Lecture 2

GAAP
Institutions
Accounting Standards
Accounting Principles
Accounting Equation
Financial Statements
Accounting Activity
 Generally Accepted Accounting Principles
 A Body of broad concepts as well as detailed
practices to guide business enterprises in preparing
financial reports that will be useful for making
decisions.

The set of Conventions, rules, & procedures

necessary to define accepted accounting practice at a
particular time is referred to as GAAP.

 It represents a fundamental position that have been

generally agreed upon, by accountants & encompasses
contemporary permissible accounting practice.
 Institutions that Influence Indian GAAP
 The Institute of Chartered Accountants of India (ICAI)

 Department of Company Affairs (DCA)

 Securities & Exchange Board Of India (SEBI)

 The Central Board of Direct Taxes (CBDT)

 The Reserve Bank Of India (RBI)

 The Comptroller & Auditor General (CAG)

 The Institute of Chartered Accountants of India (ICAI)
 It is Constituted under the Chartered Accountants Act of
1949 & it is responsible for regulating the profession of
C.A.

 It has played a Leading role in developing accounting &

reporting practices & has issued many recommendations
dealing with a variety of accounting matters.

 In the U.S & U.K. ICAI has no legal powers to enforce

compliance with its recommendations.

 It views on accounting have the weight of Professional

opinion.
 Department of Company Affairs (DCA)
 GOI is concerned with administration of the companies Act,
which lays down the form & content of financial reports of
companies.

 It articulates the Govts views on Financial reporting &

accounting requirements.

 DCA has kept a low Profile in accounting matters.

 DCA would play a key role in the evolution of accounting

with the likely establishment of a National Advisory
Committee on Accounting Standards in the Near Future.
 Securities & Exchange Board Of India (SEBI)
 It is Regulatory agency Established by Parliament “To protect the
interests of Investors in securities & to promote the development
of & to regulate the Securities market”.

 SEBI has overhauled the type & amount of information provided

in the prospectus at the time of issue of any security to the public.

 It has an interest in ensuring adequate, true & fair disclosure of

Financial information & has stated that it would work with ICAI &
others on Improving the standards of financial reporting.

 SEBI has assumed an active role for itself in corporate disclosure

by making it mandatory for Co listed in a stock exchange to
publish cash flow statements & quarterly financial Statements.
 The Central Board of Direct Taxes (CBDT)
 I.T. authorities, including the CBDT of the GOI, Commissioners of
I.T. & I.T. officers, enforce the I.T Act that authorities the levy &
collection of I.T.

 The law contains detailed provisions for determining taxable income.

 These provisions are interpreted & administered by the I.T

Department.

 A Business enterprises may choose to follow an Accounting practice

which is specified in the tax law to reduce its I.T. expense.

 Tax rules constitute one of the strongest influences on accounting

practice.

 The GOI can prescribe accounting rules for tax purposes.

 The Reserve Bank Of India (RBI)
 The Central bank of the country, regulates the
functioning of the financial sector in India.

 It has an interest in financial reporting by financial

institutions.

 RBI specifies accounting & reporting requirements

for banks & finance companies.

 It is an Apex body.
 The Comptroller & Auditor General (CAG)
 It is Constitutional functionary appointed by the
President of India to audit the accounts of Govt
organisations.

 The CAG office reviews the financial statements of

a number of Govt departments & public enterprises
& sends its observations to the Parliament.

 The advice of CAG on accounting matters is

generally accepted by Govt Organizations.
 International Organisation
 The IASC works for the improvement & harmonisation of financial
reporting, primarily through the development & publication of IAS.

 ICAI tries to formulate national accounting standards in tune with the

IASC’s standard to the extent possible.

 International Federation of Accounts (IFAC) is primarily concerned

with bringing about greater international harmony in education,
ethics, & auditing practices.

 United Nations Intergovernmental Working Group

 The Organization for Economic Co-operation & Development
 The International Organisation of Securities Commissions (IOSCO)
 European Community.
 Accounting principles
 It Comprises the Bases, conventions, rules &
procedures adopted by enterprises in preparing &
presenting financial Statements.

 Business enterprises follow diverse accounting

policies which are regarded as permissible by the
accounting profession.

 Interpretation of financial information is complicated

by the adoption of diverse policies in many areas of
accounting.

 An Accounting Standard specifies the acceptable

accounting methods.
 Accounting Standard
 In India, AS are formulated by the Accounting Standard Board
(ASB) of the ICAI.

 The Board membership comprises preparers, users,& auditors of

financial statements, representatives of Government & regulatory
agencies, & academics.

 The Final standards are issued by the council of the ICAI.

 In US accounting standards are set by the Financial Accounting

Standards Board (FASB)

 In UK AS are formulated by Accounting Standard Board.

 In Australia set by a Govt agency & in Canada by the Canadian

Institute of Chartered Accountants with the support of Stock
Exchanges.
 Accounting Standard
 Disclosure of accounting practices.
 Valuation of inventories
 Change in Financial position
 Contingencies & events happening after balancesheet has been
prepared
 Prior period & extraordinary items & changes in accounting policies
 Depreciation accounting
 Accounting for construction contracts
 Accounting for R&D
 Revenue recognition
 Accounting for Fixed Assets
 Accounting for changes in foreign exchange rate
 Accounting for Govt grants
 Accounting for investments
 Accounting for amalgamations
 Accounting for retirement benefits
 The Accounting Equation
 Assets = Liabilities + Owners Equity.

 Assets: Probable future economic benefits obtained or

controlled by a particular entity as a result of past transactions
or events.

 Liabilities: Probable future sacrifices of economic benefits

arising from present obligations of a particular entity to
transfer assets or provide services to other entities in the
future as a result of past transactions or events.

 Equity: Equity or owners equity is the residual interest in the

assets of an equity that remains after deducting its liabilities.

 The owners equity of a Co is called Shareholders equity. It

includes share capital, share Premium & retained Profit.
 Financial Statements
 It provides information about an enterprises revenues
expenses assets liabilities & owners equity.

 FS are a central feature of accounting because they are the

principal means of Communicating accounting information
to those outside an enterprise.

 Balance sheet: It is a financial statement showing the assets

& liabilities of a business entity as on a particular date.

 The Total Assets must tally with total liabilities, as every

balancesheet is based on double entry book-keeping system.
 Financial Statements
 Profit & Loss Statement: Also called the income
statement. It is a financial statement that
summarises the results of an enterprises
operations for a given period by disclosing the
revenues earned & the expenses incurred.

 P&L shows revenue (income) & expenses (costs)

of a business & the resultant surplus (Profit) or
deficit (loss) of an entity during an accounting
period.
 Financial Statements
 Statement of Cash Flows: it describes the
investments in assets during the period & how
those investments are financed.

 It reflects an enterprises major sources of cash

receipts & cash Payments & also its investing &
financing activities.
 Accounting Fields
1.) Public accounting
a.) Chartered accountants (CAs)
b.) Auditing
c.) Tax services
d.) Management advisory services
e.) Small business services
2.) Private Accounting
a.) Management accounting
b.) Internal Auditing
c.) Information systems
3.) Government Accounting
4.) Not-for-Profit Accounting.
 Principles of Double Entry Book Keeping
 For every transaction, there are two parties involved.
 Every business transaction has two aspects.
 Every debit has a corresponding credit.
 Both the aspects of transaction-debit & credit sides are
recorded in books of account.
 The two fold effect of a business transaction is recorded
by debiting one account and crediting an other account at
the same time.
 The left hand side is called debit side & is indicated by
‘Dr.’
 The Right hand side is called credit side & is denoted as
Cr.
 Rules of Double Entry
 Real account: These relate to assets or properties.
A separate account is maintained for each asset.
e.g. Cash, Stock, Bldg, Machinery.

 Personal Account: These are account of Various

entities e.g. individual, firm, Co, local authority,
association, Society.

 Nominal Account: These are accounts of

expenses (losses) & gains (income).
 Golden Rules
 Rule for Personal Accounts: Debit the
receiver Credit the Giver.

 Rule for Real accounts: Debit what comes in

credit what goes out.

 Rule for Nominal account: Debit all

Expenses & losses Credit all income &
gains.
 Kinds of Account Books
 Journal: It means a daily record. It is a book of original
entry & all business transactions are recorded in a journal
in the order of occurrence.

 Ledger: A summary of the statement of all transactions

relating to a person, assets, expenses/incomes, which took
place during a particular period of time, & their net effect.

 Cash Book: It keeps record of all cash transactions-

receipts & payments. All receipts are recorded on the
debit side, & all payments on the credit side.
 Kinds of Account Books
 Petty Cash Book: it is a subsidiary book where
all petty (small value below a defined level)
cash expenses, for e.g. Conveyance, Cartage etc
are recorded.

 Trial Balance: It is a statement showing debit &

credit balances taken from ledger, including
cash & bank balances as on a Particular date.