WHY ACCOUNTS?????

Shiva Ram

BAKERY TEXTILE
SHIVA PLANNING TO START A BUSINESS

Personal Saving Rented a place

1,00,000

Friends 1 ,00,000 Brought

Furnitures

Bank Loan
5,00,000 Brought car from
his house

T
h
i
SHIVA STARTED A BUSINESS

T
h
i
 Purchased ,
cutlery, Raw
Materials for Customer D..E…F….
25,000 paid 20,000

Customer A
Rs 100
Customer
C
500 but paid 200
Customer B (Friend)
Rs 200
NO RECORDING

PROFIT???????
BANK INTEREST

Supplier
Customers Who has to
Pay?????

NO RECORDING
RAM STARTED BUSINESS
 Sale = 100,000
Expenses = 40,000
Profit= 60,000
Book keeping is the science and art of correctly recording in the books of accounts all those
business transactions that result in the transfer of money or money ‘s worth.
Need or Objectives:
•To have a permanent record of all the business transactions
•To know the names of the customers and the amount due from them
•To know the names of suppliers and the amount due to them
•To keep records of income and expenses in such a way that the net profit or the net loss
maybe calculated
•To keep records of assets and liabilities in such a way that the financial position of the
business may be ascertained
•To have important information for legal and tax purposes
 Accountancy

American Association of certified Public Accountants (AICPA) : Accounting is the art of recording, classifying and
summarizing in terms of Money , financial transactions and events and interpreting the results thereof.

ACCOUNTANCY

RECORDING

CLASSIFICATION SUMMARIZING INTERPRECTING

FUTURE REFERENCE
ORGANISING INCOME XXXX ANALYSING
EXPENSES XXX M(2Cr), D(1Cr) C(50L)
PROFIT XXX
OBJECTIVES OF ACCOUNTING:

1. To keep systematic record

2. To ascertain the results of the operation
3. To ascertain the financial position of the business
4. To portray the liquidity position
5. To protect business properties
6. To facilitate rational decision making
7. To satisfy the requirements of law
Basics of distinction Book - keeping Accountancy

1. Nature The job of a book -keeper is clerical in The job of an accountant is analytical
nature and imaginative

2. Scope Book -keeping is concerned mainly Accountancy involves classifying,

with the recording of transactions. summarizing, analysing and
presentation of information

3.Stage Book- keeping is the primary stage of Accountancy is the secondary stage of
maintaining accounts maintaining accounts. It starts where
book- keeping ends.

4.Results Book -keeping does not provide any Accountancy shows the net results and
conclusion. financial position of the business.

5.Authority The work of bookkeeping is performed The work of accountancy is performed

by the junior staff with comparatively by the senior staff having
less authority. comparatively more authority.

6.Analytical skill It does not require analytical skill It requires analytical skill
 PERSONS INTERESTED IN ACCOUNTING

INTERNAL USERS EXTERNAL USERS

(a) Management (a) Consumer
(b) Employees (b)Creditors
(c) owners (c) Banks
(d) Investors
(e) Government
 BRANCHES OF ACCOUNTING

Financial Accounting: Financial Accounting records business transactions to know

financial position on a particular date can be known

Cost Accounting: It involves collection, classification and ascertainment of the cost of

production undertaken by the firm

Management Accounting: Management Accounting involves the use of accounting

data collected for policy formulation, planning, control and decision making by the
management.
 CURRENT
ASSET
CAPITAL
FIXED
ASSET

GOODS

DRAWINGS LIABILITIES
➢Creditor: A creditor is a person to whom amount is owed or to whom some amount is
payable. When state bank gives loan to RAM, state bank of India is a creditor

➢Debtor : A debtor is a person who owes some amount or who has to pay some amount
to another person.

➢ Company
Customers
➢PURCHASE:Any goods which are brought by an enterprise.

➢SALES: Any goods which are despatched out by an enterprise to a customer

➢PURCHASE RETURN:If the goods bought by an enterprise are of poor quality they
may have to be returned back to supplier.

➢SALES RETURN:If the goods despatched by the enterprise to a customer are of

poor quality or in excess of quantity that may be returned back by the
customers.
➢ Transactions: Transactions means an exchange between two parties It can be
Cash transactions and credit transactions

➢Accounting Year : Accounting year is a period of 12 months say from 1st April
2021 to 31st March 2022 for preparing final accounts.

➢Goodwill : It is an intangible fixed asset having realisable value. It is the cost of

reputation of a business organization. This added prestige and its value is called
the Goodwill of the firm.
Accounting brings the following advantages:
➢ It serves as a historical record.

➢ It facilitates the preparation of financial statements.

➢ It supplies information to interested persons

➢ It helps the management in taking important business decisions.

➢ It facilitates comparative study of the performance of business over different periods.

➢ It provides information for judging the efficiency of business

➢ It is useful in getting loans.

➢It helps in prevention and detection of errors and frauds.

 Accounting Concepts or principles

Accounting concepts are those assumptions, principles or conditions on which the

accounting system is based. Principles are set of rules to be followed in accounting. The
following are important accounting concepts or principles :
1. Business Entity Concepts: According to these concepts, a business is treated as
separate Entity distinct from its owner. This means that in accounting the business and
owner must be treated separately.

Business Personal Use

Use (Drawings)
(Asset)
 Accounting Concepts or principles

2. Going concern concepts: According to this, it is assumed that business will exist for a
long time. There is no intention t o liquidate the business in the immediate future.
 Accounting Concepts or principles

3. Money measurement concepts: Accounting records only those transactions which are
expressed in monetary terms. Transactions which cannot be expressed in money do not find
place in the books of accounts.

Purchase PROFIT Death Honestly

4. Cost Concepts: According to this concept, all transactions are recorded in the books of
accounts at actual price involved.

Cost = 25,00,000

Market Value = 50,00,000

5. Dual aspect Concepts: according to this concept, every transaction has two aspects. These two
aspects are receiving aspect and giving aspect. These two aspects have to be recorded. The basis of this
principle is that for every debit, there is an equal and corresponding credit.

6. Realization Concept: According to this principle revenue is said to be realized when goods or
services are sold to the customer. It emphasizes the fact that the mere receipt of an order for goods or
services cannot be taken for the realization of revenue. So advanced payment received from a customer
cannot be considered as revenue earned.

➢
7. Matching Concept: According to this concept, cost of a business of a particular period is
compared with the revenue of that period in order to ascertain net profit or net loss.
8. Accounting period Concept: According to this assumption, the life of a business is divided in to
different periods for preparing financial statements. Generally business concern adopt twelve months
period

9. Accrual Concept: Under the Cash system of accounting, the revenues and expenses are
recorded only if they are actually received or paid in cash, irrespective of the accounting period to
which they belong.
But under Accrual concept, occurrences of claims and obligations in respect of incomes or
expenditures, assets or liabilities based on happening of any event, passage of time, rendering of
services etc. Are recorded even though actaul receipts or payments of money may not have taken
place.
Accounting conventions
Accounting conventions are the customs and traditions which guide the accountant while
preparing accounting statements. Some of the accounting conventions are:-

(1) Convention of consistency: - This convention follows that the basis followed in several accounting
periods should be consistent. This means the methods adopted in one accounting year should not be
changed in another year. Then only comparison of results is possible.
(2) Convention of conservatism: - This is a convention of playing safe, which is followed while
preparing the financial statements. The idea of this convention is to consider all possible losses and
to ignore all probable profits.
(3) Convention of Materiality: - Materiality means relevance or importance or significance. It is
generally accepted in the accounting circle that the accounting statements and records must reveal
all material facts.
(4) Convention of full disclosure: - The accounting convention of full disclosure implies that accounts
must be honestly prepared and all material information must be disclosed therein.
Accounting conventions
1. Convention of consistency

Convention of conservatism:
Accounting conventions
Convention of Materiality

Convention of full disclosure

Introduction to Accounting Standards

➢ Accounting standards
Accounting standards may be defined as the accounting principles and rules which are to be followed for
various accounting treatments while preparing financial statements on uniform basis and which will reveal the
same meaning to all the interested groups.

Need for accounting standards (Objects of Accounting standards):

1. To communicate uniform results to external users as well as internal users for decision making.

2. To serve as a tools for information systems catering the needs of management, owners , creditors , Government
etc.

3. To facilitate inter firm, intra firm comparison.

4. To make the financial statement more reliable comparable and understandable.
AS 1 : Disclosure to Accounting Policies
Accounting standards ( AS) 1 deals with the disclosure of significant policies followed in preparing and
presentation of final accounts.

• FEATURES OF AS - 1

1. All significant accounting policies adopted in the preparation and presentation of financial statements should
be disclosed.
2. All policies should be disclosed in one place instead of being scattered at many places in several schedule.

3. If fundamental accounting assumptions viz, Going Concern , Consistency and Accrual assumption is not
followed, the fact should be disclosed.
4. Any change in the accounting policies which has a material effect in the current period or which is reasonably
expected to have a material effect in later periods should be disclosed.

5. Accounting policies which has a material effect in the current period the amount by which any item in the
financial statements is effected by such change should be disclosed to the extent ascertainable. Where such
amount is not ascertainable, wholly or in a part the fact should be disclosed
 ACCOUNTING STANDARDS 6: DEPRECIATION ACCOUNTING
• Accounting Standards (AS) 6 Depreciation Accounting issued by the institute of Chartered Accountants of India,
deals with depreciation accounting and applied to all depreciation assets.

• Depreciation is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from
use, effect of time, or obsolescence through technology and market changes.

•
 ACCOUNTING STANDARDS 6: DEPRECIATION ACCOUNTING
Feature of AS 6 :

1. The depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period
during the useful life of the asset.
2. The useful life of a depreciable assets should be estimated on considering the following factors: (a) expected
physical wear and tear (b) obsolescence
3. The depreciation method selected should be applied consistently from period to period. The selection depends on
the type of assets, the nature of its use and its circumstances prevailing in the business.
4. A change from one method of providing depreciation to another should be made only if required by law or
accounting standards.
 ACCOUNTING STANDARDS 6: DEPRECIATION ACCOUNTING
1. Where a depreciable asset is disposed of, scrapped etc the net surplus or deficiency should be disclosed separately.
2. The following should be disclosed in the financial statements (a) historical cost , (b) the total amount of depreciation
(c) total depreciation period ( d) the depreciation method (e) depreciation rates.
 ACCOUNTING STANDARDS 9: REVENUE RECOGNITION

Accounting standards 9 : Revenue Recognition

Accounting standards 9 ( Recognition of Revenue ) deals with recognition of revenue in

the profit and loss account of a concern. The income may be from sale of good or fees
from services or interests, royalties, dividends etc.

Revenue meaning: Revenue means the amounts earned from customers for goods sold,
services given or for use of funds or assets , interest on loans , dividends on shares and
royalties for use of patents, know how etc.
 ACCOUNTING STANDARDS 9: REVENUE RECOGNITION
Method can be used for recognizing revenue

1. Proportionate completion method: Revenue is recognized in proportion to the degree of completion of

service under a contract.
2. Completed service contract Methods: Revenue is recognized when the rendering of services under a
100contract is fully completed.
 ACCOUNTING STANDARDS 9: REVENUE RECOGNITION

Features of AS 9
➢Revenue from sale of goods should be recognized when the seller of the goods has transferred to the
buyer the property in the goods for a price , or all significant risks and rewards ownership have been
transferred to the buyer and the seller retains no effective control of the goods.
➢Revenue from rendering of services should be recognized on the basis of the performance of the
services, either on the basis proportionate completion method or on the basis completed services
contract method. In the other cases, revenue should be recognized as follows:
●Interest: should be recognized on a time proportion basis taking into account the principal outstanding.
●Royalties : should be recognized on accrual basis in accordance with the terms of the relevant agreement
● Dividends should be recognized when the right to receive the dividend payment is established.
➢ Revenue should be recognized only when no uncertainty exists regarding amount of the consideration
that will be derived and about its ultimately collectability.
 ACCOUNTING STANDARDS 10 : ACCOUNTING FOR FIXED ASSETS

ACCOUNTING STANDARDS 10 : ACCOUNTING FOR FIXED ASSETS

According to AS 10, Fixed assets is an asset held for the purpose of producing goods or services and not for sale in the
normal course of business. AS deals with accounting for fixed assets shown in the accounts under various categories
such as land , building, plants and machinery, vehicles goodwill etc.

Features of AS 10 :

1. A fixed asset is defined as “ an asset held with the intention of being used for the purposes of producing or
providing goods and services and is not held for sale in the normal course of business “.
2. The cost of a fixed asset should be determined as below:
● The cost of a purchase fixed asset includes its purchase price and any cost of bringing the assets to it’s working
conditions for its intended use.
 ACCOUNTING STANDARDS 10 : ACCOUNTING FOR FIXED ASSETS
● When a fixed asset is acquired in exchange for another asset the asset acquired should be recorded either at fair
market value or at net book value of the asset given up.
●Where several fixed assets are purchased for a consolidated price, the price should be divided among various assets
on a fair basis with the help of expert valuers.
 International Financial Reporting Standards (IFRS)

IFRS is a set of common rules so that financial statement can be consistent, transparent and
comparable around the world. IFRS is issued by International Accounting Standard Board.

Benefits:

1. Easy access to global capital market

2. Improvement in comparability of financial information and performance
3. IFRS enhances uniformity in the accounting principles
4. Cost of raising fund from abroad will be lower
5. Financial statements will be understood by foreign investors
6. It will lead to increased trust and reliance placed by Indian investors.
 International Financial Reporting Standards (IFRS)

CHALLENGES

1. Proper training is needed before adopting and implementing IFRS

2. Several laws and regulations governing financial accounting and reporting in India needed to be
amended
3. There can be shortage of professionals with practical IFRS experience
4. Indian tax authorities should ensure that there is clarity on the tax treatment of items arising out
of IFRS convergence.
5. Financial markets and analysts need to adapt to the new reporting standards and interpret them
accordingly
 International Financial Reporting Standards (IFRS)
IAS (IND AS 1) PRESENTATION OF FINANCIAL STATEMENTS

The purpose of the IAS 1 is to prescribe standards such that the financial statements presented
under the IFRS are comparable to the financial statements of the previous period and to the
financial statements of any other entity.
• Features
1. Fair Presentation-
2. Going Concern
3. Materiality
4. Consistency of presentation
5. Reporting period
 International Financial Reporting Standards (IFRS)
IAS 2 INVENTORIES : The objective of IAS 2 is to prescribe the accounting treatment for inventories. It
provides guidelines for determining the cost of inventories.

Inventories include assets held for sale in ordinary business. It can be Raw materials, work in progress and
finished goods

Inventories consists of the following:

1. In the form of materials or supplies to be consumed in the production process

2.In the process of production of such sale

3. Held for sale in the ordinary course of business

 International Financial Reporting Standards (IFRS)

FUNDEMENTAL PRINCIPLE OF IAS 2

Inventories are required to be stated at the lower cost and net realized value( NRV).

NRV is the estimated selling price in the ordinary course of business less the cost of
completion and the estimated cost necessary to make the sale

Cost of inventories include

• Cost of purchase including taxes, transport and handling ,deduct net trade discounts etc.
• Cost of conversion include fixed and variable expenses
• Other cost incurred in bringing the inventories to their present location and condition.
 Capital Expenditure Revenue Expenditure
Definition
Expenditure incurred for acquiring assets, to Expense incurred for maintaining the day to day
enhance the capacity of an existing asset that activities of a business
results in increasing its lifespan
Tenure
Long Term Short term
Value Addition
Enhances the value of an existing asset Does not enhance the value of an existing asset
Physical Presence
Has a physical presence except for intangible Does not have a physical presence
assets
Occurrence
Non-recurring in nature Recurring in nature
 Capital Expenditure Revenue Expenditure
Availability of Capitalization
Yes No
Impact on Revenue
Do not reduce business revenue Reduce business revenue
Potential Benefits
Long-term benefits for business Short-term benefits for business
Appearance
Appears as assets in the balance sheet and some Always appears in the income statement
portion in the income statement