FINANCIAL ACCOUNTING

WELCOME
 G.A.A.P

( GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES)
• 1. The general acceptance of an Accounting
Principle usually depends on how well it
meets three criteria:
• A. RELEVANCE
• B. OBJECTIVITY
• C. FEASIBILITY
• A. A PRINCIPLE HAS RELEVANCE TO THE EXTENT
THAT IT RESULTS IN INFORMATION THAT IS
MEANINGFUL AND USEFUL TO THOSE WHO NEED
TO KNOW SOMETHING ABOUT AN
ORGANIZATION.
• B. A PRINCIPLE HAS OBJECTIVITY TO THE EXTENT
THAT THE INFORMATION IS NOT INFLUENCED BY
PERSONAL BIAS OR JUDGEMENT OF THOSE WHO
FURNISH IT. OBJECTIVITY CONNOTES
RELIABILITY,TRUSTWORTHINESS,VERIFIABILITY.
• C. A PRINCIPLE HAS FEASIBILITY TO THE
EXTENT THAT IT CAN BE IMPLEMENTED
WITHOUT UNDUE COMPLEXITY OR COST.
THESE THREE CRITERIA OFTEN CONFLICT
WITH EACH OTHER.
THE MOST RELEVANT SOLUTION IS LIKELY TO
BE LEAST OBJECTIVE AND LEAST FEASIBLE.
 THE FOUNDATION OF ACCOUNTING CONSISTS OF A SET OF
PRINCIPLES CALLED G.A.A.P.
 MEMORANDUM OF UNDERSTANDING BETWEEN FASB AND
IASB WAS ENTERED AFTER THEIR JOINT MEETING IN
SEPTEMBER 2002.
 THE US FINANCIAL ACCOUNTING STANDARDS BOARD
(FASB) AND INTERNATIONAL ACCOUNTING STANDARDS
BOARD ( IASB) ISSUED THEIR NORWALK AGREEMENT IN
WHICH THEY EACH ACKNOWLEDGED THEIR COMMITMENT
TO THE DEVELOPMENT OF HIGH QUALITY, COMPATIBLE
ACCOUNTING STANDARDS THAT COULD BE USED FOR BOTH
DOMESTIC AND CROSS-BORDER FINANCIAL REPORTING.
 STAKEHOLDERS OF FINANCIAL
ACCOUNTING
SHAREHOLDERS REGULATORS
MANAGERS
CREDITORS

1. Financial position of the firm

at a given time.
EMPLOYEES 2. Financial performance of firm
over one year SUPPLIERS
3. Source and use of funds over
a period of time –one year

LENDERS BUSINESS TAX SOCIETY

PARTNERS AUTHORITIES (OTHERS)
 BUSINESS ACTIVITIES –
FINANCIAL,ECONOMY,POLITICAL ETC
ESTABLISH GOALS AND STRATEGIES

RAISE FINANCES INVEST IN RESOURCES

CONDUCT OPERATIONS
 ACCOUNTING PRINCIPLES
• SPECT
TYPE NAME MEANS

BUSINESS ENTITY Treats business as separate from owner

MONEY Records amounts only in terms of

MEASUREMENT money
COST Records only actual cost of assets and
expenses
CONCEPTS GOING CONCERN Assumes business will continue for a
long time.
REALISATION Record Income actually received or
receivable
ACCRUAL Record Income or Expenses when
due.

DUAL ASPECT Use double entry to record debit

and credit
 Record an item in same way, year
CONSISTENCY/PERIODICITY after year

C
O Ignore future profits , provide for
N CONSERVATISM/PRUDENCE
likely losses.
V
E
N
T Disclose items useful for
DISCLOSURE
I decisions
O
N
S
MATERIALITY Record and report important items
 DOUBLE ENTRY BOOK-KEEPING
SYSTEM
 An Italian Monk LUCA PACIOLI , wrote in 1994 ( 523
years ago), a book in Italian and later translated and
published in English in 1543.
 The double entry system is defined and explained by
J.R.BATLIBOI as follows: “ Every transaction has two
fold effect . Every transaction has an effect on two
accounts in the opposite direction. For making a
complete record of each transaction, it is necessary to
debit one account and credit another account . It is this
recording of the two-fold effect of every transaction
that gives rise to the term Double Entry System.
 ADVANTAGES OF DOUBLE ENTRY
SYSTEM
COMPLETE RECORD
ARITHMETICAL ACCURACY
RELIABLE INFORMATION
FINAL ACCOUNTS
BUSINESS DECISIONS
FEATURES OF DOUBLE ENTRY SYSTEM
1. Complete System
2. Records both ( dual) aspects for all transactions.
3. Used by all business organizations.
4. Records normally kept in English.
5. Follows all Generally Accepted Accounting
Principles (G.A.A.P.)
6. All types of accounts are kept– Real, Nominal &
Personal.
7. Journal & Ledger are kept.
8. Left side of account is known as Debit.
9. Right side of account is known as credit.
10. Trial Balance is prepared to check arithmetical
accuracy.
11.Trading Account is prepared to know the Gross
Profit.
12.Balance Sheet is prepared to know Assets &
Liabilities.
13) Accounting Year is based on Western
Calendar months from April of this year to
March of next year.
14) It is recognized by law the world over.
 TYPES OF ACCOUNTS

PERSONAL IMPERSONAL
PERSONAL ACCOUNTS REAL ACCOUNTS NOMINAL ACCOUNTS

1.INDIVIDUALS: Debtor 1. CURRENT ASSETS: 1. INCOME

Creditor, Lender , Borrower, CASH,GOODS.
Owner.

2. ARTIFICIAL PERSONS: 2. FIXED ASSETS: 2. GAINS

FIRM, COMPANY MACHINES,BUILDING

3. GROUP OF PERSONS: 3. INVESTMENTS:

SUNDRY SHARES, SECURITIES 3. EXPENSES
DEBTORS,OUTSTANDING
EXPENSES

4. INTANGIBLE ASSETS:
GOODWILL,PATENTS
4.LOSSES
 FINANCIAL STATEMENTS
THE END PRODUCT OF FINANCIAL
ACCOUNTING PROCESS IS A SET OF REPORTS
THAT ARE CALLED FINANCIAL STATEMENTS.
G.A.A.P REQUIRES THE PREPARATION OF
THREE SUCH REPORTS:
1. A BALANCE SHEET.
2. AN INCOME STATEMENT.
3. A STATEMENT OF CASH FLOWS.
• MOST REPORTS IN ANY FIELD CAN BE CLASSIFIED INTO
ONE OF THE TWO CATEGORIES: 1) STOCK OR STATUS
REPORTS & 2) FLOW REPORTS.
 THE AMOUNT OF WATER IN A RESERVOIR AT A GIVEN
MOMENT OF TIME IS A MEASURE OF STOCK,WHEREAS
THE AMOUNT OF WATER THAT MOVES THROUGH THE
RESERVOIR IN A DAY IS A MEASURE OF FLOW.
 REPORTS OF STOCK ARE ALWAYS AS OF A SPECIFIED
INSTANT IN TIME, REPORTS OF FLOW ALWAYS COVER
A SPECIFIED PERIOD OF TIME.
 REPORTS OF STOCKS ARE LIKE SNAPSHOTS,REPORTS OF
FLOW ARE MORE LIKE MOTION PICTURES.
FINANCIAL STATEMENTS ---CONTD.
ONE OF THE ACCOUNTING REPORTS,THE
BALANCE SHEET, IS A REPORT OF STOCKS.IT
SHOWS INFORMATION ABOUT RESOURCES OF AN
ORGANIZATION AT A SPECIFIED MOMENT OF
TIME.
THE OTHER TWO REPORTS VIZ: THE INCOME
STATEMENT AND CASHFLOW STATEMENT ARE
REPORTS OF FLOW.THEY REPORT ACTIVITIES OF
ORGANIZATION FOR A PERIOD OF TIME SUCH AS
QUARTER OR A YEAR.
 OBJECTIVES OF FINANCIAL
STATEMENTS
• FINANCIAL REPORTING SHOULD PROVIDE
INFORMATION AS REGARDS:
 USEFUL TO PRESENT AND POTENTIAL INVESTORS
AND CREDITORS IN MAKING RATIONAL
INVESTMENT AND CREDIT DECISIONS.
 COMPREHENSIBLE TO THOSE WHO HAVE A
REASONABLE UNDERSTANDING OF BUSINESS
AND ECONOMIC ACTIVITIES AND ARE WILLING
TO STUDY THE INFORMATION WITH REASONABLE
DILIGENCE.
 ABOUT THE ECONOMIC RESOURCE OF AN ENTERPRISE,
THE CLAIMS TO THOSE RESOURCES,AND EFFECTS OF
TRANSACTIONS AND EVENTS THAT CHANGE
RESOURCES AND CLAIMS TO THOSE RESOURCES.
 ABOUT AN ENTERPRISE’S FINANCIAL PERFORMANCE
DURING A PERIOD.
 TO HELP USERS ASSESS THE AMOUNTS,TIMING,AND
UNCERTAINTY OF PROSPECTIVE CASH RECEIPTS FROM
DIVIDENDS OR INTEREST AND THE PROCEEDS FROM
THE SALE OR REDEMPTION OF SECURITIES OR LOANS.
 JOURNAL AND LEDGER
JOURNAL
MEANING: A DAILY BOOK.
“JOUR” IS A French word
meaning day . In BOOK-KEEPING
Journal means a book to record
daily transactions . Journal thus
contains date-wise record of
transactions.
* JOURNAL IS CALLED “ BOOK OF
FIRST,ORIGINAL OR PRIME ENTRY”
* JOURNALISATION MEANS
PASSING AN ENTRY IN THE
JOURNAL TO RECORD A
FINANCIAL TRANSACTION OR
EVENT.
LEDGER
HOWEVER WE REQUIRE ANOTHER
BOOK,NAMELY LEDGER TO KEEP
ACCOUNTWISE RECORD OF TRANSACTIONS.
ACCOUNT IS A STATEMENT SHOWING
SUMMARY OF TRANSACTIONS AND FINAL
BALANCE IN RESPECT OF PERSON OR
ITEM.EACH ACCOUNT IS KEPT ON A
SEPARATE PAGE OR FOLIO.ALL PAGES OR
FOLIOS ARE BOUND TOGETHER IN A BOOK
CALLED LEDGER.
* LEDGER IS CALLED “MAIN” OR “
PRINCIPAL BOOK”.
* POSTING MEANS
TRANSFER OF ENTRIES FROM
JOURNAL TO CONCERNED
ACCOUNTS IN THE LEDGER.
 JOURNAL,LEDGER– CONTD.
JOURNAL LEDGER
*UTILITY: PERMANENT *BALANCING AN
RECORD, COMPLETE ACCOUNT MEANS
RECORD, DIVISION OF FINDING THE DIFFERENCE
WORK,EVIDENCE IN BETWEEN TOTAL OF DEBIT
COURT. AND CREDIT SIDE OF AN
ACCOUNT.
*IT LINKS DAILY JOURNAL
WITH YEARLY FINAL
ACCOUNTS.
 FORM OF JOURNAL
• JOURNAL OF -------- FOLIO NO------
DATE/ NO. PARTICULARS LF DEBIT CREDIT
YEAR AMOUNT AMOUNT
RS. RS.
MONTH ------ ACCOUNT 1 Xx Xx x . xx
DAY Dr. XX XXX.XX
TO ACCOUNT 2
[BEING ----- (NARRATION)

TOTAL Rs xxx.xx xxx.xx

 FORM OF LEDGER
• Dr Ledger of ---- LF X Cr
xxx account
DATE PARTICULARS F AMOUNT DATE PARTICULARS F AMOUNT

YEAR TO XXXX A/C X XXXXXX YEAR BY XXXX A/C X XXXXXX

XX.XX XX.X
X

TOTAL XXXXXX TOTAL XXXXXX

 SUBSIDIARY BOOKS
TYPE OF BOOK TYPE OF TRANSACTIONS
1. CASH BOOK RECEIPTS AND PAYMENTS OF CASH

2. PURCHASE BOOK CREDIT PURCHASES

3. SALES BOOK CREDIT SALES

4. SALES RETURNS BOOK SALES RETURNS
5. PURCHASE RETURNS BOOK PURCHASE RETURNS

6. JOURNAL PROPER OTHER TRANSACTIONS

( RECORDS ONLY UNCOMMON
TRANSACTIONS)
 TRIAL BALANCE AND ADJUSTMENT
AFTER TRIAL BALANCE
• BOTH NEEDS TO BE CONSIDERED FOR DRAWING
UP CORRECT P& L A/C & BALANCE SHEET.
• EXAMPLE: CLOSING STOCK IS ALWAYS GIVEN AS
ADJUSTMENT AFTER TRIAL BALANCE IS DRAWN
ON 31.3.XXXX,AS STOCK TAKING IS NEVER
COMPLETED REALISTICALLY BY ORGANIZATIONS
BY YEAR END,AND THIS IS USED FOR TRADING
PROFIT AND AS A CURRENT ASSET ENTRY.
 TRIAL BALANCE VS BALANCE SHEET
S.NO BASIS OF TRIAL BALANCE BALANCE SHEET
DISTINCTION
1. NEED FOR IT IS PREPARED TO CHECK THE THE BALANCE SHEET IS
PREPARATION ARITHMETICAL ACCURACY OF THE PREPARED TO KNOW THE
POSTING OF TRANSACTIONS TO FINANCIAL POSITION OF A
THE LEDGER BUSINESS CONCERN AT A
PARTICULAR TIME.
2. CONTENTS ALL THE LEDGER ACCOUNTS ARE THE BALANCES OF ONLY
SHOWN IN THE TRIAL BALANCE THOSE LEDGER ACCOUNTS
WHICH REMAIN AFTER
PREPARATION OF PROFIT &
LOSS ACCOUNT ARE SHOWN
IN BALANCE SHEET
3. FORMAT HEADINGS OF THE TWO COLUMNS THE HEADINGS OF THE TWO
ARE DEBIT BALANCE AND CREDIT SIDES ARE LIABILITIES AND
BALANCE( IN CASE OF TRIAL ASSETS
BALANCE BY NET METHOD)
 TB VS BS ---- CONTD
4. STOCK GENERALLY, THE CLOSING IN A BALANCE
STOCK DOES NOT APPEAR SHEET,ONLY THE
IN THE TRIAL BALANCE CLOSING STOCK
WHEREAS THE OPENING APPEARS ON THE
STOCK APPEARS. ASSETS SIDE AS A
CURRENT ASSET
5. ITEMS OF IT CAN BE PREPARED IT CANNOT BE
ADJUSTMENTS WITHOUT RECORDING PREPARED WITHOUT
THE ITEMS OF RECORDING THE ITEMS
ADJUSTMENTS ( EXAMPLE OF ADJUSTMENTS.
OUTSTANDING EXPENSES
ETC)
6. PERIODICITY IT CAN BE PREPARED IT IS GENERALLY
PERIODICALLY SAY AT END PREPARED AT THE END
OF MONTH OR QUARTER OF AN ACCOUNTING
HALF YEAR ETC PERIOD THAT IS A YEAR
S.NO.
PROFIT
BASIS OF
AND LOSS ACCOUNT
PROFIT & LOSS ACCOUNT
VS
BALANCE SHEET
DISTINCTION BALANCE SHEET
1. NEED FOR THE P&L ACCOUNT IS THE BALANCE SHEET IS
PREPARATION PREPARED TO ASCERTAIN THE PREPARED TO KNOW THE
RESULTS OF BUSINESS FINANCIAL POSITION OF A
OPERATIONS DURING AN BUSINESS CONCERN AT A
ACCOUNTING PERIOD. PARTICULAR TIME.

2. CONTENTS THE BALANCES OF ALL THE THE BALANCES OF ONLY THOSE

LEDGER ACCOUNTS OF LEDGER ACCOUNTS WHICH
REVENUE NATURE ARE SHOWN REMAIN AFTER PREPARATION OF
IN P&L A/C. P&L A/C ARE SHOWN IN THE
BALANCE SHEET.

3. FORMAT THE P&L A/C IS A LEDGER THE BALANCE SHEET IS ONLY A

ACCOUNT.IT HAS DEBIT SIDE STATEMENT AND NOT AN
AND A CREDIT SIDE.IT IS ACCOUNT .IT HAS NO DEBIT SIDE
CLOSED BY TRANSFERING ITS AND CREDIT SIDE. THE
BALANCE TO THE CAPITAL HEADINGS OF THE TWO SIDES
ACCOUNT ARE LIABILITIES AND ASSETS.
CONTENTS OF FINANCIAL STATEMENTS
Sell
Management Goods/Services Income
P&L
Buy
ACCOUNT
Business Activity Goods/Services Expenses

Requires Assets Long Term: Fixed

Assets
Short Term: Current
Investment Activity Assets BALAN
Assets
CE
LI
Surplus: SHEET
Requires Money LONG A
Investments
TERM BI
From Owner: Capital LOANS LI
Financing Activity From Outsiders TI
SHORT
ES
TERM
LIABILITIES
 CAPITAL:REVENUE AND DEFERRED
REVENUE EXPENDITURE AND RECEIPTS
S.NO. REVENUE EXPENDITURE (RE)
1. RE PERTAINS TO BUSINESS ACTIVITY.
2. RE HELPS TO RUN A BUSINESS
3. RE HELPS TO MAINTAIN AN ASSET
4. EXAMPLES ARE: RE FOR PURCHASE
OF GOODS,FEES PAID ETC.
5. RE PERTAINING TO CURRENT YEAR IS
SHOWN AS EXPENSES IN P&L A/C,RE
PERTAINING TO FUTURE PERIOD IS
SHOWN AS ASSET ( PREPAID
EXPENSES) IN BALANCE SHEET
6. MONEY IN RE IS IRRETRIEVABLY
GONE.IT CANT BE RECOVERED.
7. RE IS RECURRING IN NATURE
8. RE REDUCES BOTH FUNDS AND
PROFITS OF CURRENT YEAR
CAPITAL EXPENDITURE (CE)
1. CE PERTAINS TO INVESTING ACTIVITY
2. CE HELPS TO SETUP AND DEVELOP BUSINESS.
3. CE HELPS TO ACQUIRE A NEW ASSET.
4. EXAMPLES ARE: FIXED ASSETS LIKE
MACHINERY,INVESTMENT IN SHARES ETC.
5. CE IS SHOWN AS ASSETS IN BALANCE SHEET
6. MONEY IN CE MAY COME BACK ON SALE OF ASSET OR
INVESTMENT.
7. CE IS NON-RECURRING IN NATURE.
8. CE DECREASES FUNDS BUT MAY INCREASE PROFITS IN
FUTURE FROM USE OF ASSETS/INTEREST EARNED ON
INVESTMENT ETC.
DEFERRED REVENUE EXPENDITURE
IT IS THAT EXPENDITURE WHICH IS CARRIED
FORWARD ON PRESUMPTION THAT IT WILL BE OF
BENEFIT OVER SUBSEQUENT PERIODS.
IT HAS A MIXED NATURE AND HAS SOME
FEATURES OF BOTH REVENUE AND CAPITAL
EXPENDITURE.
IT MAY EITHER BE A REVENUE EXPENDITURE
WHOSE BENEFITS CAN BE ENJOYED FOR A
NUMBER OF YEARS OR A CAPITAL EXPENDITURE
NOT REPRESENTED BY ANY REAL ASSET.
 DRE CONTD.
THE ITEMS OF EXPENDITURE HAVING MEDIUM
TERM BENEFITS (SAY 3 YEARS) ARE TREATED AS
DEFERRED REVENUE EXPENDITURE.THE
PROPORTIONATE COST ( SAY 1/3) OF COST
RELATED TO CURRENT YEAR IS CHARGED AS
EXPENSES AND BALANCE ( UNEXPIRED 2/3RD OF
COST)IS CARRIED FORWARD AS “ FICTITIOUS
ASSETS” IN BALANCE SHEET AND WRITTEN OFF
GRADUALLY IN FUTURE YEARS.SUCH GRADUAL
AND SYSTEMATIC WRITING OFF IS CALLED
AMORTIZATION
 LIST PRICE/INVOICE PRICE/TRADE
DISCOUNT/CASH DISCOUNT
 CASH SALES ARE RECORDED IN THE CASH BOOK ON
BASIS OF CASH MEMOS,CREDIT SALES ARE RECORDED
IN THE SALES BOOK ON BASIS OF SALES INVOICES. THE
SAME INVOICE IS CALLED SALES INVOICE BY THE
SELLER AND PURCHASE INVOICE BY BUYER
 DISCOUNT: MEANS A DEDUCTION, REBATE OR
CONCESSION GIVEN BY a) SELLER TO BUYER AT THE
TIME OF SALE OF GOODS ( TRADE DISCOUNT), OR BY b)
RECEIVER OF CASH TO THE PAYER AT THE TIME OF
CASH RECEIPT TO SETTLE A DEBT ( CASH DISCOUNT)
• TRADE DISCOUNT: IS THE AMOUNT DEDUCTED
BY THE SELLER FROM LIST PRICE OF GOODS AT
THE TIME OF SALE TO A TRADER.IT IS A
CONCESSION ON PRINTED PRICE GIVEN BY ONE
BUSINESSMAN TO ANOTHER BUSINESSMAN ( BY
A MANUFACTURER TO A WHOLESALER OR BY A
WHOLESALER TO A RETAILER ETC.). TRADE
DISCOUNT ENABLES A BUSINESSMAN TO SELL
THE GOODS AT PRINTED PRICE TO THE
CONSUMER AND YET MAKE A PROFIT FOR
HIMSELF.
• CASH DISCOUNT: IS THE AMOUNT ALLOWED
TO BE DEDUCTED BY THE RECEIVER OF CASH
FROM THE AMOUNT DUE AT THE TIME OF
RECEIPT.
• IT IS THE CONCESSION FOR PROMPT
PAYMENT.
S.NO FEATURE TRADE DISCOUNT (TD) CASH DISCOUNT ( CD)

1. MEANING IT IS THE AMOUNT IT IS THE AMOUNT DEDUCTED

DEDUCTED FROM THE FROM CASH PAYMENT RECEIVED.
LIST PRICE OF GOODS
SOLD.
2. GIVEN BY SELLER TO TRADER GIVEN BY PERSON RECEIVING TO
(WHOLESALER TO PERSON GIVING.
RETAILER)
3. WHEN AT THE TIME OF SALE ONLY AT THE TIME OF PAYMENT
ONLY OF SALE PRICE
4. WHY ENABLES BUSINESSMAN GIVEN TO ENCOURAGE TIMELY
TO SELL GOODS TO PAYMENT OF SALE PRICE
CONSUMER AT LIST
PRICE YET MAKE PROFIT
5. COMPUTATION AS A PERECNTAGE OF AS A PERCENTAGE OF AMOUNT
LIST PRICE DUE.
6. RECORDING DEDUCTED ON SALE BILL CD IS RECORDED ALONGWITH
ITSELF.IT IS NOT ENTRY FOR RECEIPT OR
RECORDED IN THE PAYMENT OF CASH.
BOOKS.
 DEBTOR VS CREDITOR
DEBTOR
A PERSON WHO OWES SOME AMOUNT
OR WHO HAS TO PAY SOME AMOUNT
TO ANOTHER PERSON.
EXAMPLE: KRISHNA SELLS GOODS
WORTH Rs.1000 TO ARJUN. IF ARJUN
HAS NOT PAID CASH FOR THESE
GOODS,ARJUN IS A DEBTOR OF
KRISHNA.
IF SBI GIVES LOAN OF Rs. 10000 TO ANIL
AND COMPANY THEN ANIL AND
COMPANY IS A DEBTOR OF STATE BANK
OF INDIA
IF AJAY BORROWS Rs. 500 FROM VIJAY
THEN AJAY IS A DEBTOR OF VIJAY
CREDITOR
A PERSON TO WHOM AMOUNT IS OWED OR
TO WHOM SOME AMOUNT IS PAYABLE.
KRISHNA IS A CREDITOR OF ARJUN.
VIJAY IS A CREDITOR OF AJAY.
SBI IS A CREDITOR OF ANIL AND COMPANY.
A CUSTOMER WHO HAS PAID MONEY IN
ADVANCE TO A TRADER AGAINST
PURCHASES, IS A CREDITOR OF THAT
TRADER TILL GOODS ARE SUPPLIED TO HIM.
AS SOON AS GOODS ARE SUPPLIED BY THE
TRADER TO THE CUSTOMER, THE CUSTOMER
NO LONGER REMAINS A CREDITOR AND
TRADER NO LONGER REMAINS A DEBTOR.
AS 2 : VALUATION OF INVENTORIES
DEFINITION: AS 2 DEFINES ‘ INVENTORY ‘ AS
ASSETS---
a) HELD FOR SALE IN ORDINARY COURSE OF
BUSINESS;
b) IN PROCESS OF PRODUCTION FOR SUCH SALE
OR
c) IN THE FORM OF MATERIALS OR SUPPLIES TO
BE CONSUMED IN PRODUCTION PROCESS OR
RENDERING OF SERVICES.
• VALUATION: AS 2 SPECIFICALLY LAYS DOWN THE RULE THAT
INVENTORIES SHOULD BE VALUED AT LOWER OF COST AND
NET REALISABLE VALUE (N.R.V.). THUS NORMALLY STOCKS
ARE VALUED AT COST. STOCKS ARE VALUED AT NET
REALISABLE VALUE ONLY IF NRV IS LOWER THAN THE COST.

• STEPS INVOLVED IN INVENTORY VALUATION:

1. MEASUREMENT OF COST.
2. MEASUREMENT OF N.R.V.
3. COMPARISON BETWEEN COST AND NRV, ITEMWISE.
 MAIN FEATURES OR REQUIREMENTS
OF AS 2
• 1. AS 2 APPLIES TO VALUATION OF ALL INVENTORIES,
EXCEPT WORK-IN-PROGRESS,SHARES, DEBENTURES
ETC. HELD AS STOCK-IN-TRADE; AND PRODUCER’S
INVENTORIES OF LIVESTOCK,AGRICULTURAL AND
FOREST PRODUCTS,MINERAL OILS,ORES AND GASES.
• 2. INVENTORIES SHOULD BE VALUED AT LOWER OF
COST AND NRV. COST OF INVENTORIES INCLUDE : a)
ALL COSTS OF PURCHASE b) COSTS OF CONVERSION &
c) OTHER COSTS INCURRED IN BRINGING THE
INVENTORIES TO THEIR PRESENT LOCATION AND
CONDITION.
• NRV IS ESTIMATED SELLING PRICE IN ORDINARY
COURSE OF BUSINESS LESS ESTIMATED COSTS OF
COMPLETION AND ESTIMATED COSTS NECESSARY
TO MAKE THE SALE.THE COMPARISON OF COST
WITH NRV IS DONE ITEM BY ITEM WISE BASIS.
• 3. COST OF INVENTORIES OF ITEMS THAT ARE
NOT ORDINARILY INTERCHANGEABLE OR
PRODUCED FOR SPECIFIC PROJECTS SHOULD BE
ASSIGNED BY SPECIFIC IDENTIFICATION OF THEIR
INDIVIDUAL COSTS.
• 4. COST OF OTHER ( INTER-CHANGEABLE)
INVENTORIES SHOULD BE ASSIGNED USING
FIFO OR WEIGHTED AVERAGE COST
FORMULA.
• THE RETAIL METHOD MAY BE USED FOR
CONVENIENCE IF RESULTS GIVE APPROXIMATE
ACTUAL COST.
 INVENTORY CONTROL SYSTEMS
• A) PERPETUAL INVENTORY CONTROL SYSTEMS

Q SYSTEM OR FIXED
P SYSTEM OR FIXED QUANTITY SYSTEM
PERIOD SYSTEM

B) PQ SYSTEM.
C) ABC ANALYS
D) VED ANALYSIS
E) XYZ ANALYSIS
F) FNSD ANALYSIS
G. EOQ ( EBQ)
AS 6 DEPRECIATION ACCOUNTING
o ACCOUNTING STANDARD RELATING TO
DEPRECIATION:
 THE CHANGE IN METHOD OF PROVIDING FOR
DEPRECIATION CAN BE EFFECTED IN TWO WAYS:
A) WITH PROSPECTIVE EFFECT: THAT IS W.E.F THE
YEAR IN WHICH THE DECISION TO CHANGE THE
METHOD IS TAKEN OR
B) WITH RETROSPECTIVE EFFECT: THAT IS W.E.F.
FROM THE YEAR OF ACQUISITION OF ASSET.
• AS-6 SPECIFICALLY MENTIONS THAT CHANGE IN
METHOD OF PROVIDING DEPRECIATION HAS TO
BE WITH RETROSPECTIVE EFFECT.
B. WHAT IS DEPRECIATION?--- LOSS IN
VALUE,REDUCTION IN THE VALUE OF FIXED
ASSETS.
C. WHAT IS DEPLETION? --- REDUCTION IN VALUE
OF NATURAL RESOURCES ( MINES ETC.)
D. WHAT IS AMORTISATION: REDUCTION IN VALUE
OF INTANGIBLE ASSETS
 E. WHAT CAUSES DEPRECIATION
• 1. WEAR AND TEAR DUE TO USE.
• 2. EFFLUX OF TIME.
• 3. OBSOLESCENCE.
• 4. DAMAGE.
• 5. EXHAUSTION.
F. WHY ACCOUNT FOR DEPRECIATION?
1. CORRECT AMOUNT OF PROFITS.
2. MATCH REVENUE WITH COST.
3. REPLACEMENT OF ASSETS.
4. CORRECT VALUE OF ASSETS.
5. COMPLY WITH LAW ( COMPANIES ACT)
 G. METHODS OF DEPRECIATION
CALCULATION
• 1. FIXED INSTALMENT METHOD ( EQUAL INSTALMENT OR STRAIGHT
LINE METHOD S.L.M)
• 2. REDUCING BALANCE METHOD ( DIMINISHING BALANCE OR
WRITTEN DOWN VALUE METHOD, W.D.V.)
• 3. DEPRECIATION FUND METHOD OR SINKING FUND METHOD.
• 4. INSURANCE POLICY METHOD.
• 5. ANNUITY METHOD
• 6. REVALUATION METHOD.
• 7. DEPLETION METHOD.
• 8. MACHINE HOUR METHOD.
• 9. SUM OF YEARS DIGIT METHOD
• 10. MILEAGE METHOD
• 11. GLOBAL METHOD ( MACRS) ( MODIFIED ACCELERATED COST
RECOVERY SYSTEM)
 SLM VS WDV METHOD OF
FACTORS
DEPRECIATION
STRAIGHT LINE METHOD
(SLM)
WRITTEN DOWN VALUE (WDV)
1. FORMULA CALCULATED AS % OF
ORIGINAL COST
2. YEARLY CHARGE YEARLY DEPRECIATION IS
CONSTANT
3. TOTAL CHARGE TOTAL CHARGE ( REPAIRS PLUS
DEPRECIATION) INCREASES
4. NIL BOOK VALUE BOOK VALUE AT THE END OF
ITS LIFE BECOMES ZERO.
5. SUITABLE FOR ASSETS WITH FIXED LIFE
EG: LEASE
6. INCOME TAX ACT NOT ALLOWED UNDER THE
INCOME TAX ACT
7. CALCULATION DEPRECIATION = (C-S)/Y
C= TOTAL COST INCLUDING
INSTALLATION ETC
S= SCRAP OR SALVAGE VALUE
Y= ECONOMIC LIFE OF ASSET
CALCULATED AS % OF WDV.(WRITTEN
DOWN VALUE)
YEARLY DEPRECIATION DECREASES
TOTAL CHARGE REMAINS CONSTANT.
BOOK VALUE AT THE END OF LIFE
DOESNOT BECOME ZERO.
FOR ASSETS WHOSE LIFE REDUCES DUE
TO USE: EG. PLANT
ONLY METHOD ALLOWED UNDER
INCOME TAX ACT
DEPRECIATION RATE = [1 – (S/C)^n] x 100
WHERE: n = USEFUL LIFE OF ASSET IN
YEARS, S = SCRAP VALUE AT THE END OF
LIFE AND C= COST OF ASSET.
 ACCOUNTING ENTRIES FOR
DEPRECIATION
• ALTERNATIVE 1
DATE EN.NO PARTICULARS LF DEBIT (Rs.) CREDIT
(Rs.)
1 DEPRECIATION A/C -----------
Dr. --------------
TO FIXED ASSETS
ACCOUNT
( BEING DEPRECIATION FOR
THE YEAR WRITTEN OFF)
2. PROFIT AND LOSS ACCOUNT ------------
Dr. --------------
TO DEPRECIATION A/C
( BEING TRANSFER OF
DEPRECIATION TO PROFIT
AND LOSS ACCOUNT)
 DEPRECIATION ACCOUNTING
• ALTERNATIVE 2: CREATING PROVISION FOR
DEPRECIATION
DATE EN. PARTICULARS LF DEBIT (Rs.) CREDIT (Rs.)
NO
1. DEPRECIATION A/C Dr. -------------
TO PROVISION FOR
DEPRECIATION A/C -------------
( BEING DEPRECIATION FOR THE
YEAR WRITTEN OFF)
2. PROFIT AND LOSS ACCOUNT --------------
Dr. --------------
TO DEPRECIATION A/C
( BEING TRANSFER OF
DEPRECIATION TO PROFIT AND
LOSS ACCOUNT)
BAD DEBTS AND PROVISION FOR BAD
AND DOUBTFUL DEBTS
• BAD DEBTS: IF ANY AMOUNT DUE FROM A
CUSTOMER OR A DEBTOR IS NOT RECOVERABLE,
THE AMOUNT HAS TO BE SHOWN AS AN
EXPENSE OR LOSS IN THE BOOKS OF ACCOUNTS
AS A ‘BAD DEBT’. IN OTHER WORDS, IT DENOTES
AMOUNTS NOT RECOVERABLE FROM THE
CUSTOMERS.THE NON-RECOVERY CAN BE DUE TO
VARIOUS REASONS LIKE CUSTOMER BECOMING
INSOLVENT, DISPUTE BETWEEN THE TWO
PARTIES. ETC.
• PROVISION FOR DOUBTFUL DEBTS: CREATE
PROVISION FOR DEBTS WHICH MAY BE
REALISED OR MAY NOT BE.
• THE ADJUSTMENT ENTRIES HAVE ALSO TO BE
PASSED IN RESPECT OF BAD DEBTS,CREATING
PROVISION FOR BAD AND DOUBTFUL DEBTS
OR PROVISION FOR DISCOUNT ON DEBTORS.
DATE PARTICULARS LF DEBIT (Rs.) CREDIT (Rs.)

March a) For writing off bad debts:

31st BAD DEBTS A/C Dr. -----------------
TO DEBTORS A/C --------------
( BEING AMOUNT RECEIVABLE FROM Mr . X
CONSIDERED BAD,NOW WRITTEN OFF)

MARCH b) For provision for doubtful debts:

31ST PROFIT AND LOSS ACCOUNT Dr. -------------
TO PROVISION FOR
DOUBTFUL DEBTS ----------------
( BEING PROVISION MADE FOR AMOUNT
CONSIDERED DOUBTFUL OF RECOVERY)

MARCH c) For provision for discount on debtors:

31ST PROFIT AND LOSS A/C Dr. ----------------
TO PROVISION FOR DISCOUNT
ON DEBTORS ------------------
( BEING PROVISION MADE AT ---% FOR
DISCOUNT EXPECTED TO BE ALLOWED TO
CUSTOMERS)