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UNIT 20:Case Study
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Accounting in Logistics and Supply Chain Secto
Course Design
Advisory Council
Chairman
Dr Parag Diwan
Members
Dr Shrihari
Dean
Dr Anirban Sengupta
Dean
Dr Ashish Bhardwaj
CIO
Dr Satya Sheet
VP Academic Affairs
Prof I M Mishra
Dean IIT Roorkee
Mr M K Goel
Management Consultant
SLM Development Team
Wg Cdr P K Gupta
Dr Joji Rao
Dr Neeraj Anand
Dr K K Pandey
Print Production
Mr Kapil Mehra Mr A N Sinha
Manager Material Sr Manager Printing
Author
N Balwani
All rights reserved. No parts of this work may be reproduced in any form, by mimeograph or any other means,
without permission in writing from Hydrocarbon Education Research & Society.
Course Code:MBAF-911D
Course Name:Accounting in Logistics and Supply Chain Sector
Version:January 2013
MPower Applied Learning Enterprise
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UNIT 20:Case Study
Contents
Block-I
Unit 1 Fundamentals of Accounting................................ ................................ ........................ 3
Unit 2 Generally Accepted Accounting Principles (GAAP)................................ ................... 17
Unit 3 Accounting Principles and Standards ................................ ................................ ........ 29
Unit 4 Accounting Equation ................................ ................................ ................................ .. 41
Unit 5 Case Studies................................ ................................................................ ................ 49
Block-II
Unit 6 Accounts................................ ................................ ................................ ...................... 55
Unit 7 Journal................................ ................................ ........................................................ 67
Unit 8 Ledger ................................ ................................................................ ......................... 79
Unit 9 Subsidiary Books ................................ ................................................................ ........ 93
Unit 10 Case Studies................................ ................................................................ .............. 113
Block-III
Unit 11 Trial Balance................................ ................................ ............................................. 119
Unit 12 Preparation of Trading, Profit & Loss Account and Balance Sheet ........................ 127
Unit 13 Depreciation Accounting................................ ................................ ........................... 141
Unit 14 Cash Flow Statements................................ .............................................................. 153
Unit 15 Case Studies................................ ................................................................ .............. 163
Block-IV
Unit 16 Financial Aspects of Supply Chain Management................................ .................... 169
Unit 17 Inventory Managements Techniques and Control................................ .................. 181
Unit 18 Cost Accounting ................................ ................................ ........................................193
Unit 19 EVA and Budgets................................ ................................................................ ......207
Unit 20 Case Studies................................ ................................................................ .............. 217
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Accounting in Logistics and Supply Chain Secto
Block-V
Unit 21 Corporate Financial Reporting................................ ................................ ................. 223
Unit 22 International Financial Reporting Standards ................................ ......................... 233
Unit 23 International Accounting Standards-I................................ ................................ ..... 241
Unit 24 International Accounting Standards-II................................ ................................ .... 251
Unit 25 Case Study................................ ................................ ................................................ 263
Glossary ................................ ................................................................ ................................ .......... 265
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UNIT 1:Fundamentals of Accounting
Notes
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BLOCK-I
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Notes
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Accounting in Logistics and Supply Chain SectoDetailed Contents
UNIT 1: FUNDAMENTALS OF ACCOUNTING
Introduction
Characteristics of Accounting
Stages of Accounting
Objectives of Accounting
Accounting Information
Functions of Accounting
Branches of Accounting
UNIT 2: GENERALLY ACCEPTED ACCOUNTINGPRINCIPLES (GAAP)
Introduction
Classification of Accounting Principles
Basic Assumptions
Basic Accounting Principles
UNIT 3: ACCOUNTING PRINCIPLES AND
STANDARDS
Introduction
Accounting Process
Uses, Advantages or Role of Accounting
Limitations of Accounting
UNIT 4: ACCOUNTING EQUATION
Introduction
Meaning of Accounting Equation
Calculation/Computation of Accounting Equation
Effect of Transactions on Accounting Equation
UNIT 5: CASE STUDIES
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UNIT 1:Fundamentals of Accounting
Notes
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Fundamentals of Accounting
Objectives
After completion of this unit, the students will be aware of the following
topics:
Characteristics of Accounting
Stages of Accounting
Objectives of Accounting
Accounting Information
Characteristics of Accounting Information
Functions of Accounting
Branches of Accounting
Introduction
Accounting is used as an information system by its users. The
users are of two types i.e., Internal and External. Accounting is
generally termed as the language of business. It records all the
transactions which can be expressed either in money or moneys
worth and have taken place during a particular period. It is also
termed as a science as the Transactions are recorded (which are of
economic nature) in a systematic manner and also an art of
analysing and interpreting the same i.e., the business transactions.
Accounting is defined by different authors and institutions. Some
of the most important definitions are as given below:
Accounting system is a means of collecting, summarizing,
analyzing and reporting in monitory terms, information about the
business.
Robert N. Anthony
Accounting is the process of identifying, measuring and
communicating economic information to permit informed
judgements and decisions by users of information.
The American Accounting Association (AAA), 1966
Accounting is the art of recording, classifying and summarizing in
a significant manner and in terms of money, transactions and
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Notes
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Accounting in Logistics and Supply Chain Secto
events which are, in part, at least, of a financial character, and
interpreting the results there of.
American Institute of Certified Public Accountants, 1941
Characteristics of Accounting
The following are the characteristics of accounting:
Recording of transactions of financial nature:Transactions
or events which are of economic/financial nature are only recorded
in accounting. Events/transactions which cannot be measured in
terms of money, are not at all recorded in accounting. For example,
efficiency or honesty of the employees cannot be recorded because
it cannot be measured in terms of money though it affects the total
profits of business. Similar is the case of a quarrel between the
factory workers and the factory production Manager which affects
the production, but it is not recorded in the books as it can neither
be measured in terms of money nor has any exchange or economic
value.
Recording in definite (certain) units: Only such events are
recorded which are measured in terms of money, no other unit is
used to record such transactions, for example, if the publisher sells
10 books (copies) of Accounting to a bookseller and 20 copies of
Business Studies to another bookseller, then the publisher is
required to record these transactions only in terms of money. That
in the first case 10 No. of copies is to be multiplied by the price per
copy and if any discount (trade) is to be given, is deducted. The
recording is done for the net amount in the books of the business
and not in terms of 10 or 20 or so on the number of books only.
It is an art of classifying the data:Accounting is also an art of
classifying the data systematically. After all the transactions are
recorded properly, all such data are also classified under
appropriate heads, so that as and when data is analysed or
interpreted, correct results can be drawn if data of similar nature
is available at a particular place. This also saves the time and
avoids unnecessary wastage of money.
It is a science: Accounting is a science because every business
transaction is recorded in a systematic manner. This is done first
in the Journal which is the primary book of Accounting/Business.
This may further be sub-divided into various types of subsidiary
books such as cashbook for recording cash transactions only
Activity
Write an article on thecharacteristics of accounting.
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UNIT 1:Fundamentals of Accounting
Notes
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whereas sales day book for recording credit sales of goods.
Purchases book for recording credit purchases of goods and returns
books for recording purchase returns and sales returns and other
subsidiary books such as Bills Receivable book, Bills Payable book,
etc.
Accounting can be used for analyzing and interpreting
business transactions: As we know that the purpose of
accounting is not only recording of transactions but also of
analyzing and interpreting data for taking certain important
future decisions. This is also known as future forecasting. Thus, we
see that definition of accounting is changing rapidly because of
increase in its functions. i.e., from recording of transactions to
interpreting of economic events.
Stages of Accounting
After knowing the characteristics of Accounting, one can list the
different stages of Accounting which are as follows:
Financial Transactions,
Recording of Transactions,
Classifying in different groups of transactions based as per thenature of transactions,
Summarizing of transactions, and
Analyzing and interpreting the same.
Table 1.1: Distinction between Book-keeping and Accounting
S.
No.
Basis of
Difference
Book-keeping
Accounting
Accounting
1 Objective The objective of book-
keeping is to record
the transactions ofeconomic nature.
Whereas the objective of
accounting is not only the
recording of transactions butalso analyzing and interpreting
the data.
2 Nature (Art
or science)
It is an art. It is a science.
3 Scope The scope of book-
keeping is very
limited.
The scope of accounting is very
wide.
4 Functions Most of the functions
of book-keeping are
now-a-days
performed by
machines.
Functions of accounting involve
expert human beings in the art
of analysis and interpretation.
Contd...
Activity
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Notes
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Accounting in Logistics and Supply Chain Secto
5 Accounting
Process
Book-keeping is just
one part of
accounting process.
Accounting involves the entire
process of accounting that is
why it is said that accounting
begins where book-keeping
ends.
6 Rules to be
followed
Rules of accounting
are followed for
recording.
Along with rules, assumptions
and conventions are also there
to follow.
7 Net Results
Profit or loss
Net results of the
business cannot be
known from book-
keeping.
Whereas accounting is used to
find out net results of the
business.
8 Time Transactions are
immediately
recorded.
Transactions are generally
recorded after a gap of time or
at the end of a financial year.
Check Your Progress
State whether True or False:
1. Accounting is the language of business.
2. Transactions or events which are of economic/financial
nature are only recorded in accounting.
Objectives of Accounting
The basic objective of Accounting is to provide necessary
information to the persons interested in the business. As we know
that persons interested in the business are of two types: (a)
Internal users and (b) External users.
(a) Internal users: These are the persons who manage the
business, i.e., management at all the levelstop, middle and
lower level.
(b) External users: External users are all persons other than
internal users such as Investors, creditors, Government. The
necessary information is supplied to the external usersthrough the following financial statements:
Profit & Loss Account/Statement and
Balance Sheet.
Whereas the internal users can obtain necessary information other
than the above statements from the records of the business. Thus,
the primary objectives of accounting are as given below:
1. Maintenance of records of business.
2. Calculation of profit or loss of the business.
Activity
Make a report on theobjectives of accounting.
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UNIT 1:Fundamentals of Accounting
Notes
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3. Presentation of the financial position of the business.
4. To provide and make available the necessary and financial
information to the users.
The above objectives can be explained in detail:
1. Maintenance of records of business:The Primary objective
of accounting is to maintain proper records of business, i.e.,
every transaction which is of financial nature must be
recorded fully otherwise it is very difficult to remember all the
transactions because human memory is very short. Moreover,
correct and fair results of the business transactions cannot be
ascertained (calculated). So it is very much essential to keep
proper and complete records of all business transactions so
that records can be used as and when required/desired by the
persons interested in the business.
2. Calculation of Profit or Loss:As we know that one of the
most important objectives of business is to earn profit, and the
main objective of accounting is to maintain proper records of
all financial transactions in to order to calculate profit or loss
of the business. This can be done with the help of a financial
statement known as the Profit & Loss statement. This
statement is prepared for a particular period which can tell us
about the profit or loss of the business. If there is a profit, the
management can take important decisions relating to selling
price, output, etc. If two years results are known, then a
comparison can also be made. Similarly, if there is a loss, then
management can decide to discontinue the production of such
items. Thus, we see that it is a very important objective of
accounting, i.e., to provide information relating to profit or loss
of business. This statement is very useful to all the persons
interested, i.e., from management to creditors, investors,
government and society at large including employees of the
business. Thus, profit or loss statement is a measurement of
performance of the business.
3. Presentation of financial position of the business: The
financial position of the business is presented through another
financial statement known as the Balance Sheet or Position
Statement. This is a statement of assets and liabilities of the
business. It tells about the owned capital as well as borrowed
capital (liabilities) along with different assets such as fixed
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Notes
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Accounting in Logistics and Supply Chain Secto
assets and current and other assets. If total liabilities are
deducted from the total assets, then balance depicts the
owners capital (owned funds). As we know that the objective of
accounting is not only recording of financial events, make
available information relating to profit or loss of the business
but also provide full information regarding financial position of
the business. This is done through a financial statement. The
balance sheet is a mirror showing the financial solvency or
insolvency of the business. If assets are more than its
liabilities, it is a solvent otherwise in case of reverse, it is an
insolvent business.
4. To provide and make available the necessary and
financial information to the users:The major objective of
accounting is to provide and make available the necessary and
financial information to the users or the persons interested so
that, necessary and financial decisions and actions can be
initiated by the management/persons interested such as
owners, shareholders, debenture holders, creditors, investors,
government and others such as research scholars, etc.
Thus, we see that the accounting can play a very important
role in depicting the financial results (profit/loss) of the
business as well as the financial position (solvency or
insolvency) of the business.
Accounting Information
As per Accounting Principles Board (APB), Accounting is defined
as follows:
Accounting is a service activity. Its function is to provide
qualitative information, primarily financial in nature about
economic activities that is intended to be useful in making economic
decisions.
Thus, it is clear from the above definition, that accounting
information is an important function of accounting. Accounting
information must also be of quality so that important financial
decisions can be taken by the users of accounting. Accounting
information is supplied through financial statements. Financial
statements are Profit & Loss account being income statement and
balance sheet being position statement.
Activity
Present a draft on accountinginformation.
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UNIT 1:Fundamentals of Accounting
Notes
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The information which is provided by these statements is as
follows:
1. Information about profit or loss of the business.
2. Information about financial position of the business.
Information about Profit or Loss of the Business
The Profit & Loss account which is also known as income
statement provides accounting information about profit earned or
loss suffered (incurred) during an accounting period. This
statement provides gross profit through trading account and net
profit through Profit & Loss account.
Gross profit = Sales Cost of Sales
This information is very useful as it helps in deciding the following
questions:
1. Whether cost of sales is reasonable or not?
2. Whether it can be reduced or not?
3. Whether selling price can be increased or not?
The Accounting information, thus available through trading
account helps us to resolve the above questions.
Net profit is the profit earned after allowing all the expenses
relating to factory administration, financial, selling and
distribution. Thus, income statement makes available information
about net profit earned or net loss suffered. This also helps in
answering the following questions.
1. Whether expenses are reasonable or not?
2. Whether expenses can be reduced or not?
Net profit is used as a basis for taxation purposes.
Information about Financial Position of Business
The balance sheet also known as position statement tells about
financial health of the business. This statement tells about the
assets owned by the business including cash and bank balances.
These assets are total of liabilities owned by the business which
may be taken from the proprietor of the business or borrowed from
outsiders. The position statement helps in determining the
following questions:
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Notes
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Accounting in Logistics and Supply Chain Secto
1. Whether funds invested are safe and sound, means provides
reasonable return of income along with safety of funds?
2. Whether return of income is adequate or not?
3. It helps the investors, the creditors to arrive at a correct
decision regarding investment, lending of funds, etc.
4. It helps in restoring confidence among the employees about
their provident fund being properly deposited with the cost as
per requirements.
Characteristics of Accounting Information
Accounting information consists of the following characteristics:
1. Reliability: Whatever accounting information is supplied
must be reliable, means it must be free from all sorts of biases.
Otherwise the basic purpose of using accounting information is
defeated. Accounting information is reliable if following rules
are observed:
(a) Principle of prudence is followed:It means the principle of
prudence, i.e., conservatism is followed and all losses are
taken into account while all prospective gains are left out.
In other words, accounting information tells about thefacts and does not give any wrong information about the
business.
(b) Neutral Accounting information is free from all sorts of
biases because if information supplied is biased, it would
give misleading results.
(c) Complete: Whatever accounting information is supplied,
must be complete in all respects. Otherwise incomplete
information may give us misleading results.
2. Relevance: The accounting information should also disclose
other information which may be useful to the users of
information. This is in addition to the information which is
required by statutes under different Acts/Laws.
3. Understandability: The accounting information provided,
must be in a form which is understandable to the users of
information. However, the information which can be useful
must also be given. Whatever is the requirement of disclosure
of information, must be followed strictly.
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UNIT 1:Fundamentals of Accounting
Notes
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4. Comparability: The users should be able to compare the
accounting information as inter firm or intra firm comparison.
It is therefore necessary to use standardized accounting
policies consistently.
Various Users of Accounting Information
Following are the users of accounting information:
1. The owners:Whosoevers money is provided to the business,
such persons are known as owners of the business. Such
persons may be either the proprietor, the partners or the
shareholders. They are very much interested in knowing about
the profit or loss of the business and also the financial health
and wealth of the business.
2. Investors: Everyone who is either willing to invest in a
business as a partner or as a shareholder is always interested
to know about the safety of funds as well as adequate return
on investments.
3. Creditors are interested to be satisfied about the credit
worthiness of the business before supplying goods or services.
Accounting information available through financial statements
thus proves useful and helpful.
4. Government is interested in having certain other financial
information on the basis of which economic and taxation
policies are decided.
5. Employees:Accounting information is useful to the employees
by telling them about their contribution which is regularly
deposited with the Government by their employers.
6. Society: Accounting information is useful to the society. It
depicts general financial state of affairs in the society, i.e.,
standard of living, per capita income, national income, etc.
Check Your Progress
Fill in the blanks:
1. The ........................ also known as position statement
tells about financial health of the business.
2. ................... is the profit earned after allowing all the
expenses relating to factory administration, financial,
selling and distribution.
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Notes
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Accounting in Logistics and Supply Chain Secto
Functions of Accounting
The main function of accounting is to record the business
transactions scientifically and systematically. Apart from this,
there are other functions of accounting which are as follows:
1. It depicts the true and fair picture of the financial position of
the company.
2. It helps in ascertaining profit or loss of the business which is
the only primary aim of the business.
3. It helps in future decision-making by different persons
interested in such accounting information.
4. It depicts the earning capacity of the business.
5. It satisfies all Government rules and regulations connected
with Accounting information such as all the companies are
required to prepare their statements as per requirements of
the Indian companies Act, 1956, amended up to date.
Branches of Accounting
As we know that the objectives of accounting are recording of
business transactions and also make necessary information
available to the persons interested. The accounting is broadly
classified into three main branches, in order to achieve the above
objectives. The branches are:
(a) Financial Accounting
(b) Cost Accounting
(c) Management Accounting
(a) Financial Accounting: It is mainly concerned with the
ascertainment of profit or loss made during a particular periodand also presents the financial position of the business.
(b) Cost Accounting: As the name suggests, this type of
accounting is mainly related with the ascertainment of the cost
of a product, so that the management can exercise its control
in order to minimize the costs and maximize the profits.
(c) Management Accounting:This type of accounting is a tool in
the hands of management for various functions; (i) to control
costs (ii) to take important future decisions (forecasting).
Activity
Prepare an assignment on the
functions and branches ofaccounting.
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UNIT 1:Fundamentals of Accounting
Notes
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Thus, we see that there are different branches of accounting, each
branch is assigned a different job.
Check Your Progress
Fill in the blanks:
1. ................... is mainly concerned with the ascertainment
of profit or loss made during a particular period and
also presents the financial position of the business.
2. ................... accounting is a tool in the hands of
management for various functions; (i) to control costs
(ii) to take important future decisions (forecasting).
Summary
Accounting is generally termed as the language of business. It
records all the transactions which can be expressed either in
money or moneys worth and have taken place during a particular
period. It is also termed as a science as the Transactions are
recorded (which are of economic nature) in a systematic manner
and also an art of analysing and interpreting the same i.e., the
business transactions.
Lesson End Activity
Collect more information on accounting and present it in the form
of a chart.
Keywords
Accounting: It is the process of identifying, measuring and
communicating economic information to permit informed
judgements and decisions by users of information.
Cost Accounting:As the name suggests, this type of accounting is
mainly related with the ascertainment of the cost of a product.
External Users: All persons other than internal users such as
Investors, creditors, Government.
Financial Accounting: It is mainly concerned with the
ascertainment of profit or loss made during a particular period and
also presents the financial position of the business.
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Notes
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Accounting in Logistics and Supply Chain Secto
Internal Users:These are the persons who manage the business,
i.e., management at all the levelstop, middle and lower level.
Management Accounting:This type of accounting is a tool in thehands of management for various functions; (i) to control costs (ii)
to take important future decisions (forecasting).
Questions for Discussion
1. Describe the characteristics of accounting.
2. Explain the stages of accounting.
3. Discuss the objectives of accounting.
4. What do you understand by accounting information?
5. Explain the characteristics of accounting information.
6. Describe the functions of accounting.
Further Readings
Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
Homewood, Illinois, Richard D. Irwin, 1995.
Bhattacharya S. K. and Dearden J. Accounting for Management
Text and Cases, New Delhi, Vikas, 1996.
Gupta, R.L. and Ramanathan,Advanced Accountancy, Volume I &
II, Sultan Chand and Sons.
Hingorani, N.L. and Ramanathan, A. R., Management Accounting,
5th ed. New Delhi, Sultan Chand, 1992.
Jawahar Lal, Cost Accounting, Vikas Publishing House, New
Delhi.
Maheshwari, S. N.,Advanced Accounting, Vikas Publishing House,
New Delhi.
K K Verma, Financial Accounting and Analysis, Excel Books, New
Delhi.
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
Chand & Sons, New Delhi.
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.
Chand, New Delhi.
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UNIT 1:Fundamentals of Accounting
Notes
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Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html
www.accsoft.ch/download/accountingconcepts.pdfwww.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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Notes
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Accounting in Logistics and Supply Chain Secto
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UNIT 2:Generally Accepted Accounting Principles (GAAP)
Notes
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Generally Accepted AccountingPrinciples (GAAP)
Objectives
After completion of this unit, the students will be aware of the following
topics:
Classification of Accounting Principles
Basic Assumptions
Basic Accounting Principles
Introduction
Accounting is a medium of recording the transactions made in the
business that is why; accounting is termed as the language of the
business. All the persons interested in the business, such as the
owners/shareholders, the creditors, the government and the others,
get the necessary business information through accounting
because it is properly recorded, analyzed and summarized to theextent that it can be understood by all. This is possible when all
the financial statements are prepared in accordance with generally
accepted accounting principles. If such uniform principles are not
adhered /followed, there would be a lot of difficulties and confusion
which makes comparison impossible, unreliable or dependence is
also reduced because, its acceptability is unsuitable for different
business houses, etc. The accountants, therefore, have suggested
the common concepts and conventions of accounting in order to
overcome the above mentioned difficulties and problems
enumerated earlier. Such accounting concepts and conventions areknown as basic accounting concepts and conventions as they have
been commonly accepted by the professional accounting world for
preparing financial statements and reports for external use based
on experience and practice.
Classification of Accounting Principles
All the accounting concepts and conventions are broadly classified
into three broad categories, such as:
Activity
Write an article on theclassification of accountingprinciples.
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Notes
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Accounting in Logistics and Supply Chain Sector
1. Basic assumptions are like pillars on which the structure of
accounting is based
2. Basic Principles and
3. Modifying Principles.
In this unit, we will study the basic assumptions and the basic
principles. We will study the modifying principles in the next unit.
Basic Assumptions
Assumptions provide a base for accounting process without which
no enterprise can prepare its financial statements. The following
are the basic assumptions:
(a) Accounting entity/Business entity
(b) Monetary unit/Money measurement concept
(c) Going concern
(d) Periodicity.
Accounting Entity
It is also termed as Economic entity assumption which means that
economic unit/event can be known with a specific unit. For this
purpose business is considered as a distinct and separate entity
than its owners. Recording of every transaction is done whether it
is related to the owner/s or not. The business controls each and
every activity this is possible because of its separate entity hence,
it is also accountable. For example, when a business is started by
the owners, then cash/goods come in the business which results in
an increase in the capital of business and on the other hand, it
reduces private capital of the owners. Nowadays the concept of
business entity is becoming more and more popular because offurther division of accounting in different departments, so that the
responsibility of each department can be ascertained easily. This is
done in responsibility accounting. According to this accounting
entity, a distinction should be made between (1) Private/personal
and (2) those of another business entity. If it is not done, results
would not be accurate.
It would be rather confusing, uncertain, ambiguous, though it is
one of the most useful assumptions. Business and the owner/s
whether sole proprietor or partner/s are one in the eyes of law, but
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UNIT 2:Generally Accepted Accounting Principles (GAAP)
Notes
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they are considered as separate entities from practical accounting
point of view. But in case of companies, the law recognizes legal
and separate entity from its owners, i.e., the shareholders.
Monetary Unit/Money Measurement Concept
Only such transactions are recorded in accounting that are of
monetary value or that can be measured in terms of money. The
transactions/events which cannot be measured in terms of money
are not at all recorded in accounting. For example, if there is
dispute between a manager and a worker which affects/does not
affect the business, it cannot be recorded unless and until it is
measured in terms of money. Likewise the health of the proprietor,
sale policy of the business, entrance of other competitors in thebusiness are such events which cannot be recorded in accounting
howsoever important it may be, because these cannot be measured
in terms of money. This is a peculiar feature of the Money
measurement concept but this can also be termed as limitation of
this concept which has attracted the attention of all the
accountants in the world. All the transactions which are recorded if
measured in money, at a present level, any increase/decrease after
recording is left out. To make accounting records relevant, simple,
understandable and of the same class or groups, they are brought
to a common unit of measurement i.e., Money. It makes possible
the preparation of financial statements. Had there been no
monetary unit assumption, it would have been difficult to record
business transactions; hence monetary unit concept is introduced.
Though it is assumed that the monetary unit is a stable unit in
value but in practice, this assumption is not correct as the money
value changes over a period of time.
Limitations of Money Measurement
There are certain limitations of this concept because of which the
scope of accounting is limited the limitations are as follows:
(i) Records only such events/transactions which can be expressed
in terms of money but as we know that there are certain
events which affect the business but cannot be measured such
as wealth of the proprietor etc. such events are responsible for
the success of the business but unable to record in the books of
accounts, the direct result is that whatever information is
gathered not correct and fair view of the either operational orposition of the business is not there.
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Accounting in Logistics and Supply Chain Sector
(ii) There is no consideration for purchasing power of money
which is fluctuating. Again the result is that it is not a true
and fair view of the business.
Going Concern Concept
It is assumed that every business would continue for a long period
or have an indefinite life unless it is likely to be sold or wound up
in the near future. This is also known as the concept of continuity.
Keeping this in view, recording of transactions in accounting and
division of expenses is done. In other words, it is seen whether
benefit from expenses is immediate or long-term. If it is
immediate, then it is to be treated as revenue or if it is long-term,
it is to be treated as capital, depending upon the nature of
expenses. This concept of going concern is considered better as
compared to short-term or temporary business. In other words, a
businessman charges depreciation on the historical (probable) costs
as well as expected life and not on the market value. This is also a
sound and fundamental basic principle of financial statement. This
concept helps the investors in providing necessary capital to the
business because of the assurance regarding the continuation of
the business for a long time. If this type of commitment is absent,
then it would be very difficult to procure funds for the business.
Accounting Period Concept
This is also known as time period assumption, and the economic
life is divided into different periods for preparing financial
statements. As per going concern concept the financial statements
must be prepared only when either it is sold or liquidated. But
practically it is very difficult to wait for such a long period, hence it
is agreed that economic life of a business must be reported over a
reasonable time period which is normally taken as one year, eithercalendar year, financial year and or other year such as Deepawali,
Dussehra or Samvat year, etc. Though, sometimes, it may be less
than 12 months also i.e. monthly, quarterly or half yearly, etc.; but
such periods are termed as interim periods and reports for such
periods are called interim reports. Such reports are generally less
reliable than annual reports. So it is very much desired to have
relevant information, so that quick decisions can be taken. Thus,
we see that the idea of accounting period is quite helpful and
useful to all classes of users management, creditors, investors
and others.
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UNIT 2:Generally Accepted Accounting Principles (GAAP)
Notes
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Check Your Progress
Fill in the blanks:
1. ................... means that economic unit/event can be
known with a specific unit.
2. ................... is also known as time period assumption,
and the economic life is divided into different periods
for preparing financial statements.
Basic Accounting Principles
The Accountants have agreed on some principles which tell how
the transactions should be recorded and reported in the books of
the business. Important basic accounting principles are as given
below:
1. Cost principle
2. Revenue/Realization principle
3. Matching principle
4. Full disclosure principle
5. Dual aspect principle and6. Objectivity principle.
The above principles can be explained in detail one by one.
1. The Cost Principle:Every transaction should be recorded at
its actual (historical) cost or cost of its acquisition and not its
market price. For example, if a Machine is purchased for 1 lac
and its market price is 2.50 lacs, then recording of this
transaction is done at 1 lac being its actual cost/or cost of its
acquisition. Sometimes market price may be less than even
then recording would be at its actual cost because of the cost
principle, which is the basis of charging depreciation in future.
If there is any residual value of asset and the asset is sold,
then such amount is deductible from such value. If the asset is
having no residual value, such assets are not shown in the
Balance sheet though the existence of assets is very important
to the business. Thus, we see that the Balance sheets which
are based on cost concept/principle give us very wrong/
incorrect results for those investors who are interested to know
the real values of the assets. This principle of cost is applicable
Activity
Make a report on the basicaccounting principles.
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Notes
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Accounting in Logistics and Supply Chain Sector
in case of fixed assets as well as the current assets. In the
words of Hendriksen, Expenses are using or consuming goods
and services in the process of obtaining revenues. Thus, it is
the amount that is spent with a view to produce or procures
goods or services to obtain revenue from the sale of such goods
or services. In spite of so many criticisms of this, the cost
principle is definite and reliable. So, it has an edge over other
principles. It also provides an objective and comparable data in
the financial statements.
2. Revenue Principle (Realization Principle): Only such
transactions are recorded in accounting which have actually
taken place not the ones which would take place in future.
This is based on revenue realization principle. For example, if
goods are sold or purchased by a trader, transaction is
recorded but if there is a contract or an agreement has taken
place, it would not be recorded unless and until the contract is
executed/complete/obligations/duties are performed as per
contract. However, there are certain exceptions to the sales
basis for revenue realization. In case of construction projects,
revenue is generally realized before the contract is complete.
Similarly in other cases, such as in case of sale by Instalment
method revenue is realized later though sale has taken placeearlier. Revenue is realized when cash is received. Sometimes
there may be defaults in payment of some instalments. Apart
from these exceptions, revenue is generally realized at the
time of sale when actually the title of ownership passes from
the seller to the buyer. This assumption is especially
important because it recognizes the assets, liabilities, incomes
and expenses as and when the transactions relating to these
take place. We can find out from the books of account how
much is due to creditors (liabilities) and how much the firm
owns (assets). Apart from this, one can also know about the
profit earned or loss suffered.
3. Matching Principle:As we all know that the business is a
going concern, so it is even more necessary to know its
operational results for a particular/fixed period. This period
may be of six months or one year. Profit or loss during this
period indicates the financial operational results of the
business, so it is necessary to put all financial records of the
expenses, revenues or incomes relating to a particular period,
so that matching between revenues and expenses can be
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UNIT 2:Generally Accepted Accounting Principles (GAAP)
Notes
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facilitated. This matching is termed as matching principle of
accounting. The equation can be written as:
Profit = Revenues ExpensesThis principle of Matching is very much important for
ascertainment of correct amount of profit (income) which is a
measurement of performance. All expenses which can generate
revenues in the current accounting period are taken as
expenses. The matching of expenses with revenue is based on
accrual system of accounting. In accrual system, revenue is
recognized when sale is complete or services are rendered
rather than when cash is received. Similar rule is applicable in
the case of expenses, i.e., expenses are recognized, when assetsand services are put to generate revenues and not when cash
is paid.
The matching principle makes the following points clear:
(a) When an item of expense is spent against revenue it will
be entered in the following period, result would be to show
it in the Balance sheet and in the following period, to be
treated as an expense.
(b) When an item of revenue is recorded in the Profit & Loss
account, all the expenses incurred whether paid for cash
on not should be recorded as the expenses.
(c) If any amount of revenue is received but either goods are
to be supplied in future or services are rendered in future,
the amount is not recognized as revenue in the current
year, the result is to be shown as liability in the balance
sheet but if any loss is there for which no revenue is
earned it is to be charged from the current Profit & Loss
account, for example in fire insurance premium. If goods
are lost, whatever is recovered from insurance company is
deducted from the cost of goods lost and the balance of loss
is charged from Profit & Loss account.
4. Full Disclosure Principle:The objective of accounting is to
provide true and accurate information. This may be because of
law or social customs. All facts of assets must be disclosed
along with their valuations. Principle of disclosure means to
supply all information relating to economic activity of the
business completely to the owners, creditors and Investors
which can protect their interests. Disclosure does not mean
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Notes
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Accounting in Logistics and Supply Chain Sector
only that information which is required up to the stage when
the Balance Sheet is prepared but after the preparation of
Balance Sheet also. For example, bad debts, destruction of any
machinery/building because of natural calamity, loan taken
within a week or so, after the Balance Sheet is prepared,
method of providing depreciation and Valuation of stock. All
such events affect the investors decisions. So such events must
be given compulsorily. The purpose of this principle is to
convey all material and relevant facts relating to the
operational result and the financial positions to the parties
using the financial statements.
Financial Statement must be duly supported by footnotes. A
good accounting principle requires that all significant and
important information must be disclosed, apart from legal
requirements.
5. Dual Aspect Principle: Every transaction of a business is
recorded at two places. That is why it is termed as Double
entry system of accounting. Every debit has a credit. For
example, when a business is started by a proprietor for cash,
then whatever comes in the business is debited and whosever
gives loan as giver is credited. Thus the following entry in the
Journal is passed:
Cash a/c Dr.
Or
Goods a/c Dr.
To Proprietor's a/c
Or
To Capital a/c
Cash or Goods brought in as capital by the proprietor or partners.
As we know that only such events are recorded in financial
accounting which are related to economic activities or can be
expressed in money. These events may be either purchase or
sale of goods on cash or on credit, receipts or payments, etc.
Every transaction is recorded at two places that are why
double entry system is in vogue. In America, this system is
used in the form of equation. In the above example the owners
can bring cash or goods or both as capital. The Following
would be the equations:
Capital = Cash/Stock/Cash + Stock
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UNIT 2:Generally Accepted Accounting Principles (GAAP)
Notes
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If any loan is taken then
Capital + Loan = Cash + Stock
OR
Total Liabilities = Total Assets
OR
Internal + External Liabilities = Fixed Assets + Current
Assets
In other words, we can say that
Equity or owners equity = All Assets Loans or
liabilities of outsiders
Thus, we see that the Principle of Dual aspect would provide
us all the rules required for recording all the transactions of a
business.
6. Principle of Objectivity:All transactions which are recorded
must be duly supported, by documents as far as possible. Then
only the auditor would be able to verify the accounts: if it is
not, transactions must have substantial evidence which is free
from personal bias and is based on rational approach. As we
know that the cash is definite and verifiable while value is not.
The principles of Objectivity require that accounting data
should be verifiable and free from bias.
Check Your Progress
Fill in the blanks:
1. ................... principle of Matching is very much
important for ascertainment of correct amount of profit
(income) which is a measurement of performance.
2. ................... is based on revenue realization principle.
3. Principle of ................... means to supply all information
relating to economic activity of the business completely
to the owners, creditors and Investors which can protect
their interests.
Summary
All the persons interested in the business, such as the
owners/shareholders, the creditors, the government and the others,
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Notes
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Accounting in Logistics and Supply Chain Sector
get the necessary business information through accounting
because it is properly recorded, analysed and summarized to the
extent that it can be understood by all. This is possible when all
the financial statements are prepared in accordance with generally
accepted accounting principles. If such uniform principles are not
adhered /followed, there would be a lot of difficulties and confusion
which makes comparison impossible, unreliable or dependence is
also reduced because, its acceptability is unsuitable for different
business houses, etc.
Lesson End Activity
Gather information about the GAAP. Present the informationcollected in the form of a collage.
Keywords
Accounting Entity: It is also termed as Economic entity
assumption which means that economic unit/event can be known
with a specific unit.
Accounting Period Concept: This is also known as time period
assumption, and the economic life is divided into different periods
for preparing financial statements.
Going Concern Concept: It is assumed that every business would
continue for a long period or have an indefinite life unless it is
likely to be sold or wound up in the near future. This is also known
as the concept of continuity.
Monetary Unit Concept: Only such transactions are recorded in
accounting that are of monetary value or that can be measured in
terms of money.
The Cost Principle:Every transaction should be recorded at its
actual (historical) cost or cost of its acquisition and not its market
price.
Questions for Discussion
1. Describe the classification of accounting principles.
2. Explain the basic assumptions of GAAP.
3. Discuss the basic accounting principles.
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UNIT 2:Generally Accepted Accounting Principles (GAAP)
Notes
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Further Readings
Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
Homewood, Illinois, Richard D. Irwin, 1995.
Bhattacharya S. K. and Dearden J. Accounting for Management
Text and Cases, New Delhi, Vikas, 1996.
Gupta, R.L. and Ramanathan,Advanced Accountancy, Volume I &
II, Sultan Chand and Sons.
Hingorani, N.L. and Ramanathan, A. R., Management Accounting,
5th ed. New Delhi, Sultan Chand, 1992.
Jawahar Lal, Cost Accounting, Vikas Publishing House, New
Delhi.
Maheshwari, S. N.,Advanced Accounting, Vikas Publishing House,
New Delhi.
K K Verma, Financial Accounting and Analysis, Excel Books, New
Delhi.
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
Chand & Sons, New Delhi.
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.Chand, New Delhi.
Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html
www.accsoft.ch/download/accountingconcepts.pdf
www.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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Notes
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Accounting in Logistics and Supply Chain Sector
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UNIT 3:Accounting Principles and Standards
Notes
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Accounting Principles andStandards
Objectives
After completion of this unit, the students will be aware of the following
topics:
Modifying Accounting Principles
Accounting Standards in India
Accounting Process
Uses, Advantages or Role of Accounting
Limitations of Accounting
Introduction
Basic accounting assumptions and principles provide different
rules for preparing certain financial statements which can provide
useful information to different interested persons.
In the previous unit, we studied the basic assumptions and the
basic accounting principles of accounting. In this unit, we will
study the modifying accounting principles.
Modifying Accounting Principles
The information is useful if it is relevant and reliable. Information
is relevant if it can provide a basis for future forecasting and is free
from bias and errors. In order to prepare correct financial
statements, it is necessary, to modify certain assumptions andprinciples. Cost benefits relationship, materiality, consistency,
conservatism. Timeliness and industry practice, etc., have to be
taken into account for making the information more useful. The
following are the important modifying principles;
1. Consistency:One thing must be kept in view, while recording
in the books of account i.e., whatever principle or method is
adopted in a year, must be adopted for the subsequent years
then only comparison of results is possible. For example, if
stock is valued using LIFO (Last In First Out) or FIFO (First
Activity
Write an article on themodifying accountingprinciples.
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In First Out) or any other method, the same method must be
followed in subsequent years likewise is in case of depreciation
and if there is any change in the method of charging
depreciation it must be reported. Because of this, convention of
consistency occupies an important place in the field of
accounting. Consistent use of accounting principle and
conventions is necessary in achieving comparability. Though
the principle of consistency requires that a particular method
used, generally should not be changed unless otherwise
required and the user is informed accordingly. The Generally
Accepted Accounting Principles (GAAP) allow more than one
method of explaining similar operational results but in such
situations, financial statements are not comparable. This iswhy the principle of consistency requires that the basis should
remain consistent with the previous accounting year. One can
conclude from the above that the principle of consistency does
not allow a firm to change its method under any situation. It
allows the firm to change its method if it is more useful or can
supply better information or results. This change must be
reported/disclosed in the financial statements by way of a foot
note with a view to inform the users about the lack of
consistency.
2. Conservatism [Prudence]: All financial statements are
prepared and presented as per law or conservatism and not for
a specific purpose. That is why it is termed as convention of
conservatism. This is a good and the safest policy. Accordingly
all possible losses are taken into account and all (probable)
(unrealized) profits/gains are left out. Likewise stock can be
valued either at cost or market price whichever is lower.
Similarly, provision for doubtful debts or provision for
depreciation can also be arranged as per the conservatism. It
can be a useful tool in such situations but if it is not used
properly, it may lead to unpleasant and unforeseen results.
For example, if a machine is purchased and the cost of
machine is charged as an expense, then profit as well as assets
would be underestimated.
Nowadays conservatism has been replaced by prudence which
means the principle of conservatism is applied by the
accountants only in case of doubts or uncertainties with
prudence. The theme of the principle of conservatism is under-
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statement of profit or assets rather than over-statement of
profit or assets.
3. Principle of Materiality: The American Accounting
Association defines the term materiality as, an item should be
regarded as material if there is reason to believe that
knowledge of it would influence the decision of informed
investor. In other words, materiality means only that
information should be used which influences the decision of
the investors, creditors, shareholders, etc. Though there may
be so much financial information, but only relevant must be
taken into account. This is very subjective. Likewise the
problem may be in case of allocation of costs/other expenses.
Moreover information material for one concern may not bematerial for others so, an alert is required and care has to be
exercised while selecting or rejecting information. As per
principle of disclosure, all relevant and necessary information
(facts) must be disclosed whereas the Principle of Materiality
is an exception or modifying principle. It is because of this,
that the events or items not relevant or having an insignificant
effect, need not be given. The concept of Materiality is relative.
It is different for different enterprises. For example, the cost of
a component is very significant to a small company whereas it
is insignificant for a big company. Similarly nature of
transaction also affects the decision of the user of information.
Thus, it is clear from the above that the principle of
materiality is very much useful in the day-to-day working of
an organization.
4. Cost Benefit Principle:This principle says that the cost of
applying an accounting principle should not exceed its benefit.
It does not mean that to save cost, no information or very little
information should be given to the users. Certain minimum
levels of relevance and reliability must be reached for
information to be useful.
For example, it is required under the Companies Act, 1956
that information regarding managerial remuneration
satisfying the overall ceiling of 11% of Net Profits should be
given. This increases the cost of providing information.
5. Timeliness:Information given must be relevant and reliable.
In order to be relevant the information must also be timely. If
information is not available or is provided after a long gap, it is
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of no use. It is therefore desired that information must be
available for decision-making before it becomes redundant. Old
and late information hampers the ability of users on
application of different accounting principles.
6. Substance over form: Means accounting treatment and its
presentation in financial statement should be as per substance
of the Transaction and not by its legal form alone. For
example, in case of a lease the lessor is funding the
transactions, hence he recognized the assets so financed as his
assets whereas the lessee recognized lease payments as hire
charges paid. In the First case, it is the legal form whereas in
the second case, it is the substance of the transaction.
7. Variations in Accounting Practices: It means different
accounting practices, which are equally acceptable. As such
there is no single accounting practice which is applicable in all
cases. For example valuation of inventories, method of
charging depreciation, treatment of contingent liabilities etc.
In the above such cases, the Management is required to use
considerable judgment to select an appropriate/just practice.
8. Industry Practice: Sometimes different industries use
different accounting principles and approaches to producerealistic financial reporting. For example, it is a practice to
show investment at cost or market price whichever is lower.
Similarly, agricultural produce is shown at market price
because of certain practical difficulties. Thus, it is very much
clear from the above that Industry practice also plays a very
important role while applying certain accounting principles.
Check Your Progress
Fill in the blanks:
1. ................... is defined as an item should be regarded as
material if there is reason to believe that knowledge of
it would influence the decision of informed investor
2. ................... principle says that the cost of applying an
accounting principle should not exceed its benefit.
Accounting Standards in India
Indias accounting standards are explained in the following sub-
sections:
Activity
Present a report on theaccounting standards of India.
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Meaning of Accounting Standards
It is a set of certain generally accepted rules, principles, concepts
and conventions issued by the Institute of Chartered Accountants
of India in consultation with other International Accounting
Bodies. The purpose of making uniform rules and principles is to
make the preparation and presentation of financial statement
easy, relevant, reliable, understandable and finally comparable. In
other words, Accounting standards are the basis of accounting
policies and practices to facilitate the recording of transactions and
events in such a way which can change them into financial
statements, to be used by the persons interested in getting the
correct and reliable information with a view to take future
decisions.
Need for Accounting Standards
Different business enterprises were having different modes of
recording the transactions and events and lack of uniform set of
rules created a lot of problems, such as comparison was not truly
possible but difficult also this was because of the nature of
business, diversified and complex economic situations. This also
made accounting information incomparable and less meaningful.
Therefore a need was felt to have certain minimum standardswhich can are universally applicable, so that the financial
statements thus made, can be more reliable, comparable, relevant
and understandable. Keeping this in view, International
Accounting Standard Committee (IASC) was set up in 1973. The
objectives of this Committee were:
(i) To formulate and publish in the public interest, accounting
standards to be observed in the presentation of financial
statements and also its world-wide acceptance, and
(ii) To work for improvement and harmonization of regulation of
accounting standards and procedure relating to the
presentation of financial transactions.
Nature
The Institute of Chartered Accountants of India had set up
Accounting Standards Board on 22nd April, 1977 to formulate
accounting standards on a number of accounting issues, taking
into account the accounting standards developed by the
International Accounting Standard Committee, prevailing laws in
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India, business customs usages and conventions, etc. The
Accounting Standards made were not mandatory in the beginning
but after the amendment in the Sec 211(3C) of Companies Act,
1956 Accounting Standards out of 28 have been made mandatory.
The Auditor is required to give in his report to the shareholders
that accounts are prepared (drawn) in accordance with the
provisions relating to Accounting Standards in India.
Accounting Process
The basic accounting process is shown in the Figure 3.1.
The first thing that the accounting system takes on is the financial
transactions. A transaction is defined as an external event or
internal event which gives rise to a change affecting the operations
or finances of an organisation. Now there should be evidence that a
transaction has taken place. This evidence comes from the
documents that are used to support a transaction, like invoices,
receipts, cheques, bank statements, etc. For recording a
transaction, it must be analysed to determine its effects on the two
(or more) accounts and the reason why it affects those accounts. As
the original document cannot be used to write these details, a
standard document known as a voucher is used to accompany theoriginal document.
Figure 3.1: Basic Accounting Process
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Voucher is therefore the basic document of an accounting
transaction. Every voucher mentions the two (or more) accounts
that are being affected, the amount with which each account is
affected and the reason for the transaction (known as narration).
Each voucher is numbered and dated, so as to make referencing
easier.
Once the vouchers are made for the day, they are entered into an
intermediate book known as Journal. Vouchers are normally
recorded in the order in which they occu