5 to 8_Accounting Principles, Accounting Systems, Accounting Standards.pdf

7/28/2019 5 to 8_Accounting Principles, Accounting Systems, Accounting Standards.pdf

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Accounting principles are the basic guidelines, which

ensures the correctness of the entry of business

transactions in the books of accounts.

Accounting principles are based on the combination of

the following (a) Accounting Concepts and (b)

Accounting Conventions.

Accounting Concepts + Accounting Conventions =Accounting Principles.

Accounting principles are also called as GAAP i.e.,

Generally Accepted Accounting Principles.

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Business Entity Concept

Going Concern Concept

Money Measurement Concept

Cost Concept

Duality Concept

Accounting Period Concept

Matching Concept

Realization & Recognition Concept

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Convention of Disclosure

Convention of Consistency

Convention of Conservatism

Convention of Materiality

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Accounting

Standards

Details

AS 1 Disclosure of accounting policies

AS 2 Valuation of inventories

AS 3 Cash flow statement

AS 4 Contingencies & events occurring afterthe balance sheet date

AS 5 Net profit or net loss for the period, priorperiod change in accounting

AS 6 Depreciation accounting

AS 7 Construction contracts

AS 9 Revenue recognition

AS 10 Accounting for fixed assets

AS 11 Changes in foreign exchange rates


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AccountingStandards Details

AS 12 Accounting for Government grants

AS 13 Accounting for investment

AS 14 Accounting for amalgamation

AS 15 Employee benefit

AS 16 Borrowing cost

AS 17 Segment reporting

AS 18 Related party disclosure

AS 19 Accounting for leasesAS 20 Earnings per share

AS 21 Consolidated financial statement

AS 22 Accounting for taxes & income


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Accounting

Standards

Details

AS 23 Accounting for investment in associates inconsolidated financial statements

AS 24 Discontinuing operations

AS 25 Interim financial reporting

AS 26 Accounting for intangible assets

AS 27 Financial reporting of interests in joint ventures

AS 28 Impairment of assets

AS 29 Provisions, contingent liabilities and contingentassets

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Underlying assumptions:

Under Indian GAAP, Financial statements are prepared

in accordance with the principle of conservatism which

basically means Anticipate no profits and provide for

all possible losses.

Under US GAAP conservatism is not considered, if it

leads to deliberate and consistent understatements.

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Prudence vs. Rules:

The Institute of Chartered Accountants of India (ICAI)

has been structuring Accounting Standards based on

the International Accounting Standards ( IAS) , which

employ concepts and `prudence as the principle in

contrast to the US GAAP, which are "rule oriented",detailed and complex.

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Format/ Presentation of financial statements

Under Indian GAAP, financial statements are prepared

in accordance with the presentation requirements of

Schedule VI to the Companies Act, 1956.

On the other hand , financial statements prepared as

per US GAAP are not required to be prepared under

any specific format as long as they comply with the

disclosure requirements of US GAAP.

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Cash flow statement:

Under Indian GAAP (AS 3) , inclusion of Cash Flow

statement in financial statements is mandatory only for

companies whose share are listed on recognized stock

exchanges and Certain enterprises whose turnover for theaccounting period exceeds Rs. 50 crore. Thus , unlisted

companies escape the burden of providing cash flow

statements as part of their financial statements.

On the other hand, US GAAP (SFAS 95) mandates furnishing

of cash flow statements for 3 years current year and 2

immediate preceding years irrespective of whether the

company is listed or not .

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Depreciation: Under the Indian GAAP, depreciation is provided based on

rates prescribed by the Companies Act, 1956. Higher

depreciation provision based on estimated useful life of the

assets is permitted, but must be disclosed in Notes to

Accounts.( Guidance note no 49) . Depreciation cannot be

provided at a rate lower than prescribed in any

circumstance.

Contrary to this, under the US GAAP , depreciation has to be

provided over the estimated useful life of the asset, thusmaking the Accounting more realistic and providing

sufficient funds for replacement when the asset becomes

obsolete and fully worn out.

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Capital issue expenses:

Under the US GAAP, capital issue expenses are

required to be written off when incurred against

proceeds of capital

Whereas under Indian GAAP , capital issue

expense can be amortized or written off against

reserves

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Long term Debts:

Under US GAAP , the current portion of long termdebt is classified as current liability.

Whereas under the Indian GAAP, there is no suchrequirement and hence the interest accrued onsuch long term debt in not taken as current liability.

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What is cash basis accounting? Most small businesses use the cash basis method of

accounting, which is based on real-time cash flow.

In cash method, you report an expense when it is paidand record income when it is received.

So, the day you receive a cheque, it becomes a cashreceipt. And you record your expenses when you payyour bills, not when the bill is received.

By the way, the word "cash" is not meant literallyit alsocovers payments by cheque, credit card, barter, etc.

In most cases, small businesses that primarily sell serviceswill choose the cash basis method of accountingbecause it is easier to track and account for.

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What is the accrual method of accounting? With accrual accounting, you record income when it is earned, not

when it is paid. Similarly, you record your expenses when theobligation arises, not when you pay it.

If you sell a product to a customer and he doesn't pay you for 30days, the sale is recorded in the books on the day that you made

the sale. When the money comes in the "accounts receivable" isthen turned into cash.

The same with expenses: if you incur an expense on one month butdon't pay until the next month, the expense will be recognized in themonth in which you incurred the expense. It is not necessary for cashto change-hands.

For example, say your business completes a job on December 15,but you haven't been paid for it. You recognize all expenses inrelation to that contract when they were incurred, regardless ofwhether you've been paid yet or not. Both the income andexpenses are recorded for the current tax year, even if payment isreceived and bills are paid the following February.

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5 to 8_Accounting Principles, Accounting Systems, Accounting Standards.pdf