ACCOUNTING POLICIES:

Accounting policies refer to the specific accounting principles and methods applied by an enterprise in the
preparation and presentation of financial statements. These policies are chosen based on the nature and
circumstances of the enterprise and may vary across businesses.
Examples of Accounting Policies:
1. Treatment of expenditure during construction
2. Conversion or translation of foreign currency items
3. Valuation of inventories
4. Treatment of goodwill
5. Valuation of investments
6. Treatment of retirement benefits
7. Recognition of profit on long-term contracts
8. Valuation of fixed assets
9. Treatment of contingent liabilities
This list is not exhaustive and serves only as an illustration of common areas where different
enterprises might adopt varying accounting policies.
Major Considerations in the Selection of Accounting Policies:
1. Prudence: Recognize uncertainties by exercising caution when preparing financial statements.
However, prudence does not justify creating hidden reserves.
2. Substance Over Form: Transactions should be accounted for according to their financial
reality rather than just their legal form.
3. Materiality: Financial statements should disclose all material items, the knowledge of which
might influence users’ decisions.
Disclosure Requirements of Accounting Policies (AS-1):
1. All significant accounting policies adopted in preparing and presenting financial statements
should be disclosed.
2. These disclosures should be provided in one place for clarity and consistency.
When Is a Change in Accounting Policy Recommended?
A change in accounting policy is recommended when:
• It is required by statute to comply with an accounting standard.
• It is believed that the change would provide a more accurate or appropriate presentation of the
enterprise’s financial statements.
Disclosure Requirements in Case of Change in Accounting Policy:
1. Material Effect in Current Period: If the change has a material effect on the current period,
the amount of change should be disclosed.
2. Material Effect, but Effect Not Ascertainable: If the effect of the change is not ascertainable
(either wholly or partly), the fact of the change should still be disclosed.
3. No Material Effect in Current Period: If the change has no material effect in the current period
but is reasonably expected to have a material effect in future periods, this should be disclosed
accordingly.

ACCOUNTING STANDARDS
Concepts of Accounting Standards: Accounting standards refer to a set of rules, principles, and
guidelines that dictate how specific types of transactions and other financial events should be
reported in financial statements. They aim to ensure consistency, transparency, and reliability in
financial reporting. These standards are formulated by authoritative bodies like the Institute of
Chartered Accountants of India (ICAI) or the International Accounting Standards Board (IASB). By
following these standards, companies can present their financial data in a comparable and
understandable manner, fostering confidence among stakeholders.
Objectives:
1. Uniformity & Comparability: Establish consistency for easier comparison across companies.
2. Transparency & Reliability: Provide accurate financial data for informed decision-making.
3. Regulatory Compliance: Ensure adherence to legal and tax requirements.
4. Improved Decision-Making: Help stakeholders make well-informed financial decisions.
Benefits:
1. Enhanced Trust: Increases credibility and trust among stakeholders.
2. Investor Confidence: Boosts investment opportunities by ensuring reliable financial data.
3. Better Financial Analysis: Aids in effective interpretation and comparison of financial data.
4. Global Harmonization: Facilitates consistent international financial reporting.
5. Minimization of Fraud & Errors: Reduces the risk of manipulation and errors in financial
reporting.
Conclusion: Accounting standards ensure accurate, transparent, and comparable financial statements,
benefiting businesses, investors, and the economy.

ACCOUNTING AS A MEASUREMENT DISCIPLINE

1. Recording Financial Transactions: Systematically records business transactions and assigns a
monetary value to them (assets, liabilities, revenue, expenses, etc.).
2. Use of Standards: Follows specific frameworks like GAAP (Generally Accepted Accounting
Principles) or IFRS (International Financial Reporting Standards) to ensure consistency and
comparability in financial reporting.
3. Measurement Bases: • Historical Cost: Measures assets and liabilities based on their original cost.
• Fair Value: Measures assets and liabilities at their current market value.
4. Accrual vs. Cash Basis: • Accrual Accounting: Recognizes revenues and expenses when they occur,
not when cash is exchanged.
• Cash Basis Accounting: Recognizes revenues and expenses when cash is received or paid.
5. Valuation Techniques: Uses various approaches (cost model, market-based, income-based) to
determine the value of assets and liabilities.
6. Objectivity and Reliability: Ensures that financial data is unbiased, verifiable, and trustworthy for
stakeholders.
7. Decision-Making: Provides essential data for decision-making by managers, investors, and other
stakeholders through accurate financial reporting.
8. Transparency: Enhances transparency in financial markets by adhering to standardized
measurement and reporting practices.
9. Impact on Financial Statements: Measurement influences the presentation of financial statements
like the balance sheet, income statement, and cash flow statement.
10. Legal and Regulatory Compliance: Accounting measurement ensures compliance with legal and
regulatory requirements, helping prevent fraud and misrepresentation.

VALUATION PRINCIPLES IN ACCOUNTING:

1. Historical Cost Principle: Assets are recorded at their original purchase cost, ensuring consistency
but may not reflect current market values.
2. Fair Value Principle: Assets and liabilities are valued at their current market value, offering a more
accurate reflection of value, though it can be subjective.
3. Cost Principle: Similar to historical cost, assets are recorded at acquisition cost, including any direct
costs incurred to make the asset usable.
4. Revenue Recognition Principle: Revenue is recognized when earned (when goods are delivered or
services are performed), not when payment is received.
5. Matching Principle: Expenses are recorded in the same period as the revenues they generate,
ensuring accurate profit measurement.
ACCOUNTING ESTIMATES
Introduction: Accounting estimates are approximate values used when exact measurements are not
possible. They are crucial in accrual basis accounting, ensuring financial statements reflect the true financial
position by recognizing revenues and expenses when earned or incurred, not when cash is exchanged.
Types of Accounting Estimates:
1. Cash-Generating Unit Value: Estimating the value of a group of assets that generate cash
flows, crucial for impairment testing.
2. Variable Portion of a Transaction Price: Estimating discounts, rebates, or bonuses in
contracts with uncertain transaction prices.
3. Residual Value of Property, Plant, and Equipment: Estimating the expected value of an asset
at the end of its useful life for depreciation purposes.
4. Allowance for Expected Credit Losses: Estimating potential uncollectible accounts
receivable based on historical data.
5. Fair Value of Investment Property: Estimating the market value of investment properties,
often using market data or valuation models.
6. Depreciation: Allocating an asset’s cost over its useful life, influencing the depreciation
expense each period.
7. Pension Benefits: Estimating future obligations for employee pensions based on assumptions
about factors like life expectancy and wage growth.
8. Bad Debts: Estimating the amount of accounts receivable that may be uncollectible due to
customers’ financial issues.
9. Useful Life of Non-Current Assets: Estimating how long an asset will remain productive,
influencing depreciation and amortization.

Challenges of Accounting Estimates: Accounting estimates are based on historical evidence and
judgment, but they face challenges:
Uncertainty of Future Events: Many estimates depend on future occurrences, making them uncertain.
Information Availability: Required information may not be readily available or cost-effective, leading to
approximations.
Changing Assumptions: Estimates are influenced by assumptions that may change over time, affecting
their accuracy.
Role in Financial Statements: Accounting estimates ensure the completeness and reliability of financial
statements. They enable the recognition of revenues and expenses when precise figures are unavailable,
offering stakeholders a fair view of the company’s financial performance.
Conclusion: Accounting estimates are essential in financial reporting, allowing companies to reflect their
economic reality when exact data is not available. Though based on judgment and historical evidence, they
provide a more complete and reliable view of a company’s financial position, helping stakeholders make
informed decisions despite uncertainties.

CASH BOOK
1. Meaning: A cash book is a financial journal that records all cash transactions, i.e., receipts and
payments of cash. It is maintained by the business to keep track of cash movements.
2. Purpose: The purpose of a cash book is to track the inflow and outflow of cash for a business. It
helps in managing daily cash transactions and maintaining a record of cash balance.
3. Maintained By: Maintained by the business or organization itself to record its cash and bank
transactions.
4. Transactions Recorded: Records all cash transactions such as cash receipts and payments. It
includes both cash and bank transactions if maintained as a two-column cash book.
5. Format: Typically includes columns for the date, particulars, voucher number, receipts (debit),
payments (credit), and the balance amount.
6. Updates: Updated by the business as soon as the cash transaction takes place.
7. Type of Transactions: Covers all forms of cash transactions like cash sales, cash payments, cash
receipts, and cash expenses.
8. Recording Method: It is recorded on a day-to-day basis in chronological order.
9. Nature of Balance: The balance shown in the cash book is the cash available with the business,
including cash in hand and in the bank (if two-column cash book).
10. Purpose of Reconciliation: The cash book’s balance is checked against the actual cash in hand
during a cash count to ensure accuracy.
11. Legal Status: It is an internal document used for record-keeping and is not a legal document on its
own.
12. Example of Transactions: A business paying rent or receiving cash from a customer.
13. Closing Balance: The closing balance in a cash book represents the cash balance the business
has, which may be carried forward to the next accounting period.
14. Importance: It is crucial for businesses to maintain liquidity by recording all cash-related
transactions to ensure proper cash flow management.
15. Frequency of Updates: Updated continuously as each cash transaction occurs in the business.
16. Responsibility: It is the responsibility of the business to maintain and update the cash book
accurately.

PASS BOOK
1. Meaning: A pass book is a bank record of a customer’s account. It is issued by the bank to record
all deposits, withdrawals, and other transactions related to the bank account.
2. Purpose: The purpose of a pass book is to provide a bank statement for the account holder,
detailing all transactions made through the bank. It serves as proof of transactions with the bank.
3. Maintained By: Maintained by the bank. It is updated by the bank, either manually or
electronically, to show all the activities in a customer’s bank account.
4. Transactions Recorded: Records only the transactions related to the bank account, such as
deposits, withdrawals, and bank charges.
5. Format: Typically includes columns for the date, details of transactions (credit or debit), the
amount, and the running balance.
6. Updates: Updated by the bank whenever a transaction takes place. The account holder can
update it manually at the bank or through ATM/e-banking facilities.
7. Type of Transactions: Covers only transactions related to the bank account, such as deposits,
withdrawals, transfers, and bank charges.
8. Recording Method: It is updated by the bank, and the account holder receives it periodically,
reflecting the transactions since the last update.
9. Nature of Balance: The balance shown in the pass book is the available balance in the customer’s
bank account.
10. Purpose of Reconciliation: The pass book balance is compared with the balance in the
company’s cash book during the process of bank reconciliation to ensure no errors or fraud.
11. Legal Status: It is a legal document provided by the bank and can be used as evidence in legal
proceedings.
12. Example of Transactions: A customer depositing money into their account or withdrawing funds
from the bank.
13. Closing Balance: The closing balance in a pass book is the current balance in the bank account
as of the last recorded transaction.
14. Importance: It is vital for tracking the activity of a customer’s bank account, which helps in
maintaining accurate financial records for the customer.
15. Frequency of Updates: Updated periodically, based on customer requests or by bank schedule,
either electronically or manually.
16. Responsibility: It is the responsibility of the bank to maintain and update the pass book for each
customer.

SUBSIDIARY BOOKS IN ACCOUNTING

Subsidiary books are used to record financial transactions before transferring them to the general
ledger. These books help in organizing financial data, reducing errors, and improving efficiency.
Types of Subsidiary Books
1. Sales Book (Sales Journal)
Purpose: Records all credit sales of goods.
Details Recorded: Date of sale, customer’s name, invoice number, sale amount (excluding VAT/GST).
Posting to Ledger: Total transferred to the “Sales” account.
Individual customer accounts updated in the receivables ledger.
2. Purchase Book (Purchase Journal)
Purpose: Records all credit purchases of goods.
Details Recorded: Date of purchase, supplier’s name, invoice number, purchase amount (excluding
VAT/GST).
Posting to Ledger: Total posted to the “Purchases” account.
Individual supplier accounts updated in the creditors ledger.
3. Cash Book
Purpose: Records all cash and bank transactions.
Types:
Single column cash book – Only cash transactions.
Double column cash book – Cash and bank transactions.
Triple column cash book – Cash, bank, and discount transactions.
Details Recorded: Date of transaction, cash receipt/payment details, amount.
Posting to Ledger: Cash and bank balances updated.
4. Bank Book
Purpose: Records all bank transactions such as deposits, withdrawals, and bank charges.
Details Recorded: Date of transaction, bank details (deposits or withdrawals), amount.
Posting to Ledger: Bank account updated in the general ledger.
5. Sales Returns Book (Return Inwards Book)
Purpose: Records goods returned by customers.
Details Recorded: Date of return, customer’s name, invoice number, quantity and value of returned
goods.
Posting to Ledger: Amount credited to the “Sales” account.
Customer’s account adjusted.
6. Purchase Returns Book (Return Outwards Book)
Purpose: Records goods returned to suppliers.
Details Recorded: Date of return, supplier’s name, invoice number, quantity and value of returned
goods.
Posting to Ledger: Amount debited to the “Purchases” account.
Supplier’s account adjusted.
7. Journal Proper
Purpose: Records transactions that do not fit into any other subsidiary books.
Examples: Opening entries, closing entries, error corrections, adjustments (e.g., depreciation,
accruals).
Details Recorded: Date of transaction, affected accounts, amounts.
Posting to Ledger: Entries posted directly to relevant ledger accounts.
8. Bills Receivable Book
Purpose: Records bills of exchange or promissory notes received.
Details Recorded: Date of the bill, name of the drawer (who issued the bill), amount, due date.
Posting to Ledger: Bills receivable account updated.
9. Bills Payable Book
Purpose: Records bills of exchange or promissory notes the business must pay.
Details Recorded: Date of the bill, name of the payee (to whom the bill is payable), amount, due date.
Posting to Ledger: Bills payable account updated.
Features of Subsidiary Books
1. Specialization: Each book records specific transactions, making bookkeeping more efficient.
2. Classification: Helps in organizing financial data and simplifies posting to the general ledger.
3. Prevents Duplication: Reduces errors due to duplicate or missing entries.
4. Facilitates Control: Improves control over receivables and payables through detailed records.
5. Aids Auditing: Provides a systematic record, making audits easier.
Process of Using Subsidiary Books
1. Recording Transactions: Transactions are first recorded in the relevant subsidiary book.
2. Posting to Ledger: The totals (or individual entries) are posted to the general ledger accounts.
3. Balancing: Books are balanced periodically and used to prepare financial statements.
Advantages of Subsidiary Books
Efficiency: Speeds up transaction recording.
Accuracy: Reduces errors by categorizing transactions.
Time-Saving: Simplifies ledger posting.
Better Control: Enhances cash flow, receivables, and payables management.
Conclusion Subsidiary books play a crucial role in systematic bookkeeping, ensuring transactions are
accurately recorded, classified, and posted to the ledger efficiently.

IMPORTANT PROVISIONS OF THE COMPANIES ACT, 1956 IN RESPECT OF

PREPARATION OF FINAL ACCOUNTS
The Companies Act, 1956, lays down specific provisions regarding the preparation and presentation of final
accounts to ensure transparency, accuracy, and compliance with statutory requirements. The key provisions
related to the preparation of final accounts are as follows:
1. Statutory Requirement Under Section 210
According to Section 210 of the Companies Act, 1956:
• Every company must prepare its final accounts annually, which include:
o Profit and Loss Account (or Income and Expenditure Account for non-profit
companies).
o Balance Sheet as at the end of the financial year.
 • The accounts must give a true and fair view of the company’s financial position and
performance.
• The financial statements must comply with Accounting Standards prescribed by the Institute
of Chartered Accountants of India (ICAI).
2. Form and Content of Final Accounts (Schedule VI)
The format and disclosure requirements for final accounts are governed by Schedule VI of the Act:
A. Balance Sheet
• The Balance Sheet must be prepared in either the horizontal (T-form) or vertical (columnar
form) as per Schedule VI.
• It must classify assets and liabilities into:
o Fixed Assets (Land, Buildings, Machinery, etc.).
o Current Assets (Cash, Debtors, Inventory, etc.).
o Share Capital and Reserves (Equity, Preference Share Capital, General Reserves, etc.).
o Liabilities (Long-term borrowings, Current Liabilities, etc.).
B. Profit and Loss Account
• The Profit and Loss Account must present the financial performance for the year, including:
o Revenue from operations.
o Cost of goods sold.
o Gross profit, operating profit, and net profit.
o Appropriation of profits (Dividends, Reserves, etc.).
3. Compliance with Accounting Standards
• Section 211(3A) & (3B) mandates compliance with Accounting Standards (AS) issued by ICAI.
• Important Accounting Standards applicable to final accounts:
o AS-1: Disclosure of Accounting Policies.
o AS-2: Valuation of Inventories.
o AS-6: Depreciation Accounting.
o AS-9: Revenue Recognition.
4. Director’s Responsibility and Authentication (Section 215)
• The final accounts must be approved by the Board of Directors and signed by:
o Two directors (one of whom must be the Managing Director, if any).
o Company Secretary (if appointed).
• The financial statements must be audited by a Statutory Auditor before being presented at the
AGM.
5. Presentation and Adoption in AGM (Section 210 & 216)
• The audited accounts must be presented to shareholders at the Annual General Meeting
(AGM).
• Shareholders may approve, reject, or seek modifications before adopting the financial
statements.
6. Filing with the Registrar of Companies (ROC) (Section 220)
• A copy of the final accounts, along with the Board’s Report and Auditor’s Report, must be
filed with the ROC within 30 days from the AGM.
• Non-compliance may result in penalties and legal consequences.
7. Audit Requirement (Section 224-233)
• Every company must appoint a statutory auditor at the AGM.
• The auditor ensures that the accounts are true and fair and issues an Auditor’s Report under
Section 227.
Conclusion The Companies Act, 1956 ensures that companies prepare and present their final
accounts in a structured and transparent manner. Compliance with Section 210, Schedule VI,
Accounting Standards, and audit requirements helps maintain accountability and provide accurate
financial information to stakeholders.
AS 1 – Disclosure of Accounting Policies
Objective: Ensures consistency, transparency, and comparability in financial statements by prescribing
principles for selecting and disclosing accounting policies.
Key Assumptions:
1. Going Concern: Entity will continue operating.
2. Consistency: Policies remain unchanged unless necessary.
3. Accrual: Transactions recorded when they occur, not when cash is received/paid.
Selection of Policies:
• Prudence: Recognize losses early, profits only when realized.
• Substance over Form: Reflect real economic impact.
• Materiality: Disclose all significant information.
Disclosure & Changes:
• Policies should be disclosed in notes to accounts.
• Changes allowed only if required by law, accounting standards, or for better presentation.
• Impact of changes must be disclosed.
Conclusion: AS 1 promotes transparency and informed decision-making by ensuring proper disclosure of
accounting policies.
AS 2 – Valuation of Inventories
Objective: AS 2 prescribes the method for valuing inventories to ensure accurate financial reporting and
consistency in determining inventory costs.
Scope: Applicable to all inventories except:
• Work-in-progress for construction contracts.
• Shares, debentures, and financial instruments.
• Livestock and agricultural produce.
Valuation Method:
• Inventories are valued at Cost or Net Realizable Value (NRV), whichever is lower.
Cost Components:
1. Direct Costs: Purchase price, import duties, taxes (excluding refundable taxes).
2. Conversion Costs: Direct labor and manufacturing overheads.
3. Other Costs: Only if incurred in bringing inventory to its present condition and location.
Exclusions from Cost:
• Abnormal wastage.
• Storage costs (unless necessary for production).
• Administrative and selling expenses.
Cost Formulas:
If specific identification is not possible, cost is assigned using:
• FIFO (First-In-First-Out)
• Weighted Average Method
Conclusion: AS 2 ensures fair valuation of inventories, preventing overstatement of profits and assets.

AS 3 – Cash Flow Statements

Objective: AS 3 prescribes the presentation of cash flow statements to provide information on cash inflows
and outflows, helping stakeholders assess an entity’s liquidity and financial performance.
Classification of Cash Flows:
1. Operating Activities:
 o Cash flows from core business operations (e.g., receipts from sales, payments to
suppliers).
2. Investing Activities:
o Cash flows from acquisition/sale of assets, investments, and loans given.
3. Financing Activities:
o Cash flows from issuing/repaying debt, equity, and dividend payments.
Methods of Presentation:
• Direct Method: Lists actual cash receipts and payments.
• Indirect Method: Starts with net profit and adjusts for non-cash items (e.g., depreciation,
changes in working capital).
Conclusion: AS 3 ensures transparency in cash management, helping users evaluate an entity’s financial
health and cash-generating ability.

AS 4 – Contingencies and Events Occurring After the Balance Sheet Date

Objective: AS 4 prescribes the accounting treatment for contingencies and post-balance sheet events to
ensure accurate financial reporting.
Key Aspects:
1. Contingencies:
o A possible gain or loss from past events, confirmed by future occurrences.
o Loss contingencies (e.g., pending lawsuits) are recorded if probable and measurable.
o Gain contingencies are disclosed only if virtually certain.
2. Events After the Balance Sheet Date:
o Adjusting Events: Provide additional evidence about conditions existing on the balance
sheet date (e.g., settlement of a court case). These affect financial statements.
o Non-Adjusting Events: Relate to new conditions after the balance sheet date (e.g.,
natural disasters). These are disclosed in notes if significant.
Conclusion: AS 4 ensures financial statements reflect all relevant information, preventing misleading
representation of an entity’s financial position.
AS 12 – Accounting for Government Grants
Objective: AS 12 provides guidelines for accounting government grants, ensuring their proper recognition,
measurement, and disclosure in financial statements.
Types of Government Grants:
1. Capital Grants:
o Given for the acquisition of fixed assets (e.g., machinery, buildings).
o Recognized either as deferred income or by deducting it from the asset’s cost.
2. Revenue Grants:
o Given to cover operational expenses.
o Recognized as income over the period of the related expenses or as a single
transaction.
Recognition of Grants:
• Grants are recognized when there is reasonable assurance that:
o The entity will comply with the conditions attached.
o The grant will be received.
Treatment of Non-Compliance:
1. If conditions are not met, the grant is returned, and the associated income is reversed.
Disclosure:
• The nature and extent of government grants and related conditions should be disclosed.
• The method of recognition and treatment should be clearly stated.
Conclusion: AS 12 ensures that government grants are accurately accounted for, providing clarity on their
impact on financial performance and position.
DEPRECIATION
Depreciation refers to the process of allocating the cost of a tangible asset over its useful life. As
assets age, they lose their value due to factors such as wear and tear, obsolescence, or usage.
Depreciation is important for businesses as it helps in accounting for the decrease in value, ensuring
accurate financial statements.
Terms in Depreciation:
1. Depreciable Asset: An asset with a limited useful life, like machinery or vehicles.
2. Cost of Asset: The amount paid to acquire the asset, including any additional costs to bring it into
service.
3. Residual Value (Salvage Value): The estimated value of the asset at the end of its useful life.
4. Useful Life: The period over which the asset is expected to be used.
5. Depreciation Expense: The annual amount of depreciation charged to the income statement.
6. Accumulated Depreciation: The total depreciation recorded on an asset up to a specific point in time.
7. Book Value (Carrying Amount): The asset’s value after accounting for accumulated depreciation.
8. Depreciation Rate: The percentage of the asset’s value depreciated each year, used in methods like
the Written Down Value method.
METHODS OF DEPRICIATION
1) Straight-Line Method (SLM). 4) Sum-of-the-Years’-Digits Method
2) Written Down Value (WDV) Method. 5) Double Declining Balance (DDB) Method
3) Units of Production Method
STRAIGHT-LINE METHOD (SLM):
Definition: Under the Straight-Line Method, the depreciation expense is spread evenly across the
asset’s useful life. The same amount of depreciation is charged every year.
Formula: Annual Depreciation = (Cost of Asset – Residual Value) / Useful Life
Rate of Depreciation = (Annual Depreciation / Cost of Asset) × 100
Advantages:
• Simple to calculate and apply.
• Provides consistent depreciation expense, making budgeting easier.
• Suitable for assets that lose value evenly over time (e.g., buildings, furniture).
Disadvantages:
• May not reflect the actual usage or wear of the asset.
• Not ideal for assets that have higher depreciation in the initial years.
WRITTEN DOWN VALUE (WDV) METHOD:
Definition: The Written Down Value (or Reducing Balance) Method calculates depreciation based
on the book value of the asset at the beginning of each year. Depreciation decreases over time as
the value of the asset decreases.
Formula: Depreciation = (Net book value – Salvage Value) × Rate of depreciation
Rate of Depreciation = (Depreciation / Book Value) × 100
Advantages:
• Suitable for assets that lose value more rapidly in the initial years (e.g., vehicles, machinery).
• Reflects actual wear and tear as it charges higher depreciation in the earlier years.
• Reduces taxable income more in the earlier years.
Disadvantages:
• More complex to calculate compared to the Straight-Line Method.
• Depreciation decreases over time, which may not be ideal for businesses requiring consistent
expense levels.