The economic approach to the formulation of an accounting theory puts

emphasise on controlling the attitude of macro-economic indicators that
result from the adoption of different accounting techniques.

▪ Sweden is the country where the accounting techniques are adjusted to

the macro economic situation. Under this approach the selection of a
particular accounting technique depends on a particular economic situation.
▪ For example, under the condition of continuous increase in price level it is
more reasonable to adopt 'Last in First Out' method of pricing of materials.
So this method of pricing of materials is to be adopted in times of inflation.

▪ The main drawback of this approach is that while framing theory it relies
more on economic conditions rather than on operational problems of
accounting.

vi) Eclectic Approach

▪ The word 'eclectic' refers to the inference of opinion from different

methods. All the above approaches to the formulation of accounting theory
have some special advantages with limitations as well. In comparative
analysis none of these approaches is identified as the best fit to construct
theories which can match up all the practical needs of the users of
accounting information.

▪ For this reason there lies the need to develop an approach by combining
all the accepted approaches. This combined approach will assist in framing
such an accounting theory that can consider all the practical problems of
different users of accounting information.

▪ This combined approach is known as eclectic approach. So eclectic

approach is that approach which is built up by combining the advantages of
all other approaches for formulating that theory which will assist in solving
the problems of all the users. It is not a new approach but a mixture of the
old ones.

2. Modern or New Approaches

The traditional approaches discussed above mainly aim at construction of

theories but not evaluation of the theories already established. Due to this
defect, efforts were made by the scholars of accounting to develop such
approaches which would not only help in formulating new accounting
theories but in verifying the same as well. These new approaches are
identified as modern approaches. The important modern approaches are as
under:

o Events Approach

o Decision Model Approach

o Behavioural Approach

o Predictive Approach

❖ Events Approach

▪ The events approach for the formulation of accounting theory was first
proposed by George Sorter and it was endorsed by the majority of the
members of the AAA committee that issued “A statement of Basic
Accounting Theory” in 1966.

▪ To formulate accounting theory on the basis of relevant economic events

affecting the users' decisions is known as events approach. The principal
argument used in favour of the events approach is that, due to wide ranging
use and heterogeneous users of financial statements, accountants should
not direct the published financial statements to specified ‘assumed’ group.

▪ Events are of two types: Monetary event and Non-monetary event. Under
this approach the main objective of accounting is to supply information of
those monetary events which have relevance in decision making of the
users.

▪ Advantages: The main advantage of this approach is that it helps

maximisation of forecasting accuracy of the accounting statements because
it takes into consideration all probable information of an economic event
which may be useful to the users. Given this argument, the events approach
suggests expansion of accounting data in the financial statements.

▪ Disadvantages: The limitations of the events approach, however, are the

following:
o Events approach presupposes that the users are knowledgeable enough to
be able to classify and aggregate accounting data for their own use.

o Events approach does not explicitly mention which data are to be selected
for the financial statements.

o There is definite limit to the amount of data a person can handle at a time.
The expansion of data may cause information overload to the users.

❖ Decision Model Approach

▪ The accounting approach, where an ideally adequate decision model is

pre-determined on the basis of anticipated needs of the users of the financial
statements, is identified as decision model approach.

▪ In this approach, the information need of different users for making

decisions is emphasised upon. Keeping an eye to this need all probable
information which may be helpful to the users is presumed with care.

▪ On the basis of such anticipated information standard or ideal decision

models are pre-fixed.

▪ Advantages: Such accounting principles or techniques are formulated

which may be the best fit for meeting information need of the users.

❖ Behavioural Approach

▪ In most of the approaches to the formulation of accounting theory, how the

accounting practice should be done that is emphasised upon. But how is the
accounting theory applied or used in practice that question is not considered
at all.

▪ The behavioural approach is concerned with direct evidence of user’s

reaction to accounting reports as a basis for descriptive generalisation about
the behavioural aspects of particular accounting techniques and problems
such as:

o The adequacy of disclosure;

o The usefulness of financial statement data;

o Attitudes about corporate reporting practices;

o Materiality Judgement; and

o The decision effects of alternative accounting valuation bases.

▪ In behavioural approach, developed by the modern thinkers of accounting,

the behavioural aspect of accounting theory is accepted as the basis for
formulation of theory. So the approach, where the need and behaviour of the
users of accounting information are taken as the primary consideration for
the formulation of accounting theory, is identified as behavioural approach.

▪ The development of this approach started in the first phase of the decade
of 1960, before which the traditional approaches were dominating the
accounting field. C.T. Devine introduced this approach for the first time in
1960.

▪ Accounting is practice oriented work which directly and indirectly affects

human behaviour. This behaviour orientation of accounting paves the way of
introducing the concept of behavioural science in developing its principles
and techniques. Under this approach it is accepted that accounting should be
done keeping an eye to the objectives and behaviour of the users of
accounting information. For this purpose, the choice of accounting principles
should be based on what information the users need and what would be their
behaviour in relation to that information. As accounting is identified as a
behavioural process the behavioural approach makes accounting ideas
nearer to behavioural science.

▪ This approach is on the process of continuous research. It has not yet been
finalised and no theory has yet been formulated following this approach. But
no doubt, it has created great enthusiasm among the thinkers of accounting
and in near future, something positive and constructive can be expected of
it.
❖ Predictive Approach

▪ Like other modern approaches this approach is also decision oriented; but
here decision is not the primary goal, primary goal is prediction for decision.
Under the traditional approach accounting measures are generally used for
non-predictive purposes e.g., accountability and reporting on stewardship. In
the predictive approach however, accounting measures are not just
considered as post-mortem exercise. This approach is based on predictive
forecasting to take future decisions on the basis of data supplied by
accounting. Under predictive approach the principles are formulated taking
into consideration the predictive capacity of accounting information.

▪ According to this approach, when accountant confronted with the choice

between different measurement alternatives, they will select that measure
alternative, which provide the greatest predictive power in respect to a given
event. The predictive approach is directly related to the predictive ability of
financial data and is purported to provide a purposive criterion to relate the
function of collecting financial data to the task of decision-making.

▪ W.H. Beaver, W. Frank, J.K. Simmons and others have made contribution to
develop this approach. The FASB in its Statement of Financial Accounting No.
2 considered the predictive ability of accounting information as a criterion of
the quality of accounting information

All the modern approaches, as discussed above, are still in a developing

stage. Like the traditional approaches, they have not yet been used and
widely tested for formulating accounting theories.

Accounting Concepts

Accounting Concepts refers to the assumptions on the basis of which the

transactions are recorded in the books of accounts and financial statements
are drafted. They are perceived, presumed and accepted in accounting to
provide a unifying structure and internal logic to the accounting process.
They are also referred to as Accounting Postulates.

Features

• These are the necessary assumptions and ideas which are fundamental to
accounting practice.

• These are the ideas which have been accepted universally.

• It is the foundation on which the superstructure of accounting is developed.

• The concepts provide the support to the basic structure of accountancy.

• It is not subject to any proof.

Classification

The different accounting concepts are:

1. Entity concept

2. Going concern concept

3. Money measurement concept

4. Dual aspect concept

5. Periodicity concept

6. Matching concept

7. Accrual concept

8. Realisation concept

9. Cost concept

Business entity concept

This concept assumes that, for accounting purposes, the business enterprise
and its owners are two separate independent entities. Thus, the business
and personal transactions of its owner are separate. For example, when the
owner invests money in the business, it is recorded as liability of the
business to the owner. Similarly, when the owner takes away from the
business cash/goods for his/her personal use, it is not treated as business
expense.

Money measurement concept

This concept assumes that all business transactions must be in terms of

money, that is in the currency of a country. In our country such transactions
are in terms of rupees. Thus, as per the money measurement concept,
transactions which can be expressed in terms of money are recorded in the
books of accounts. For example, sale of goods worth Rs.200000, Rent Paid
Rs.10000 etc. are expressed in terms of money, and so they are recorded in
the books of accounts. But the transactions which cannot be expressed in
monetary terms are not recorded in the books of accounts.  For example,
sincerity, loyality are not recorded in books of accounts because these
cannot be measured in terms of money although they do affect the profits
and losses of the business concern.

Going concern concept

This concept states that a business firm will continue to carry on its activities
for an indefinite period of time. Simply stated, it means that every business
entity has continuity of life. Thus, it will not be dissolved in the near future.
This is an important assumption of accounting, as it provides a basis for
showing the value of assets in the balance sheet.

Accounting period concept

All the transactions are recorded in the books of accounts on the assumption
that profits on these transactions are to be ascertained for a specified period.
This is known as accounting period concept. Thus, this concept requires that
a balance sheet and profit and loss account should be prepared at regular
intervals. This is necessary for different purposes like, calculation of profit,
ascertaining financial position, tax computation etc.

Accounting cost concept

It states that all assets are recorded in the books of accounts at their
purchase price, which includes cost of acquisition, transportation and
installation and not at its market price. It means that fixed assets like
building, plant and machinery, furniture, etc are recorded in the books of
accounts at a price paid for them.

Dual aspect concept

Dual aspect is the foundation or basic principle of accounting. It provides the

very basis of recording business transactions in the books of accounts. This
concept assumes that every transaction has a dual effect, i.e. it affects two
accounts in their respective opposite sides. Therefore, the transaction should
be recorded at two places. It means, both the aspects of the transaction
must be recorded in the books of accounts. Thus, the duality concept is
commonly expressed in terms of fundamental accounting equation :

Assets = Liabilities + Capital

Matching concept

The matching concept states that the revenue and the expenses incurred to
earn the revenues must belong to the same accounting period. So once the
revenue is realised, the next step is to allocate it to the relevant accounting
period. This can be done with the help of accrual concept If the revenue is
more than the expenses, it is called profit. If the expenses are more than
revenue it is called loss. This is what exactly has been done by applying the
matching concept.

Therefore, the matching concept implies that all revenues earned during an
accounting year, whether received/not received during that year and all cost
incurred, whether paid/not paid during the year should be taken into account
while ascertaining profit or loss for that year.

Significance

1. It guides how the expenses should be matched with revenue for

determining exact profit or loss for a particular period.

2. It is very helpful for the investors/shareholders to know the exact amount

of profit or loss of the business

Realisation concept

This concept states that revenue from any business transaction should be
included in the accounting records only when it is realised. The term
realisation means creation of legal right to receive money. Selling goods is
realisation, receiving order is not. In other words, it can be said that :
Revenue is said to have been realised when cash has been received or right
to receive cash on the sale of goods or services or both has been created.

The concept of realisation states that revenue is realized at the time when
goods or services are actually delivered.

Let us study the following examples

A Jeweller received an order to supply gold ornaments worth Rs.500000.

They supplied ornaments worth Rs.200000 up to the year ending 31st
December 2005 and rest of the ornaments were supplied in January 2006.
The revenue for the year 2005 for a Jeweller is Rs.200000. Mere getting an
order is not considered as revenue until the goods have been delivered.

Bansal sold goods for Rs.1,00,000 for cash in 2006 and the goods have been
delivered during the same year The revenue for Bansal for year 2005 is
Rs100000 as Sales.

Accrual concept
The meaning of accrual is something that becomes due especially an amount
of money that is yet to be paid or received at the end of the accounting
period. It means that revenues are recognised when they become receivable.
Though cash is received or not received and the expenses are recognised
when they become payable though cash is paid or not paid. Both
transactions will be recorded in the accounting period to which they relate.

Therefore, the accrual concept makes a distinction between the accrual

receipt of cash and the right to receive cash as regards revenue and actual
payment of cash and obligation to pay cash as regards expenses. The
accrual concept under accounting assumes that revenue is realised at the
time of sale of goods or services irrespective of the fact when the cash is
received.

Accounting Conventions

These are the traditions or customs that are observed by the accountants for
preparation of financial statements. They have evolved out the different
accounting practices followed by different entities over a period of time.

Features

• They have been developed by the accountants by usage and practice.

• Conventions need not have universal application.

• The accounting conventions have developed over a period of time.

Classification

The different accounting conventions are:

1. Conservatism;

2. Consistency;

3. Materiality;

4. Full Disclosure
ACCOUNTING CONVENTION

 An accounting convention refers to common practices which are

universally followed in recording and presenting accounting information of
the business entity.

Conventions denote customs or traditions or usages which are in use since

long. To be clear, these are nothing but unwritten laws.

The accountants have to adopt the usage or customs, which are used as a
guide in the preparation of accounting reports and statements. These
conventions are also known as doctrine.

Convention of consistency

The convention of consistency means that same accounting principles should

be used for preparing financial statements year after year. A meaningful
conclusion can be drawn from financial statements of the same enterprise
when there is comparison between them over a period of time. But this can
be possible only when accounting policies and practices followed by the
enterprise are uniform and consistent over a period of time. If different
accounting procedures and practices are used for preparing financial
statements of different years, then the result will not be comparable.

Convention of full disclosure

Convention of full disclosure requires that all material and relevant facts
concerning financial statements should be fully disclosed. Full disclosure
means that there should be full, fair and adequate disclosure of accounting
information. Adequate means sufficient set of information to be disclosed.
Fair indicates an equitable treatment of users. Full refers to complete and
detailed presentation of information. Thus, the convention of full disclosure
suggests that every financial statement should fully disclose all relevant
information. Let us relate it to the business.
The business provides financial information to all interested parties like
investors, lenders, creditors, shareholders etc. The shareholder would like to
know profitability of the firm while the creditor would like to know the
solvency of the business. In the same way, other parties would be interested
in the financial information according to their requirements. This is possible if
financial statement discloses all relevant information in full, fair and
adequate manner.

Convention of conservatism

This convention is based on the principle that “Anticipate no profit, but

provide for all possible losses”. It provides guidance for recording
transactions in the books of accounts. It is based on the policy of playing safe
in regard to showing profit .

The main objective of this convention is to show minimum profit. Profit

should not be overstated. If profit shows more than actual, it may lead to
distribution of dividend out of capital. This is not a fair policy and it will lead
to the reduction in the capital of the enterprise.

Thus, this convention clearly states that profit should not be recorded until it
is realised. But if the business anticipates any loss in the near future
provision should be made in the books of accounts for the same. . For
example, valuing closing stock at cost or market price whichever is lower,
creating provision for doubtful debts, discount on debtors, writing off
intangible assets like goodwill, patent, etc. The convention of conservatism is
a very useful tool in situation of uncertainty and doubts.

Convention of materiality

 The convention of materiality states that, to make financial statements

meaningful, only material fact i.e. important and relevant information should
be supplied to the users of accounting information. The question that arises
here is what is a material fact.
The materiality of a fact depends on its nature and the amount involved.
Material fact means the information of which will influence the decision of its
user.

Indian Accounting Standards (Ind AS)

Ind AS or Indian Accounting Standards govern the accounting and recording

of financial transactions as well as the presentation of statements such as
balance sheet and profit and loss account of a company in India.

 Companies, especially in the west and the developed world, follow the
International Financial Reporting Standards (IFRS) for their accounts.

 The Ind AS was prescribed as a result of calls for Indian accounting

standards to be on par with the globally accepted standards, the IFRS.

 The Ind AS was issued under the supervision and control of the
Accounting Standards Board (ASB).

 The ASB was constituted in 1977 by the Institute of Chartered

Accountants of India (ICAI) to harmonize the varied accounting
policies and practices.

 The Companies Act mandates the balance sheets and income

statements of all companies to comply with the accounting standards.

 Many companies in India had resisted the imposition of the IFRS stating
that the move would result in too many changes to the way their
numbers were captured and reported.

 The Ind AS was formulated as a compromise formula that tries to

harmonise Indian accounting rules with the IFRS.

List of Accounting Standards in India

We have collated a list of Indian accounting standards that as a blooming
company you must know about. Take notes! For your in depth knowledge
and understanding we have also mentioned the objective of each accounting
standard.

Ind AS 1 Presentation of Financial Statements

Objective: This standard sets out generally speaking necessities for show of
financial statements, rules for their construction and least prerequisites for
their substance to guarantee likeness.

Ind AS 2 Inventories Accounting

Objective: Its arrangements with accounting of inventories like estimation of

stock, incorporations and avoidances in its expense, divulgence necessities,
and so forth.

Ind AS 7 Statement of Cash Flows

Objective: It manages cash got or paid during the period from working,
financing and contributing exercises. It additionally shows any adjustment of
the money and money counterparts of any element.

Ind AS 8 Accounting Policies, Changes in Accounting Estimates and

Errors

Objective: It prescribes choosing and changing accounting strategies along

with accounting medicines and exposures.

Ind AS 10 Events after Reporting Period

Objective: It manages any changing or unchanging occasion happening

subsequent to reporting.
Ind AS 11 Construction Contracts

Objective: It manages any changing or unchanging occasion happening

subsequent to reports.

Ind AS 12 Income Taxes

Objective: This standard recommends accounting for income tax. The chief
issue in representing annual duties is the means by which to represent the
current and future assessment.

Ind AS 16 Property, Plant and Equipment

Objective: This recommends accounting treatment for Property, Plant And

Equipment (PPE) like acknowledgment of resources, assurance of their
conveying sums and the devaluation charges and impedance misfortunes to
be perceived comparable to them.

Ind AS 17 Leases

Objective: This standard recommends fitting accounting arrangements and

guidelines for tenants and lessors.

Ind AS 19 Employee Benefits

Objective: This standard recommends bookkeeping and divulgence

prerequisites identifying with representative advantages.

Ind AS 20 Accounting for Government Grants and Disclosure of

Government Assistance

Objective: This Standard will be applied in representing and in exposure of,

government awards and in revelation of different types of government help.

Ind AS 21 The Effects of Changes in Foreign Exchange Rates

Objective: This standard helps to understand how to incorporate unfamiliar
cash exchanges and unfamiliar activities in the financial reports of a
company and how to make an interpretation of budget reports into a
presentation currency.

Ind AS 23 Borrowing Costs

Objective: It gives acquiring cost caused on qualifying asset should frame

part of that asset, it additionally directs on which money cost ought to be
promoted, conditions for capitalization, season of initiation and
discontinuance of capitalization of getting cost.

Ind AS 24 Related Party Disclosures

Objective: This guarantees that any organization’s fiscal reports contain

fundamental revelations to cause us to notice the likelihood that its
monetary position and benefit or misfortune might have been influenced by
the presence of related gatherings and by exchanges and exceptional
equilibriums.

Ind AS 27 Separate Financial Statements

Objective: This recommends bookkeeping and revelation necessities for

interests in auxiliaries, joint endeavors and partners when a company plans
separate budget reports.

Ind AS 28 Investments in Associates and Joint Ventures

Objective: This standard endorses representing interests in partners and to

set out necessities for the utilization of value technique when representing
interests in partners and joint endeavors.

Ind AS 29 Financial Reporting in Hyperinflationary Economies

Objective: This standard will give a comprehensive rundown of qualities that
will order an economy as hyper inflationary and detailing of working
outcomes and monetary position.

Ind AS 32 Financial Instruments: Presentation

Objective: This Standard sets up standards for introducing monetary

instruments as liabilities or value and for balancing monetary resources and
monetary liabilities.

Ind AS 33 Earnings per Share

Objective: This Standard recommends standards for the assurance and

presentation of per share.

Ind AS 34 Interim Financial Reporting

Objective: This helps with least minimum content of an interval financial

report and standards for acknowledgment and estimation in complete or
dense financial statements for a period.

Ind AS 36 Impairment of Assets

Objective: This Standard recommends techniques that a company applies to

guarantee that a company's conveying sum isn't more than its recoverable
sum.

Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

Objective: This guarantees that correct acknowledgment rules and

estimation bases are applied to arrangements, unforeseen liabilities and
unexpected resources and appropriate divulgences are made in the notes to
empower clients to comprehend their tendency, timing and sum.
Ind AS 38 Intangible Assets

Objective: This Standard recommends bookkeeping treatment for intangible

assets. It determines conditions for acknowledgment of intangible assets and
how to quantify conveying sums at which elusive resources ought to be
perceived.

Ind AS 40 Investment Property

Objective: This recommends accounting treatment for speculation property

and related exposure prerequisites.

Ind AS 41 Agriculture

Objective: This prescribes accounting treatment and divulgences identified

with agricultural movement.

Ind AS 101 First-time adoption of Ind AS

Objective: Its primary goal is to plan first financial reports according to Ind
AS containing excellent data that is straightforward, tantamount and ready
at prudent expense, appropriate beginning stage for bookkeeping as per Ind
AS.

Ind AS 102 Share Based payments

Objective: It manages bookkeeping of offer based installment exchanges and

reflects impact of such installment on benefit or misfortune and financial
reports of elements.

Ind AS 103 Business Combination

Objective: It applies to exchanges or other occasions that meet the meaning

of a business mix. This standard aids in working on the significance,
unwavering quality and equivalence of the data that a revealing substance
gives in its budget summaries about a business mix and its belongings.

Ind AS 104 Insurance Contracts

Objective: This standard determines financial reporting for protection

decreases by a back up plan element.

Ind AS 105 Non-Current Assets Held for Sale and Discontinued

Operations

Objective: This determines representing resources held available to be

purchased, and sold and divulgence of uncompleted activities.

Ind AS 106 Exploration for and Evaluation of Mineral Resources

Objective: This standard indicates financial reporting for investigation and

assessment of mineral resources.

Ind AS 107 Financial Instruments: Disclosures

Objective: This expect elements to give exposures identified with monetary

instruments that will empower clients to assess meaning of monetary
instruments for substance's monetary position and execution and nature and
degree of dangers emerging from monetary instruments to which the
element is uncovered during the period and toward the finish of the detailing
time frame, and how the element deals with those dangers.

Ind AS 108 Operating Segments

Objective: This reveals data to empower clients of its fiscal reports to assess
the nature and monetary impacts of the business exercises in which it draws
in and the financial conditions where it works.
Ind AS 109 Financial Instruments

Objective: This builds up standards for financial reporting of financial assets

and financial liabilities that will introduce important and helpful data to
clients of financial reports for their evaluation of the sums, timing and
vulnerability of an element's future cash flows.

Ind AS 110 Consolidated Financial Statements

Objective: This sets up standards for the presentation of the financial

statements when a company controls at least one different.

Ind AS 111 Joint Arrangements

Objective: This sets up standards for financial reporting by companies that

have an interest in game plans that are controlled jointly.

Ind AS 112 Disclosure of Interests in Other Entities

Objective: This standard requires a company to unveil data that empower

clients of its fiscal reports nature hazard and impact of such interest.

Ind AS 113 Fair Value Measurement

Objective: This characterizes reasonable worth, set outs system for

estimating fair value and divulgences about reasonable worth estimations.
Such a value measurement estimation guideline will apply when one more
Ind AS requires or allows utilization of reasonable worth.

Ind AS 114 Regulatory Deferral Accounts

Objective: This determines financial statements requirements for

administrative deferral account adjustments that emerge when a company
gives labor and products to customers at a cost or rate that is liable to rate
guideline.

Ind AS 115 Revenue from Contracts with Customers

Objective: This sets up rules that an organization will apply to report helpful
data to clients of financial statements about, sum, timing and vulnerability of
income and incomes emerging from an agreement with a customer.

GAAP

Generally Accepted Accounting Principles or GAAP is a defined set of rules

and procedures that needs to be followed in order to create financial
statements, which are consistent with the industry standards.

GAAP helps in ensuring that financial reporting is transparent and uniform

across industries. As financial information is based on historical data,
therefore in order to facilitate comparison between data from various
sources, GAAP must be followed.

GAAP is developed by the Financial Accounting Standards Board (FASB)

The following GAAP principles can be discussed:

1. Principle of Consistency: This principle ensures that the organizations

use consistent standards while recording the transactions.

2. Principle of Regularity: This principle states that all the accountants

abide by the rules and regulations as per GAAP.

3. Principle of Sincerity: This principle states that an accountant should

provide an accurate depiction of the financial situation of a business.

4. Principle of Permanence of Method: This principle states that

consistent practices and procedures should be followed for financial
reporting purposes.
5. Principle of Prudence: This principle states that financial data should be
reasonable, factual and should not be based on any speculation.

6. Principle of Continuity: This principle states that the valuation of assets

is based on the assumption that the business will be continuing its
operations in the future.

7. Principle of Materiality: This principle lays emphasis on the full

disclosure of the true financial position of the business.

8. Principle of Periodicity: This principle states that business entities

should abide by the commonly accepted accounting periods for
financial reporting such as yearly, half-yearly, etc.

9. Principle of Non-compensation: This principle states that no business

entities should expect compensation in return for providing accurate
information in financial reporting.

10. Principle of Good Faith: This principle states that all the parties
involved in financial reporting should be honest in reporting the
transactions.