1

ACCOUNTING

INTRODUCTION
The necessity of book-keeping and accountancy arose due to the fact that memory of
persons is limited and one cannot remember various informations for ever and secondly, the
proprietors or owners of business are eager to know the financial position of the business over
a particular period. Thirdly, book-keeping records are also considered as evidence in the Courts
to prove claims or to defend in case of claims made against the person conc_e rned regarding
debts , etc. Transactions related to business have become so important that their proper
recording is considered a prime requirement of any business and this recording of business
transactions is regarded as book-keeping in the field of accounting.
DEVELOPMENT OF ACCOUNTING
Lucas F. Pacioli, a resident of Venice (Italy), is regarded as the founder of book-keeping.
His book 'De Computiset Scripturise' was published in 1494, which is regarded as the first book
on book-keeping. Really speaking, it was a book on Arithmetic and book-keeping was described
in its one part only. The advent of industrial revolution resulted in large-scale production,
competition and broadening of market. In recent years the change in technology has brought
about remarkable changes in the field of accounting. It has thus led to formulation of various
professional bodies and Institutes in order to monitor, regulate and control accounting
profession at national and international level. The various bodies have laid down various
accounting policies, broad guidelines, principles and methods at global level for uniformity in
accounting practices.
MEANING OF ACCOUNTING
The language of business is accounting. Accounting refers to the actual process of
preparing and presenting the accounts.
The work of accounting starts where the work of book-keeping ends. Accounting is based
on careful and efficient book-keeping system. Accounting refers to process of preparing and
presenting the accounts in a scientific and systematic manner in the shape of final accounts.
The main object of accounting is to analyse and interpret the financial results disclosed by
final accounts and financial statements, drawing objective conclusions and communicate
relevant required informations to the prospective uses of accounting informations. viz., the
proprietor, creditors, investors, banking institutions, Government agencies, etc. Accounting is
useful for profit earning organisations and Not-for-Profit organisations or in fact for any kind
of organisation.
2 L ACCOUNTING:____ ___-- ------ -
- - -~FINANCIA
~~~ ~~~
DEFINITIONS OF ACCOUNTING
Accountin g has been defined in different ways by different authorit~e s on t_he subject.
Accountin g is a comprehe nsive discipline and it is difficult to explain satisfacto nly through
any single definition . However following definition s are given below : .
(1) According to R. N. Anthony, "Accounti ng is a means of _colle~~mg , summaris ing,
analysing and reporting in monetary terms, informati ons about busmess.
(2) According to Smith and Ashburne , "Accounti ng is a means of reporting the results of
economic activities."
(3) According to Bierman and Derbin , "Accounti ng may be defined as identifyin g,
measurin g, recording and communic ating of financial results.
(4) According to American Accounting Association (1966), "Account ing is th_ e p_rocess of
identifyin g, measuring and communic ating economic informati ons to permit mformed
judgemen t and decisions by the users of accounts."
Ideal Definition : Accounting is the process of identifyin g, measurin g, recording,
classifying , summaris ing, analysing, interpreti ng and communi cating the financial
transactio ns and events in monetary terms . It covers preparatio n of Trial Balance,
Manufact uring Account, Trading Account, Profit and Loss Account and Balance Sheet. lt is
an art as well as a science also.
CHARACTERISTICS OR ELEMENTS OF ACCOUNTING
The following are the characteri stics/elem ents of modern accounti ng :
(1) Recording of economic activities : Accountin g i1wolves recording of finan cial
transactio ns on the basis of certain specific rul e8 . 'I'he wtt y ofrecordin g m ay differ in accordanc e
with the nature and size of business.
(2) Re-arrangement of figures : Account.mg re-11rrnnge s tlw figures of book-keep ing in
accordance with the fin al accounts. ·
(3_) Record,:ng of pa st <)ro nomu· ePent N : Acrmrntm g 1~ historica l in nature. lt is the
recording of past economi c evc•nLs.
(4) Monetary tran sart,:ont-:: Atro1mti11 g- n--cords univ monetarv transactio ns No . t 8 1..
transact.ions are not cakulat.Pd in arcount1.ng. · · · · · n-mon e Y
p pr e!'.lt'"" {..:..., ti11e acono · th e
· even t B m
(5) Presentati
fi • ·. facJr111 · Arrountin ,.,
• in S umnw ,...,,·
on ,.:; • m1c
summary 01m. 1•u .. Manufactu nn,-: AC'tolmt. fl'rnding- Aceount. Profit and Los 8 Account
BultuH·t• Sh t•t-'1 nnd otJw.r fin ancial 8tatemen ts. Thes~
summary form s represent the financial position of the
ACCOUNTANCY concern.
art of classifyin g the data : Accountin g is
(6 ) An
ACCOUNTING
an art of classifyin g the data systemati cally on the
basis of certain rules.
(7) It is a science : Accountin g is a science because
every business transactio n is recorded in a systematic
manner. Manners of accountin g are fixed and depend
on financial rules of accountin g.
(8) Coverage : Basically accountin g covers profit
earning concerns. But Not-for-Profit earning
institutio ns (College, Hospital. School, Muncipality,
etc.) also come under the umbrella of accounting.
 3
ACC OU NTING

(9 ) Usefuln ess Accoun ting provid es fact ual and interpr etative inform ation about
ing the
t ransact ions and other events which a re useful for predi cting, compar ing a nd evaluat
enterpr i se's earning pO\ver.
ting
00 ) Analys is of Int erpreta tions : On the basis of r ecorded busines s events accoun
plannin g and
analyse s interpr etates the data accordi ng to th e users of accoun ting. Future
forecas ting are made on t h e basis of accoun ting.
NATURE OF ACCOU NfING
The nature of accoun ting is as fo ll ows :
ion in
Cl ) A ccount ing: A Profession : In moden1 days accoun ting has emerge d a s a profess
Accoun tants,
t he field of busines s concern . Skilled Accoun tants . Charte red Accoun tants, Cost
etc. are workin g as profess ionals very success full y.
ical and
(2) A ccounting : An Intellectual Discipline : Accounting is an organis ed, theoret
objective of
practic al knowledge based on certain basic principles. It helps us in achievi ng our
the busines s.
mainta ining proper accoun ts, i.e., to know the profitability and financi al position of
ting
(3) Accoun ting : A Social Force : Accoun ting bears the social respons ibility. Accoun
also useful
inform ations are useful for the owner of the busines s but these inform ations are
as well as
for other section s of the society , viz., credito rs, investo rs, debtors , public and
Govern ment.
ting
(4) Accoun ting: A Policy making Force : On the basis and conclus ions of the accoun
ment also
price policy, busine ss policy, investm ent policy, etc., are formul ated. Govern
the basis of
formul ates export- import policy, industr ial policy and produc tion policy on
accoun ting.
ACCOU NTING : AN ART OR A SCIENC E OR BOTH
certain
Accoun ting is an art : Art is that part of knowle dge which enable s us to attain
t accoun ting is
goals and prescri bes certain manne rs to achieve it. On the basis of this concep
attain the certain
definit ely an art. In fact, Accoun ting is based upon certain rules (manne rs) to
goals (profita bility, financi al positio n of busines s etc.)
nting
The Ameri can Institu te of Certifi ed Public Accou ntants also define s Accou
ctions ."
as "the art of record ing, classif ying and summ arisin g the financ ial transa
atised
Accoun ting is a Science : Science is a body of knowle dge based on the system
and verifia ble.
princip les based on causes and their effects. The concep t of science is univer sal
has its own
On the basis of this concep t accoun ting is definite ly a science becaus e accoun ting
causes .
concep ts, princip les, rules and assump tions. Its results are based on econom ic
of
Accoun ting is an art and a science both : Accoun ting is both an art and a science
ing financi al
re-arra nging the accoun ts and records mainta ined by a book-k eeper and prepar
statem ents based on them and to interpr et their effect on the busine ss.
SCOPE OF ACCOU NTING
point of
The action of accoun ting starts where the work of book-k eeping ends. From this
view followi ng are the scope of accoun ting :
(1) To test and verify the entries in book-ke eping.
(2) To test the total and balanc es of ledger.
(3) To prepar e Trial Balanc e from the ledger.
(4) To disclose adjus tments .
and Loss
(5) To prepar e Final Accoun ts (Manu facturi ng Accoun t, Tradin g Accoun t, Profit
Accoun t and Balanc e Sheet).
(6) To rectify errors.
(7) To find out conclus ion s on the basis of analys is of financi al statem ents.
 NEED OF ACCOUNTING
At present the rok of accounting is aR followR :
(1) Language of busin ess : Accountin g r e00cts th e pos ition of bu s iness a n <l communicates
the financial results and conclm~ions to tlw concC' rncd person s.
(2) Ba.se of fi.nancial j udgem ent : Accounting provides inform ation for judging_manage ment
abilitv to utilise financial resources effectively in achi eving the goals of the busm ess.
(3) B ase of Information S.vslem : Accounting covers all _th e economi c event~ with res ults.
Due to this. accounting also communi cates the results to inter est ed persons 10 th e form of
quantitative and financial in nature.
(. 4 ) H i,storic R ecords indicate futu re : Accounting suppli es informations based on past
economic events i.e. historical records . But it is also a universal truth that these records help
in evaluation, p;edi~tion or estimation of business for future economic decisions.
OBJECTIVES OF ACCOUNTING
I. Main objects are : (i) To know profit or loss of the business. (ii) To know the worth of
assets and liabilities of the business at a particular date. (iii) To know about the progress or
downfall of business. (iv) To know as to what amount is to be paid to a particular person or
what amount is to be received from a certain person on a particular date. (v) In the case of the
companies to comply with the provisions of the Companies Act, 1956 as under this Act it is
necessary for the companies to maintain accounting record.
II. Other Objects : In addition to the main objects described above, following are other
objects : (i) To know about the position of goods stocks. (ii) To know the position of cash. (iii)
To know about the errors and frauds committed by the employees. (iv) To have detailed
information about capital employed in the business. (v) To satisfy the taxation authorities. (vi)
To know the financial and other requirements of business at a particular time.
In short the object of accounting is measurement of wealth and financial health.
BRANCHES OF ACCOUNTING OR TYPES OF ACCOUNTING
(1) Fi71:ancial Accou_nting : An accounting which relates with the analysis and recording
of trans~ct10ns of financial nature, their classification, the preparation of financial statements
and their analysis and interpretation is termed as financial accounting.
(2)Mana?ement Accounting : The accounting which is prepared exclusively for the u se of
mhanag~ment i~ called M.a nagement Accounting. Management prepares plans and budgets on
t e basis of this accountmg.
Ace Acc?r~g to lnsti~ute_of Cost and Management Accountants, London, "M anagement
ounting is_ the applicati.o n of the Professional Information in such a way a s to assist the
management in the formation of policies d . th l .
l!,ndertaking.,, an in e P anning and control of operations of the
(3) Cost Accounting• The ace t· h. h .
per unit of goods and · . . oun ing w ic helps In ascertainment of total cost and cost
reduction. services is called Cost Accounting. It helps in cost control and cost
(4) Tax Accounting • The .
Accounting. Income-ta · t accounting which is u sed for tax purposes is called Tax
b asis . account· x, 8 a 1es- ax and othe d .
· of this
1ng. r irect an d Indirect
· · taxes are calculated on the
(5) Government Accountin . T
State Governments and L 1g . he accounts which are maintained by Central Government,
of recording is called G oca Governments are called Government accounts and the system
overnment Accounting.
,
j
r ACCOUNTING 5
--------- - -- -- -- -- - - -- - -
I (6) Human Resource Accounting : Accounting which is exclusively related with human
resource is called hun1an resource accounting. Costs and values of human resources are
recorded in this accounting system. It is of immense use for a business enterprise.
(7) Social Responsibility Accounting : Social responsibility accounting deals with
identifying, n1easuring and communicating social activities carried out by the entity for the
benefit of various segments of the society.
(8) Environment Accounting : Accounting for environment and ecology preservation is a
part of environment accounting. It deals with the accounting of natural resources, pollution
and prevention etc.
 BASIC ACCOUNTING PRINCIPLES,
CONCEPTS AND CONVENTIONS
NATUUE OF ACCOUNTING
Know1edge of Accounting Prin cipleR can be derjved on th e basis of its history and its
relation with human knowledge . Its relation with historical events is very limited and only
few events of the subjects related with hum an knowledge have intimate relationship with it,
but this relationship indicates th e nature of Accounting. Accounting is based on some definite
principles.
J ust as it is very necessary to have good knowledge of grammar in order to have sufficient
control over language, in the same way one must know the grammar of Accounting. This is
why the knowledge of Accounting Principles, Concepts, Conventions and Assumptions is
required. Utility of Accounting Principles is related with nature of Accounting.
ACCOUNTING PRINCIPLES
.Meaning of Accounting Principles
(i) According to Canadian Institute of Chartered Accountants, accounting principles are
the body of doctrines commonly associated with the theory and procedure of account-
ing. They serve as an explanation of current practices and as a guide for the selection
of conventions or procedures where alternative exists.
(ii) According to the American Institute of Certified Public Accountants, accounting
principle is a general law or rule adopted or professed as a guide to action. It is a basis
of conduct or practice.
(iii) Accounting principles are really speaking the rules which are based on the customs,
usages and traditions and all accounting practices are based on them. These principles
are not fixed but they vary according to changes in time. If a particular problem bas
been solved a~cording to one method evolved by one who solved the problem and the
same method IS approved and adopted by others, it becomes a principle.
Some accountants have used the word standard in place of principles. Hence, they use
the word accounting standard in place of accounting principles.
Characteristics of Accounting Principles
If accounting
· principle possesses th e fi.o·11 owing . . 1t
. characteristics . accepted by all :
. 1s
1. Objectivity· It mu8 t b b d .r. • • ' d
for it If' •t. · . . e ase on iacts and impartial attitude ought to have been adopte
· 1 1s so , the pnnc1p · sa1•d to possess objectivity.
.. 1e IS
2. Application : If th z· · . . . . d
Principle I . . . _ ~ app ication of the principle 1s possible, it is regarded as a goo
. · n case theoretically · · 1 · '. .. . . . the
Pnnciple has· . . · · pnncip e is sound but its apphcat10n 1s difficult, then
• nova1ue.
 7
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~ '-n::,.:: oecn
_poin-rro om earlier that acrounting is the lfilleauage of business. Just as
·v- ~ i ~ rr gn,irnm,;':\r ~ .. eS5enp:i?l fur nncie:rstanding and making corred interpretati on of
· ~~~~~e... m Lhe .same ~Y it 1, ncee-.._~ry to kno~ certain acrounting con,entions and concepts
Th 7'"',{~,--_r- ,;p.-:-n -:he J-;o n gn..agc of on~ne:5,.: namely accounting .
.Ali ~ : i n g eonn3lri0lli and roneepts fall under accounting principles.
A.ecxn:rnri:ng Con~-ention s
U-?.n:ning : A ""';. . , tLJ.-a-~ is ba...'CCi on usage.s and customs. Custom or u.__~ge is a practice
wt-~::i ::E- 7" r.sc. ~nee iong ~&rurally aecountant8 have to adopt that usage or custom. These
~c 1E:11 •oo a:S con_~cnrion.s in accolmtine. Com.:entions are also knoicn as doctrines . Major
t:vii~EL.:i.m::, @"E:: usetl 1n preparation of final account£ also.

Types of Acc ounting Convention s

Conserva:ti s:m Disclosie.r Consistency Materiality

P1-01'.ule fur F ~ lli:scl0x- All Continuance of All Material

I i 'SF€S bm. 3Ia1trial Accounting Facts
-~tip-'at.e ~v Profit !nforn:rari.on Practices Regularly R&0rded
l. Co~atis m : Pmm-e is unc.--ertain. Though an estiniate ma y be made about future
~ ;sn,fa and arCilllli,,-tan-CcS, but no one can gues~ future with perfect certainty in business, hence
~JID: a:ITangEmfil it or proviEion is made to me<:t future- uncertaintie s. Every sincere
r.r::.e"12~5.:::---rr-;, makes an e ~ e of future loss.es and then some provision for it is made.
 ACCOUNTING CON CEP TS
Ther e ar e som e assu mptions on. whic h acco unti ng is
base d . The se assu mpti ons are rnost
natu ral and ar e not forced ones. Thes e are gene r al
moti ons h ence they are calle d concepts.
These concepts are also known as p ostu lates beca use post
ul a tes too ar e nece ssar y assu mpti ons.
A concept is a self.evid ent prop ositi on, i.e., som ethin
g take n for gran ~ed. Con cept s are also
termed 88 grou nd rules th at gove rn acco unti ng. In a
ccou ntan cy follo wing conc epts are quite
popular:
1. Acc ou n ting P erio d Con cept : Ever y busi.ness
man wan ts to know the resu lt of his
inve stme nt and effor tAafter a certa in peri od. Usu ally
one year peri od is rega rded as an idea}
for this purp ose. It may be of 2 years 6 m on ths or 3 mon
ths also . This peri od is calle d accounting
period. It depe nds on the nat ure of busi ness and obje
ct of the prop rieto r of busi ness .
· Real income of busi ness can be foun d out only whe
n the busi ness com es to an end, but
this period is usua lly too long and no busi ness man can
wait for such a long peri od for knowing
its prof it or loss, ther efore the acco untin g perio d is mos
tly one year .
· From taxa tion poin t of view one year perio d is nece
ssar y as inco me-t ax is paya ble every
year . From April 1st of the curr ent year to Mar ch 31st
of the next year may be acco untin g
year .
Effects of this Concept :
ff) Fina ncia l posit ion of one year may be com
pare d with anot her year .
{ij) E arni ng capa city of one year may be com
pare d with anot her year .
(iii) Thes e com paris ons h elp the man agem ent in
plan ning and incr easi ng the effic ienc y of
busi ness.
(i v) Prop rieto r and outsiders can also
deriv e vario us conc lusio ns acco rdin g to thei r
quer ries.
2. Dua l Asp ect Con cept : Acco untin g concept is
that ever y tran sact ion affec ts two
acco unts. This is why doub le entr y syste m of book -kee
ping cam e into exis tenc e. All busi ness
transactions are reco rded on the basi s of this concept.
No tran sact ion is ·com plete with out
dou bl e aspect. This conc ept is the foun datio n on whic
h the entir e syste m of book -kee ping and
(L{:co unta ncy is base d.
Effects of this Concept :
(i) If one aspe ct of a tran sact ion is reco rded
and othe r is igno red, the acco unta ncy reco rd
will not indic ate true posit ion, henc e this conc ept is
of grea t help in indi catin g true
posit ion of the busi ness .
(ii ) Duri ng recent perio d whe n prod uctio n
has beco me very fast due to tech nolo gica l
adva nces and comp licat ed affai r in large -scal e indu
strie s, this conc ept is of utmo st
use.
(iii) This concept help s in dete cting the erro rs of
emp loye es and in havi ng stric t control
over them .
8. Mon ey Mea sure men t Con cept : Only thos e tran
sact ions are reco rded in books of
account~ _which can be expr esse d in mon ey. Thos e tran
sact ions whic h cann ot be expr esse d in
mon ey full bey~nd the scope of acco untin g. One serio us
shor tcom ing of this conc ept is that the
mo?ey v.alue ~f that date is reco rded on which tran sact
to mfla ion has take n plac e and later on due
Ef:11.twn when . . chan ges m
· mon ey va 1 k 1
ue ta e p ace, thes e chan ges are not cons idere d.
__1 e<.:t8 o1 this Concept :
(i ) In the _abse nce of this concept,
it wou ld have not been poss ible to add vario us
~~~s ~~B~ons . For exam ple a proprieto r has 400
chai rs, 10 mac hine s, 500 acre of land
, . t~bles. He can.n ot add them, but by find ing out thei
amo unt of all these poss essions can easil y be foun d out. r valu es in money, total
 BASIC ACCOUN TING PRINCIP LES, CONCEP I'S AND CONVENTIONS 11
- ~- - - ~-- - --
(ii) Ability of th e boRrd of director s, quRlity of the articles produce d and effici ency of
workers cannot be recorded as thPSP arp not expresse d in money. Thus, this concept
has both merits and demerit s.
4. Realisa tion Concep t : Every business unit spends money to purchas e goods or to
manufa cture goods for sale. Profits cannot be earned only by manufac ture, sale of goods either
for cash or on credit is essentia l to make earning. Without realisati on of sale proceeds , there
can be no profit. Revenue may be realised either for increasi ng an asset or it may be in the
form of extinctio n of an existing liability . Thus , whole of accounta ncy is based on this concept
of realisati on. All efforts in business are made to make utmost realisati on.
Effects of this Concept :
Without realisati on, no earning s can be made by the business unit. The very existenc e of
busines s becomes useless without realisati on.
5. Separa te Entity Concep t : Busines s is treated separate from its owners. All the
transact ions are recorded in the books of the business and not in the books of the propriet or.
On the basis of this concept the propriet or is treated as a creditor for the business . Wben he
contribu tes capital, he is treated as a person who has invested his amount in the busines s and
therefor e, capital appears in the liability side of balance sheet of the propriet or's busines s.
Thus, this concept thus requires to make a distincti on between (i) persona l transact ions and
(ii) busines s transact ions of the entity in order to ascertai n financia l position and operatin g
results of busines s entity.
Effects of this Concept :
(i) Financi al position of the business can be easily found out.
(ii) Earning capacity of the business can be easily ascertain ed.
6. Cost Concep t : According to this concept fixed assets are recorded at the price at which
they are acquired . This price is termed as 'Cost'. In balance sheet, however , these assets do
not appear always at cost price every year, but systema tically it is reduced by the amount of
annual deprecia tion and thus they appeaT at the amount which is cost less deprecia tion. This
value is called book value. Under cost concept, all such events are ignored which affect the
business but have no cost. For example , the most active, importa nt and influenc ial director
dies, then the earning capacity and position of the business will be affected , but this event has
no cost hence it will not be recorded in account books.
Effects of this Concept :
(i) Due to cost concept, market price is ignored and balance sheet indicate s financia l
position on cost and expired cost basis.
(ii) This concept is mainly for fixed assets, current assets are not a:ffec.ted by it.
They
appear in balance sheet at cost or market price, whichev er is lower. though they hvo
are acquired at cost price.
7. Going Concer n Concep t: This concept relat,es with the indefinite long economical life of
the business. The assumpt ion is that business will continue to exist for unlimite d period unless
of course it is dissolved due to some reason or the other. This is why in balance sheet, market
price of fixed assets is not considered. When final accounts are prepared , record is made for
outstand ing expense s and prepaid expense s because of the assumpt ion that business will
continue . If the condition of business is deprecia ted to such an extent that it is to be dosed
down, even then accounta nt's concept is that business is to continue and he records all big and
small transact ions, he never stops making recoTd on the possibility of closing dmvn of business .
This is the best quality of accounta nt which is based on this concept of going concern.
Effects of this Concep t :
e
(i ) Working life of asset is taken into consider ation for \mting off deprecia tion becaus-
of this concept .
 FINAN CIAL ACCOU ~TING --
12 _ _ __ - - - --- - - . b •t does not affect on the accounting
. .
(ii) Whatever bad positio f the busme ss mav e, 1
no .
aspect of the business. b , ntinui tv of busin ess and h e does not stop
. s hopefu1 a ou t, co
.. i) Accoun tant alway s remam ss detenora t·mg. ·
.J
(n d't· of busine •
. though the con wn
writing transactions even •etor provides the f'un d s 1or
1 c
Th acqms. 1tion
. .
8. Accou nting Equiv alenc e Conc ept : e prop:i be equal to the funds provid
ed by the
of assets . hence the assets owned by the b_us;nWhess mt us r prope rties or things
· h · t l · lly called 'Eqwt y are owned by the
proprietor w I11c 1s ec 1ruca . a eve · •
· ·. . tor Hence, accou nting eqmv a1ence concept
proprietor. they are termed as assets of the prnpn e .
is :
Assets = Equities . b d h .ch is know n as liability.
These days in addi~ion to ownhfunds:t mone ; ;:b~~ ;w;he :e;ore , accou nting
Hence. assets are acqmred throug eqm Y an 1 equation
·
is : A=E
Assets = Owner 's Equit y+ Liabilities or Outs1.ders ' eqru·ries
Effects of thi,s Concept : . . t R 11
Any business transa ction can be recorded on the basis eakin
of this con~ep · e~ ~ sp g,
the principle of double entry system that every debit has a corres pondi ng credit
is based on
this concept. It will be discussed in detail later on in this b~ok. . . . .
All the business transactions are covered by the following six comb inatio ns:
. . ..
1. Increase in owner's equity, 2. Decrease in owner's equity , 3. Increa
se 1n liabili ties,
4. Decrease in liabilities, 5. Increase in assets, and 6. Decrease in assets
.
Each transaction is recorded in such a way that the accou nting equat ion contin
ues. Thus,
the two aspects of a transaction are recorded in such a way that their effect
s balan ce each
other and equation is maintained. Had this accounting equivalence conce pt
not been there,
double entry system of book-keeping would have never come into existe nce.
9. Verifi able Objec tive Evide nce Conc ept: This concept relate s with the
verifi cation
of accounting record with the outside evidence. Outsid e evidence mean
s study of those
documents and vouchers etc. on the basis of which accounting record s has
been made . This
sort of verification has become very impor tant these days, becau se of indire
ct mana geme nt
which is increasing by leaps and bounds due to large-scale produ ction. When
all purch ases
and sales were made by the sole trader himself, verification of accou nting
record was not of
much importance, though in Great Britai n this concept occupies key positi
beginning. on since the
Effects of this Concept :
~~) Accounting record is made on the basis of variou s vouch ers and docum ents etc.
~~) These vouchers, ~tc. also help a lot in auditi ng accou nting record.
(m) Acco1;ntant remam s menta lly free due to existe nce of vouch
ers, etc.
Pro 1~. Capit al Co~ce pt : !his ~once~t is that record for capita l be
made separa tely.
00
~~~to r may co~tn bute capita l e~ther m cash or in goods or partly in cash and partly in
fo cap.italn sole tradbmg ~nd partne rship concerns profit of each accou nting period
is transf erred
account ut m case of limite d co · fi ·
Accountant must k hi , . . mpa~i es, pro it 18 not transf erred to capita l account.
E_ffects of this ~:~:e p: ~oncept m view while record ing capita l and profit .
(1) Th·18 ·
.. concept helps to ascert ain th , · · . · .
(n) It also helps in com arin . , e_eam ing ~~pacity ~f busin ess easily . .
of business can be P rtg. th edearn mg capac ity of vanou s period s and thus
11 iu- asce ame efficiency
. . u1.atching of Cost and R .
m~m um profit at minimum . evenu ~ Conc ept: Every busin essma n is eager to make
to find out revenue and cost o;~~~~ Hence , in an accoun~ing_ period name ly
one year, he tries
year and compa res it with that of anoth er year and th us
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 ACCOUNTING
14
- - - - - - - -- -- ~FINANCIAL
~ ~=-=-=~=-----=---- -------- -
ACCOUNTING POLICIES
··~4.ccounting Policies refer to the specific Accounting Principles and the met~ods of ~pplying
those Principles adopted by the enterprise in the preparation and presentation of financial
statenients." There is no single list of accounting policies which are applicable to all enterprises
in all cir cumstances. The 111anagement of each enterprise has to select appropriate accounting
policies having regard to the nature and circumstances of the enterprise. Following are the
example of some of the areas in which different accounting policies may be adopted by different
enterprises.
-Method of Depreciation,
-Valuation of Inventories,
-Valuation of Investment,
-Valuation of Fixed assets,
-Treatment of Goodwill etc. (Disclosure ofAccounting Policies ) (A.S.-1)
Importance of Accounting Policies
Accounting Policies have very gre~t _influence on the subject-matter of Balance Sheet and
Profit and Loss Account, hence the pos1t1on shown by financial statements of a t · ·
s1gru d b h t· . . f h
· ·ficant1yaffiecte y t e accoun 1ng po11c1es o t e business unit. · n en erpr1se 1s
Nature of Accounting Policies
(i) Accounting policies varies from enterprise to enterprise.
(ii) The enterprise makes alternative accounting principles and meth 0 d 8 0 f .
principles in a situation of diverse economic activity. 1
app ying those
(iii) Various accounting policies from year to year should not be ad t d b
distorts the accounting results. op e ecause they
(iv) Selection of Accounting principles and then application method sh Id .
ance with the nature of business enterprise. ou he 1n accord-
 3
ACCOUNTING STANDA RD S IN INDIA
WI TH INTERNATIONAL FINANCIAL
REPORTING STANDARDS (IFRS)

MEA NING OF ACCOUNTING STA NDA RDS

Accounting stan ards are desig ned to harm onis e dive rse
acco untin g polic ies and prac tices .
It is a selected set of acco untin g policies or broa d guid eline
s rega rdin g the prin ciple s, concepts
and conventions issue d by Insti tute of Char tered Acco
unta nts of Indi a. Acco untin g Stan dard s
are issue d for the prep arati on of unifo rm and cons isten
t finan cial state men ts and also for othe r
disclosures affecting the diffe rent user s of acco
untin g infor mati ons. Its natu re is
reco mme ndat ory or man dato ry.
"Accounting Stan dard s are writ ten policy docu men ts,
whic h are issue d by an expe rt
accounting body or Gov ernm ent or othe r regu lator y body
, covering the aspe cts of reco gniti on,
mea sure men t, acco untin g treat men t, pres enta tion of discl
osur e of acco untin g tran sact ions in
financial state men t."
CHARACTERISTICS OF ACCOUNTING STA NDA
RDS
According to prac tical acco untin g natu re of acco untin g
stan dard s are as follows :
(1) Accounting stan dard s are reco mme ndat ory or man
dato ry in natu re.
(2) Accounting stan dard s are mad e takin g into acco unt
the laws of the coun try, busi ness
customs, busi ness envi ronm ents, busi ness laws , economic
policies and Con stitu tion of
the country.
(3) It mak es acco untin g infor mati ons and finan cial state
men ts more com para ble flexible
and mean ingfu l.
'
(4) It serv_es the acco unta nts as a guid e in the acco untin
g treat men t. They prov ide basis
on which accounts are prep ared . For exam ple, Acco untin
meth ods of valu ation of inve ntion s. g Stan dard -2 prov ides the
(5) It dete rmin es the acco untin g policies and prac tices
.
(6) It prescribes a suita ble acco untin g treat men t amo ng
the alter nativ es.
(7) It provides the base s of acco untin g process and the
finan cial area s of acco untin g.
(8) It ~cts as ~ h~~ oniz er and removes the conflict on
acco untin g issue s.
(9) It~ desc nptiv e m natu re and serv es as a dicta tor of
1 acco untin g princ iples .
(lO) ~ 18 an a~counting rule and proc edur es
relat ing to mea sure men t, valu ation and
disc los~ e ISsued by the Council of the Insti tute of Cha
rtere d Acco unta nts of India.
(ll) According to the Prefa ce of the State men ts
st nd rds of Acco untin g Stan dard s "The accounting
a a by their very natu re cann ot and do not over ride the local
govern the prep arati on and pres enta tion of finan cial state ;egu latio ns which
men ts in our country.
 ACCOUNTING STANDARDS IN INDIA 17

LATEST STATUS OF ACCOUNTING STANDARDS ISSUED BY THE ICAI

The Institute of Chartered Accountants of India has so far issued the following standards
effective from the date noted against them :
Number of the Title of the Accounting Standards Date from Entity to which
Accounting which mandatory applicable
Standard (AS) (accounting periods
commencing on or after)
AS-1 Disclosure of Accounting Policies 1-4-1993 All
AS-2 (Revised) Valuation oflnventories 1-4-2016 All
AS-3 Cash Flow Statement 1-4-2001 Level-I/Non-SMC
AS-4 (Revised) Contingencies and Events Occurring
after the Balance Sheet Date 1-4-2016 All
AS-5 Net Profit or Loss for the period,
Prior Period Items and changes in
Accounting Policies 1-4-1996 All
AS-6 Depreciation Accounting withdrawn
and included in AS 10
AS-7 <Revised) Construction Contracts 1-4-2002 All
AS-8 Withdrawn and included in AS-26
AS-9 Revenue Recognition 1-4-1993 All
AS-10 Property, Plant and Equipment 1-4-2016 All
AS-11 The Effects of Changes in Foreign
Exchange Rates [Companies (Accounting
Standards Amendment Rules, 2018)] 1-4-2004 All
AS-12 Accounting for Government grants 1-4-1994 All
AS-13 (Revised) Accounting for Investments 1-4-2016 All
AS-14 (Revised) Accounting for Amalgamations 1-4-2016 All
AS-15 Employee Benefits 1-4-2016 All
AS-16 Borrowing Costs 1-4-2000 All
AS-17 Segment Reporting 1-4-2001 Level-I/Non-SMC
AS-18 Related Party Disclosures 1-4-2001 Level-I & II/all
companies
AS-19 Leases 1-4-2001 All
AS-20 Earnings Per Share 1-4-2001 Level-I, all companies
AS-21 (Revised) Consolidated Financial Statements 1-4-2016 See Note-1
AS-22 Accounting for Truces on Income 1-4-2001 -For Listed
Companies
1-4-2002 -Companies
other than
listed 1-4-2006 -All
AS-23 Accounting for Investment in Associates
in Consolidated Financial Statements 1-4-2002 See Note-1
AS-24 Discontinuing Operations 1-4-2004 Level-I & II/all
companies
AS-25 Interim Financial Reporting 1-4-2002 Level-I/Non-SMC
Note3
AS-26 Intangible Assets 1-4-2003 All
AS-27 Financial Reporting oflnterest in
Joint Ventures 1-4-2002 See Note 1
AS-28 Impairment of Assets 1-4-2004 -Level-I
1-4-2006 -Level-II
1-4-2008 -Level-III
AS-29 (Revised) Provisions, Contingent Liabilities
and Contingent Assets 1-4-2016 All
Note 1 : AS-21, AS-23 and AS-27 (relating to consolidated financial statements) are required to be complied with by
an entity if the entity, prepares and presents consolidated financial statements.
Note 2 : Applicability of Accounting Standards to companies will be governed by the Companies (Accounting
Standards) Rules not by applicability as announced by the !CAI as above.
Note 3: If an entity is required .o r elect to prepare and present an interim financial report, it should comply with this
standard.
 OBJECTIVES OF ACCOUNTING STANDARDS
The objectives for accounting standards can be listed as follows :
( 1) To bring uniformity in accounting policies, methods, principles and disclosure of
accounting process in case of necessity.
(2) To improve the relevancy, simplicity, credibility and reliability of financial statement.
(3) To help in explaining the accounting terminology.
(4) To remove the rigidity of accounting policies.
(5) To present a logical view on controversial accounting practices.
(6) To give scientific approach to disclosure and presentation of financial statement
(7) To prevent the users from reaching and misleading conclusions. ·
(8 ) To prevent manipulation of data by the management and others.
(g) To determine the managerial accountability, corporate accountabilit .
·1 ·t Y and financial
account a b 1 1 y.
(10) To make financial accounting standardised internationally.
C,,w, A - -
 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
CONCEPT OF IFRS
Intern_a tional Financial Reporting Standards (IFRS) is a set of accounting standards
developed by an independent not-for-profit organisation called the international accounting
standards board (IASB ).
The goal of IFRS is to provide a global framework for how public companies prepare and
disclose their financial statements. IFRS provides general guidance for the preparation of
financial statements, rather than setting rules for industry specific reporting.
FEATURES OF IFRS
1. Relevance : So that it makes a difference to the decisions about a company made by users
of the statements.
2. Comparability : You can compare financial statements from one period to the next or for
two companies in the same industry so that you can make informed decisions about the
comparues.
3. Understandability : You present and classify information clearly and concisely to make
it understandable to users.
4. Verifiability: Different people could reach the same decision based on the information,
but not necessarily reach complete agreement. .
5. Timeliness: You make information available to users in good time. Historical information
quickly becomes out of date.
 ACCO UNTI NG STANDARDS IN INDIA
19
Adva ntag es of IFRS
l. It allow s for great er comp arabi lity.
2. It is benef icial to new and small inves tors.
3. It creat es more flexib ility.
Disa dvan tages of IFRS
1. It requi res high costs .
2. It is prone to mani pulat ion.
3. It is not globa lly accep ted.
IMPORTANCE AND PROCEDURE
The term IFR~ comp rises IFRS issue d by IASB; IAS issue d by
Intern ation al Acco untin g
Stand ards Com mitte e (IASC ); Inter preta tions issue d by
the Stand ard Inter preta tions
Comm ittee (SIC) and the IFRS Inter preta tions Comm ittee of the
IASB.
Inter natio nal Finan cial Repo rting Stand ards (IFRS s) are consi
dered a "prin ciples -base d"
set of stand ards. In fact, they estab lish broad rules rathe r than
dicta ting specific treatm ents.
Every majo r natio n is movi ng towa rd adopt ing them to some exten
t. Large numb er of autho rities
requi res publi c comp anies to use IFRS for stock -exch ange listin
g purpo ses, and in addit ion,
bank s, insur ance comp anies and stock excha nges may use them
for their statu torily requi red
repor ts. So over the next few years , thous ands of comp anies
will adopt the intern ation al
stand ards. This requi reme nt will affect abou t 7,000 enter prise
s, inclu ding their subsi diarie s,
equit y inves tors and joint ventu re partn ers. The incre ased use
of IFRS is not limite d to
publi c-com pany listin g requi reme nts or statu tory repor ting. Many
lende rs and regul atory and
gove rnme nt bodie s are looki ng to IFRS to fulfil local finan cial repor
ting oblig ations relate d to
finan cing or licen sing.
List ofIFR S
as on 30-06 -2019
Title Originally issued E ffective
IFRS 1 First- time Adop tion of Intern ationa l Finan cial 2003 1.1.2004
Repor ting Stand ards
IFRS 2 Share based Paym ent 2004 1.1.2005
IFRS 3 Busin ess Comb inatio ns 2004 1.4.2004
IFRS 4 Insur ance Contr acts . . 2004 1.1.2005
IFRS 5 Non-c urren t Asset s held for sale and discon tmued 2004 1.1.2005
opera tions .
IFRS 6 Explo ration for and Evah;1.ation of Mmer al Resou rces 2004 1.1.2006
IFRS 7 Finan cial Instru ments Disclo sures 2005 1.1.2007
IFRS 8 Opera ting Segm ents 2006 1.1.2009
IFRS 9 Finan cial Instru ments 2009, 1.1.2018
updat ed 2014
IFRS 10 Conso lidate d Finan cial Statem ents 2011 1.1.2013
IFRS 11 Joint Arran geme nts .. . 2011 1.1.2013
IFRS 12 Disclo sure of Intere sts in other Entiti es 2011 1.1.2013
IFRS 13 Fair Value Meas ureme nt 2011 1.1.2013
IFRS 14 Regul atory Defer ral Accou nts 2014 1.1.2016
IFRS 15 Reven ue from Contr acts with Custo mers 2014 1.1.2018
IFRS 16 Lease s 2016 1.1.2019
IFRS 17 Insura nce contra cts 2017 1.1.2021
 INDIAN ACCOUNTING STANDARDS (Ind AS)
Indian Accounting Standards (Ind-AS) are the International Financial Reporting
Standards (IFRS) converged standards issued by the Central Government of India under the
supervision and control of Accounting Standards Board (ASB) ofICAI and in consultation with
National Advisory Committee on Accounting Standards (NACAS).
National Advisory Committee on Accounting Standards (NACAS) recommend these
standards to the Ministry of Corporate Affairs (MCA). MCA has to spell out the accounting
standards applicable for companies in India.
 The Ind AS are nam ed and num ber ed in the sam e way
as the cor resp ond ing Inte rna tion al
Fin anc ial Rep orti ng Sta nda rds (IFR S).
The Ind ian Acc oun ting Sta nda rds (Ind AS) , as not ifie d
und er sec tion 133 of the Com pan ies
Act , 201 3, hav e bee n form ulat ed kee pin g the Ind ian eco
nom ic and leg al env iron me nt in view
and wit h a view to con verg e wit h IFR S Sta nda rds .
As per the Not ific atio n, Ind ian Acc oun ting
Sta nda rds (In d AS) con v erg ed with
Inte r-na tion al Fin anc ial Rep orti ng Sta nda rds (IFR
S) hav e bee n imp lem ent ed on v olu nta ry
bas is from 1st Apr il, 201 5 and man dat ory from 1st
Apr il, 201 6. '
 LIST OF INDIAN ACCOUNTING STANDARDS OND-AS)
As on 01.04.2018
Ind AS
Title of Ind AS
101 First Time Adoption of Indian Accounting -Standards - - - - -
102 Share Based Payment
103 Business Combination s
104 Insurance Contracts
105 Non-current Assets
106 Exploration for and Evaluation of Mineral Resources
107 Financial Instruments : Disclosures
108 Operating Segments
109 Financial Instruments
110 Consolidated Financial Statements
111 Joint Arrangemen ts
112 Disclosures of Interests in Other Entities
113 Fair Value Measuremen t
114 Regulatory Deferral Accounts
115 Revenue from Contracts with Customers
1 Presentation of Financial Statements
2 Inventories
7 Statement of Cash Flows . .
8 Accounting Policies, Changes in Accountmg Estimates and Errors
10 Events after the Reporting Period
11 Construction s Contracts
12 Income Taxes
16 Property, Plant and Equipment
17 Leases
18 Revenue
19 Employee Benefits
20 Accounting for Government Gr~m ts and Disclosure
R of Government Assistance
21 The Effects of Changes in Foreign Exchange ates
23 Borrowing Costs
24 Related Party Disclosures
27
I Separate Fi~an cial ~tat:~:1t}oi nt Ventures .
28 Investment m As_soci_ateHyperinflationary Economies
29
1
Financial Reportmg m .
32 I Financial Instruments : Presentation
33
34 I Earnings per Share .
Interim Financial Reportmg
36 \ Impairment of ~sets t L' b'lities and Contingent Assets
37 Provisions, Contmgen ia i
38 Intangible Assets
40 Investment Property
41 I Agriculture