ACCOUNTING

Introduction

         In the past, when the size of business was very small, the proprietor was the only person who needed information about the performance of the business. With the growing size of the business, other than the proprietor, the various other users of financial statements also felt the need of information. They use the information for various purposes. Accounting communicates the required information to them, that is why, accounting is popularly recognised as a "language of business."

       If each business adopts its own methods and principles to maintain account books, it would lead to a big confusion in the business world. Such financial statements will have the disadvantage of inconsistency and low acceptability, and consequently will render the account books unreliable and incomparable.. Thus, the use of different principles of accounting by the accountants of different organisations according to their own suitability will make the financial statements biased..

       Therefore, in order to make the financial statements more meaningful, acceptable, comparable, consistent, reliable and unbiased, it is necessary that a uniform system of accounting based on Generally Accepted Accounting Principles (GAAP) is followed.



      "The principles, which constitute the ground rule for financial reporting are termed as generally accepted accounting principles".                                                           Meigs, Meigs and Johnson 

       These principles are usually developed by professional accounting bodies, like the Institute of Chartered Accountants of India (ICAI), the Institute of Chartered Accountants of England and Wales (ICAEW), The American Institute of Certified Public Accountants (AICPA), etc. The application of GAAP definitely provides standards for sound accounting practices and procedures. These principles are the guidelines to make the financial statements true and fair.

       There is no agreement among the accountants as regards the basic concepts of accounting. There is no uniformity in generally accepted accounting principles (GAAP). Now, the consensus is developing on the adoption of International Financial Reporting Standards (IFRS). At present, over one hundred countries have implemented IFRS and some more countries are on their way to implement IFRS. The terms axioms, assumptions, conventions, concepts, generalisations, methods, rules, doctrines, techniques, postulates, standards and canons are used freely and inconsistently in the same sense.

Principles

      "A general law or rule, adopted or professed as a guide to action, a settled ground or basis of conduct or practice."

      This definition given by AICPA comes nearest to describing what most accountants mean by the word 'Principle'. Care should be taken to make it clear that as applied to accounting practice, the word principle does not connote a rule for which there can be no deviation. An accounting principle is not a principle in the sense that it admits of no conflict with other principles.

Essential Features of Accounting Principles

      The following are the essential features of accounting principles:

(i) Man made. Accounting principles are man made. They are not tested in a laboratory, therefore, they do not have authoritativeness, as universal principles like other natural sciences viz., Physics, Chemistry, Botany, etc.

(ii) Objectivity. It means accounting principles must be based on facts and free from personal bias or judgement of the individual who prepares the statements.

(iii) Usefulness/Relevance. Accounting principles must be relevant and useful to the person who is using financial statements. In case, accounting principles do not cater to the need of users of account books, then its acceptance as an accounting principle becomes doubtful.

(iv) Feasibility. The accounting principles should be practicable or feasible. In case, principle is sound theoretically but its application is difficult, then the principle does not have much value.

Classification of Accounting Principles

       Accounting principles are also referred to as assumptions, postulates (assumptions without proof), axioms (statements of truth), concepts, conventions, standards etc. The above terms are used interchangeably though they have different connotations. We will discuss here only assumptions, concepts and conventions because these terms have reasonable bearing on the accounting system.

Fundamental Accounting Assumptions

         Certain fundamental accounting assumptions underlie the preparation and presentation of financial statements. The Institute of Chartered Accountants of India (ICAI) and the International Accounting Standards Board (IASB) vide AS-1 and IAS-1 respectively have stated three Fundamental Accounting Assumptions:

1. Going Concern

2. Consistency

3. Accrual

      The basic purpose of accounting assumptions underlying the preparation of financial statements is not to disclose above facts. These are assumed to have been followed. If any fundamental accounting assumption is not followed, the fact should be disclosed in the financial statements.

1. Going Concern Assumption

      Accounting assumes that the business will continue to exist and carry on its operations for a very long period in the future unless there is good evidence to its contrary.

     Under this assumption:

(i) The enterprise is normally viewed as a going concern i.e. as continuing in operations for the foreseeable future.

(ii) The enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations.

(iii) To provide the true picture of profitability, the valuation of assets and liabilities should be realistic, and

(iv) The entity is not expected to liquidate in next 12 months.

Significance of Going Concern Assumption

        The significance of this assumption can be judged by comparing it with contrast possible alternative of gone concern that the business is about to be liquidated or sold. In the latter assumption, accounting would attempt to measure at all times what the business is currently worth to a business enterprise but under the going concern assumption this is not done. The business is viewed as a mechanism of creating value of its outputs (i.e. sale of goods and services).

Implications of Going Concern Assumption

This assumption of continuity has an important implication for the valuation of assets and liabilities.

(i) The assets are classified as Current Assets and Non Current Assets.

(ii) The liabilities are classified as Current Liabilities and Non Current Liabilities.

(iii) The assets of a business are shown at book value (i.e. historical cost less depreciation) and not at current realisable value.

(iv) The liabilities are shown at the value which business actually owes and not the value which would be paid in the event of its liquidation.

(v) The prepaid expenses (i.e. unused resources) are recognized as asset since the benefit will be utilized in future, when business enterprise continues.



       If there is good reason to believe that the business is going to be liquidated or sold, then the assets and liabilities would be reported at their liquidation value. Such circumstances are

not common.

2. Consistency Assumption

       There are in practice several different methods of calculation or recording of some events in the accounts. The availability of different methods in accounts may make our accounting data irrelevant and incomparable. The consistency assumption plays an important role in creating the utility of the accounting data.

The consistency assumption requires :

(i) That once a particular method of calculation or recording has been decided, the business enterprise should follow the same method for all subsequent events of the same character.

(ii) That the transactions in a given category must be treated consistently from one accounting period to the next. It refers to consistency over time.

(iii) It does not require that the treatment of different categories of transactions must be

consistent with one another.

Significance of Consistency Assumption

      This assumption is important to ensure uniformity in accounting processes and policies. A change of method from one period to another may affect the trading results materially. When consistency is followed from year to year, the results disclosed in the financial statements will be uniform and comparable. It helps in interpreting intelligently the changes in financial

statements.

      The assumption of consistency does not mean that once a particular method has been adopted, it can never be changed. Whenever a more useful alternative/improved method is available, it may be followed. The assumption of consistency is not a hindrance in that case. The consistency of methods does not require any disclosure. A specific disclosure should be given in the financial statements, if the alternate accounting method is used.

3. Accrual Assumption

The accrual assumption requires that

(i) The effects of transactions and other events are recognized when they occur (not when cash flows !), and

(ii) These are recorded and reported in financial statements of the period to which they relate.

       This accounting assumption indicates that the revenue is recognized when it is earned and expense is recognized when obligation of payment arises. Cash may be received or paid in advance or simultaneously on accrual or on a later date. According to IASI, Revenue and costs are recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements for the periods to which they relate. Common examples of accruals include purchases and sales of goods or services on credit, all expenses or incomes outstanding. Thus, we make record of all expenses and incomes relating to the accounting period when cash has been disbursed or received or not. For companies, it is mandatory to keep its books of account on accrual basis under the Companies Act, 2013.



      It is important to remember that if the fundamental accounting assumptions viz., going concern, consistency and accrual are followed in financial statements, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed.

Accounting Concepts

      Concept denotes logical consideration and a notion which is generally and widely accepted. The term is not used in the sense of a set of hard and fast rules but rather of rules of general application which helps in the selection of accounting methods appropriate in particular circumstances. Concepts are the foundation of the accounting. Various concepts and their implication is described below:

1. Business Entity Concept (Accounting Entity)

       According to this concept, the task of measuring income and wealth is undertaken by accounting, for an identifiable unit or entity. The unit or entity so identified is treated different and distinct from its owners. In law, the distinction between owners and the business is drawn only in case of joint stock companies but in accounting this distinction is made in the case of sole proprietor and partnership firm as well. For example, goods used from the stock of the business for business purposes are treated as business expenditure but similar goods used by the proprietor i.e, owner for his personal use are treated as his drawings. Such distinction between the owner and the business unit has helped accounting in reporting profitability more objectively and fairly. It has also lead to the development of "responsibility accounting" which enables us to find out the profitability of even the different sub-units of the main business.

      Implication of the above concept is that the owner and business are treated as two different and distinct entities and we record the transactions from the view point of business. This explains why capital contributed by the owner is shown as a liability in the balance sheet of the business.

2. Money Measurement Concept

       All the business transactions are measured and settled in monetary terms. Money is a common denominator. It is used to measure assets, liabilities, expenses, losses, incomes, etc. Money is a medium to value the quantities. Suppose, a firm has 20 chairs, 5 tons of raw materials and 3 machines. This information is not much meaningful to keep systematic records. If one says that a firm has chairs worth? 6,000, raw materials worth 10,000 and machines worth 60,000, it is more meaningful an information to keep proper records. In India, rupee is the legal currency for measurement.

      The money measurement concept holds that the transactions and events, howsoever important they may be, which cannot be measured in monetary terms are not recorded in accounting. The skill, experience and honesty of a chairman or a manager: employer and employee cordial relations; profit yielding sales promotion policy, etc. are not recorded in the books of accounts. Moreover, money does not provide a stable measurement basis because it is influenced by inflation or deflation in the economy which render the accounting data less useful.

 3. Accounting Period Concept

       Though accounting practice believes in continuing entity concept i.e. life of the business is perpetual but still it has to report 'the results of the activity undertaken in specific period' (normally one year). Thus, accounting attempts to present the gains or losses earned or suffered by the business during the period under review. Normally, it is the financial year (i.e. Ist April to 31st March).

       Due to this concept, it is necessary to take into account all items of revenue and expenses accruing during the accounting period. The problem confronting this concept is that proper allocation between capital and revenue expenditure should be made, otherwise, the results disclosed by the financial statements will be affected.

       Implication of accounting period concept is that final accounts are prepared for the 'accounting period' and financial position of the business is shown at the end of accounting period. Thus, for all purposes like performance evaluation, tax computation, budgetary control etc., the financial statements prepared at a periodical interval are useful and desirable.

4. Cost Concept

       This concept is closely related to the going concern concept. According to this concept, an asset is ordinarily recorded in the books at a price at which it was acquired i.e. at its cost price. This 'cost' serves the basis for the accounting of this asset during the subsequent period. This 'cost' should not be confused with 'value. It must be remembered that as the real worth of the assets changes from time to time, it does not mean that the value of such an asset is wrongly recorded in the books. The book value of the assets as recorded does not reflect their real value. They do not signify that the values noted therein are the values for which they can be sold. Though the assets are recorded in the books at cost, in course of time, they become reduced in value on account of depreciation charges. In certain cases, only the assets like 'goodwill' when paid for will appear in the books at cost and when nothing is paid for, it will not appear even though this asset exists on name and fame created by a concern. This idea that the transactions should be recorded at cost rather than at a subjective or arbitrary value is known as Cost Concept.

       With the passage of time, the market value of fixed assets like land and buildings vary greately from their cost. These changes or variations are, generally, ignored by the accountants and they continue to value them at historical cost (i.e. the cost at which purchased). The method of valuing the fixed assets at their cost and not at market value is the underlying principle in cost concept. The cost concept is based on the principle of objectivity.

       Implication of this concept is to record the assets in the books of accounts only at the actual cost of acquisition. For example, if nothing has been paid for goodwill, it should not be shown in the books of account.

5. Dual-Aspect Concept

       Dual concept may be stated as "for every debit, there is a credit". Every transaction should have two sided effect to the extent of same amount. This concept has resulted in accounting equation which states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of owner's equity and outsider's liabilities. This may be expressed in the form of equation:

                A-L=P

Where     A stands for assets of the business

                L stands for liabilities (outsiders' claims) of the business; and

                P stands for proprietors' claim (Capital) of the business

      The form of presentation of equation A-L= P is consistent with the legal interpretation of financial position. Thus, it emphasizes that the proprietary claim is the balance after providing for outsiders' claims against the business from the total assets of the business.

6. Revenue Recognition (Realisation) Concept

       This concept emphasizes that profit should be considered only when realised. The question is at what stage profit should be deemed to have accrued? Whether at the time of receiving the order or at the time of execution of the order or at the time of receiving the cash? For answering this question, the accounting is in conformity with the law (Sales of Goods Act) and recognises the principle of law i.e. the revenue is earned only when the goods are transferred. It means that profit is deemed to have accrued when 'property in goods passes to the buyer' i.e. when sales are effected.

       Implication of the concept of realisation flows from the convention of conservatism. It implies that accounting should take into consideration profits only when the same have been realised. No anticipated profit should be taken credit of. However, in case of long term contracts and instalment system of purchase and sale, the exceptions have been devised by accounting practices.

7. Matching Concept

       Though the business is a continuous affair yet its continuity is artificially split into several accounting years for determining its periodic results. This profit is the measure of the economic performance of a concern and as such it increases proprietor's equity. Since profit is an excess of revenue over expenditure, it becomes necessary to bring together all revenues and expenses relating to the period under review. The realisation and accrual concepts are essentially derived from the need of matching expenses with revenues earned during the accounting period. The earnings and expenses shown in an income statement must both refer to the same goods transferred or services rendered during the accounting period. The matching concept requires that expenses should be matched to the revenues of the appropriate accounting period. So, we must determine the revenue earned during a particular accounting period and the expenses incurred to earn these revenues.

      Implication of this concept is that meaningful information can be ascertained relating to the profits of any entity only if the revenues of the same accounting period are matched against the expenses of the same period. For example, salary paid in January 1998 relating to December 1997 should be treated as the expenditure for the year 1997 and not 1998.

8. Stable Monetary Unit Concept

      Accounting presumes that the purchasing power of monetary unit, say Rupee, remains the same throughout, thus ignoring the effect of rising or falling purchasing power of monetary unit due to deflation or inflation. Inspite of the fact that the assumption is unreal and the practice of ignoring changes in the value of money is now being extensively questioned, still the alternatives suggested to incorporate the changing value of money in accounting statements viz., current purchasing power method (CPP) and current cost accounting method (CCA) are in evolutionary stage. Therefore, for the time being we have to be content with the 'stable monetary unit' concept.

      Implication of the above concept is that variations in the intrinsic value of monetary unit say Rupee in ignored by the traditional financial accounting. Suppose, a price of land was purchased in 1985 for 10,000. Further as no depreciation is provided on land. In the present case, land shall continue to be valued by the business at 10,000 only. Whereas in fact the current price of the same piece of land might have, considerably, gone up. Perhaps it is so because accounting bases itself on "objectivity" and price of acquisition can be supported by the documents.

Accounting Conventions

      The term convention means an 'established usage. Conventions are based on customs and practability, which may have some logic behind its usage. The writing of the words "To' and 'By' along with the names of the persons, properties or expenses and incomes respectively on the debit and credit side of the account is a convention followed in U.K., India and other countries but not in U.S.A. The conventions are discussed as follows:

1. Full Disclosure

      The doctrine of disclosure suggests that

(i) The financial statements should act as means of conveying and not concealing.

(ii) The financial statements must disclose all the material, relevant and reliable information which may be more beneficial to the shareholders, creditors, bankers etc.

(iii) It is necessary that the information is accounted for and presented in accordance with its substance and economic reality and not merely with its legal form. If some material information is not shown in the balance sheet, the practice of appending notes has developed as a result of the principle of full disclosure..

      Disclosure of material facts does not mean leaking out the business secrets, but disclosing all relevant information for the use of creditors and investors. It builds the confidence and faith among them. Earlier, the disclosure of useful information with the users was voluntarily but now the enactment of law of 'Right to Information' has rolled the ball in the court of creditors, and investors. They can seek any relevant information from the enterprises without much difficulty.

 2. Conservatism or Prudence

      Business is prone to risks and uncertainties. No one can guess future business happenings with perfect certainty. Prudence in financial statements requires "anticipate no profits, but provide for all losses". In other words, accountant follows the policy of playing safe. If market price of stock is more than cost, the stock is recorded at cost as the unrealised profit from the increase in market price is ignored. But, if the market price of stock is lower than the cost, it is recorded at market price because we should make sufficient provision for unforeseen losses. So, the stock is recorded at cost or market price, whichever is lower. Other examples of conservatism are maintaining provision for doubtful debts; showing depreciation only on the fixed assets but not appreciation; valuation of investments at cost or market price whichever is less; ignoring provision for discount on creditors, etc.

3. Materiality

      It refers to the relative importance of an item or event. Those who make accounting decisions continually confront the need to make judgements regarding materiality. Is this item large enough for users of the information to be influenced by it? The essence of the materiality concept is the omission or mis-statement of an item is material if. in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgement of a reasonable person relying on the report would have been changed or influenced by the inclusion or correctness of the item.

      American Accounting Association (AAA) explains the term materiality as under: "An item should be regarded as material, if there is a reason to believe that knowledge of it would influence the decision of informed investors."

      Implication of materiality concept is that material details must be given due consideration whereas trivial items should be ignored. Otherwise, accounting information shall be overburdened with minute details. The term 'materiality' is relevant e.g. while sending statement of account to each debtor individually, accuracy upto paise is desirable but when a statement of total debtors is submitted to top management, the figure may be rounded off to the nearest hundred.

    4. Objectivity

       Every accounting transaction is recorded on the basis of some documentary evidence. Invoices, bills, cash memos are some of the vouchers used as documentary evidence for recording business transactions. It implies verifiability which means the true and accurate information is reported. Objectivity connotes reliability and trustworthiness. The accounting information is objective, if it is not influenced by personal bias or judgement of those who provide it. Accounting records maintained on the basis of proper documentary evidence produce genuine results and are legally acceptable.

Accounting Mechanism

      The mode of recording transactions and the types of accounts to be maintained depends upon the choice, skill or the requirements of an enterprise. The organisation may like to maintain cash. book and personal accounts only, which is considered as the system of maintaining incomplete records. Other organisations may choose to prepare all personal, real and nominal accounts. This accounting mechanism is described below:

      (a) Single entry system. This system ignores the two fold aspect of each transaction as considered in double entry system. Under single entry system, merely personal aspects of a transaction i.e. personal accounts are recorded. This method takes no note of the impersonal aspects of the transactions other than cash. It offers no check on the accuracy of the posting and no safeguard against fraud because it does not provide any check over the recording of cash transactions. Therefore, it is called as 'imperfect accounting'.

     According to Kohler "It is a system which records cash transactions, and transactions relating to personal accounts."

     (b) Indian (Deshi Nama) system. This is the Indian system. It differs from region to region; community to community and from business to business. Under this system, books are written in regional languages such as Muriya, Sarafi etc. Books are called 'Bahis'. It is older than double entry system and is complete in itself.

    (c) Double Entry System. The double entry system was first evolved by Luca Pacioli, who was a Fransiscan Monk of Italy. With the passage of time, the system has gone through lot of developmental stages. It is the only method fulfilling all the objectives of systematic accounting. It recognises the two fold aspects of every business transaction.

Double Entry System

     'Dual Concept' is the basis of accounting equation. Under this concept, the total assets are always equal to total equities.

     The rights or claim against the assets of the business are called equities. In other words, the sources of the assets are called equities. These rights or claims may consist of owners' and creditors'. The rights of owners is called owners' equity and the rights of creditors is called creditors' equity.

Hence,

                 Owners' Equity+ Creditors' Equity Assets 

i.e.

                  Capital + Liabilities = Assets

      The total of cash and other assets contributed by the owner is called capital. The amount payable to the creditors of goods and expenses or money borrowed on business account is called liabilities. The total of capital and liabilities will always be equal to total assets. Any increase! decrease in asset will have a corresponding equal decrease/increase in asset or increase/ decrease in capital total or liability, resulting into the left hand side total equal to right hand side total.

     In case of winding up of a business, the owner does not have any claim against the assets until all claims of the creditors have been paid in full. For this reason, the claims of the owner are sometimes referred to as residual. From this point of view, the accounting equation can be expressed:

                              Assets Liabilities = Capital

     Accounting historians have established that double-entry book-keeping was practised in Florence in the later 13th century. Although several systems were developed by mathematicians and businessmen to summarize and communicate business transactions, only the one which Luca Friar Pacioli compiled has survived and has become the basis of modern accounting. Luca Friar Pacioli is rightly recognised as the father of modern accounting. He authored the first printed book on double entry book-keeping. It was titled as "Summa de arithmetica geometrica proportion i e. proportionalita."

      He described a method of arranging accounts in such a way that the dual aspect (present in every account transaction) would be expressed by a debit amount and an equal and offsetting

credit amount.

     Double entry system is the system under which each transaction is regarded to have two- fold aspects and both the aspects are recorded to obtain complete record of dealings. Double entry system of book keeping adheres to the rule, that for each transaction the debit amount(s) must equal the credit amount(s). That is why this system is called double entry system.

     "Every financial transaction involves a transfer of money or its equivalent from one person to another. It must necessarily, therefore, require two parties for its performance, and may mean, either the receipt of at benefit in shape of cash, goods or service or the imparting of such benefits."    J.R. Batlibol

     "The Double Entry System seeks to record every transaction in money or money's worth in its double aspect-the receipt of a benefit by one account and the surrender of a like benefit by another account, the former entry being to the debit of the account receiving, the latter to the credit of the account surrendering."                                                                                                 William Pickles "

     The rules of debit and credit are designed so that equal amount of debit and credit entries are needed to record every business transaction,"                                                   Walter B. Meigs and R.F.Meigs

Features of Double-Entry System

      The following are the main features of double entry system:

(1) Two parties. Transaction takes place only if there are two parties-one party receiving the benefit and other party giving or parting with the benefit.

(2) Each party is affected (by the transaction) in opposite direction but with the same

amount..

(3) Each transaction affects at least two items in an accounting equation. Accounting equation is composed of three elements, namely, assets, liabilities and capital.

(4) Changes are recognized from the angle of the party in whose books recording is being

done.

(5) Changes are recorded in two related accounts in the books of party.

(6) Account receiving the benefit is debited i.e. recorded on the left hand side and the account rendering the benefit is credited i.e. recorded on the right hand side.

(7) Each account has two sides-left (debit) and right (credit).

(8) For each transaction, debit amount is equal to the credit amount.

So, the famous proverb "every debit has a corresponding credit and vice-versa" is based on this system.

Advantages of Double-Entry system

      Double entry system is very useful in accounting. It has the following advantages:

(1) It enables to keep a complete record of business transactions.

(ii) It provides a check on the arithmetical accuracy of books of accounts based on equality of debits and credits.

(iii) It gives the results of business activities, either profit or loss during the accounting period.

(iv) It tells the financial position of the business at a point of time. Total resources of the business, claims of the outsiders, amount due by outsiders etc. are revealed by at statement known as balance sheet.

(v) It makes possible comparison of the current year with those of previous years, helping the owner to manage his business on better lines.

(vi) It reduces the chances of errors creeping in the accounting records because of its equality principle.

(vii) It helps to ascertain the details regarding any account easily and accurately.

(viii) It helps in ascertaining cost of production by preparing manufacturing account in the case of manufacturing business.

(ix) Profit disclosed is shown under the heading of gross profit and net profit.

(x) Above distinction between gross and net profit helps in administering effective control systems.

(xi) Financial statements prepared are the basis of determining tax liability of the business. 

(xii) Calculation of abnormal loss (due to loss of stock) on account of various factors like accident, fire etc, helps in filing claims with insurance company.

Disadvantages of Double-Entry System

     In fact, there are no disadvantages of double entry system of book-keeping. However, for the sake of argument, the following may be regarded as disadvantages:

1. Requirement of expert knowledge. Now a days, accounting is a profession and is being practised by qualified Chartered Accountants.

2. Lengthy cumbersome process. The process of recording, classifying, analysing and interpreting is cumbersome and tedious.

3. Expensive. Accounting department is to be staffed by qualified and trained personnel requiring high salaries. So, it is expensive for small business units. It may not be economical to maintain full fledged accounting department.

Bases of Accounting Systems

      A basis of accounting is nothing more than a set of rules that the accountant follows in preparing three basic financial reports-profit and loss account, balance sheet and cash flow statement. It tells him when to count certain transactions in the records and how to do it.

     The "when" is the biggest difference between the accrual method and the cash method of accounting.

      (a) Accrual or Mercantile Basis is the method of recording transactions by which revenues, costs, assets and liabilities are reflected in accounts in the period in which they accrue. All incomes and expenses belonging to the accounting period are recorded in the books, even if these are not transacted in cash during the accounting period.

     Suppose an employee who was appointed on a salary of 40,000 per month has served the organisation for 12 months in an accounting year. If he has been paid salary for 8 months so far, the accrual concept suggests that the salary for remaining 4 months should also be recorded in the business as expense as well as a liability to be met in future.

     (b) Cash or Receipts Basis is the method of recording transactions under which revenues, costs, assets and liabilities are reflected in the accounts in the period in which actual receipts or actual payments are made. Entries are made only when cash is actually received or paid. No entry is made in the books of business for the items which are outstanding, such as: salaries. due, rent unpaid, etc. The profit under this system is calculated on the basis of the revenue. received in cash during the accounting period less the expenditure incurred in cash during that period.

     Very few companies use the cash basis to keep their books, and there are lots of reasons for not following it.

(i) It does not give a clear picture of real profits in a given month or year because it does not match expenses with revenues.

(ii) Your bank may not allow you to use the cash basis; it wants to know what you are earning or losing: and cash method is not good indicator of that.

(iii) Income tax law of the countries may not allow you to use it. Indian income tax law permits the use of cash basis also.

     (e) Hybrid Basis is the combination of first two methods Le accrual on expenses and cash basis on incomes. This method is followed by advocates or others where only received income is sure but receivable income may not be guaranteed. The expenses are recorded on accrual basis Le paid and payable while incomes are recorded on cash basis i.e. received only.

Distinction between Cash System and Mercantile System

Basis of Difference	Cash System	.Mercantile System
1.Genuineness of results       2. Period   3. Users of system   4. Simplicity   5. True and fair view	1.This method does not give the accurate picture of the profit or loss.   2. It records the receipts and payments made during the year, whether these relate to current, cast or future years.   3. This system is followed by doctors, engineers, clubs, societies etc.   4. This method is simple to understand and practise.   5. True and fair position of the business can not be ascertained under this system.	1.This method gives the profit or loss figure more accurately.   2.It records the receipts and payments made and to be made for the current year only, whether these are paid in the past, current or future years.   3. This method is followed by business houses engaged in trading and manufacturing   4. This method is based on accounting technicalities.   5. This system meets the requirements of Company Law. Therefore, it gives true: and fair view of the books of accounts.

Accounting Standards

     The basic concepts and conventions used in preparing financial statements had evolved over many years as a product of the collective experience of the practising accountants. The enterprises recorded the transactions on the basis of principles they considered appropriate because the guiding accounting policies were not available. Similar oranisations gave different treatment to similar transactions, leading to different results. The diversity in accounting alternatives resulted into less meaningful accounting information. A need was felt to formulate. some guidelines which are universally applicable so that the accounting may serve the useful purpose of those dealing with it.

Meaning of Accounting Standard

      An accounting standard is a selected set of accounting policies or broad guidelines issued by an accounting body, regarding the principles and methods to be chosen out of several alternatives, that are followed for the preparation of financial statements, Accounting standards are the norms of accounting policies and practices to guide the treatment of transactions and events in the accounting process. The adoption and application of accounting standards ensures uniformity, comparability and qualitative improvement in the preparation and presentation of financial statements.

Nature of Accounting Standards

      In Indian context, the Institute of Chartered Accountants of India (ICAI) constituted an Accounting Standards Board (ASB) on 21st April, 1977. The main function of ASB is to formulate the accounting standards (ASS), taking into consideration the applicable laws, customs, usages and business environment, bringing them in line with the International Accounting Standards (IASS). The Institute of Chartered Accountants of India has so far pronounced 32 Accounting Standards (ASs), of which majority of them are mandatory for the companies under section 211 (3C) of the company law. The auditors are supposed to report the fact whether the accounts of the company have been prepared in accordance with accounting standards.

     The Accounting Standards have been made flexible in the sense that where alternative accounting practices are acceptable, the companies are free to follow any of the alternative suitable to them with a suitable disclosure. The consistency must be preferred in the adoption of a method chosen. In case of switching over to some other acceptable alternative method, the effect of such change must be quantified and disclosed.

Need for Accounting Standards

     A wide variety of concepts and conventions evolved over many years world over, globalisation of business, the involvement of large scale public funds, international funding agencies etc necessitated some standardised set of principles to reduce or eliminate confusing variations in the methods used to prepare financial statements. The following are the causes of development of accounting standards:

     1. Removal of confusing variations. Like any other language, accounting has its own complicated set of rules. The availability of alternative choices of accounting methods have created confusion among accounting circles. The need was felt to reduce or eliminate confusing or ambiguous terms and practices, such as, methods of valuation of stock, methods of depreciation. treatment of goodwill etc.

     2. Uniform presentation of accounts. The users of financial statements require the accounting information which is comparable. The presence of wide variety of concepts. conventions and principles created confusion among them, rather than providing a solid and logical treatment of the transactions. The necessity to present uniform accounting information resulted in the emergence of accounting standards.

     3. Avoidance of manipulation. Misusing the vagueness of accounting concepts, conventions and principles generates accounting scandals resulting into failure of the business. The choice of different methods of treatment of stock or providing depreciation on fixed assets may be manipulated to show the desired results. Accounting standards are needed to avoid such manipulation of accounting results.

      4. Globalised business. Globalisation of business has resulted in the emergence of multinational corporations in different countries with different principles, customs and currency. If every country is permitted to follow its own principles and customs, it will create confusion. among the users of accounting information of multinational corporations. The global business needs standardisation of accounting system for its smooth and fair flow.

     5. Disclosure beyond law. There are certain areas of accounting where law does not require important information to be disclosed. Accounting standards may call for disclosure of such information beyond that required by law.

     Accounting Standards (ASS) issued by ICAI till 31.12.2011

The following accounting standards have been issued by the Institute of Chartered Accountants of India till 31st December, 2011:

AS-1    Disclosure of accounting policies

AS-2    Valuation of inventories

AS-3      Cash flow Statement

AS-4    Contingencies and events occuring after the balance sheet date 

AS-5     Net profit or loss for the period, prior period items and changes in accounting policies

AS-6 AS-7    Construction contracts (Revised 2002)



AS-8    Accounting for research and development

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

AS-16    Borrowing costs

AS-17    Segment reporting

AS-18    Related party disclosures

AS-19    Leases

AS-20   Earning 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 & Measurement

AS-31    Financial Instruments: Presentation

. 

AS 32     Financial Instruments: Disclosures

Development of Standards

    Forty One International Accounting Standards (IASs) were issued by International Accounting Standards Committee (IASC) from 1973-2001. The International Accounting Standards Board (IASB) replaced the IASC in April 2001. Since then, the IASB has amended some IASS, has proposed to amend other IASs, has proposed to replace some IASS with new International Financial Reporting Standards (IFRSS). IASB has so far issued nine IFRSS. International Financial Reporting Standards (IFRSS) refers to the entire body of IASB pronouncements, including standards and interpretations.

After the enactment of Companies Act, 2013, according to the draft plan of the ministry of corporate affairs, the International Financial Reporting Standards (IFRS) will be implemented beginning with companies that have a net worth of over 1,000 crore from April 1, 2015.

In the second phase, both listed and unlisted companies with a net worth of over 500 crore but less than 1,000 cr. will have to converge with IFRS from the financial year beginning April 1, 2016.

IFRS is more comprehensive and market driven since it improves quality of information. increases market efficiency, and minimize capital cost. Accounts prepared under IFRS will give a confidence to investors and world community to understand Indian business more prudently. which ultimately attract more investment in India.

International Financial Reporting Standards

    The term International Financial Reporting Standards (IFRSS) has both a narrow and a broad meaning. Narrowly, IFRSs refer to the new numbered series of pronouncements that the International Accounting Standards Board (IASB) is using, as distinct from the IASS series issued by its predecessor International Accounting Standards Committee (IASC). More broadly. IFRSS refer to the entire body of IASB pronouncements, including standards and interpretations approved by the IASB and IASS and SIC (Standards Interpretation Committee) interpretations approved by the predecessor IASC.

Why IFRS ?

     The need for IFRSS arises due to the following:

1. A single set of accounting standards would enable internationally to standardise training and assure better quality on a global screen.

2. It would also permit international capital to flow more freely.

3. It would enable the companies to develop consistent global practices on accounting problems.

4. It would be beneficial to regulators too, as a complexity associated with needing to understand various reporting regimes would be reduced.

Objectives of IFRS

    The following are the important objectives of IFRSS:

1. To develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting. It would help participants in the world's capital markets and other users to make economic decisions.

2. To promote the use and rigorous application of those standards:

(i) In fulfilling the objectives associated with the objectives of IFRSS to take account of the special needs of Small and Medium Enterprises (SMEs) and emerging

economies.

(ii) To bring about convergence of national accounting standards (AS), international accounting standards (IAS) and international financial reporting standards (IFRS) to high quality Solutions.

Scope of IFRSS

The scope of IFRSS is described in the following points:

1. International Accounting Standards Board (TASB) standards are known as International Financial Reporting Standards (IFRSs).

2. All International Accounting Standards (IAS) and Interpretations issued by 1ASC (International Accounting Standards Committee) and SIC (Standard Interpretation Committee) continue to be applicable unless and until they are amended or withdrawn.

3. IFRSS apply to general purpose financial statements and other financial reporting by profit-oriented entities - those engaged in commercial, industrial, financial and similar activities, regardless of their legal form.

4. Entities other than profit-oriented business entities may also find IFRSS appropriate. 5. General Purpose Financial Statements are intended to meet the common needs of shareholders, creditors, employees, and the public at large for information about an entity's financial position, performance and cash flows.

6. Other financial reporting includes information provided outside financial statements that assists in the interpretation of a complete set of financial statements or improves users' ability to make efficient economic decisions.

7. IFRSS apply to individual companies and consolidated financial statements.

8. A complete set of financial statements includes a balance sheet, income statement, cash flow statement, a statement sharing due all changes in equity, or changes in equity due than the one allowing firm investments by and distribution to owners a summary of accounting policies and explanatory notes.

9. If an IFRS allows both a 'benchmark' and an allowed alternative' treatment, financial statements may be described as conforming to IFRS whichever treatment is followed. 

10. In developing standards, IASB intends not to permit choices in accounting treatment. Further, IASB intends to reconsider the choices in existing IASS with a view to reducing the number of those choices.

11. IFRS will present fundamental principles in bold face type and other guidance in non- bold type.

12. The provisions of IAS 1 that conformity with IAS requires compliance with every applicable IAS and interpretation requires compliance with all IFRSS as well.

List of IFRSS

The following is the list of IFRSS issued, so far, by IASB:

IFRS 1    First time adoption of IFRSS.

IFRS 2   Share-based Payment

IFRS 3    Business Combinations

IFRS 4    Insurance Contracts

IFRS 5    Non Current Assets held for sale and Discontinued Operations.

IFRS 6    Exploration for and Evaluation of Mineral Resources

IFRS 7     Financial Instruments: Disclosures

IFRS 8    Operating Segments

IFRS 9    Financial Instruments

IFRS 10   Consolidated Financial Statements

IFRS 11   Joint Arrangements

IFRS 12   Disclosure of Interests in other Entities.

IFRS 13   Fair Value Measurement

Convergence with IFRSS Indian Perspective

    Indian Accounting Standards are formulated on the basis of IFRSS. While formulating Accounting Standards, the endeavour of the Institute of Chartered Accountants of India (ICAI) remains to converge with IFRS. The ICAI has till date issued 32 Accounting Standards corresponding to IFRSS. Some recent Accounting Standards, issued by the ICAI, are totally at par with the corresponding IFRSS. e.g. the Standards on 'Impairment of Assets' and 'Construction Contracts.

    While formulating Indian Accounting Standards, changes from the corresponding IAS/IFRS are made only in those cases where these are unavoidable, considering:

1. legal and/or regulatory framework prevailing in the country.

2. to reduce or eliminate the alternatives so as to ensure comparability.

3. state of economic environment in the country..

4. level of preparedness of various interest groups interested in implementing the accounting standards.

KEY POINTS AT A GLANCE

1. There are three basic assumptions of accounting described under Accounting standard-1 and International Accounting stardard-1: Going concern; Consistency: and Accrual.

2. There are three bases of accounting system: Cash system; Accrual system and Hybrid system, of which accrual system is mostly followed.

3. So far, the Institute of Chartered Accountants of India has issued 32 accounting standards (ASS).

4. Luca Pacioli codified the double entry system of book-keeping.

5. IASC had issued 41 IASs between 1973-2001.

6. IASB has issued 13 IFRSS so far.

7. Indian Accounting Standards (ASs) will be converged with IFRS with effect from April 2015.