OLC Chapter1

Financial Accounting for Management 5/e by Ramachandran & Ram Kumar Kakani, “Copyright with Tata McGraw
Hill Education Private Limited, 2020”
Students Manual
for
CHAPTER I
CONCEPTUAL BASIS OF ACCOUNTING
KEY WORDS
You are suggested to visit Glossary to appreciate and review the following key words used in this
chapter:
➢ Accounting ➢ Going concern

➢ Accounting Policy ➢ Institute of the Chartered
➢ Accounting Postulates Accountants of India (ICAI)
➢ Accounting Principles ➢ Internal audit
➢ Accounting Theory ➢ International Financial Reporting
➢ Attention directing Standard (IFRS)
➢ Business entities ➢ Management control
➢ Conservatism ➢ Materiality
➢ Consistency ➢ Monetary expression
➢ External audit ➢ Problem solving
➢ Financial Reporting ➢ Property rights
➢ Full-disclosure ➢ Score keeping
➢ Generally Accepted Accounting ➢ Timeliness
Principles (GAAP)
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ANNEXURES
Annexure 1.1
Three Ways of Capital Maintenance

Capital maintenance in an organization can be attained by any of the following three ways:
(a) Financial capital maintenance
(b) General purchasing power financial capital maintenance
(c) Maintenance of productive capacity
Financial Capital maintenance

Under the concept of financial capital maintenance, 'Capital' means the net assets (i.e., the
excess of assets over liabilities) or equity (i.e., share capital plus reserves and surplus) of
the entity. Therefore, income is the amount of increase in the net assets or equity of the
entity, over the period. This excess, even if distributed as dividend, will not result in a
reduction of capital.
For example, if the total assets and liabilities of a firm at the beginning of a year are Rs
1,00,000 and Rs 80,000 respectively, the net assets of the firm at the beginning amount to
Rs 20,000 (being assets less liabilities). Now, if at the end of the same period, the amount
of assets and liabilities are Rs 1,50,000 and Rs 1,25,000 respectively, the net assets at the
end of the period would become Rs 25,000. Here, the income for the period can be
calculated as the excess of net assets at the end of the period, as compared with the net
assets at the beginning of the period, which comes to Rs 5,000. This amount, even if
distributed, will not reduce the capital. This concept is also known as Money Capital
Maintenance. During periods of high inflation, the profits under this concept are
inflated; as a result, the maintenance of the real value of capital may not be feasible.
General Purchasing Power Financial Capital maintenance
The concept of general purchasing power financial capital maintenance means the
purchasing power of the financial capital invested is required to be maintained. The
income for the period is the change in the net assets, expressed in monetary units of the
same purchasing power. Continuing with the above example, if the rate of inflation is
assumed to be at 5 percent, the net capital at the beginning of the period is restated to Rs
21,000 (adding a 5 percent increase to Rs 20,000 due to inflation). Thus, using this
method the income for the period becomes Rs 4,000 (being Rs 25,000 less 21,000),
which can be distributed as dividend without reducing the capital.
Maintenance of Productive Capacity
The concept of maintenance of productive capital suggests that the productive capacity of
a firm should be maintained when the income is determined. In other words, income
means the excess of productive capacity at the end of the year, over the productive
capacity at the beginning of the year. Taking the same example, if we assume that the net
assets required to maintain the existing productive capacity is Rs 23,000, the income for
the period would be Rs 2,000 (Rs 25,000 less 23,000).
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The selection of the appropriate method of capital maintenance depends on the needs of
the users of the financial statements.
Annexure 1.2
Limited Liability Partnership

Limited Liability Partnership (LLP) is a blend of the provisions of Companies Act and
Partnership Act; and hence it is a hybrid corporate business with perpetual succession and
separate legal entity. It allows flexibility of Partnership firms with the benefits of limited liability
of a company. The two prime reasons for the introduction of LLP in India are the “risk factor”
and the “enhanced global competitive advantage” that an LLP offers to Indian professionals.
Thus, in the year 2006, the Limited Liability Partnership Bill was introduced in the Parliament.
It brought great relief to the partners of partnership firms, particularly, professionals like
Chartered Accountants, Company Secretaries, Cost Accountants, Lawyers, Doctors and
Architects. It limits the exposure to the extent of liability while being engaged in businesses with
large firms such as Multinational Companies.
Each LLP is required to appoint two designated partners who shall be accountable for regulatory
and legal compliances, besides their liability as “partner, per-se” and a manager, not necessarily
a partner of the LLP, who is responsible for ensuring statutory compliance for the LLP.
The possible advantages of LLP are as follows:
✓ It is a legal entity separate from its partners, having perpetual succession.

✓ The liability is limited to the extent of partners’ contribution – thus, a partner is shielded
from the fraudulent act of another partner.
✓ Low cost of formation. Less compliance level. Thus, it is easy to establish and run with
minimal interventions of the Government
✓ No restriction as to maximum number of partners.
✓ High level of flexibility. A Multi-disciplinary LLP can also be formed.
✓ A partner is agent to LLP and thus one could bind LLP by a partners acts and not the
other partners.
✓ No exposure to personal assets of the partners except in the case of fraud. Only
designated partners are liable for legal compliances.
✓ Death of a partner does not dissolve partnership.
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Annexure 1.3
One Person Company

According to the new Companies Act, 2013, a ‘One Person Company' (OPC) means a company
which has only one person as a member. It is thus a one shareholder corporate entity, where
despite having just one person, legal and financial liability is limited to the company alone.
The reason why earlier Companies Act, 1956 had made it compulsory for a company to have a
minimum of two members was so that it could clearly separate it from a sole proprietorship, a
form of carrying out business which is categorically excluded from the Act (see, table 1.1 for
details). However, the hypocrisy of this provision was too glaring to ignore. People started
forming companies by adding a nominal member/director and allotting them one single share,
which is the minimum requirement for a director as per the Act, and retaining the rest of the
shares for themselves. Thus a person could enjoy the status and benefits of a Company while
operating and functioning like a proprietary concern for all practical purposes.
Besides this, entrepreneurs found themselves investing their creative energy in unproductive
paperwork and legal formalities which a full blown private limited company necessitated. Hence,
the J.J. Irani Committee in 2005 suggested OPC with a simpler regime through exemptions so
that the single entrepreneur is not compelled to fritter away his time, energy and resources on
procedural matters.”
The major advantage of the OPC will be that apart from completing basic procedural formalities
for oneself, the sole member needn’t delve into other time consuming procedures and focus fully
on functionality and scalability. At the same time, this sole member can hire employees in the
name of the company, transact as an agent of the company and even appoint a full-fledged board
to allow a corporate style of operation. For example, from a procedural point of view, the
Companies Bill grants certain relaxations to OPC which are not otherwise available to a private
limited company. For instance, an OPC is not mandated to convene an annual general meeting,
extraordinary general meeting and other board meetings subject to certain conditions. Moreover,
reporting requirements with the Registrar of Companies are toned down for an OPC.
Further prominent features of OPC includes the sole shareholder is required to appoint a nominee
(with such nominee’s written consent) who would take charge of the company in case of the
shareholder’s death. Further, such a nominee may be changed any time in the manner prescribed
under the Companies Bill.
On the negative side, from a taxation point of view, the concept of OPC may not appeal to
smaller proprietorships since the base rate of tax of a company is quite steep (30% approx) and
may result in a higher incidence of taxation for the smaller sole ventures.
Source: “One is company: A glance at OPC,” The Hindu Business Line 17 Dec. 2011, print.
“Analysis: OPC under the Companies Bill,” Business Standard 27 Aug. 2011, print.
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Annexure 1.4
India’s Roadmap of Convergence with IFRS

The adoption of the International Financial Reporting Standards (IFRS) by Indian firms is one of
the most significant financial accounting and reporting changes in the history of Indian corporate
accounting.
On 16 February 2015, the Ministry of Corporate Affairs (MCA) notified the Companies (Indian
Accounting Standards) Rules, 2015 (the 'Rules'). The Rules specify the Indian Accounting
Standards (Ind AS) applicable to certain class of companies and set out the dates of applicability.
The key requirements of the Rules with regard to the class of companies that will be required to
follow Ind AS and the date of adoption by such companies are as under:
Voluntary Adoption
Companies may voluntarily adopt Ind AS for financial statements for accounting periods
beginning on or after 1 April 2015, with the comparatives for the periods ending 31 March 2015
or thereafter. Once a company opts to follow the Ind AS, it will be required to follow the same
for all the subsequent financial statements.
Mandatory adoption
For the accounting periods beginning on or For the accounting periods beginning on or
after 1 April 2016 after 1 April 2017
The following companies will have to adopt The following companies will have to adopt
Ind AS for financial statements from the above Ind AS for financial statements from the above
mentioned date: mentioned date:
➢ Companies whose equity and/or debt ➢ Listed companies having net worth of less
securities are listed or are in the process of than Rs. 500 crore.
listing on any stock exchange in India or ➢ Unlisted companies having net worth of
outside India (listed companies) and having Rs. 250 crore or more but less than Rs. 500
net worth of Rs. 500 crores or more. crore.
➢ Unlisted companies having a net worth of ➢ Holding, subsidiary, joint venture or
Rs. 500 crores or more. associate companies of the listed and
➢ Holding, subsidiary, joint venture or unlisted companies covered above.
associate companies of the listed and
unlisted companies covered above.
Comparative for these financial statements will Comparative for these financial statements will
be periods ending 31 March 2016 or thereafter. be periods ending 31 March 2017 or thereafter.
The roadmap will not be applicable to:
❖ Companies whose securities are listed or in the process of listing on SME exchanges.
❖ Companies not covered by the roadmap in the "Mandatory adoption" categories above.
❖ Insurance companies, banking companies and non-banking finance companies.
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These companies should continue to apply existing Accounting Standards prescribed in the Annexure
to the Companies (Accounting Standards) Rules, 2006, unless they opt for voluntary adoption.
Insurance companies, banking companies and non-banking finance companies cannot voluntarily
adopt the Ind ASs. Separate road map for these companies will be submitted.
However, it is to be noted that the regulator have been revising and extending these timeliness largely
due to interval pressures by ICAI such as resolution of taxation issues relating to the transition to Ind
AS.
Source: “Indian GAAP IFRS and Ind AS a Comparison,” Delloitte Report 26 Feb. 2015. print.
“Breather for Indian Firms on IFRS,” Hindu business Line 26 Feb. 2012. print.
Annexure 1.5
Auxiliary Reading Material
Arthashastra and link to Accounting
Chanakya’s Arthashastra
Administration of Justice
National Security issues Economic Development
including Crime and
including Foreign Policy Policies
Punishment issues
Labor Financial Others

Taxation Accounting
Management Management
Structure organization to Create comprehensive

“Virtue Ethics” to Maintain
create minimal conflict & Rules & Regulations for
Ethical Values
agency issues Implementation
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Footnotes: “Virtue Ethics” is an approach to Ethics that emphasizes an individual's character as the key element of
ethical thinking, rather than rules about the acts themselves (Deontology) or their consequences (Consequentialism).
Note: This write-up will make more sense – if read along with chapter 1 opener titled “Chanakya on the scope and
methodology of accounting”
@~!~@
Accounting Profession and Economic Development
The fact that accounting is a late entrant to professional status is due to the fact that these organized
economic activity of the earlier epochs in history, was not sufficient to support and sustain an
independent profession of accounting. After all, accounting is concerned with processing and
reporting economic information to decision makers and as such, the demand for such a service
could not have arisen without the development of economic activity which needed such information
for decision making.
Economic transactions form the basis of accounting. Some form of recording of economic
transactions was undertaken in almost all the ancient civilizations. In Babylon and Egypt, and in
Rome and Greece, these records were kept both for private and public purposes. The development
and acceptance of the organized form of accounting took place only around the fourteenth century.
Note: This write-up will make more sense – if read along with chapter 1, section 1.1: Evolution of financial accounting
@~!~@
Leonardo da Vinci and Pacioli’s Contribution to Accounting!
We look upon the Franciscan, Monk Fra Luca Pacioli (1445-1517), as the father of modern
accounting. He was also a close friend and tutor to Leonardo da Vinci. Summa de Arithmetica,
Geometria, Proportioni et Proportionalita, published in 1494, is considered as the first text on
accounting. By the time Pacioli published his later work, De Divina Proportione, in 1509, he was so
well respected that Leonardo da Vinci contributed several engravings for his text.
Luca Pacioli
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Merchants had been using a system of recording transactions, recognising the benefit and sacrifice
aspects, for over three hundred years by the time Pacioli published his text. However, the system
became a standard for merchants and businessmen only after Pacioli structured and organised it in
his books. Although Luca Pacioli is not the inventor of the accounting system, his codifying and
publishing of the system has rightfully earned him the title of 'Father of Accounting'.
@~!~@
Table 1.1a with Specific Features of various Types of Business Entities
One Person Partnership Limited Company*

Company Liability
(OPC) Partnership
(LLP)
Owner Sole Proprietor Partners Partners Shareholders
In case of Private Limited
Company: Minimum: 2 and
Minimum: 2
Maximum: 200;
Number of Maximum: 20 Minimum:2 In case of Public Limited
Owners/ One Person (10 in case of Maximum: No Company: Minimum: 7 and
Shareholders banking Limit Maximum: No Limit (But
business)
limited by the number of
shares issued)
Can corporate
bodies
No No Yes
participate as Yes
a partner?
Management Board of Designated
Partners Board of Directors
Control Directors** Partners***
Liability Limited Unlimited Limited Limited
Footnotes: * Limited liability companies can be further bifurcated into two types – private limited and public limited.
Even within the public limited companies there can be further bifurcation into two types – listed and unlisted companies.
** The law requires OPC to be started by only residents of India. It also requires OPC to have state the nominee at the
time of registration. *** The law requires every LLP to have at least two Designated Partners and at least one of the
Designated Partners shall be a resident of India.
Note: This write-up will make more sense – if read along with chapter 1, section 1.5: Forms of business entities
@~!~@
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More on Conceptual Basis, its Needs and Conventions
Accounting concepts are formed primarily by observation and are established through agreement.
They are partially of a technical nature. Most of the concepts, evolved over the years, have been
generally accepted as postulates. Some of the basic concepts, generally accepted as the basis of
accounting, are to be clearly understood for the purpose of learning the accounting methodology.
Some of the popular accounting concepts are separate entity, matching, conservatism, consistency,
going concern, and money measurement. These various, widely accepted accounting concepts are
also referred to as accounting conventions. Different schools of thoughts have a different view
regarding these accounting concepts. Most experts feel that separate entity, consistency and money
measurement are fundamental concepts, while others are procedural.
IFRS converged Indian Accounting Standard 1 (Ind AS1) on “Presentation of Financial Statements”
states that the fundamental accounting assumptions are going concern, consistency and accrual.
They are usually not specifically stated because their acceptance and use are assumed. Disclosure is
necessary if they are not followed.
Note: This write-up will make more sense – if read along with chapter 1, section 1.7: Conceptual basis of accounting.
@~!~@
From the Horse’s mouth – Accounting is like Scorekeeping
Accounting and financial reporting are like scorekeeping. How well you keep the score is the
issue. You ask me, why in the Western and other countries - where there is better accounting and
more sophisticated accounting, or accounting to which we in India aspire to reach in the next five
years – there are failures such as Lehman, AIG and such. Accounting is scorekeeping. It is a
measurement of wealth, performance and liquidity.
Our argument is, let us do scorekeeping on a parameter that is internationally recognized. Now,
because you have a good scorer does not mean in the language of cricket, your batsman should
always score centuries. If Virat Kohli or other batsmen do not succeed in South Africa that
doesn't mean you should not have a good scorekeeper in the system.
Well, there are other business reasons for failure. Greed is one cause. In the examples mentioned
above - Sub-prime lending, for instance, is lending against inadequate security. In fact, the
current failures call for better accounting, better scorekeeping. Thus, as an accountant I am a
scorekeeper. I'll give you the score, and also give you the quality of that score.
Note: This write-up will make more sense – if read along with chapter 1, section 1.10: Purposes of
accounting information
Source: “Accounting is like scorekeeping,” The Hindu Business Line 22 Sep. 2008, print.
@~!~@
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ONGC and its Stakeholders
Oil & Natural Gas Corporation Limited (ONGC)) is a multinational energy company headquartered
in Dehradun, India. It is a public sector undertaking with a manpower of over 33,000 professionals.
It is one of the largest oil and gas exploration & production firm with a market capitalization of over
INR 2 trillion. Table below gives few reasons why some of the stakeholders would be interested in
looking at the financial statements of the company:
Stakeholder Would be interested due to

Government and its agencies To look at income tax and other tax liabilities of the firm
Top Managers, Officers, Potential for pay hikes, bonus, and incentive deals
Workers and their Unions
Public The Ethical and environmental activities of the firm
Long-term Lenders, Present Whether the firm has a long-term future
and Potential Shareholder
Equity analysts and fund Profitability and share performance
managers
Customer The ability of the firm to take a bigger order, carry on
providing a service
Supplier & Other Creditors To decide whether to offer the firm its products on credit
and if so at what terms
Note: This write-up will make more sense – if read along with chapter 1, section 1.12: Users of accounting information
@~!~@
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QR CODES
QR Code 1
A peek into Accounting Information Systems
We all must have read that an information system is a process for collecting data, processing the
data into information, and distributing that information to users. The purpose of a computer-
based accounting information system (AIS) is to formally collect, store, process and tabulate
financial and accounting data to produce meaningful reports that decision-maker managers or
other interested parties can use to make decisions. AIS-led Accounting-data frameworks
structure information preparing framework utilizing programming.
Trying to run business in the 21st century without an accounting information system is like trying
to drive a railway train on the road. In the modern world of computerization, businesses will fail
without adequately designed accounting information system. And, reasons would include failure
to file compliances, pay taxes, collect revenues, pay bills, pay salaries and such.
AIS enables expanded speed of handling the financial numbers, and quick association to simplify
financial reporting for purposes of making well-informed decisions. The components of the AIS
process includes: people, procedures, data, software, devices and security. The software is on a
computing device, and the security is inbuilt in the software. People put together procedures and
enter data into the accounting software. For example, AIS is used to analyze the effectiveness of
the company's pricing structure by looking at sales and costs data. Auditors use the AIS to assess
a company’s internal controls and compliance with the Companies Act, 2013. Ideally, the AIS
designed should not only meet the needs of the people who will be using it but also improve
efficiency.
AIS can be categorized in various ways:

 AIS Categories based on Processing Mode: Batch processing systems, online batch systems and
online real-time systems
 AIS Categories based on System Objectives: Transaction processing systems, decision support
systems and expert systems.
 AIS Categories based on Interaction with Environment: Transformational systems, transaction
processing systems, and Reactive systems.
 AIS Categories based on Age: manual systems, legacy systems and integrated IT systems.
There are a wide range of AIS-linked professional courses leading to certifications given by
global professional Accounting Information System Organization. It enables one to apply
information systems technology to accounting processes.
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QR Code 2
Nuances of Business Entity Principle
The focus on ‘business entity’ concept is upon events as they affect a specific area of attention and
efforts of an organization. This business entity may be a consolidated group of many interrelated
companies, or a specific production unit, a division or a department of an enterprise. For instance,
this entity may be a public limited firm (say, Tata Motors Limited), or consolidated group (say, Tata
Group), or a specific manufacturing unit (say, Pune Unit of Tata Motors), a specific division (say,
Axle Division of Tata Motors) or a specific department of an enterprise (say, Marketing Department
of Tata Motors).
A financial transaction arises when the economic characteristics of the things of value possessed or
claims against such possessions of an entity, change. This cannot be clearly defined and delineated
unless the entity, to which these changes are to be related, can be identified. In this context,
transactions, which are to be recorded, are defined in relation to the entity for which the records are
being maintained. Thus, a case in point is the insurance premium of the owners property (say, Shah
Rukh Khan) should be excluded from the expenses of the business (Red Chilies Entertainment).
Illustration QR2: Gurupreet Vs Gurupreet Traders Limited
Gurupreet Traders Limited borrowed money & invested in business. When lenders asked Gurupreet
to return the invested money, Gurupreet responded by stating that he invested them into business &
it went bankrupt. Thus, he can’t be personally held liable for loss in business & they are separate
legal entities! Is he right?
Yes he is. The underlying principle is “Separate Legal Entity”. A Person cannot be held personally
liable for the profit & loss of the trading firm.
As illustrated above, on a few occasions, this concept remains only an accounting fiction, as the law
does not accept the distinction. Sole proprietorships and partnerships are the best examples where
the liability of the entity is to be met by the proprietor or the partners, if the entity is not able to meet
its liabilities out of the available funds (refer chapter 1, table 1.1 for details).
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QR Code 3
Assessing ‘Going Concern’
Historically, the moving away of business activities from closed one-time ventures to continuing
enterprises, necessitated this ‘Going concern’ concept. This concept assumes that entity will
continue to operate under the same economic conditions and in the same general environment, but
does not assume that business will be profitable as long as it exists. Going concern also assumes that
the claims against the entity will be paid on the maturity of such claims (say, loan will be repaid
when matured and not when an entity has cash).
Going Concern assumes that the entity has neither the intention nor the necessity to liquidate or
curtail materially the scale of its business operations. In assessing whether an entity is a going
concern, usually a detailed analysis is not required if the entity has a history of profitable
operations and has access to financial resources. However, in certain situations detailed analysis
is required. There IFRS (IAS 1, Presentation of Financial Statements) stipulates that in assessing
if the going concern assumption is appropriate the management should take into account all
available information about the future.
As a thumb rule, the period covered should be about twelve months from the balance sheet date.
The assessment of the validity of the going concern assumption involves judgment about
outcome of events and conditions, which is uncertain. Examples of events and conditions that
individually or collectively give rise to significant uncertainty on the ability of an entity to
continue its operations are: net liability or net current liability position; absence of realistic
prospect for renewal or repayment of long term loan approaching maturity, inability to comply
with key terms of loan agreements, adverse financial ratios, loss of key management personnel
without replacement, labor difficulties or shortage of essential inputs, non-compliance with
statutory requirements, and change in the government policy.
Often, start-ups end up getting liquidated (example: Medinfi Healthcare and JustLikeNew). After
a decision to liquidate the entity is taken, these start-ups tend to restate their financial numbers
that were stated earlier using the ‘going concern’ concepts.
Source: “A going concern,” Business Standard 04 May. 2009, print.
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QR Code 4
Conservatism: How conservative should one be?

The meaning of conservatism (prudence) is acting with or showing care and thought for the future.
In accounting, as a rule, the historical costs of acquiring an asset are regarded as the ceiling for its
valuation. Usually, an asset may be written up only in case of an exchange, but it may be written
down without an exchange. Even the accounting rules such as ‘lower of cost or market price', for
the valuation of inventories, clearly indicate that the assets can be written down when their
replacement costs decline, but they are never written up when replacement costs increase.
Thus, conservatism is the inclusion of a degree of caution in the exercise of the judgment needed to
make estimates under conditions of uncertainty, and it should not go beyond an appropriate level of
‘caution’. Every individual or organization suffers from one or more natural bias. A listed enterprise
is influenced to report better profitability to meet market expectations, a sales manager would
always be interested in reflecting higher sales, and a closed held business may be influenced to
show low profitability to minimise tax. Prudence as a concept pushes us to identify our natural bias
and counter those when dealing with matters requiring the exercise of judgments or estimates. In
that sense, conservatism is much bigger than just an accounting concept — rather, it is the value that
each of us should imbibe in our actions, and exercise whenever faced with a challenge to make a
key judgment.
Any accountant will tell you that conservatism is ensuring that assets or income are not overstated,
and liabilities or expenses are not understated. Those supporting the concept of conservatism
believe that there should be a distinction between ‘bad’ conservatism (deliberate misstatement,
which is unacceptable) and ‘good’ conservatism (caution in making the judgments necessitated by
uncertainty, which is desirable). Excess conservatism only purports the latter. They argue that
exercise of prudence does not allow, for example, the creation of hidden reserves or excessive
provisions, the deliberate understatement of assets or income, or overstatement of liabilities or
expenses.
Thus, conservatism is not to artificially smoothening income, reducing profits in good years to
provide a cushion to camouflage results in the poor years, making it difficult to understand the
entity’s performance. It is to present a picture of financial information with a thought for the future.
Source: “For the right kind of ‘prudence’,” The Hindu Business Line 05 Jan. 2014, print.
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QR Code 5
Upcoming Prospects of Accountants in India
I have observed a large number of accounting experts thanking the Father of Accounting, Luca
Pacioli, for giving them a source of daily bread and creating enough intellectual musings in their
mind. The field for modern accounting careers is a wide range and includes:
 Commerce and Industry: Internal Audit, Cost Analyst, Investment Analyst, Accounting
Information System Staff, Financial Analyst, Budget Analyst, Credit Analyst, Cost Accountant,
Controller/Comptroller, Information System Auditor, Loan Officer, Budget Officer, Insolvency
Professional
 Public Practice: Analyst, Consulting Staff, Advisor. In modern times, Public Practice category
faces hurdles such as – pressure from client, corporate services opportunity of rendering cannot
be performed. Further, the control and management lies in hands of founder.
 Government: Government Accountancy and Audit, Financial Services Manager, Audit Services
Manager, Auditor, Audit Examiner, Accounting Examiner, Treasury Agent, State Accountant,
Revenue Officer, Budget Officer, Financial Services Specialist.
The traditional areas of accounting like doing individual return filing, bank audit, tax audit of
(politically linked) individuals/organizations are seeing automation and seem to be having less
growth opportunities. A less explored option having huge demand is working for the knowledge
process outsourcing (KPO) industry. The sheer breadth of roles therein allows one to find
accounting work that helps you specialize in range of niche fields such as audit, taxation, legal,
accounting, analytics, and financial services. Services providers such as Barclays, City Bank,
Credit Suisse Deutsche Bank, Genpact, and HSBC have been recruiting tens of thousands people
every year with about 25% going to Hyderabad alone. Delhi (NCR), Bangalore, Pune and
Chennai being other cities that are attracting new talent. In the past few years, the hiring has been
only increasing. The hiring is primarily in areas of finance accounting and transaction
processing. This also leads to a fission effect of further jobs such as third party analytics services.
These KPO organizations offer more than international level work experience by having wider
exposure in niche domains (say, credit rating, portfolio risk management), working with global
clients and such. The upcoming areas include Taxation International taxation involving foreign
party, Management consultancy services including Project Financing Mergers acquisition and
preparing Valuation reports, Preparing Consolidated financial statement for companies. (doing
IFRS / IND AS consultancy); Auditing Statutory audit of Companies; Internal /management
audit of companies; Cooperative audits; Forensic audit and such.
Source: Information through professional networks.
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ADDITIONAL READING MATERIAL

1.1 Evolution of Accounting
Accounting Profession in THE TWENTY-FIRST CENTURY
Given large changes in the business environment and information computing (say, cloud computing and
hosting), the accountant, the accounting firm, and the accounting profession of the twenty-first century are
quite different from what existed earlier. In contrast to a bookkeeper manually recording entries in a large
bound volume (khata), an accountant is now responsible for information regarding all facets of a business
and is dependent on the latest technology for processing that information. In contrast to small local firms
(say, local accounts firm in New York), accounting firms now can be varying-sized international
organizations located elsewhere (say, Pune) with reported revenues of thousands-to-billions of dollars.
In addition to the traditional audit/attest information, accounting firms provide their clients with tax
services, financial planning, system analysis, consulting, and legal services. Today, the profession is
comprised of millions of people working in public and private firms as well as profit and non-profit
enterprises (such as, Deloitte, KCSPL and WNS).
Source: Carol Normand and Charles Wootton, Accounting: Historical Perspectives, Encyclopedia of Business and Finance,
2nd ed, 2007, Encyclopedia. Web, 21 Dec 2015.
Let us check concept 1!

State whether the following statements are True or False:
(a) Historically, accounting developed as a system for reporting information to the managers.
(b) Modern management accounting is intended at reporting the activities of the entity to owners so
as to enable them to plan and control the activities of the entity.
1.3 Accounting as a Measurement and Valuation System

(a) Ideas of capital maintenance, productive capital, and profitable operations supported by
commerce and credit, form the pillars up on which accounting is built.
(b) Accounting as a measurement and valuation system, recognizes the doubleness of values
by taking into account, both the benefit and sacrifice involved.
16
1.4 Forms of Business Entities

What Type of Business Entity Should One Prefer
Business owners are required to choose the optimal business structure not only at the start, but
they also must continually reassess their original choice. The appropriate choice will inevitably
shift, as the business evolves (for example, see Case # 3 of chapter one). Some of the factors that
enable the owners in making the appropriate choice are:
➢ Size of the capital and its availability

➢ Legal structure of a country
➢ Purpose and scope of business
➢ Size of business operation
➢ Tax structure of a country for different types of organizations
1.5 Basic Framework of Accounting
Country-wise GAAP and its Analogy with Eating Habits
Imagine you are on world tour. And you have dinner invitations from local families in internal
areas of China, Europe and India. By default, your style of eating will have to adapt to local
context. In other words, while the purpose at everyplace is same (food consumption) – yet, you
should be prepared to eat with chop-stic in China; with knife & fork in Europe; and such. Thus,
local context necessitates different requirements.
Similarly, across the globe, the basic purpose of using financial information remains unchanged
yet we may observe the country-wise GAAP being molded by the local business environment
(culture, traditions, business norms, tax laws and such). Table 1.3 illustrates this in brief.

(a) Business entities once selected cannot change their form with time.
(b) The conventions of accounting are inflexible, and not much is left to the judgment of the
individual accountant.
17
1.6 Conceptual Basis of Accounting
A Take on Flexibility of Accounting (in lighter vein)
One of the largest Indian public sector enterprise in the steel industry was having interviews for
promotion of their accountants. The interview panel asked the first candidate, “What do you believe
our income will be this year end?” The IND AS 1 onsaid,
accountant Concepts
“Rs 4,600 crores.” The panel asked the other
candidate the same question, and the answer was, “What would you like it to be?” Now, you can
IFRS
think of converged Indian Accounting Standard 1 (Ind AS1) on “Presentation of Financial Statements”
who got promoted?
Thestates that the principles
accounting fundamental accounting
offer practicalassumptions
flexibility, itareis going concern,
important that consistency
a consistentand accrual.be
treatment
They are usually not specifically stated in financial statements because their acceptance
provided from time to time, otherwise it would be tough to interpret financial statements. Perhaps & use areno
assumed.
choice Disclosure
of methods is necessary
should if they
be permitted in are not followed.
accounting. Give us your thoughts?
Source: Interview with Syed Shabbirul Haque (MBA, IIM Kolkata), Ex-Employee & Junior Manager, Steel Authority of
India Limited, 23 Dec. 2014.
1.7 Accounting Policies

(a) The process of management reporting involves the provision of information for decision making
with respect to only making plans for the future.
(b) Accounting has some broad guidelines, such as, going concern, business entity,
prudence, and consistency, which are to be used as guideposts for assistance.
1.8 Purposes of Accounting Information

(a) Universal objectives of accounting practice includes ‘income determination’.

(b) Accounting system is also concerned with the provision of information for solving
tricky situations.
1.9 Users of Accounting Information

18
(a) The process of management reporting involves the provision of information for decision making
with respect to control of day to day operations of the entity, as well as for making plans for the
future.
(b) Financial statements is for internal users of the company, to aid in their decision-making
function, and hence, needs to be confidential in nature.
1.10 Globalization and Accounting Standards
“Benefits of IFRS would start from 2018”
In an interview to the Business Standard newspaper, Ian Mackintosh, vice-chairman, IASB, told
that greater transparency in financial reporting and higher level of disclosure are likely to lower
the cost of capital for Indian businesses in the long term. Edited excerpts:
 Has the accounting profession become more globalized with the adoption of IFRS in the past
10 years?
… the number of countries using the standard (IFRS) has been growing. In an in-depth survey of
140 countries, we found 114 used the IFRS. This means for accountancy, there is a common
language. In some ways, this is globalization of the accountancy profession. So, people can move
from country to country with the basic background of IFRS. It has been quite a revolution in past
14 years. What drove it essentially was the globalization of the markets. It became obvious you
needed a common language for financial reporting, as everyone had a different financial
reporting standard. We are very happy that India is joining in at this stage.
 How well prepared is corporate India and the government?
The government announced it in its Budget last year and seems determined to achieve it this time
- April 1, 2016. The Reserve Bank of India has put out a consultation paper for making banks
compliant by 2018. The gap after that is of insurance companies.
The next challenge is to get companies organized. Europe introduced IFRS in 2005, and there
companies are happy that it has lowered the cost of capital. Over the long term, Indian
companies should also expect tangible benefits.
 How long will it take for companies to start getting those benefits?
Generally, results start to come out after two years of applying the standards. It would be
reasonable to expect the benefits would start to flow in around 2018. For foreign investors
looking at India, it takes time to trust and understand the financial situation that companies are
in.
Source: “Benefits of IFRS would start to flow in 2018: Ian Mackintosh,” Business Standard 29 Nov. 2015, Print.
19
1.11 Branches of Accounting

(a) Accounting can be broadly divided into two branches, social accounting and government
accounting
(b) ICAI is progressively working towards convergence reflecting “Indian conditions” in the IFRS.
AUXILIARY TEST MATERIAL

Exercises
Fill in the Blanks LO 6 Medium
Fill in the blanks based on the relevant concept applicability:

1. ___________ concept applies when Abdul Agro Limited bought a grinding machine and
recorded the purchase at the amount of cash paid to purchase it.
2. Using the same method of accounting over a considerable period is referred to as the
_____________ principle.
3. If an accountant overstates a business entities resources (or material assets) then we can
state that he is violating the ______________ principle of accounting.
4. M/s Gagan Cycle Ltd. …
a. The accounts of M/s. Gagan Cycle Ltd. show a profit of Rs 88,000 for the year. This
includes an amount of Rs 25,000 relating to an order just received. Based on this
information, what will be the profit?
b. The corrected profit would be Rs. ________ because we should apply the ___________
concept.
5. M/s Manish Boutique Ltd. …
During the year, Manish Malhotra had taken home some clothing fabric from his boutique,
to present his wife a new suit for her birthday. He has included the cost of this stock (Rs
12,000) as a business expense while calculating the profits, which came to Rs 62,000. Based
on this information, what will be the profit?
a. The ___________ concept applies here and the profit figure should be Rs. ______________.
20
Answers to the “Check Your Concepts”
1. Check Your Concepts 1!

(a) False
(b) False
(a) True
(b) True
(a) True
(b) False
(a) False
(b) True
(a) True
(b) True
(a) True
(b) False
(a) False
(b) True
21

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Financial Accounting for Management 5/e by Ramachandran & Ram Kumar Kakani, “Copyright with Tata McGraw

Hill Education Private Limited, 2020”

CONCEPTUAL BASIS OF ACCOUNTING

➢ Accounting ➢ Going concern

Three Ways of Capital Maintenance

Financial Capital maintenance

Limited Liability Partnership

The possible advantages of LLP are as follows:

✓ It is a legal entity separate from its partners, having perpetual succession.

One Person Company

India’s Roadmap of Convergence with IFRS

Auxiliary Reading Material

Arthashastra and link to Accounting

Labor Financial Others

Structure organization to Create comprehensive

Accounting Profession and Economic Development

Leonardo da Vinci and Pacioli’s Contribution to Accounting!

Table 1.1a with Specific Features of various Types of Business Entities

One Person Partnership Limited Company*

More on Conceptual Basis, its Needs and Conventions

From the Horse’s mouth – Accounting is like Scorekeeping

ONGC and its Stakeholders

Stakeholder Would be interested due to

A peek into Accounting Information Systems

AIS can be categorized in various ways:

Nuances of Business Entity Principle

Illustration QR2: Gurupreet Vs Gurupreet Traders Limited

Assessing ‘Going Concern’

Source: “A going concern,” Business Standard 04 May. 2009, print.

Conservatism: How conservative should one be?

Upcoming Prospects of Accountants in India

Source: Information through professional networks.

ADDITIONAL READING MATERIAL

Accounting Profession in THE TWENTY-FIRST CENTURY

Let us check concept 1!

1.3 Accounting as a Measurement and Valuation System

Let us check concept 2!

State whether the following statements are True or False:

1.4 Forms of Business Entities

➢ Size of the capital and its availability

1.5 Basic Framework of Accounting

Country-wise GAAP and its Analogy with Eating Habits

Let us check concept 3!

1.6 Conceptual Basis of Accounting

A Take on Flexibility of Accounting (in lighter vein)

1.7 Accounting Policies

Let us check concept 4!

1.8 Purposes of Accounting Information

Let us check concept 5!

(a) Universal objectives of accounting practice includes ‘income determination’.

1.9 Users of Accounting Information

1.10 Globalization and Accounting Standards

“Benefits of IFRS would start from 2018”

 How well prepared is corporate India and the government?

1.11 Branches of Accounting

Let us check concept 7!

AUXILIARY TEST MATERIAL

Fill in the Blanks LO 6 Medium