SNM Accounting Principles - Unit 1 Ch II

7/31/2019 SNM Accounting Principles - Unit 1 Ch II

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Introduction Financial Accounting End Products

Balance Sheet

Profit and Loss Account

Statement of Changes in Financial Position


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Generally Accepted Accounting

Principle (GAAP) These are certain norms and standards

on which financial accounts are

prepared. Based on experience, usage, reason,

convention and necessity.

Ensures uniformity so that financialreports can be understood properly andcommunicated effectively.


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GAAP - Principles Money Measurement Concept

Expression of facts in monetary terms.

Monetary terms provide a common denominator. Different costs have different units

Labor Hours, Electricity units, RM Kgs

Fact that cannot be expressed in monetary terms

is excluded. Transactions recorded at their value at the time

they take place. No effect of changes inpurchasing power of money.


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GAAP - Principles Business Entity Concept

Business has a separate entity from its

owners.

All transactions recorded from theviewpoint of the firm and not owners.

Enables to judge performance of themanagement.


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GAAP - Principles Going Concern concept

Business will continue to operate in future

and will not cease doing business.

Value of assets historical value and notresale value.

Asset will be used in creating future outputvalues.


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GAAP - Principles The Cost Concept

Asset is shown at cost and not current

market value or current worth.

It provides objective basis of accounting.

Cost based system is more feasible.

Difficulty in estimating market value.


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GAAP - Principles The Duality concept

Financial Accounting based on double entry

system.

There are two aspects for each transaction.

Cash put into business: Rs. 100,000.

Cash = 100,000 ; Capital = 100,000Assets = Liabilities + Equity


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GAAP - Convention Conservatism

Anticipate no profit; provide for all possible

losses. Profit to be accounted only when realised

but expenses to be accounted actual as

well as anticipated.


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GAAP - Convention The Accrual concept the matching

concept

Expenses recognised in a particularaccounting period should be matched withrevenues recognised in that period.

Determine revenues for the particularaccounting period and then determineexpenses associated with it.


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GAAP - Convention The Full Disclosure concept

Honestly and sufficiently disclose information to allstakeholders Internal as well as External

Stakeholders Shareholders, Employees,Suppliers Creditors, Government, Stock Exchange,Society

The Materiality concept Attach importance to material details and ignore

insignificant details. Rounding to nearest Rs. 1000. Clubbing of small item expenditure.


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Accounting Standards Board Established in 1977 by The Institute of

Chartered Accountants of India.

To formulate the Accounting Standards.

Consists of representatives from CAG,CBDT, ICWA, ICSI, FICCI, CII, RBI,

SEBI, Financial Institutions etc.


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Accounting Standards Twenty nine definitive standards

(Pg. 1.27)

Compliance with Accounting Standardsis mandatory.

However, they do not overrideprovisions of the Law, if there is anynon- conformity with the Law.


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AS 1: Disclosure of Accounting

Policies Fundamental Accounting Assumptions

Going Concern

ConsistencyAccrual concept

Accounting Policies

Prudence Substance over form

Materiality


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Systems of Book - Keeping Single entry system

Double Entry system


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Difference between Double and

Single Entry system Single Entry

Dual aspect is notfollowed. Some

transactions may not berecorded.

Only personal A/csmaintained.

No Trial Balance. Rough P&L and B/S

Very small Businesses.

Double Entry

Dual aspect completelyfollowed.

All A/cs maintained.

Trial balance must.

Accurate P&L and B/S.

All other entities.


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Systems of Accounting Cash system of Accounting

Accounting entries made only when cash is receivedor paid.

Government system of Accounting is mostly on thissystem.

Mercantile or Accrual system of Accounting

Accounting entries are made on the basis of amountshaving become due for payment or receipt.

Example: Rent on page 1.34


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Contents of Balance Sheet Fixed Assets: Retained on long - term basis

Tangible and Intangible Fixed Assets

Intangible Assets: Reflect Rights of the firmCurrent Assets

Cash

Marketable Securities

Accounts Receivable

Notes/ Bills Receivable

Inventory


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Contents of Balance Sheet

(Contd) Liabilities

Claims of outsiders against the firm.

Current Liabilities Trade Credit

Short term Bank Credit

Tax Payable

Accrued Expenses Outstanding Wages,Salaries

Deferred Income Receipt of income inadvance


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Contents of Balance Sheet

(Contd) Long- term liabilities

Long term borrowings

Debenture, Bonds, Mortgages

Term loan

Owners Equity

Preference Shareholders Ordinary Shareholders

Paid - up Capital + Retained Earnings


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Contents of Profit and Loss

Account Profit and Loss Account

Portrays the operations over a particular period

of time. Reports results of operations in terms of

income, net profit for the year.

Presented broadly in two forms:

Usual account form

Step - form


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Contents of Profit and Loss

Account (Contd) Net Income/Profit

Revenues Expenses = Profit/Loss

Appropriation

Provision for Dividends etc.

Retained Earnings

This retained earnings is transferred toReserves and Surplus Account which isreflected in the Balance - sheet


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Assignment Test Questions Objective and Essay

type Pg. 1.35.

No Practical Problems.

Documents

SNM Accounting Principles - Unit 1 Ch II