Introduction To Accounting

INTRODUCTION The basic purpose of accounting is to provide financial information about a business organization to various parties. Accounting communicates financial information to the decision makers. Hence there should be a complete uniformity in the preparation of financial statements. If every organization follows its own principles there will be a complete confusion. In order to have consistency accounting operates within the framework of Generally Accepted Accounting Principles {GAAP}. The term GAAP is used to describe rules, guidelines which are called concepts, conventions, principles etc. This is also referred to as the theory base of accounting. Yorston, Smith and Brown define accounting principles as the body of doctrines commonly associated with the theory and procedure of accounting serving as an explanation of current practices and as guide for the selection of conventions and procedures where alternatives exist. The GAAP are the pillars on which the structure of accounting rests. If these principles are removed; the whole structure will come down.

DEFINATION “ACCOUNTING

IS

AN

ART

OF

RECORDING,

CLASSIFYING

AND

SUMMARISING IN TERMS OF MONEY, TRANSACTION AND EVENTS WHICH ARE IN PART AT LEAST, OF FINANCIAL CHARACTER AND INTERPRETING THE RESULT THEREOF.”

COMPANY PROFILE ACC Limited is India’s foremost manufacturer of cement and ready mix concrete with a countrywide network of factories and marketing offices. Established in 1936, ACC has been a pioneer and trend-setter in cement and concrete technology. ACC’s brand name is synonymous with cement and enjoys a high level of equity in the Indian market. It is among first companies in India to include commitment to environment protection as a corporate objective. ACC's operations are spread throughout the country with 14 modern cement factories, more than 30 Ready mix concrete plants, 20 sales offices, and several zonal offices. ACC's research and development facility has a unique track record of innovative research, product development and specialized consultancy services.

ACC has won

several prizes and accolades for environment friendly measures taken at its plants and mines. The company has also been felicitated for its acts of good corporate citizenship The company's various businesses are supported by a powerful, in-house research and technology backup facility-the only one of its kind in the Indian cement industry. This ensures not just consistency in product quality but also continuous improvements in products, processes, and application areas. ACC has rich experience in mining, being the largest user of limestone, and it is also one of the principal users of coal. As the largest cement producer in India, it is one of the biggest customers of the Indian Railways, and the foremost user of the road transport network services for inward and outward movement of materials and products. ACC has also extended its services overseas to the Middle East, Africa, and South America, where it has provided technical and managerial consultancy to a variety of consumers, and also helps in the operation and maintenance of cement plants abroad.

STAFFING PATTERN ACC has a large workforce of about 10,032 people, comprising experts in various disciplines assisted by a dedicated workforce of skilled persons and also a countrywide distribution network of over 9,000 dealers. ACC employees, referred to as the ACC Parivar, come from all parts of the country and belonging to a variety of ethnic, cultural and religious backgrounds. ACC employees display a strong sense of loyalty to the Company and their special stellar qualities as ‘value-adding’ human capital are well known in the industry. Salient points of the latest survey of employees: •

People are treated fairly regardless of religion and gender

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ACC is a safe place to work

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Management is competent in running business

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Employees feel good about what we do for society

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Proud to tell others I work here

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Management thinks positively

ACCOUNTING PRINCIPLES The dictionary meaning of the term principle is a fundamental truth implying uniformity of an acceptance everywhere. However, when applied to accounting, it gives different meanings in different contexts. Accounting principles is a guiding influence or an accepted rule of action or conduct. In other words accounting principles are those rules of action or conduct which are adopted by the accountants universally in recording accounting transactions.

It has been

developed over the years from experience, reason, usage and necessities. Hence they accepted accounting principles.

ACCOUNTING PRINCIPLES

ACCOUNTING CONCEPTS •

Entity concept

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Dual aspect concept

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Going concern concept

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Money measurement Concept

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Cost concept

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Accounting period

ACCOUNTING CONVENTIONS

Concept •

Accrual concept

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Realization concept

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Periodic matching Of cost and revenue Concept

ENTITY CONCEPT: For accounting purpose the business is stated as a separate entity from the proprietors. It may be sound to absurd that one can sell goods to himself, but all transactions are recorded in the books of business as per this point of view. This concept helps in keeping private affairs of the proprietor away from the business affair. Accounting entity concept enables to record transactions between business and the proprietor. It ensures that accounting records reflect only the activities of business. It separates business transactions from personal transactions of the proprietor. This concept is applicable to all forms of business organizations. Although in the eyes of law a sole trader and his business over the partners and their business are one and the same, for accounting purposes they are regarded as separate entities. It is the business with which we are concerned. DUAL ASPECT CONCEPT: This is the basic concept of accounting. As per this concept, every business transaction has a dual effect. According to Dual Aspect Concept, every transaction has two aspects. a) It increases one asset decreases other asset. b) It increases an asset and simultaneously increases liability. c) It decreases an asset, increases another asset. d) It decreases one asset, decreases a liability.

GOING CONCERN CONCEPT: Accounting standard 1 implies that the enterprise normally viewed as a going concern that is as continuing in operation for the foreseeable further. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operation. It is assumed that the business concern will continue for fairly long time, unless and until it has entered into a state of liquidation. It does not imply permanent existence but simply stability and continuity for a period sufficient to carry business plans. It is assumed that the activities will continue at least for a span of time necessary to meet its present contractual obligations. It implies that the assets are acquired for utilization and not for sale. It is as per this assumption, that the accountant does not take into account the forced sale values of asset while valuing them. Similarly, depreciation of assets is provided on basis of expected lives of the assets rather than on their market values. Since the concern is to be kept continuously alive for a long period of time, financial and accounting policies are directed towards maintaining such continuity of activity. MONEY MEASUREMENT CONCEPT: This concept basically means that everything in accounting is recorded in terms of money. It means that every event which can be expressed in terms of money can be recorded in the books of accounts. Example: Sale or purchase of goods, expenses incurred etc. Apart from these events there are many other events that take place every year. These events are death of an executive, resignation of an employee etc. these events affect the business materially but cannot be expressed in terms of money. Therefore we can not record these events in the books of accounts. ACC Company believes that Though our balance sheet’s model of what balance sheets should be; Typed and ruled with great precision in a type that all can see; in a type that all can see;

Though the grouping of the assets is commendable and clear; And details which are given more than usually appear; Though investments have been valued at the sale price of the day; And the auditor’s certificate shows everything O.K.; One asset is omitted – and its worth They want to know; That asset is value Of the men, who run the show? Thus we can say that ACC considers human resource as a valuable asset but it cannot be expressed in terms of money. Thus to follow accounting standards do not calculate it in the books of account. COST CONCEPT: This concept does not recognize the realisable value, the replacement value or the real worth of an asset. Thus, as per cost concept. a) An asset is ordinarily recorded at the price paid to acquire it i.e. at its cost, and b) This cost is the basis for all subsequent accounting for the asset. The cost concept does not mean that the asset will always be shown at the cost. It only means that cost becomes the basis for all subsequent accounting for the asset. Thus the assets recorded at cost at the time of purchase may systematically be reduced by the process of depreciation. These assets ultimately disappear from the Balance Sheet when they have been fully depreciated [and sold as scrap]. The cost concept also implies that if nothing has been paid to acquire an asset, it cannot be shown as an asset in the books of accounts. Cost concept brings objectivity in the preparation and presentation of financial statements. It implies that the figures shown in the accounting records should be based on objective evidence and not on subjective views of a person.

ACCRUAL CONCEPT: The accrual system is a method whereby revenue and expense are identified with specific periods of time like a month, half a year or a year. It implies recording of revenues and expenses of particular accounting period whether they are received paid in cash or not under cash system of accounting the revenues and expenses are recorded only if they are actually received paid in case irrespective of the accounting period to which they belong. But under accrual method, the revenues and expenses relating to that particular accounting period only are considered. The accountant records revenues as they are earned and expenses as they are incurred not necessary when case changes hands. Under this concept, to a specific accounting period. From this concept of accounting, one chief problem arises viz, the segregation of ‘capital ’and ‘revenue’ items. Any increase in the owners Equity resulting from business operations ‘revenue’ and any decrease is called ‘expense’. Therefore, excess of revenues over expenses is called ‘income’ and if expenses exceed revenues it is called ‘lost’. Expenses and revenues related to period may be paid or unpaid. ACCOUNTING PERIOD CONCEPT: The only way to know whether the business has operated successfully is to close down its doors, sell all its assets, pay the liabilities and returns any leftover cash to the owners. Obviously, it is not practical for accountants to measure business income in this manner. Instead of this business need periodic report on their progress. Accountants slice time into small segments and prepare financial statements for specific periods. Accounting period is the spam of time at the end of which financial statements are prepared to throw light on the results of business during relevant period. An accounting period is the interval of time at the end of which the Income Statement and Balance Sheet are prepared to know the results and resources of business. Although shorter periods are frequently adopted for purpose of comparative studies, the normal accounting period is twelve months. This is because life of business is considered to be indefinite, the measurement of income and study of financial position of business after a long time would not help in taking appropriate steps and also distribution of income to proprietor.

The splitting of life of business in small periods is due to various reasons: a) To compute and disburse periodic rewards to owners at regular intervals. b) To comply with requirements under laws applicable to the organization. c) To settle liabilities towards the state. A business organization can make its accounts every day by pressing few keys on computer. Companies prepare financial statements for interim period less than one year. Managers want financial statements frequently for decision making. REALISATION CONCEPT: According to this concept profit should be accounted for only when it is actually realized. Revenue is recognized only when sale is effected or the services are rendered. Sale is considered to be made when the property in goods passes to buyer and he is legally liable to pay. However to recognize the sale receipt is not essential. Even credit sale is result in realization as it creates a definite asset called ‘Account Receivable’. However there are certain exceptions to the concept: contract accounts, hire purchases etc. Similarly incomes like commission, interest, rent etc. are shown in P&L account on accrual basis though may be not realized in cash on date of preparing. Revenue is recognize at the time of production when product can be mandated easily at an objectively determined price. In the case of long term contracts the contractor may elect to take up revenue as ended on the basis of percentage of work completed during particular period. PERIODIC MATCHING OF COST AND REVENUE CONCEPT: This concept is based on the accounting period concept or Accrual concept. Making profit is the most important objective that keeps the proprietor engaged in business activities. That is why most of accountants time is spent in evolving techniques for measuring the profitability of the concern. To ascertain the profit made during the period, it is necessary to match ‘revenues’ of the period with the ‘expenses’ of that period. Income gained by the business during the period can be measured only when revenue earned during period earned is compared with the expenses incurred to earn that revenue. The question arises when payment made/received is irrelevant. Therefore, as per this

concept, adjustments are made for all outstanding expenses, prepaid expenses, accrued incomes, unearned incomes etc.The matching principle directs to identify all expenses incurred during accounting period, to measure the expense and match all expenses against revenue earned during that span of time. To match expenses against revenues means to subtract expenses from the revenues in order to compute net income or net loss. Match expenses against revenue earned during the period. REVENUE – EXPENSE = NET INCOME OR REVENUE – EXPENSE = NET LOSS

ACCOUNTING CONVENTIONS Conventions are the customs or traditions guiding the preparations of accounting statements. They are adopted to make financial statements clear and meaningful. They represent usage or methods generally accepted and customarily used. These are statements or rules of practice employed or followed with common consent. These exist in the cases where there are different alternatives, which are equally logical and some of these are generally accepted having consideration of cost, time, habit or convenience. Compilations of such conventions take the form of Generally Accepted Accounting Practices or Procedures. Some areas of convention relate to methods of depreciation, stock valuation, method of accounting etc. CONVENTION OF MATERIALITY: The accountant should attach importance to material details and ignore insignificant details. If this is not done accounts will be overburdened with minute details. As per the American Accounting Association, an item should be regarded as material, if there is reason to believe that knowledge of it would influence the decision of informed investor. Therefore, keeping the convention of materiality in view, unimportant items are either left out or merged with other items. Some items are shown as footnotes like: contingent liabilities, market value of investments etc. The decision to regard any information as material should be taken objectively.

However, any item may be material for one purpose but immaterial for another, material for one concern but immaterial for another or material one year but immaterial for next year. Practical considerations assume more importance than theoretically correct way of recording information. CONVENTION OF CONSISTENCY: The comparison of one accounting period with the other is possible only when the convention of consistency is followed. It means accounting from one accounting period to another should be on the same basis. For example: A company may adopt a straight line method, written down value method, or any other method of providing depreciation on fixed assets. But is expected that the company follows a particular method of depreciation consistently. Similarly, if stock is valued at cost or at market price whichever is less, this principle should be followed every year. Any change from one method to another would lead to inconsistency. However, consistency does not mean non flexibility.

It should permit introduction of improved techniques of accounting.

Consistency also means that different businesses are using the same kind of accounting principles and materials in maintenance of accounts and preparation of financial statements. This is ensured by GAAP. CONVENTION OF CONSERVATISM: It refers to the policy of “Playing safe”. As per the convention all prospective losses are taken into consideration but not all prospective profits. In other words “anticipate no profit but provide for all possible losses”. However, this convention is being criticized on the ground that it goes not only against the convention of full disclosure but also against the concept of matching costs and revenues. It encourages creation of secret reserves by making excess provision for depreciation, bad and doubtful debts etc. some degree of conservatism is inevitable where objective data is not available. Following are some examples of application of conservatism: 1. Making provision for doubtful debts and discount on debtors

2. Not providing for discount on creditors 3. Valuing stock in trade at cost or market price whichever is less In the case of uncertainty it should be the philosophy of life to have conservatism. Conservatism does not justify deliberate understatement of profits. With the development of corporate form of organization conservatism is using much of its significance

ACCOUNTING STANDARDS Accounting Standards are issued by ICAI after an elaborate procedure. Accounting Standard plays a very important role in today’s competitive business environment to facilitate better comparisons between different enterprises. Non-compliance of Accounting Standard is today looked upon as a negative aspect of the financial statements and the creditability of the enterprise not complying with Accounting Standard is also doubted. Some of the Accounting Standards that ACC uses are discussed below: (AS – 1) DISCLOSURE OF ACCOUNTING POLICES: This Accounting Standard deals with the disclosure of significant accounting policies followed in preparation and presentation of financial statements. Such disclosure is necessary since accounting policies followed vary or differ from enterprise to enterprise. If the significant accounting policies of the enterprise are not disclosed, the results of the enterprise i.e., its profit or loss for the year cannot be compared easily with another enterprise’s results. This Accounting Standard also seeks to promote better understanding of financial statements by establishing an AS on the same. Disclosure of accounting policies as required by this standard would also facilitate a more meaningful comparison between financial statements of different enterprises.

As ACC has already completed 72 yrs, they have a better understanding of financial statements and also various concepts like Dual Aspect concept, depreciation accounting, etc.

(AS – 6) DEPRECIATION ACCOUNTING: Depreciation is defined as a measure of wearing out, i.e., wear-n-tear consumption or other loss of value of a depreciable asset arising from use, efflux of time or obsolescence through technology and market changes. When the cost of a depreciable asset is spread over or allocated over its useful life, it is nothing but depreciation. In a Profit and Loss account, depreciation is one of the main items of expenditure and has a significant effect in determining the profitability of an enterprise. There are two methods of calculating depreciation: 1. Straight Line Method: Straight Line Method means depreciation is calculated on the principal amount and amount of depreciation remain the same every year. 2. Written Down Method (Reducing Balance Method): Reducing Balance Method means depreciation is calculated on the written down value where the amount of depreciation is not fixed. ACC uses both the methods i.e. Straight Line Method (SLM) and Written Down Value Method (WDV). Straight Line Method (SLM) of depreciation is followed in Butibori unit and Written Down Value Method (WDV) of depreciation is followed in Kalwe, Kymore and Madukkarai when the goods are transferred to and fro. But since the company has come into existence, they are using SLM only. (AS-9)Revenue Recognition:

It is the gross inflow of cash, receivables or other considerations arising in the course of ordinary activities of the reporting entity from sale of goods, rendering services, and from the use of entities resources by other yielding interest, dividend and royalties. Exceptions: •

Realized capital gains arising out of disposal of non-current assets. Eg: Appreciation in the value of fixed assets.

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Unrealized holing gains in the value of current assets. Eg: increase in the market value of stock in trade.

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Natural increase in the herds of livestock agricultural and forest products.

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Realized/ unrealized gains arising out of fluctuations in the foreign exchange rate and translation of foreign currency financial statements.

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Realized gain from discharge of an obligation at a lesser amount than carrying of amount.

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Unrealized gains resulting from restatement of the carrying amount of the obligation.

(AS-10)ACCOUNTING FOR FIXED ASSETS: Fixed assets are held by the enterprise for use in the production of supply of goods or services. They are expected to be used for more than one accounting period. Fixed assets are not held for sale in the normal course of business. Exceptions: •

Forest, plantations etc.

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Wasting assets

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Expenditure on real estate development

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Livestock