Accounting Concepts & Principles3,4

Basic Accounting Concepts & Principles

Financial Accounting

J S Matharu

GAAP 

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

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Ground rules which define the parameters and constraints within which accounting reports are generated. Financial Accounting

J S Matharu

GAAP 

It is a combination of authoritative standards set by policy boards and the accepted ways of doing accounting

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In India, it is set by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of J S Matharu India (ICAI) Financial Accounting

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Accounting Concepts / Conventions Business Entity Business Entity  

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Going Concern  

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Separate Existence Distinct Legal Identity

Life of infinite duration Profits measured for accounting periods as a segment of infinite life

Periodicity concept 

One year period is taken up for measuring performance and appraisal of financial position

Financial Accounting

J S Matharu

Accounting Concepts / Conventions 

Money Measurement Money is common denominator  Helps in aggregation and summarisation  Human resources are assets but not recorded 

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Matching 

Matching of income with expenses of the same period Financial Accounting

J S Matharu

Accounting Concepts / Conventions 

Cost concept 

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Generally all transactions recorded at cost and not market value

Realisation 

Change in value of an asset is recorded only when business realises it

Financial Accounting

J S Matharu

Accounting Concepts / Conventions 

Conservatism Selecting the method of measurement which yields the gloomiest immediate results  Anticipate no immediate gains but provide for all possible losses  If in doubt, write it off  Lower of cost or market price 

Financial Accounting

J S Matharu

Accounting Concepts / Conventions 

Materiality 

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Trivial assets of small value may be written off as expenses

Accrual Income is recognised when the right to receive cash arises without waiting for actual receipt  Expenditure is recognised when the obligation to pay cash arises without waiting for actual Financial payment Accounting J S Matharu 

Accounting Concepts / Conventions

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Consistency

Similar treatment of transaction e.g. depreciation methods, inventory valuation etc.  Changes can be made but should be disclosed with their effects 

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Dual Aspect Every transaction has two aspects  E.g. increase in one asset & decrease in another  E.g. increase in one asset increases a Financial Accounting J S Matharu liability 

Qualitative Characteristics of Financial Statements 

Understandability  

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Structured presentation Adequate disclosure

Relevance 

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Helping to evaluate past, present and future events Helping to confirm or correct the past evaluations Financial Accounting

J S Matharu

Qualitative Characteristics of Financial Statements 

Reliability 

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Faithful representation according to GAAP Free from material error or bias Transactions to be presented according to economic substance and not legal form Prudence i.e. allowing understatement of profits under uncertainty but cannot be willful Transparency (more information like segment reporting) Financial Accounting J S Matharu

Qualitative Characteristics of Financial Statements 

Comparability   

Consistency Disclosure regarding policies Corresponding information for the preceding periods

Financial Accounting

J S Matharu

True and fair view 

Financial statements must meet the minimum threshold of all qualities mentioned before. If so, they give a true and fair view of the financial statements

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An adequate and effective internal control system helps to ensure that financial statements are free from any material error or bias Financial Accounting

J S Matharu

True and fair view 

Internal audit helps to identify weaknesses of the internal control system. It is carried out by internal staff.

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External Audit is audit of financial statements by external auditors. They provide reasonable assurance that the statements provide true and fair view of the financial position and operating results Financial Accounting

J S Matharu

Accounting Standards 

They codify acceptable accounting practices

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They suggest the rules for recognition, measurement, treatment, presentation and disclosure of accounting transactions in the financial statements of an organisation. Financial Accounting

J S Matharu

Importance of Accounting Standards in India 

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Accounting Standards (AS) in India are legislated by the Companies Act, 1956 and so have the weight of law. The balance sheet and the P & L Account should be prepared as per the AS The Directors and the Auditors should mention that the annual accounts have been prepared as per the AS

Financial Accounting

J S Matharu

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List of existing AS issued by ICAI

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 AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets

Financial Accounting

J S Matharu

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List of existing AS issued by ICAI in Foreign AS 11 The Effects of Changes

Exchange Rates (revised 2003), AS 12 Accounting for Government Grants AS 13 Accounting for Investments AS 14 Accounting for Amalgamations AS 15 (revised 2005) Employee Benefits including treatment of Retirement Benefits AS 16 Borrowing Costs AS 17 Segment Reporting AS 18 Related Party Disclosures AS 19 Leases AS 20 Earnings Per Share

Financial Accounting

J S Matharu

List of existing AS issued by ICAI

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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 Revisions to AS 2, AS 11 (revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28 and AS 29 AS 31, Financial Instruments: Presentation Financial Accounting

J S Matharu