“ Theory Base of Accounting”

- An insight into the Accounting Principles, Conceptual Framework

& Policy Documents

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!!

Generally Accepted

Accounting Principles

(GAAP)

• It is assumed that business has separate existence and its entity is different from that of its owner.

• Accounting records reflect only the activities of the business only.

1. Accounting Entity

• Value of money is assumed to be stable, irrespective of price level changes.

• Emphasizes maintenance of financial capital.

2. Stable Money Measurement

• Continuity of activity assumption.

• Justifies deferred recognition of revenue to specific time periods.

• Justifies systematic expiration of costs over future time periods.

3. Going Concern

• Span of time at the end of which Financial Statements are prepared.

• Provides timely information to users of financial statements.

• Normally of 12 months.

CONTD….

2. Accounting Period

• Enables management to compute & disburse periodic rewards(or profits) to the owners of the business at regular intervals.

• To settle the liabilities for taxation towards the State.

• Basis for valuation of non-monetary fixed assets in traditional system of accounting.

• The historical cost of fixed non-monetary assets are subjected to the process of depreciation & they are shown in the books…

CONTD……

5. Cost Principle

….at their original historical cost LESS depreciation to date.

• Non-monetary Current Assets are normally valued at lower of cost or market price.

• Revenue is considered as being realized or earned on the date when the sale process is complete and transfer of title or ownership takes place.

• Results in increase in Owner’s Equity.

Contd….

6. Revenue Recognition

• In exceptional cases, following alternatives are used for revenue recognition:-

1.CASH BASIS

2.PRODUCTION BASIS

• Refers to that portion of cost outlay (or expenditure) which is consumed in the process of obtaining revenue in an accounting period.

• Distinguished from Expenditure.

Contd…

7. Expense Recognition

• Recognised when there is a –

1.A direct identification or association with the revenue of the period;

2.An indirect association with the revenue of the period;

3.A measurable expiration of asset cost even though not associated with the production of revenue for the current period.

• Recognition of revenue and expenses by allocation to a particular period on a consistent basis –

- Accrual or mercantile basis;

- Cash basis;

- Modified Accrual basis or hybrid basis.

8. Matching or Accrual Principle

• Accounting is language of business.

• All significant material information is disclosed and financial statements are prepared in conformity with GAAP.

9.Full, Fair & Adequate Disclosure

• Full disclosure means nothing is omitted.

• Fair disclosure ensures accounting principles have been applied in a fair manner.

• And, Adequacy is a qualification which ensures that anything which influences the decision of the user must always be reported.

• Every transaction has a two-fold effect.

• This is so because for accounting, business entity is different from the its owner(s) .

10. Dual Aspect (or Duality)

• Accounting records are based on documentary evidence which can be verified objectively and substantiates the recorded event.

• Reliability is needed because most of the users of Financial Statements are external to the entity.

11. Reliability.

• Accounting should focus on material facts & resources should not be wasted in recording and analyzing immaterial and insignificant facts.

• An item is material if there is reason to believe that knowledge of it would influence the decision of the informed investor.

12. Materiality

• To eliminate personal bias and judgment, it is necessary that the procedure once adopted is consistently followed over a period of time.

• It does not mean lack of flexibility.

• Ensures, harmonisation of Accounting Practices.

13. Consistency Principle

• Anticipate no profits but provide for all possible losses by way of provision.

• It however, does not permit creation of hidden reserve by understating profits and assets or by overstating liabilities and losses.

14. Prudence Principle

Transactions and other events should be

accounted for and presented in accordance

with their substance and their financial

reality and merely with their legal form.

- Substance over form

CONCEPTUAL FRAMEWORK

OF

ACCOUNTING

?!

It deals with –

- Objectives,

- Users,

- Fundamental Assumptions,

- Elements, Qualitative characteristics etc., of Financial

Statements.

ICAI basically adapted the conceptual

framework of IASC and issued in

the year 2000, its own conceptual framework

for the preparation and presentation of

financial statements.

ACCOUNTING

POLICIES?

!

It refers to the specific Accounting Principles

and the methods of applying those principles

adopted by an enterprise in the preparation &

presentation of Financial Statements.

It is not possible to have an exhaustive

list of Accounting Policies which are

applicable across different enterprises

and countries.

The specific accounting policies are

selected by an enterprise in

conformity with GAAP and

Accounting Standards.

Any Questions?Any Questions?

THANK YOU !!!

- CA. Pankaj Dubey