UNIT-1

ACCOUNTING

1. “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 results thereof.”

Sl.
Characteristics Description
No.

1. Financial Nature Only transactions of a monetary nature are recorded.

It involves a step-by-step process: recording → classifying

2. Systematic Process
→ summarizing → interpreting.

3. Historical Recording It mainly records past transactions.

Use of Double Entry

4. Every transaction has dual effects (debit and credit).
System

Communicates financial information to internal and

5. Communication Tool
external users (e.g., owners, creditors).

Assists management in planning, control, and decision-

6. Helps in Decision-Making
making.

Based on Principles and Follows standard accounting principles (e.g., GAAP or

7.
Standards IFRS).

2. NATURE

1. Accounting as a Science
It is a systematic body of knowledge with principles (like GAAP, IFRS) and
concepts (like matching, accrual). These principles help in maintaining
accuracy, reliability, and consistency in financial records.

2. Accounting as an Art
Accounting involves applying rules and principles creatively and skilfully
to real-life business situations. Like any art, it requires judgment and
experience, especially in interpretation and presentation of data.

3. Accounting as a Language of Business

 Just as language helps us communicate, accounting communicates
financial results and status of a business to stakeholders.

4. Accounting is Historical in Nature

It primarily deals with past transactions — what has already happened.

5. Accounting is Monetary in Nature

Only those transactions which can be measured in money are recorded.
Qualitative aspects like employee skill, brand reputation, etc., are not
recorded.

6. Accounting is Analytical
It doesn’t just record numbers — it interprets financial results, helps
evaluate performance, and assists in decision-making.

3. SCOPE (pg. 23, Q-8)

1. Recording of Transactions
This is the first and most basic function of accounting. All financial
transactions are recorded systematically in the books of accounts
(journal, subsidiary books etc.).

2. Classifying
Transactions are sorted and grouped into categories (e.g., rent, salaries,
sales). Ledger accounts are prepared.

3. Summarizing
Data is summarized to prepare financial statements: Trial balance,
Trading and Profit & Loss Account, Balance Sheet

4. Analysis and Interpretation

Accounting helps in analysing financial performance, trends, and ratios.

5. Communicating Financial Information

Accounting communicates financial results to internal and external
stakeholders: Owners, creditors, investors, government, etc.

6. Decision-Making Tool
Modern accounting supports management decisions like budgeting,
forecasting, cost control, etc.
4. BRANCHES OF ACCOUNTING

1. Financial Accounting
Purpose: To record, classify, and summarize financial transactions to
prepare financial statements. Users: External users like shareholders,
creditors, banks, government.

2. Cost Accounting
Purpose: To calculate and control the cost of production or service. Use:
Helps in cost control, decision-making, and pricing.

3. Management Accounting
Purpose: To provide relevant financial and non-financial information to
management for planning, controlling, and decision-making. Internal Use
Only: Not shared with external parties.

4. Social Responsibility Accounting / Environmental Accounting

Purpose: To report on a firm’s social and environmental impact. Focus:
Sustainability, corporate social responsibility (CSR), pollution, etc.

5. OBJECTIVES/FUNCTIONS OF ACCOUNTING

1. Systematic Record of Transactions

The primary objective of bookkeeping is to maintain a complete, accurate, and
chronological record of all financial transactions.

2. Determining Profit or Loss

At the end of an accounting period, a Trading and Profit & Loss Account is prepared
to calculate: Total revenue, Total expenses, Net profit or loss. This helps the
business understand whether it is financially viable and sustainable.

3. Determining Financial Position

A Balance Sheet shows the business's financial status on a particular date. It lists:
Assets – what the business owns, Liabilities – what it owes and Owner’s equity. It
helps assess solvency, liquidity, and capital structure.

4. Facilitating Decision-Making
Accurate accounting data supports management in making strategic decisions such
as: Budgeting, Investment planning, Cost control, Product pricing
5. Legal and Tax Compliance
Proper books of accounts are mandatory under laws like: Income Tax Act, Companies
Act, GST regulations. Accurate records ensure timely filing of returns, payment of
taxes, and avoidance of legal penalties.

6. Providing Evidence in Court

In case of legal disputes, audited financial statements and accounting records can
serve as documentary evidence in court or during tax assessments.

7. Detection and Prevention of Errors and Frauds

Regular bookkeeping allows early identification of: Clerical errors, Misappropriation
of funds, Falsification of records

8. Assisting in Audits
An audit is a critical review of financial statements. Proper accounting ensures:
Smooth conduct of internal and statutory audits, Reliability of financial data,
Compliance with auditing standards

9. Measurement and Comparison

Accounting helps measure business performance and compare it: Year-over-year,
With competitors, Against set targets or budgets

10. Assistance in Raising Finance

Banks and investors require financial statements before: Approving loans, Making
investments. Transparent and well-prepared accounts build credibility and trust.

11. Helps in Business Valuation

In cases like mergers, acquisitions, or sales, financial records help determine the fair
value of a business.

12. Tool of Communication

6. LIMITATIONS OF ACCOUNTING

1. Ignores Qualitative Aspects

Accounting records only quantitative (monetary) information. Non-financial
elements like employee skill, brand reputation, customer satisfaction, or work
environment are not recorded, though they significantly affect business
performance.
2. Based on Historical Costs
Assets are recorded at their original purchase price and not at current market value.
This ignores depreciation due to inflation or appreciation over time, making the
financial position outdated or misleading.

3. Window Dressing Possible

Management may intentionally manipulate financial statements to show better
results than actual performance (e.g., delaying expenses or inflating sales).

4. Does Not Reflect Real-Time Changes

Accounting data is often retrospective, focusing on past performance. It may not
capture real-time events or current market dynamics, making it less useful for
immediate decisions.

5. Estimates and Judgments Involved

Accounting involves many estimates, such as: Provision for bad debts, Depreciation
methods. These are subjective and can vary between firms, reducing comparability
and reliability.

6. Not Free from Errors or Fraud

Despite internal controls, accounting may still have: Clerical errors, Omissions,
Fraudulent entries

7. Does Not Show Effect of Price-Level Changes

Traditional accounting ignores inflation or deflation. The value of money changes
over time, but accounts are prepared assuming money’s value is constant, which
distorts financial analysis.

8. Lacks Uniformity
Different firms may use different accounting methods (e.g., FIFO vs. LIFO, straight-
line vs. written-down depreciation). This limits comparability across companies.

9. Limited Use in Decision-Making

Accounting alone cannot guide major strategic decisions like: Market entry, Product
diversification, Employee productivity

10. To many legal compliances

7. ACCOUNTING AS AN INFORMATION SYSTEM

An information system is a structured process that collects, processes, stores, and

disseminates data for decision-making and control. Accounting fits this definition
because it transforms raw financial data into meaningful financial information.

Component Accounting Role

Input Source documents (invoices, receipts, bank statements)

Processing Recording transactions in journals, ledgers, trial balance

Storage Storing data in financial records and digital databases

Output Financial statements (Balance Sheet, P&L Account, Cash Flow)

Analysis, internal reports, audits used for improving future

Feedback
performance

USERS – (pg. 22, Q-7)

User Purpose

Management Planning, control, decision-making

Employees Job security, compensation, negotiations

Owners ROI, capital management

Investors Returns, risk analysis

Creditors/Suppliers Liquidity, payment ability

Lenders Credit risk, interest income

Government Taxation, regulation

Customers Business stability

Competitors Benchmarking, strategic analysis

Analysts/Researchers Financial research and trends

Public/Society Ethical and sustainable practices

DOUBLE ENTRY SYSTEM OF BOOK-KEEPING

The Double Entry System is a scientific method of recording business transactions where every
transaction affects at least two accounts—one is debited, and the other is credited—ensuring the
accounting equation (Assets = Liabilities + Capital) always remains balanced. According to Luca
Pacioli, the father of accounting: “Every debit has a corresponding credit, and every credit has a
corresponding debit.”

Characteristics of Double Entry System:

1. Two-Fold Effect: Every transaction impacts two accounts – one debit, one credit.

2. Equal Value Entries: The amount debited = amount credited, maintaining balance.

3. Scientific and Systematic: Provides a logical and consistent structure for recording
transactions.

4. Classification of Accounts: Transactions are classified into Personal, Real, and Nominal
accounts.

5. Helps in Trial Balance and Final Accounts: Supports preparation of Trial Balance, Profit &
Loss Account, and Balance Sheet.

6. Accuracy Check: Ensures arithmetical accuracy through a trial balance.

Rules of Double Entry System:

Type of Account Rule for Debit Rule for Credit

Personal Debit the Receiver Credit the Giver

Real Debit what comes in Credit what goes out

Nominal Debit all Expenses & Losses Credit all Incomes & Gains

Merits of Double Entry System:

1. Scientific and Systematic: Recognized globally for its logical structure and accuracy.

2. Complete Record: Each transaction’s full effect is recorded—gives a complete financial

picture.

3. Accuracy and Error Detection: Trial balance helps detect arithmetical errors.

4. Prevention of Frauds: Dual recording makes it harder to conceal financial irregularities.

5. Helpful in Decision-Making: Offers reliable data for financial planning and analysis.

6. Facilitates Preparation of Final Accounts: Ensures proper Profit & Loss Account and Balance
Sheet can be prepared.
 7. Legal Acceptance: Accepted by tax authorities, courts, and auditors.

Demerits of Double Entry System:

1. Complex and Technical: Requires accounting knowledge; not suitable for laypersons.

2. Costly: Maintaining books and hiring skilled accountants can be expensive for small
businesses.

3. Time-Consuming: Involves multiple steps—journalizing, posting, balancing, etc.

4. Errors Still Possible: Cannot detect: Errors of omission, Errors of principle, Compensating
errors

5. Misuse of Window Dressing: Can be manipulated to show an artificially healthy financial

position

ACCOUNTING PRINCIPLES (include all concepts and conventions)

Broad rules and guidelines for accounting practices. Purpose is to ensure consistency, reliability, and
comparability of financial statements.

Nature of Accounting Principles:

1. Man-Made Rules: Developed by accounting bodies based on experience and logic.

2. Generally Accepted: Known as GAAP (Generally Accepted Accounting Principles).
3. Flexible and Evolving: Subject to modification as per changes in economic and legal
environments.
4. Universal Application: Applied by all businesses to maintain uniformity in financial
reporting.

Importance of Accounting Principles:

1. Uniformity: Ensures standardization in accounting practices.

2. Comparability: Enables comparison across periods and companies.
3. Reliability: Builds trust among users like investors, creditors, and government.
4. Legal Compliance: Adheres to laws like Companies Act, Income Tax Act, etc.
5. Framework for Financial Reporting: Helps in preparation of accurate and
meaningful financial statements.
6. Basis for Auditing: Auditors rely on accounting principles to verify financial
accuracy.

Limitations of Accounting Principles:

1. Subjectivity: Some principles (e.g., valuation of assets) involve judgment and estimates.
 2. Historical Cost Bias: Ignores current market value, especially during inflation.
3. Exclusion of Qualitative Information: Factors like employee morale or brand reputation
aren't recorded.
4. Different Interpretations: May lead to inconsistencies across firms.
5. Non-Universal Application: In practice, companies might adopt different methods for
similar items.

ACCOUNTING CONVENTIONS

Customs or traditions followed consistently in accounting. Purpose is to maintain uniformity and

practicality in reporting

1. Convention of Conservatism (Prudence)

This convention advises accountants to anticipate losses but not gains. When choosing between
several accounting methods, the one that shows lower profits or asset values is preferred. Purpose:
To avoid overstatement of income and ensure that liabilities and losses are not understated.

Examples:

 Stock is valued at cost or market price, whichever is lower.

 Expected bad debts are recorded even if not yet incurred.
 No recognition of unrealized profits, but expected losses are recognized.

2. Convention of Consistency

This convention emphasizes using the same accounting methods over different accounting periods.
Once an accounting policy or method is adopted (like depreciation method or inventory valuation), it
should be applied consistently year to year. Purpose: Ensures comparability of financial statements
across different periods.

Examples:

 If a company uses the straight-line method of depreciation, it should not change it

to diminishing balance without valid reason.
 Inventory valuation should follow the same method (e.g., FIFO or LIFO) across years
for comparability.

3. Convention of Full Disclosure

This convention requires that all relevant and material information should be disclosed in the
financial statements. Users of financial statements should be provided with complete and
understandable financial information that may affect their decisions. Purpose: To ensure
transparency and help users make informed decisions.

Examples:
  Disclosing contingent liabilities like legal cases in the notes to accounts.
 Mentioning accounting policies used for depreciation, inventory, etc.

4. Convention of Materiality

Only transactions that are significant enough to influence decisions should be recorded and
reported in detail. Insignificant or immaterial items may be recorded in a simplified manner.
Purpose: To avoid unnecessary clutter in financial statements and focus on important information.

Examples:

 A company may write off small-value assets (like staplers or calculators) in the year of
purchase rather than capitalizing and depreciating them.

ACCOUNTING APPROACHES
Methods or frameworks used for recording and presenting accounting data. Purpose is to decide
how transactions should be recorded or valued.

1. Cash Basis Accounting

Revenues and expenses are recorded only when cash is received or paid. Used by: Small businesses,
professionals (e.g., doctors, lawyers) for simplicity. Features: Simple to apply, No accounts
receivable/payable, Not accepted under GAAP/IFRS for large businesses.

2. Accrual Basis Accounting

Revenues and expenses are recorded when they are earned or incurred, regardless of cash flow.
Used by: All companies required to follow accounting standards. Features: Complies with GAAP and
IFRS, Provides a more accurate financial picture.

3. Hybrid (Modified Cash) Basis

Combines elements of both cash and accrual accounting. Used by: Some governments or non-
profits. Features: Income may be recognized on a cash basis, but expenses on an accrual basis, or
vice versa.

4. Historical Cost Approach

Assets and liabilities are recorded at their original purchase price. Used in: Traditional accounting
systems. Features: Easy to verify and apply, Ignores inflation and current market value.
5. Fair Value Approach

Assets and liabilities are recorded at their current market value (market value at the time of
reporting). Used in: Modern financial reporting (as per IFRS). Features: Reflects real-time market
conditions, Can fluctuate based on market volatility.

6. Realization and Matching Approach

Revenue is recognized when earned, and expenses when incurred to generate that revenue.
Features: Matches costs with related revenues in the same period, Ensures accurate profit
determination.

Example: A sale and its associated delivery cost are recorded in the same period.
 UNIT-2

ACCOUNTING CONCEPTS (pg. 35,36,37,38)

Fundamental assumptions on which accounting is based. Purpose is to form the base for recording
business transactions.

1. Business Entity Concept

The business is treated as separate from its owner(s). All transactions are recorded from the
business’s point of view, not the owners.

Example: If the owner invests ₹1,00,000 in the business, it is shown as a liability (capital) in the
business books, not personal income.

2. Money Measurement Concept

Only those transactions and events that can be expressed in monetary terms are recorded.
Qualitative factors like employee morale, market reputation, or management efficiency are not
recorded.

Example: Hiring a skilled manager improves efficiency, but unless it has a monetary impact (like
salary), it is not recorded.

3. Going Concern Concept

It is assumed that the business will continue to operate indefinitely. Assets are not valued at
liquidation price; they are shown at historical cost or depreciated value.

4. Accounting Period Concept

The life of the business is divided into fixed time periods (usually 1 year) for reporting. Profit or loss
is measured periodically for decision-making and taxation.

Example: If a business earns income over 3 years, each year's income is calculated separately to
prepare annual financial statements.

5. Cost Concept

Assets are recorded at their original purchase cost, not market value. Increases or decreases in asset
value are not recorded unless realized.

Example: Land purchased at ₹5,00,000 in 2010 is still shown at ₹5,00,000 in 2025, even if market
value is ₹15,00,000.
 6. Dual Aspect Concept

Every transaction has two aspects – debit and credit. Foundation of Double-entry system of
accounting.

Equation:
Assets = Liabilities + Capital

7. Revenue Recognition (Realization) Concept

Revenue is recognized when earned, not necessarily when cash is received. Helps match revenue
with the related accounting period.

Example: Goods sold on credit in March are recorded in March, even if the payment comes in April.

8. Matching Concept

Expenses are recorded in the same period in which the related revenues are earned. This ensures
accurate profit calculation.

Example: If a machine helps generate income for 5 years, its cost is spread as depreciation over
those 5 years.

9. Accrual Concept

Revenues and expenses are recognized when earned or incurred, regardless of cash flow.

10. Full Disclosure Concept

All material and relevant information should be disclosed in the financial statements.

11. Consistency Concept

The same accounting policies and procedures must be applied consistently every year.

12. Conservatism Concept (Prudence)

Recognize anticipated losses but not anticipated gains.

ACCOUNTING POSTULATES
Accounting postulates are the fundamental assumptions or conditions on which the entire structure
of accounting is based. They are not proven laws but are accepted as self-evident truths that guide
the development of accounting principles and standards.

Nature of Accounting Postulates

1. Foundational: Postulates are basic assumptions; they form the base of all accounting
principles and rules.

2. Implicit and Accepted: They are usually not explicitly stated in every transaction, but are
universally followed.

3. Theoretical in Nature: They are conceptual ideas rather than concrete rules.

4. Preceding Principles: They precede and shape accounting principles, standards, and
conventions.

5. Non-verifiable: These are assumptions, not empirically proven facts.

Classification of Accounting Postulates

A. Environment Assumptions / General Postulates - These relate to the overall environment in

which accounting operates.

1. Entity Postulate (Business Entity)

2. Going Concern Postulate

3. Unit of Measurement Postulate (Money Measurement)

4. Accounting Period Postulate

B. Operational Assumptions / Accounting Process Postulates - These guide the recording and
processing of accounting data.

1. Accrual Postulate

2. Matching Postulate.

3. Realization Postulate.

4. Objectivity Postulate: All accounting records must be based on verifiable evidence (invoices,
receipts).

5. Consistency Postulate.

6. Conservatism Postulate (Prudence)

ACCOUNTING POLICIES
Accounting policies refer to the specific accounting principles, rules, and procedures adopted by a
business to prepare and present financial statements. They are chosen from acceptable alternatives
available within accounting standards (like GAAP or Ind AS).

Types of Accounting Policies

a. Measurement Policies - Methods for valuing assets and liabilities.

 Inventory valuation (FIFO, LIFO, Weighted Average)

 Depreciation methods (Straight-Line Method, Written Down Value Method)
 Fixed asset valuation (historical cost or revaluation)

b. Recognition Policies - Policies that determine when to recognize income or expenses in the
books.

 Revenue recognition (e.g., accrual basis vs. cash basis)

 Recognition of provisions and contingent liabilities

c. Presentation Policies - Policies concerning how items are presented in financial statements.

 Classification of assets and liabilities (current vs. non-current)

 Grouping of similar items for disclosure

d. Disclosure Policies - Policies related to providing essential information in financial statements.

 Disclosing related party transactions

 Disclosing accounting estimates and assumptions

Selection of Accounting Policies

The selection of accounting policies must ensure that the financial statements present a true and
fair view of the financial position and performance of the business.

 Relevance: Must provide information useful to users for decision-making.

 Reliability: Should be free from material error and bias.
 Comparability: Consistent application enhances comparability across periods.
 Understandability: Should be clear and easy to interpret by users.

Disclosure of Accounting Policies

As per AS 1 (Indian GAAP) or Ind AS 1, a company must disclose all significant accounting policies
adopted in the preparation of financial statements. Disclosures typically appear in the "Notes to
Accounts" and include: Nature of the policies used, Any changes made, Impact of such changes on
financial performance.

Changes in Accounting Policies

Changes in accounting policies are not encouraged frequently, and they are permitted only when:

 Required by law or a new accounting standard

 Results in more relevant or reliable financial information

If a change is made, the following must be disclosed:

1. Nature of the change

2. Reasons for the change

3. Amount of adjustment, if any, made to current and prior periods

4. Financial impact on key figures like profit, loss, or asset value

ACCOUNTING EQUATION
The Accounting Equation is the foundation of the double-entry bookkeeping system. It shows the
relationship between the assets, liabilities, and owner’s equity of a business. This equation must
always remain balanced, as every transaction affects at least two accounts. It represents the
financial position of a business at a specific point in time.

 Assets: These are the economic resources owned by the business (e.g., cash, inventory,
machinery, buildings).

 Liabilities: These are the debts or obligations of the business (e.g., loans, creditors, bills
payable).

 Capital (Owner’s Equity): The owner’s claim on the assets after liabilities are paid off.
Includes owner’s investment and retained earnings.

Rules for Accounting Equation

Rule 1: Increase in Assets = Increase in Liabilities or Capital

 Example: Business borrows ₹50,000 from the bank.

o Asset (Cash) ↑ ₹50,000

o Liability (Bank Loan) ↑ ₹50,000

Rule 2: Decrease in Assets = Decrease in Liabilities or Capital

 Example: Business repays ₹20,000 of its bank loan.

o Asset (Cash) ↓ ₹20,000

o Liability (Bank Loan) ↓ ₹20,000

Rule 3: Increase in One Asset = Decrease in Another Asset

  Example: Buy machinery for ₹30,000 in cash.

o Asset (Machinery) ↑ ₹30,000

o Asset (Cash) ↓ ₹30,000

Rule 4: Increase in One Liability = Decrease in Another Liability

 Less common, but occurs in debt restructuring.

o E.g., Short-term loan converted to long-term loan.

Rule 5: Increase in Capital (via Profit or Investment) = Increase in Assets

 Example: Owner invests ₹1,00,000 into the business.

o Asset (Cash) ↑ ₹1,00,000

o Capital ↑ ₹1,00,000

Rule 6: Drawings = Decrease in Assets and Capital

 Example: Owner withdraws ₹5,000 for personal use

o Asset (Cash) ↓ ₹5,000

o Capital ↓ ₹5,000

ACCOUNTING STANDARDS
Accounting Standards (AS) are written policy documents issued by recognized accounting bodies or
regulatory authorities that serve as guidelines for measuring, presenting, and disclosing accounting
information in financial statements. They ensure uniformity, transparency, and comparability in
financial reporting by eliminating subjective judgments and inconsistent practices.

A. Accounting Standards (AS) – Old Framework - Applicable to SMEs and non-corporate entities.
Total of 29 standards issued by ICAI.

B. Indian Accounting Standards (Ind AS) – IFRS Converged - Applicable to listed and large unlisted
companies (as per MCA roadmap). Total 41 standards.

Need for Accounting Standards

a. Uniformity in Accounting Practices- Different firms may follow different methods (e.g.,
depreciation, inventory valuation). Standards bring consistency and comparability.

b. Credibility of Financial Statements - Users of financial statements (investors, banks) rely on

standardized financial data to make decisions.

c. Fair Presentation - Ensures true and fair view of the financial position and performance of a
company.
d. Legal Compliance - Companies Act and Income Tax laws require certain disclosures, which are
guided by accounting standards.

e. Global Comparability - Especially important for multinational companies and foreign investors
who require internationally consistent reports.

AS-9 (REVENUE RECOGNITION)

Accounting Standard 9 (AS-9) deals with the recognition of revenue in the statement of
profit and loss. Revenue is the gross inflow of cash, receivables, or other considerations
arising from the ordinary activities of an enterprise such as sales of goods, rendering of
services, and the use of enterprise resources by others yielding royalties, interest and
dividend.
AS-9 applies to:
 Sale of goods
 Rendering of services
 Revenue from interest, royalties, and dividends
Not applicable to: Lease income (AS-19), Government grants (AS-12), Insurance contracts,
Construction contracts (AS-7)

Revenue is recognized when the following conditions are satisfied:

A. Sale of Goods
Revenue is recognized when:
1. Ownership is transferred to the buyer.
2. Significant risks and rewards of ownership are transferred.
3. No significant uncertainty of payment or amount exists.

B. Rendering of Services
Revenue is recognized:
 Completed service contract method - Revenue is recognized only when the service
is completed in full. A consultant provides a one-time legal opinion. Revenue is
recognized after delivery of the opinion, not when payment is received.

 Proportionate completion method - Revenue is recognized in proportion to the

degree of completion of the service. A consulting firm provides services over 6
months and invoices monthly. Revenue is recognized monthly as work is completed.

C. Interest, Royalties, and Dividends

 Interest – On time basis, using the rate of interest.
If ₹1,00,000 is invested at 10% p.a. on 1st January, then by 31st March (3 months),
₹2,500 (i.e., ₹1,00,000 × 10% × 3/12) is recognized as revenue.

 Royalties – On accrual basis as per agreement (when benefit occurs). If royalties are
earned based on number of units sold by a licensee, and 10,000 units were sold in
March, the royalty revenue is recognized for March.

 Dividends – When right to receive is established (typically when declared). If a

company declares a dividend on 20th June, even if the payment is made later, the
revenue is recognized on 20th June.

Sl.
Special Case / Situation Revenue Recognition Treatment
No.

Revenue not recognized until ownership and risk are

1️⃣ Sale with deferred delivery
transferred to the buyer.

Full revenue recognized at the time of sale; provision

2️⃣ Instalment sales
made for doubtful debts if collection is uncertain.

Right of return (sale with Revenue recognized net of expected returns if returns can
3️⃣
return clause) be estimated reliably.

Revenue not recognized if significant uncertainty exists

4️⃣ Uncertainty in collection
about ultimate collection.
Sl.
Special Case / Situation Revenue Recognition Treatment
No.

- No revenue if goods/services exchanged are similar.-

5️⃣ Barter transactions
Revenue recognized at fair value if dissimilar.

Multiple-element Revenue split and recognized separately for each

6️⃣
contracts component, if identifiable.

Revenue split into components (initial fees, royalties) and

7️⃣ Franchise arrangements
recognized as per contract terms.

8️⃣ Subscription income Recognized over time as the service is delivered.

Service contracts with Use completed service contract method — recognize

9️⃣
uncertain outcome revenue only when service is fully performed.

Advance payments (sale or Not recognized as revenue until goods delivered/services

🔟
service) rendered.

INCOME
"Income is the increase in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from owners."

Type Description Example

Revenue Sales, services, rent

Arises from regular operating activities
Income received

Interest, dividends, profit

Other Income Arises from non-operating or incidental activities
on sale

Arise from events outside normal operations,

Gains Gain on sale of asset
often one-time

(Rules of recognition of income) – above

Importance:
 Forms the basis of profit measurement
  Helps in performance evaluation
 Crucial for income tax assessment
 Essential for stakeholders’ decision-making
 Affects equity and retained earnings

PROFIT or LOSS
Profit refers to the excess of revenue over expenses during a specific accounting period. Conversely,
Loss arises when expenses exceed revenues.

Type Meaning Example

Gross Profit Revenue from sales minus cost of goods sold (COGS) Sales – COGS

Operating Profit Gross profit minus operating expenses Gross Profit – Operating Costs

Net Profit Final profit after deducting all expenses, taxes, and interest Total Revenue – Total Expenses

Retained Profit Profit retained in business after dividends Net Profit – Dividends

Importance of Profit and Loss

 Performance Indicator: Measures financial health and success of operations.

 Investment Decisions: Investors use profit data to assess viability.

 Creditworthiness: Lenders examine profitability before granting loans.

 Policy Framing: Management uses it for future planning and control.

 Dividend Decisions: Determines amount of profit distributable to shareholders.

Profit and Loss Account

The Profit and Loss Account (also called the Income Statement) is prepared to show:

 All incomes (credit side)

 All expenses (debit side)

It summarizes operations for a specific period, leading to either Net Profit or Net Loss.

EXPENSES
“Expenses are decreases in economic benefits during the accounting period in the form of outflows
or depletions of assets or incurrences of liabilities that result in decreases in equity, other than
those relating to distributions to equity participants.”

Type Description Examples

Raw materials, wages, factory

Direct Expenses Incurred directly in production or purchase
rent

Salaries, rent, electricity,

Indirect Expenses Not directly traceable to production
advertising

Result in asset creation; provide benefit over Purchase of machinery,

Capital Expenses
several years building

Incurred for daily operations; benefit only in Repairs, insurance, telephone

Revenue Expenses
current period bills

Selling, distribution, admin

Operating Expenses Related to the core business operations
expenses

Non-operating
Arise from incidental or financial activities Interest paid, loss on asset sale
Expenses

According to the Matching Principle, expenses should be recognized in the same period in which the
related revenue is recognized. This ensures fair presentation of financial performance.

Importance:

Helps in determining true profit or loss

Ensures accurate financial statements

Assists in cost control and budgeting

Aids in pricing decisions

Helps investors and creditors assess financial health

UNIT – 3
CONCEPT OF CAPITAL and REVENUE in Accounting
In accounting, transactions are broadly classified into Capital and Revenue based on their nature and
purpose. This classification helps in the accurate preparation of financial statements, particularly in
distinguishing between items that affect the Balance Sheet and those that affect the Profit & Loss
Account.

Capital Transactions

Capital transactions are those that relate to the financial structure of the business and involve long-
term impact. They are non-recurring in nature and usually impact the Balance Sheet items.

 Capital Expenditure (buying machinery, buildings)

 Capital Receipts (sale of fixed assets, share capital)

 Capital Profits (gain from asset sale)

 Capital Losses (loss on disposal of assets)

Revenue Transactions

Revenue transactions are related to the day-to-day operations of the business. These are recurring
in nature and impact the profit or loss of the accounting period.

 Revenue Expenditure (rent, salaries, repairs)

 Revenue Receipts (sales, service income)

 Revenue Profits (profit from regular sales)

 Revenue Losses (loss from operations)

Importance of Distinction (pg. 133)

 Helps in correct profit calculation

 Correct assessment of financial position

 Tax assessment

 For depreciation accounting

 Assists in accurate financial reporting

CAPITAL EXPENDITURE
Capital expenditure refers to expenditure incurred to acquire or enhance long-term assets such as
land, buildings, machinery, or vehicles, which are used in the business for more than one accounting
period.

These expenses are not charged immediately to the profit and loss account; instead, they are
capitalized and spread over several years through depreciation.

It includes expenditure incurred on- (pg.113)

1. Acquiring long term asset and putting it to use (not for resale)
2. Improving the present condition of an asset or putting an old asset in working
condition.
3. To increase earing capacity of business.
4. Preliminary expenses before commencement of business.

REVENUE EXPENDITURE

Revenue Expenditure refers to the recurring expenses incurred in the normal course of business
operations, which are necessary for generating revenue and maintaining day-to-day functioning.
These expenses are short-term in nature, and their benefits are usually consumed within the same
accounting period.

They are charged as an expense against profit in the year they are incurred or recognized.

Includes expenditure on- (pg. 114)

1. Day to day conduct of business.

2. On consumable items
3. On goods and services for resale either in original or improved form.
4. Maintaining fixed assets in working condition.

DEFERRED REVENUE EXPENDITURE

Deferred Revenue Expenditure refers to a type of revenue expense that is incurred in one accounting
period but whose benefit extends over multiple future periods.

Although it is revenue in nature, it is not fully charged to the profit and loss account in the year of
incurrence. Instead, it is spread over several years.

It includes-

 Promotional Expenditure - Large advertising or sales promotion expenses.

 Preliminary Expenses - Costs incurred during the formation of a company. Includes legal
fees, registration fees, stamp duty, etc.
 Development Expenditure - Cost incurred for expanding into new areas, launching new
products, etc.
 Research & Training Expenses

Accounting Treatment
  Under Traditional Accounting (AS Framework):

1. Initially recorded as an asset (under "Other Assets" or "Miscellaneous Expenditure").

2. Amortized over the period during which benefits are expected.

3. The written-off portion is shown in the Profit & Loss Account.

4. The balance is carried forward as an asset.

 Under Ind AS (Modern Accounting Standards):

Ind AS does not recognize deferred revenue expenditure unless it meets the criteria of an
asset under Ind AS 38. Most deferred revenue expenses are now fully charged to P&L unless
they qualify as an intangible asset.

REVENUE EXPENDITURE TREATED AS CAPITAL (pg. 115)

1. Legal expenses incurred to realise unpaid amount in connection to fixed assets.

2. Raw materials and stores purchased for construction of fixed assets.
3. Repair and renewals on an old asset to bring it to working condition for the first time.
4. Wages and salaries for manufacturing, installing, expanding fixed assets.
5. Railway and freight charges in connection to fixed assets.
6. Brokerage and stamp duty in connection to fixed assets.
7. Interest on subscribed capital by a public utility service company,
8. Preliminary expenses.
9. Developmental expenditure by public utility institutions.
10. Advertisement expenses in initial stages.

CAPITAL EXPENDITURE TREATED AS REVENUE

1. If a fixed asset is purchased at a very low cost (e.g., calculators, staplers), and though it is
capital in nature, it may be treated as a revenue expense due to immateriality.
2. If a capital asset is acquired only for a short-term project or demonstration, and not for
long-term use, its cost is treated as a revenue expense.
3. Heavy advertising and promotional expenditure during product launch may be capital in
impact, but is treated as revenue expense since it does not create any identifiable tangible
asset.
4. Expenses on research and development are treated as revenue expenses unless they meet
the conditions for recognition of an intangible asset as per Ind AS 38.
5. If expenditure is made to maintain or restore an asset to normal working condition, without
enhancing its life, efficiency, or capacity, it is treated as revenue.
6. Training cost for new equipment or system - even though such costs relate to a new asset,
they do not directly increase the asset's value, so are treated as revenue expenses.
7. Preliminary Expenses Written Off - While these are incurred at the formation of a
company and technically capital, they written off over years, effectively treated like
revenue expenditure
 Reason for
S.
Situation Treating as Example
No.
Revenue

Immaterial cost;
₹500 calculator
1 Low-Value Asset Purchase does not affect
written off
asset base

Short-term Generator for 10-

2 Temporary Use of Asset
benefit only day exhibition

No tangible asset ₹10 lakh ad

3 Advertising / Brand Launch
created campaign

Doesn't meet
recognition ₹2 lakh spent on
4 Research & Development
criteria for formula research
intangible assets

Does not
₹50,000 on ERP
5 Training on New Equipment enhance asset’s
training
value directly

To make asset
₹1 lakh on
Initial Repairs After Asset operational, not
6 repairing second-
Purchase to enhance
hand truck
efficiency

Treated as ₹5 lakh
Preliminary/Incorporation
7 deferred revenue incorporation
Expenses
and amortized cost

Machine
Not part of a
Installation for Short-Term installed
8 long-term fixed
Use temporarily in
asset
exhibition

Does not
Routine Maintenance or Repainting office
9 increase asset’s
Painting after acquisition
value or life

No lasting
Obsolete/Short-Lived Asset benefit; Asset scrapped
10
Written Off immediate within months
expense

CAPITAL AND REVENUE RECEIPTS

In accounting, receipts refer to cash inflows or receivables by a business. These may be: Recurring or
non-recurring, From core operations or external source.

Basis Capital Receipts Revenue Receipts

Nature Non-recurring, irregular Recurring, regular

Source From non-operational activities From main business activities

Effect on P&L Not recorded in Profit & Loss Account Credited to Profit & Loss Account

Impact on Position Affects capital structure (assets/liabilities) Affects profitability

Examples Loan received, share capital, asset sale Sales, commission, rent received

Shown In Balance Sheet Profit & Loss Account credit side

CAPITAL AND REVENUE PROFITS

Profit refers to the excess of income over expenditure.

Basis Capital Profit Revenue Profit

Nature Non-recurring Recurring and operational
Sale of fixed assets, share premium, Business operations like sales,
Source
etc. services
Recorded in Profit & Loss
Treatment Transferred to capital reserve
Account
Used for capital expenditure or Used for dividend, reserves,
Purpose of Use
bonus issue reinvestment
Usually not taxable (with
Taxability Taxable as business income
exceptions)
Financial
Shown in Balance Sheet (Reserves) Shown in Profit & Loss Account
Statement

CAPITAL AND REVENUE LOSSES

 Basis Capital Loss Revenue Loss
Non-recurring, not from normal
Nature Recurring, operational
operations
Daily operations, stock sale,
Source Sale of capital assets, investments, etc.
bad debts
Not shown in P&L; adjusted in balance Shown in Profit & Loss
Treatment
sheet Account
Effect on Profit No direct effect on net operating profit Directly reduces net profit
Not always deductible; depends on Fully deductible for business
Tax Deduction
capital gains income
Financial Reported under capital
Reported in net income or loss
Reporting reserve/adjustments

METHODS FOR MEASUREMENT OF INCOME

1. Transaction-Based Method (Accounting income)

Income is measured as the difference between revenues earned and expenses incurred
during a specific period, based on actual transactions recorded at historical cost.
Income = Revenues – Expenses
Features:
 Follows the accrual basis of accounting
 Based on recorded historical costs
 Ignores unrealized gains or changes in market value
Limitations:
 Ignores inflation or changes in asset value
 Not suitable for economic decision-making in volatile price environments

2. Current Cost Method (Replacement Cost Accounting)

Income is measured by comparing revenues with the current cost of replacing the goods or
services used to generate them, not their historical cost. Provides more realistic profitability
by accounting for price level changes.
Benefits:
 More relevant during periods of high inflation
 Reflects the true economic cost of operations
Limitations:
 Valuation of current cost can be subjective
 Complex to implement consistently

3. Economic Income Method

Economic income is the change in the economic value of a firm’s net assets during a period,
plus any consumption/dividends/withdrawals made during the period.
Economic Income = Ending Net Worth – Beginning Net Worth + Consumption
Features:
 Forward-looking (considers future earnings potential)
 Includes unrealized gains/losses.
Limitations:
 Based on estimates of future cash flows and fair values
 Difficult to verify objectively
 Not widely used for financial reporting

4. Capital Maintenance Approach

This approach defines income as the amount that can be distributed to owners while
maintaining the capital of the business intact.
a) Financial Capital Maintenance:
 Income is earned only if financial capital (money invested) remains intact.
 Based on historical cost or current cost.
b) Physical Capital Maintenance:
 Income is earned only if the productive capacity (physical capital) is maintained.
 Accounts for replacement costs and inflation.
COMPREHENSIVE INCOME (EXTRAORDINARY, PRIOR PERIOD ITEMS)
Comprehensive income refers to the total change in a company’s net assets during a period from all
sources. It includes both net profit or loss and other non-owner-related gains or losses.

Comprehensive income includes:

1. Net Profit or Loss (from income statement)

2. Other Comprehensive Income (OCI), which includes:

o Unrealized gains/losses on revaluation of assets

o Foreign currency translation adjustments
o Actuarial gains/losses on defined benefit plans
o Gains/losses on cash flow hedges
o Fair value changes in financial instruments

Prior period items refer to income or expenses that arise in the current period as a result of errors
or omissions in the preparation of the financial statements of one or more prior periods.

 Mathematical mistakes
 Mistakes in applying accounting policies
 Oversights or misinterpretation of facts
 Fraud or misstatements

Accounting Treatment (As per AS-5 / Ind AS-8):

 Disclosed separately in the statement of profit and loss
 Shown below the line of current operations
 Should not be included in the current year’s operating results
 Adjustments made retrospectively

Extraordinary items are gains or losses that arise from events or transactions that are: Clearly
distinct from the ordinary activities of the enterprise, Not expected to recur frequently or regularly

 Natural disasters (earthquakes, floods)

 Expropriation of assets
 Unexpected nationalization of company operations

Disclosure:

 Should be disclosed separately in the Profit and Loss Account

 Description and impact on financial results must be clearly stated

UNIT-4
INFLATION ACCOUNTING
Inflation accounting refers to the method of accounting that adjusts financial statements to
reflect the effects of changes in the price level or inflation. Under traditional accounting,
assets, liabilities, revenues, and expenses are recorded at their historical cost, which may
become outdated in times of rising prices. Inflation accounting aims to present a realistic
and fair view of the financial position and performance of a business by factoring in current
price levels.

I. NEED (pg. 144)

Inflation accounting arises from the limitations of traditional accounting, which records
transactions at historical cost. In periods of inflation, this practice can distort the real
financial position and performance of a business.
1. Overstated profits
2. Understatement of Assets
3. Inadequate funds for replacement
4. Capital not intact
5. Misleading insolvency and profitability ratios.

II. METHODS

1. Current Purchasing Power Method (CPP)

The CPP method adjusts all items in the financial statements using a general price index (like
CPI – Consumer Price Index) to reflect the purchasing power of money at the end of the
period.
 Focuses on general price level changes, not specific asset prices.
 Monetary items (like cash, debtors, creditors) are not adjusted.
 Non-monetary items (like fixed assets, inventory, equity) are restated based on a
price index.

Steps Involved:
i. Determine a suitable general price index (e.g., CPI).
ii. Adjust historical figures using:
Adjusted Value = Historical Cost × (Price Index at Purchase Date/Current Price Index)

iii. Prepare restated financial statements using adjusted figures.

A machine bought in 2010 for ₹1,00,000.
Price Index in 2010 = 100
Price Index now = 250
Adjusted value = ₹1,00,000 × (250 / 100) = ₹2,50,000

Advantages:
 Simple to apply when general price indices are available.
 Helps in maintaining capital in real terms.

Limitations:
 Does not consider specific price changes for individual assets.
 May be misleading for firms operating in industries with unique price dynamics.

2. Replacement Cost Accounting Method (RCA)

This method uses Individual Price Index Number directly related to one particular asset and
not general price index level.

3. Current Cost Accounting Method (CCA)

The CCA method replaces historical costs with current replacement costs of assets and
expenses. It reflects the actual cost of replacing assets at current market prices.
 Adjusts each asset individually based on current market/replacement value.
 More accurate reflection of economic value and operating capacity.
 Adjusts depreciation and cost of goods sold using current costs.

Steps Involved:
i. Revalue fixed assets and inventory at current replacement cost.
ii. Calculate depreciation based on revalued figures.
iii. Restate cost of goods sold and operating expenses at current cost.
iv. Determine real operating profit by subtracting adjusted expenses from
current revenue.
If the cost to replace a building today is ₹50 lakh (originally bought for ₹20 lakh), it is
recorded at ₹50 lakh under CCA. Depreciation is charged on ₹50 lakh.

Advantages:
 Reflects the true economic cost of using assets.

 Useful for capital-intensive industries and high-inflation environments.
Limitations:
 Requires valuation experts to assess replacement cost.
 More complex and costly to implement than CPP.

III. ADVANTAGES
1. More Accurate Profit Measurement
Adjusts for inflation in costs and revenues. Prevents overstatement of profits due to
historical cost depreciation and cost of goods sold. Leads to better profit planning and tax
calculations.

2. Fair Asset Valuation

Assets are revalued based on current prices or replacement costs. Reflects the true worth of
assets on the balance sheet.

3. Improved Decision Making

Provides more realistic data to management for making financial, investment, and pricing
decisions. Helps in comparing performance across different time periods.

4. Prevents Capital Erosion

Protects capital by maintaining real capital rather than nominal capital. Ensures profits are
not distributed until true capital maintenance is achieved.

5. Realistic Depreciation Charges

Depreciation is calculated based on current value of assets.

6. Better Comparability
Inflation-adjusted figures improve comparability between companies and across different
time periods. Especially useful for multi-year trend analysis.

7. Transparent Reporting
Ensures stakeholders (investors, creditors, tax authorities) receive a true and fair view of
financial health
.
8. Rational Taxation
Avoids taxation on illusory profits by showing correct income.

9. Reflects Real Cost of Production

Inventory and COGS are valued at current prices, giving a better view of production
efficiency and pricing strategies.
IV. LIMITATIONS
 1. Complex and Time-Consuming
Adjusting financial statements for inflation requires detailed data collection, index tracking,
and complex calculations. Especially under Current Cost Accounting (CCA), determining
replacement costs for each asset is a tedious task.

2. Subjectivity in Valuation
Estimating the current replacement cost of assets (in CCA) often involves judgment and
estimation, which can lead to inconsistencies and errors.

3. Lack of Universally Accepted Standards

Inflation accounting methods are not uniformly accepted across countries and accounting
bodies. Creates inconsistency in reporting and difficulty in comparing international financial
statements.

4. Non-Availability of Suitable Indices

General Price Indices (used in Current Purchasing Power method) may not always reflect the
specific inflation faced by a business or industry.

5. Difficulties in Interpretation
Adjusted financial statements may be difficult to understand for stakeholders unfamiliar
with inflation accounting.

6. Costly Implementation
Requires expert assistance, frequent revaluation, and system changes. Small and medium
enterprises (SMEs) may find it financially burdensome to adopt.

7. Resistance from Stakeholders

Investors and tax authorities may be resistant to changes in reported profits, especially when
inflation accounting results in lower profits.

8. Not Suitable in Stable Economies

In countries with stable price levels, inflation accounting may not provide significant
advantages.

9. Double Accounting Records

Some firms may need to maintain both historical and inflation-adjusted records, adding to
administrative burden.

10. Limited Legal Recognition

Inflation-adjusted profits are not always accepted by tax authorities or for dividend
declaration in many jurisdictions.

SEGMENT REPORTING
Segment Reporting refers to the disclosure of financial and other relevant information by different
segments (parts) of a company in its financial statements. These segments are often based on
products, services, geographical areas, or business lines. It helps stakeholders analyse the
performance, risks, and returns of individual components of a diversified enterprise, which may not
be visible in consolidated figures alone.

A. Objectives of Segment Reporting

 Provide detailed information about different areas of business.

 Enhance transparency in financial statements.
 Assist users in evaluating the performance, risk, and growth of each segment.
 Help in decision-making for investors, regulators, and management.
 Comply with regulatory requirements (like AS-17, Ind AS 108, IFRS 8).

B. Types of Segments

a) Business Segment - Distinct products or services. Ex: Consumer electronics, automotive, and
insurance in a conglomerate.

b) Geographical Segment - Different regions where business operates. Ex: India, Europe, North
America.

c) Reportable Segment - A segment that meets certain threshold criteria for disclosure.

C. Criteria for Reportable Segment (AS-17)

A segment is reportable if it satisfies any one of the following:

1. Revenue Test: Segment revenue is ≥ 10% of total revenue.

2. Result Test: Segment result (profit or loss) is ≥ 10% of the combined result of all segments.

3. Asset Test: Segment assets are ≥ 10% of total assets.

D. Key Disclosures Under Segment Reporting

Particulars Description

Segment Revenue Revenue from external and inter-segment sales.

Segment Result Profit or loss before interest and tax (EBIT).

Segment Assets Assets used in business of that segment.

Segment Liabilities Liabilities attributable to the segment.

Capital Expenditure Amount spent on acquiring fixed assets.

Depreciation and Amortization Expense related to segment’s assets.

Particulars Description

Inter-segment Transfers Revenue/expense between segments.

E. Benefits of Segment Reporting

1. Enhanced transparency and accountability.

2. Helps investors identify profitable areas.
3. Aids management in internal analysis and decision-making.
4. Assists in resource allocation.
5. Improves comparability with other companies and industries.
6. Discloses risks and opportunities faced by different segments.

F. Challenges in Segment Reporting

 Allocation of common costs across segments can be complex and arbitrary.

 May lead to competitive disadvantage if sensitive segment data is disclosed.
 Increased reporting burden for diversified companies.
 Subjectivity in identifying segments and allocating assets/liabilities.

SOCIAL ACCOUNTING
Social Accounting is a process by which a business or organization measures, records, and
reports its contributions to society beyond financial transactions. It involves tracking the
social and environmental impacts of a company’s activities, including its effects on
stakeholders, the community, the environment, and the economy.

Objectives of Social Accounting

 To disclose the social performance of a business.
 To measure and report the social costs and benefits of business operations.
 To improve accountability towards society.
 To aid decision-making by stakeholders, including consumers, government, and
investors.
 To support ethical and sustainable business practices.
 To track compliance with CSR (Corporate Social Responsibility) obligations.

Nature of Social Accounting

 Voluntary in nature (except where CSR reporting is mandated).
  Focuses on qualitative and quantitative aspects.
 Goes beyond shareholders to include stakeholders such as employees, local
communities, environment, and customers.
 Provides a broader perspective than traditional accounting, which focuses only on
profits.

Scope of Social Accounting

Social accounting covers a wide range of activities and impacts, including:

Area Examples of Social Impact
Environmental impact Pollution, waste management, resource use, carbon emissions
Employee welfare Health and safety, wages, training, diversity
Consumer protection Product safety, fair pricing, quality
Community development Infrastructure, education, health programs
Human rights Ethical labour practices, child labour prevention
Corporate governance Ethical behaviour, transparency

Need and Importance of Social Accounting

1. Transparency: Provides a complete picture of the organization’s impact.

2. Stakeholder Trust: Builds goodwill and trust among society.
3. Compliance: Helps fulfil CSR and regulatory obligations.
4. Improved Decision-Making: Informs investors and management about ethical
practices.
5. Long-Term Sustainability: Encourages sustainable use of resources.
6. Reputation Management: Enhances corporate image and reduces reputational risks.

Methods of Social Accounting

Method Description
Cost-Benefit Analysis Measures the social cost and benefit in monetary terms.
Social Indicator Uses qualitative and quantitative indicators (e.g., employee
Approach turnover, CO₂ levels).
Integral Approach Combines social, financial, and environmental performance.
Net Contribution
Compares total social contribution against social costs.
Approach
Social Audit Independent assessment of social performance.
Steps in Social Accounting Process

1. Identify social objectives (e.g., reduce emissions, support education).

2. Measure social costs and benefits (monetary and non-monetary).
3. Compare performance with targets.
4. Prepare social accounting reports.
5. Conduct internal or external social audit.
6. Disclose reports to stakeholders.

Advantages of Social Accounting

 Promotes corporate transparency and accountability.

 Enhances stakeholder relationships.
 Provides a competitive edge in socially responsible investing.
 Assists in evaluating long-term performance.
 Helps in ethical governance and sustainability reporting.

Limitations of Social Accounting

 Lack of standardized framework or uniform reporting format.

 Difficulty in quantifying social impact.
 Often voluntary, so not all companies report.
 Can be used as a tool for image management rather than actual accountability.
 Costly and time-consuming to implement comprehensively.

Legal Framework in India

 Under Section 135 of the Companies Act, 2013, companies meeting certain
thresholds are required to spend at least 2% of their average net profits on CSR
activities.
 The CSR Report must be disclosed annually, thus integrating social reporting into the
legal framework.