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accounting concepts
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Accounting theory Accounting standards
What is accounting
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 financial character and interpreting the results thereof.
Nature and scope of accounting
Nature and scope of accounting was explained in 1961 by the American institute of certified public accountants (AICPA) in the following definition which is also known as traditional
Features of accounting
Identifying Measuring Recording Classifying Summarizing Significant Interpretation Communication
Real nature of accounting While accounting is many thing to many
people, real nature of accounting is essentially described as :
An intellectual discipline A profession A social force A tool of social welfare An aid or help to resource
Difference between book keeping and accounting
BOOK KEEPING
The process of identifying or recognizing the business transactions
Expression the value of transaction in money terms
Recording of business transaction in books of original entry and
Classifying or grouping business transactions into proper heading and posting them in the ledger
ACCOUNTING
Accounting is concerned not only with the recording of business transactions but also
Summarizing of classified transaction in the form of profit and loss account and balance sheet
Analyzing and interpreting the business transactions
Communicating the results to the ultimate users of accounting information.
Difference between book keeping and accounting
BOOK KEEPING
Book-keeping is the primary or first stage of maintaining the book of account
The main objectives the book-keeping is to maintain records of business transactions a systematic manner
ACCOUNTING
Accounting is secondary or second stage of maintaining the book of account in fact accounting begins where book-keeping ends.
The objectives of accounting is to find out the profit or loss and financial position of the enterprise and communicate the same to users of accounting information
Objectives of accounting
Maintaining proper records of business transactions Ascertaining or knowing the profit or loss of the
business Ascertaining the sources of the item of revenue and
expenses Ascertaining of the financial position of the business Ascertaining the cash flow position Communicating the financial information of various
groups Meeting legal requirements Controlling the performance of the business Ascertaining the position of debtors and creditors Facilitating research in business operations
Functions of accounting
Maintaining systematic records Communicating the financial results Meeting legal needs Protecting business assets Accounting assists the management
in the task Fixing responsibility
Advantages of accounting Maintenance of records rather than
memory Preparation of financial statements Comparison of result Assistance to management As legal evidence Helps in taxation matter Ascertainment of value of business Raising loans Control over assets or properties Prevention of errors and frauds Communication to external users
Limitations of accounting
No recording of non-monetary transactions
No information about the present value of business
Use of estimates or personal judgement Window dressing Unrealistic accounting information Accounting information is not natural or
unbiased Lack of consistency Disclosure of only material items Historical information only
Branches or divisions of accounting
Financial accounting Management accounting Cost accounting Tax accounting Social accounting Human resources accounting National accounting Green accounting Creative accounting Forensic accounting
Bases of accounting
Cash basis of accounting : credit transactions are not considered at all including adjustments for outstanding expenses or accrued income items
Advantages or merits
This basis is simple to use and does not require technical knowledge of accountancy
There is no scope for estimation or personal judgements because cash transactions are recorded only when actual cash is received or paid
This basis is suitable for business firms having most of the transactions in cash
Disadvantages or demerits Cash basis does not give a true and fair
view of profit or loss There is no scope of matching principle There is enough possibility of
manipulating As capital and revenue items are treated
at par there is no consistency in the profit or loss figure of different accounting periods
Cash basis of accounting is not recoganised by the companies act
Accrual basis of accounting
Under accrual basis of accounting , only revenue items are taken into account for income determination and capital expenditure are ignored. Income is recognized when it is earned and not when the money is actually received later on .
Advantages or merits
It is based on all business transactions of the year in respect of income and expense items and not simply relating to cash transactions
This basis of accounting can be used in all types of business enterprises
It is more suitable for the application of matching principle
It is more scientific and rational basis of accounting
There is a consistency in the computation of profit or loss of different years
It is recognized by the companies act
Systems of accounting
Primarily there are two systems of accounting which are used as a basis for recording day – to – day business transactions in a systematic manner they are :single entry system and double entry system
Single entry system: also known as accounts from incomplete records this system ignores the two – fold or dual aspect of recording the transactions
(a) Pure single entry, in which only personal accounts are maintained with the result that no information is available in respect of cash and bank balances, sales and purchases etc. In view of its failure to provide even the basic information regarding cash etc., this method exists only on paper and has no practical application ;
(b) Simple single entry, in which only : (1)personal accounts and (2)cash book are maintained
(c) Quasi single entry is a system in which (1)personal accounts (2) cash book (3) some subsidiary books are maintained
Systems Of Accounting
Double entry: under this system, all transactions relating to persons , goods services, cash or credit are recorded in a scientific manner taking into consideration their two –fold or double effects.
Indian system : system of book keeping which is followed throughout the country for a long time
Accounting principles
Accounting principles are uniform set of rules and guidelines for any accountant to record the business transactions and prepare the financial statements , namely : the income statement , the balance sheet and the cash flow statement.
Accounting principles must satisfy the following conditions , namely :
(1) They must be real assumptions like money concept or entity concept
(2) they must be simple and understandable(3) they must be followed consistently (4) they should be able to provide useful information
to the users.
Characteristics of generally accepted accounting principles
(1) To ensure uniformity (2) simple guidelines(3) Not final statements(4) The general acceptance of accountancy
principles depends upon how well they meet the three criteria or conditions of (a) relevance ; (b) objectivity and (c) feasibility.
Accounting standards
Accounting standards may be defined as written policy documents issued by expert accounting body or by government or its regulatory body covering such aspects as recognition of events , measurements , presentation and disclosure of accounting transactions and events in the financial statements , namely : balance sheet and profit and loss account.
Accounting standards may also be termed as codified forms of generally accepted accounting principles
Issued covered by accounting standards
The accounting standards primarily deal with the following issues :
(a) Recognition or identification of events and transactions in the financial statements
(b) Measurements of these transactions and events in terms of money
(c) Presentation of these transactions and events in the financial statements in a manner that is meaningful and understandable to the users of accounting information
(d) The disclosure requirements to unable the public in general and creditors , owners and potential or future investors in particular to know what is inside the financial statements .
Nature of accounting standards
Accounting standards prescribe a model code or yardstick or benchmark of accounting policies and practices for guidance of the accountants
Accounting standards eliminate or remove the effect of several or various accounting policies and practices so that financial statement of different firms become comparable
Accounting standards provides the most suitable accounting method to solve one or more accounting problems
Accounting standards clearly communicate to the users of the financial information the basis on which financial statements have been prepared
Accounting standards limit the scope of discretion by the accountants in presenting financial information through profit and loss account and balance sheet
Concepts and standards
CONCEPTS
Concept are in the nature of general statement like entity concept etc and do not provide solutions to specific problems
Concept may allow alternative treatments for the same items
They are unwritten general statements about the rules or guidelines for recording business transactions
They do not have legal status
STANDARDS
Accounting standards will aim at specific solution to specific issues such as inventory valuation , revenue recognition etc
Accounting standards on valuation of fixed assets and inventory valuation may limit the number of method of valuation of these items
They are written or codified statements issued by accountant specifying uniform rules
They are legally recognized by government
Classification of accounting standards
We can classify the standards into following categories:
(a) Policy standards which deals with simple concepts and conventions
(b) Standards whish deal with the format of financial statements as prescribed in companies act, insurance companies act , banking companies act and so on
(c) Standards which deals with the measurement of financial events
Significance of accounting standards
(a)Easy intra-firm and inter-firm comparability(b) Reliability and credibility(c) True and fair view of financial position(d) Improve the quality of financial reporting (e) Reduction in alternative accounting
practices (f) Efficiency of management (g) Value of accounting information (h) Useful to accountants and auditors (i) Reduction of manipulation and frauds(j) Resolving conflict of financial interest
The accounting standards issued by the institution of chartered accountants of India
AS 1 Disclosure of Accounting Policies AS 2 Valuation of Inventories AS 3 Cash Flow Statements AS 4 Contingencies and Events Occurring after the Balance Sheet Date AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes
in Accounting Policies AS 6 Depreciation Accounting AS 7 Construction Contracts (revised 2002) AS 8 Accounting for Research and Development (withdrawn pursua
the issuance of AS 26) AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003) AS 12 Accounting for Government Grants AS 13 Accounting for Investments AS 14 Accounting for Amalgamations AS 15 Accounting for Retirement Benefits in the Financial Statements of Employers
The accounting standards issued by the institution of chartered accountants of India
AS 16 Borrowing Costs AS 17 Segment Reporting AS 18 Related Party Disclosures AS 19 Leases AS 20 Earnings Per Share AS 21 Consolidated Financial Statements AS 22 Accounting for Taxes on Income AS 23 Accounting for Investments in Associates in Consolidated financial
statements AS 24 Discontinuing Operations AS 25 Interim Financial Reporting AS 26 Intangible Assets AS 27 Financial Reporting of Interests in Joint Ventures AS 28 Impairment of Assets AS 29 Provisions, Contingent Liabilities and Contingent Assets AS-30 Financial instruments: Recognition and measurement and
limited revision to AS-2, AS-11,AS-21,AS-23,AS-26.AS-27,AS-28. AS-31 Financial instrument – presentation AS-32 Financial instrument – disclosure