Basic concepts in Financial Accounting

Dept. of Management Studies, SSITS, Rayachoty.

UNIT – I

INTRODUCTION TO ACCOUNTING

INTRODUCTION

Accounting is as old as money itself. The early stage of civilization where the number of

transactions to be recorded were so small that the business man was able to record and check for

himself all his transactions. But with the remarkable change in business such as scale of

production, level of competition, change in technology etc., there is a need to give immense

importance to the concept of Accounting. In our country, the system of Accounting was

practiced 23 centuries ago as it is clear from the book named “Artha sasthra” written by

Koutilya, Chandra Gupta‟s minister. In this book, he not only discussed the matters relating to

politics and economics but also he discussed about the art of proper keeping of accounts.

However, the modern system of accounting based on the principles of double entry system owes

its origin to „Fra Luca Pacioli‟ (Father of Accounting) who first published the principles of

double entry system in 1494 at Venice in Italy.

MEANING OF ACCOUNTING

The main purpose of accounting is to ascertain profit or loss made during a specific period, to

know the financial condition of the organization and to have control over company‟s property.

DEFINITIONS OF ACCOUNTING

Accounting is an art of recording, classifying, summarizing and interpreting the financial

information so as to take intelligent decisions.

Accounting has been defined as:

The art of recording, classifying, and summarizing in a significant manner and in terms of

money, transactions and events which are, in part at least, of financial character, and interpreting

the results thereof.(AICPA)


Accountancy is the process of communicating financial information about a business entity to

users such as shareholders and managers (Elliot, Barry & Elliot, Jamie: Financial accounting and

reporting).

ACCOUNTING OBJECTIVES

1. To maintain a written record of business transactions

2. It is a record of income and expenses

3. It is a record of assets and liabilities

4. It is a record that communicates with the people, Government, customers etc.

ACCOUNTING FUNCTIONS

The main functions of Accounting can be given as follows.

1. It keeps a systematic permanent written record of business transactions of the

organization.

2. It keeps a record of incomes and expenses of the organization.

3. It maintains a record of assets and liabilities.

4. It provides information for meeting various legal requirements such as I.T returns, Sales

tax returns etc..

5. It communicates the results of the business to the various categories of persons such as

owners, creditors, Government etc..

6. It protects the property of the business

7. It keeps a track of all changes in the value of assets and liabilities.

8. It helps in managerial decision making.

9. It helps in optimum utilisation of resources.

10. It helps in meeting the competition in the market.

IMPORTANCE OF ACCOUNTING

Accounting is important in view of the following:

It provides legal information to stakeholders such as financial accounts in the form of

trading, profit and loss account and balance sheet.

It shows the mode of investment for shareholders.


It provides business trade credit for suppliers.

It notifies the risks of loan in business for banks and lenders.

Financial accounting generates some key documents, which includes profit and loss

account, patterning the method of business traded for a specific period and the balance

sheet that provides a statement, showing mode of trade in business for a specific period.

It records financial transactions showing both the inflows and outflows of money from

sales, wages etc.

Financial accounting empowers the managers and aids them in managing more efficiently

by preparing standard financial information, which includes monthly management report

tracing the costs and profits against budgets, sales and investigations of the cost.

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BASIC TERMINOLOGY IN ACCOUNTING

Business transaction: Any transaction involving exchange of money or money‟s worth as

goods and services constitutes Business transaction.

Business: Any lawful and continuous economic activity carried on with a motive of

earning profit is called as Business. It includes production and distribution of goods and

services.

Goods: Articles either produced or purchased for the purpose of sale are called goods.

Capital: Amount invested by the proprietor to run the business is termed as capital.

Asset: Any physical thing that possesses money value can be called as an asset.

Fixed asset: The asset which cannot be converted in to cash within one year is called as

fixed asset. Ex: Land, buildings, machinery etc.

Current asset: The assets which can be convertible into cash within one year are called

current assets.

Debtor: The person who owes money to the firm is known as debtor.

Creditor: The person to whom money is owed is called as creditor.

Debt: The amount due from debtor is termed as debt.

Credit: The amount due to creditor is termed as credit.


Debit and Credit in a transaction: There will be two aspects in every transaction

namely 1.Receiving aspect 2. Giving aspect. Receiving aspect is called as Debit and the

Giving aspect is called as Credit.

Drawings: Amount or goods withdrawn by the owner from the business for personal

purposes constitutes drawings.

Loss: Expenditure incurred without any benefit to the concern is termed as loss.

Income: Favorable change in owners‟ equity is called as income.

Profit: Excess of income over expenditure.

Industry: Group of companies engaged in similar kind of production is known as an

industry. Ex: sugar industry, steel industry etc.

Commerce: Commerce is the subject that is concerned with distribution of goods and

services.

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BRANCHES OF ACCOUNTING

The financial literature classifies accounting into three broad categories, viz, Financial

Accounting, Cost Accounting and Management Accounting. Financial accounting is primarily

concerned with the preparation of financial statements. Cost accounting makes elaborate cost

records regarding various products, operations and functions. Management accounting covers

areas such as interpretation of financial statements, cost accounting, etc.

Financial Accounting

Financial accounting deals with the preparation of financial statements for the basic purpose of

providing information to various interested groups like creditors, banks, shareholders, financial

institutions, government, consumers, etc. Financial statements, i.e. the income statement and the

balance sheet indicate the way in which the activities of the business have been conducted during

a given period of time. The significance of financial accounting lies in the fact that it aids the

management in directing and controlling the activities of the firm and to frame relevant

managerial policies related to areas like production, sales, financing, etc.


Cost Accounting

Cost Accounting is the process of determining and accumulating the cost of a particular product

or activity. Any product, function, job or process for which costs are determined and

accumulated, are called cost centres. The basic purpose of cost accounting is to provide a

detailed breakup of cost of different departments, processes, jobs, products, sales territories, etc.,

so that effective cost control can be exercised. Cost accounting also helps in making revenue

decisions such as those related to pricing, product-mix, profit-volume decisions, expansion of

business, replacement decisions, etc.

Management Accounting

The basic purpose of Management Accounting is to communicate the facts according to the

specific needs of decision-makers by presenting the information in a systematic and meaningful

manner. Management Accounting, therefore, specifically helps in planning and control. It helps

in setting standards and in case of variances between planned and actual performances, it helps in

deciding the corrective action. An important characteristic of management accounting is that it

is forward looking. Its basic focus is one future activity to be performed and not what has already

happened in the past.

SYSTEMS OF BOOK-KEEPING

There are two systems of book-keeping namely 1. Single entry system and 2. Double entry

system.

Single entry system: It is the age old unscientific method of accounting which records only one

aspect of the transaction i.e., either debit or credit. Usually sole trader (single seller) keeps his

books of accounts under this method. This method of accounting is not helpful in any way to the

organizations in the preparation of final accounts. Moreover it doesn‟t provide sufficient

information for managerial decision making.

Double Entry System: This system was stated by Fra Luca Pacioli in the year 1494. He hails

from Venice in Italy. This is the scientific method of accounting where the two aspects of

transaction are taken into consideration. Therefore one can find that, for every debit there is an

equal and corresponding credit for every transaction in this method. It is helpful not only in


preparing final accounts but also in taking important financial decisions. In our country as per

the Companies Act 1956 and the Income Tax Act 1962 all the companies are supposed to

maintain their books of accounting under this method.

BOOK-KEEPING Vs ACCOUNTING

Book-keeping and accounting are two different departments dealing with the accounts of

company. Book-keeping is the initial stage, in which we keep the record of income and

expenditure, whereas in Accounting department, accountants analyze the company‟s financial

activity and prepare reports. Both are very important for the proper management and financial

success of a business.

Book-keeping

In simple words, recording the financial dealings of a company or individual is

bookkeeping, like sales, purchase, revenues and expenses. Traditionally, it is called as book-

keeping since records were kept in books; now there is specific software for this purpose, but the

old name is still in use. Usually, book-keepers are appointed to keep the record in accurate and

precise manner. This activity is very important for the financial health of a company, as it

informs the management about up to date financial condition of their company. Commonly used

books are, daybook, ledger, cashbook and many others are also used, according to the nature of

business. A bookkeeper enters a particular financial activity in its respective book and post to the

ledger as well. Single entry and double entry are two types of bookkeeping. As the name suggest,

in single entry a transaction is either recorded in debit or in credit column of the same account,

but in case of double entry, two entries of each transaction are carried to ledger, one in debit

column and other under credit heading.

Accounting

Accounting deals with organized recording, reporting and analysis of financial activity of

a company. Making statements regarding assets and liabilities also come under the jurisdiction of

accounting. Accountants are also responsible for making monthly fiscal statements and yearly

tax returns. The accounting departments also do preparation of company‟s budgets and plan loan

proposals. Moreover, they analyze the cost of company‟s products or services. Now-a-days,

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Accounting is called as the language of business, as it provides required information to many

people. For instance, Management accounting is the branch, which keeps the mangers of the

company informed. Financial accounting informs the outsiders, like bank, vendors and

stakeholders, about the financial activity of company. The nature of information for the outsiders

and insiders is different, that is why big companies need both of these branches.

Differences and Similarities

Both are different sections of finance department, bookkeeping involves the keeping of

systematical record of company’s financial activity, where as accounting is the next section, which

analyze these records to prepare different reports and proposals. Bookkeeping is the procedure which

helps the management to manage day-to-day financial activities of the company, whereas Accounting

justifies these financial actions and find their reasons. In large companies, accounting department is also

very large to analyze the fiscal activity of business, on the other hand, an individual usually does

Bookkeeping or at the most two people are involved in this activity, even in big companies.

Bookkeeping and Accounting are essential for the successful running of any business. Book-

keeping is important as it is the primary stage of keeping financial records and accounting is the building

of analysis based on the brick of book-keeping.

ACCOUNTING CONCEPTS AND CONVENTIONS

Accounting concepts

Accounting concepts may be considered as postulates i.e., basic assumptions or conditions upon

which the science of accounting is based. There is no authoritative list of these concepts but most of the

following concepts have fairly general support.

Accounting Conventions

The term „convention‟ denotes circumstances or traditions which guide the accountant while

preparing the accounting statements. The concepts and conventions can be put in the form of a chart as

given below:

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Accounting Principles

Accounting Concepts Accounting Conventions i. Business Entity concept i. consistency ii. Money Measurement concept ii. Full Disclosure iii. Going Concern concept iii. Conservatism iv. Cost concept iv. Materiality v. Dual Aspect concept vi. Accounting Period concept vii. Matching concept viii. Realization concept ix. Accrual concept

The concepts and conventions are explained below:

I) Business Entity Concept

This concept implies that a business unit is separate and distinct from the persons who

supply capital to it. Irrespective of the form of organization, a business unit has got its own

individuality as distinguished from the persons who own or control it. In case this concept is not

followed, affairs of the business will be mixed up with the private affairs of the proprietor and

the true picture of the business will not be available.

II) Money Measurement Concept

Money is the only practical unit of measurement that can be employed to achieve

homogeneity of financial data, so accounting records only those transactions which can be

expressed in terms of money though quantitative records are also kept. The advantage of

expressing business transactions in terms of money is that money serves a common denominator

by means of which heterogeneous (different) facts about a business can be expressed in terms of

numbers (i.e. money) which are capable of additions and subtractions.

III) Going Concern Concept

It is assumed that a business unit has a reasonable expectation of continuing business at a

profit for an indefinite period of time. A business unit is deemed to be a going concern and not a

gone concern. It will continue to operate in the future. Transactions are recorded in the books

keeping in view the going concern aspect of the business unit. It is because of this concept that


suppliers supply goods and services and other business firms enter into business transactions

with the business unit.

IV) Cost Concept

According to this concept the asset is recorded at cost at the time of its purchase but is

systematically reduced in its value by charging deprecation. The cost concept has the advantage

of bringing objectivity in the accounts. Information given in the financial statements is not

influenced by the personal bias or judgment of those who furnish such statements. In the absence

of cost concept, assets will be shown at their market values which will depend on the subjective

views of persons who furnish financial statements.

V) Dual Aspect Concept

This is the basic concept of accounting. According to this concept, every financial

transaction involves a two-fold aspect, (a) yielding of a benefit and (b) the giving of that benefit.

VI) Accounting Period Concept

Normally accounting period adopted is one year as it helps to take any corrective action,

to pay income-tax, to absorb the seasonal fluctuations and for reporting to the outsiders. A period

of more than one year reduces the utility of accounting data. The principle of segregating capital

expenditure from revenue expenditure is based on the accounting period concept. The revenue

expenditure for a particular period is transferred to the Profit and Loss Account of that period

whereas capital expenditure is carried forward to the extent its benefit will be utilized in future

accounting periods. Thus, the accounting period concept plays a very important role in

determining the income of a particular accounting period. It is also helpful in ascertaining the

true and fair financial position of a business entity on a particular date at a particular point of

time.

VII) Matching Concept

This concept is based on the accounting period concept. The most important objective of

running a business is to ascertain profit periodically. The determination of profit of a particular

accounting period is essentially a process of catching the revenue recognized during the period

and the costs to be allocated to the period to obtain the revenue. The matching concept stands on


firm footing and should be followed while preparing financial statements to have a true and fair

view of the profitability and financial position of a business entity.

VIII) Realization Concept

According to this concept revenue is considered as being earned on the date at which it is

realized, i.e., on the date when the property in goods passes to the buyer and he becomes legally

liable to pay.

IX) Accrual Concept

The essence of the accrual concept is that revenue is recognized when it is realized, that

is when sale is complete or services are given and it is immaterial whether cash is received or

not. Similarly, according to this concept, expenses are recognized in the accounting period in

which they help in earning the revenue whether cash is paid or not. Thus, to ascertain correct

profit or loss for an accounting period and to show the true and fair financial position of the

business at the end of the accounting period, we make record of all expenses and incomes

relating to the accounting period whether actual cash has been paid or received or not. Therefore,

as a result of the accrual concept, outstanding expenses and outstanding incomes are taken into

consideration while preparing final accounts of a business entity.

Accounting Conventions

The term „conventions‟ denotes customs or traditions which guide the accountant while

preparing the accounting statements. The following are the important accounting conventions:-

1. Convention of consistency

2. Convention of full disclosure.

3. Convention of conservatism.

4. Convention of materiality.

1. Convention of Consistency

Accounting rules and conventions should be continuously observed and applied i.e., these

should not change from one year to another. The results of different years will be comparable

only when accounting rules are continuously adhered to from year to year. Consistency also

implies external consistency, i.e., the financial statements of one enterprise should be comparable


with another. It means that every enterprise should follow same accounting methods and

procedures of recording and reporting business transactions. The development of international

and national accounting standards is due to the convention of consistency.

2. Convention of Full Disclosure

According to this convention, all accounting statements should be honestly prepared and

to that end full disclosure of all significant information should be made. All information which is

of material interest to proprietors, creditors and investors should be disclosed in accounting

statements. An obligation is placed on the accounting profession to see that the books of

accounts prepared on behalf of others are as reliable and informative as circumstances permit.

3. Convention of Conservatism or Prudence

Literally speaking, conservatism means taking the gloomy view of a situation. It is a

policy of caution or playing safe and had its origin as a safeguard against possible losses in a

world of uncertainty. It compels the businessman to wear a “risk-proof” jacket, for the working

rule is: anticipate no-profits, but provide for all possible losses.”

4. Convention of Materiality

Whether something should be disclosed or not in the financial statements will depend on

whether it is material or not. Materiality depends on the amount involved in the transaction. For

example, minor expenditure of Rs. 10 for the purchase of a waste basket may be treated as an

expense of the period rather than as asset. Custom also influence materiality. For example, only

round figures (to the nearest rupee) may be shown in the financial statements to make the figures

manageable without affecting the accuracy of the accounting data. Similarly, for income tax

purposes the income has to be rounded to nearest ten rupees. The term “materiality” is a

subjective term. The accountant should record an item as material even though it is of small

amount if its knowledge seems to influence the decision of the proprietors or auditors or

investors.

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ROLE OF ACCOUNTANTS IN MODERN BUSINESS ORGANIZATION

Accounting is an age-old profession. In old days of accounting, the main function of an

accountant was to maintain the records of the business. However over the years, the role of an

accountant has undergone a sea change. With the inception of joint stock company form of an

organization, the profession of accountancy has come to be recognized as one of the lucrative

professions. Accountants can be broadly divided into two categories namely, Accountants in

public practice and Accountants in employment. Accountants in public practice (practicing

chartered accountants) are members of the Institutes of Chartered Accountants of India. The

accountant renders valuable service to the society in the following manner:

1. Writing up Accounts for Preparing Financial Statements: Professional accountants

offer services for writing up accounts and preparing financial statements. By maintaining

proper books of accounts and records he assists management to a great extent in the field

of planning, decision-making and controlling. A systematic record also enables the

business to compare one year‟s results with those of other years.

2. Audit of Accounts: Conducting of audit is one of the most important functions of a

professional accountant where his specialized training, skills and judgement are most

often called into play. Audit satisfies the users of financial statements that the accounting

information contained in these statements is true and reliable and that accounts have been

prepared in accordance with the accounting standards. It, thus, adds credibility to

financial statements prepared by the business. He also points out the shortcoming and

suggests ways to overcome them.

3. Role as Management Accountant: A management accountant helps the management in

planning and control of organizational activities and their performance evaluation.

4. Help to government, Revenue Department and Tax Payer: Chartered accountant

plays an important role in ensuring that the Government gets its proper share of taxes and

at the same time the tax payer is not exploited. Chartered accountant is instrumental in

preparing the financial statements of the enterprise. He also prepares the returns for tax

purposes. He also appears before the tax authorities on behalf of the taxpayer. He also

does the work of certification of documents in many cases.


5. Role as Cost Accountant: As a cost accountant, he maintains the costing records and

ascertains the cost of product or service. He provides costing information introduces cost

control and cost reduction methods and assists the management in fixing appropriate

selling prices.

6. Role in Merger, Liquidation, etc: The services or advice of chartered accountants are

frequently sought in the formation, merger or liquidation of limited companies. They are

called upon to undertake investigation for achieving greater efficiency in management and

find out the reasons for increase of decrease in profits. They act as executors and trustees

under a will or trust deed to carry out the administration of the estate or settlements.

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ADVANTAGES OF ACCOUNTING

Accounting gives businesses many advantages which can be summarized as under-

Maintaining systematic records

It is a primary function of accounting to keep a proper and chronological record of

transactions and events, which provides a base for further processing and proof for checking and

verification purposes. It involves writing in the original/subsidiary books of entry, posting to

ledger, preparation of trial balance and final accounts.

Meeting legal requirements

Accounting helps to comply with the various legal requirements. It is mandatory for joint

stock companies to prepare and present their accounts in a prescribed form. Various returns such

as income tax, sales tax are prepared with the help of the financial accounts.

Protecting and safeguarding business assets

Records serve a dual purpose as evidence in the event of any dispute regarding ownership

title of any property or assets of the business. It also helps prevent unwarranted and unjustified

use. This function is of paramount importance, for it makes the best use of available resources.

Facilitates rational decision-making

Accounting is the key to success for any decision making process. Managerial decisions

based on facts and figures take the organisation to heights of success. An effective price policy,

satisfied wage structure, collective bargaining decisions, competing with rivals, advertisement


and sales promotion policy etc all owe it to well set accounting structure. Accounting provides

the necessary database on which a range of alternatives can be considered to make managerial

decision-making process a rational one.

Communicating and reporting

The individual events and transactions recorded and processed are given a concrete form

to convey information to others. This economic information derived from financial statements

and various reports is intended to be used by different groups who are directly or indirectly

involved or associated with the business enterprise.

Comparison of results

Systematic maintenance of business records enables to compare profit of one year with those of

earlier years to know the facts about the changes. This helps the business to plan its future

affairs.

Decision making

The accountant helps the management by providing the relevant information for solving the day-

to-day problems of business.

LIMITATIONS OF FINANCIAL ACCOUNTING

The following limitations of financial accounting have led to the development of cost

accounting:

1. No clear idea of operating efficiency:. Financial accounting does not give a clear picture of

operating efficiency when prices are rising or decreasing on account of inflation or trade

depression.

2. Not helpful in the price fixation: In financial accounting costs are not available as an aid in

determining prices of the products, services, production order and lines of products.

3. No classification of expenses and accounts: In financial accounting there is no such system

by which accounts are classified so as to give data regarding costs by departments, processes,

products in the manufacturing divisions; by units of product lines and sales territories; by

departments, services and functions in the administrative divisions. Further expenses are not


classified as to direct and indirect items and are not assigned to the products at each stage of

production to show the controllable and uncontrollable items of overhead costs.

4. No data for comparison and decision making: It does not supply useful data to

management for comparison with previous period and for taking various financial decisions as

introduction of a new product, replacement of labour by machines, price in normal or special

circumstances, producing a part in the factory or buying it from outside market , production of a

product to be continued or given up, priority accorded to different products, investment to be

made in new products are not etc.

5. No control on cost: It does not provide for a proper control of materials and supplies, wages,

labour and overheads.

6. No standards to assess the performance: In financial accounting there is no well-developed

system of standards to appraise the efficiency of the organizations in the use of materials, labour

and overhead cost by comparing the work of labours, clerks, salesmen and executives which

should have been accomplished in producing and selling a given number of product in an allotted

period of time. It does not provide information to assess the performance of various persons and

departments and to see that the costs do not exceed a reasonable limit for given quantum of work

of the requisite quality.

7. Provides only historical information: Financial accounting is mainly historical and tells

about the cost already incurred. It does not provide day to day cost information to management

for making effective plans for the coming year and period after that as financial data is

summarized at the end of the accounting period.

8. No analysis of losses: It does not provide complete analysis of losses due to defective

material, idle time, idle plant and equipment. In other words, no distinction is made between

available and un available wastage.

9. Inadequate information for reports: I t does not provide adequate information for reports to

outside agencies such as banks, government, insurance companies and trade associations.

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USERS OF ACCOUNTING INFORMATION

Accounting is the language of business. It is the system of recording, summarizing, and

analyzing an economic entity's financial transactions. Effectively communicating this

information is key to the success of every business. Those who rely on financial information

include internal users, such as a company's managers and employees, and external users, such as

banks, investors, governmental agencies, financial analysts, and labor unions.

Accounting information helps users to make better financial decisions. Users of financial

information may be both internal and external to the organization.

Internal users of accounting information include the following:

Management: for analyzing the organization's performance and position and taking

appropriate measures to improve the company results.

Employees: for assessing company's profitability and its consequence on their future

remuneration and job security.

Owners: for analyzing the viability and profitability of their investment and determining

any future course of action.

Accounting information is presented to internal users usually in the form of management

accounts, budgets, forecasts and financial statements.

External users of accounting information include the following:

Creditors: for determining the credit worthiness of the organization. Terms of credit are

set according to the assessment of their customers' financial health. Creditors include

suppliers as well as lenders of finance such as banks.

Tax Authorities: for determining the credibility of the tax returns filed on behalf of the

company.

Investors: for analyzing the feasibility of investing in the company. Investors want to

make sure they can earn a reasonable return on their investment before they commit any

financial resources to the company.

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Customers: for assessing the financial position of its supplier which is necessary for a

stable source of supply in the long term.

Regulatory Authorities: for ensuring that the company's disclosure of accounting

information is in accordance with the rules and regulations set in order to protect the

interests of the stakeholders who rely on such information in forming their decisions.

External users are communicated accounting information usually in the form of financial

statements. The purpose of financial statements is to cater for the needs of such diverse users of

accounting information in order to assist them in making sound financial decisions.

Accounting is a very dynamic profession which is constantly adapting itself to varying needs

of its users. Over the past few decades, accountancy has branched out into different types of

accounting to cater for the different needs of the users.

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ACCOUNTING STANDARDS IN INDIA AND INTERNATIONAL ACCOUNTING

STANDARDS

Accounting standards are being established both at national and international levels.

However, the diversity of accounting standards among the nations of the world has been a

problem for the globalisation of the business environment. In India, the Accounting Standards

Board (ASB) was constituted by the Institute of Chartered Accountants of India (ICAI) on 21st

April 1977, which performs the function of formulating accounting standards.

The Statements on accounting standards are issued by the Institute of Chartered

Accountants of India (ICAI) to establish standards that have to be complied with, to ensure that

financial statements are prepared in accordance with a commonly accepted accounting standard

in India (India GAAP).

Accurate and reliable financial information is the lifeline of commerce and investing.

Presently, there are two sets of accounting standards that are accepted for international use

namely, the U.S., Generally Accepted Accounting Principles (GAAP) and the International

Financial Reporting Standards (IFRS) issued by the London-based International Accounting

Standards Board (IASB).

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Generally, accepted accounting principles (GAAP) are diverse in nature but based on a

few basic principles as advocated by all GAAP rules. These principles include consistency,

relevance, reliability and comparability. Generally Accepted Accounting Principles (GAAP)

ensures that all companies are on a level playing field and that the information they present is

consistent, relevant, reliable and comparable. Although U.S. GAAP is only applicable in the

U.S., other countries have their own adaptations that are similar in purpose, although not always

in design.

IFRS are International Financial Reporting Standards, which are issued by the

International Accounting Standards Board (IASB), a committee compromising of 14 members,

from nine different countries, which work together to develop global accounting standards. The

aim of this committee is to build universal standards that are translucent, enforceable, logical,

and of high quality. Nearly 100 countries make use of IFRS. These countries include the

European Union, Australia and South Africa. While some countries require all companies to

stick to IFRS, others merely try to synchronize their own country‟s standards to be similar.

India is yet to implement IFRS. It was reported in the Financial Express, New Delhi on

March 26 that India will adopt the globally accepted International Financial Reporting Standards

(IFRS) by 2011, a move that will integrate the accounting system with the rest of the world.

According to the Institute of Chartered Accountants of India (ICAI) President Ved Jain, “A

common accounting standard is in the interest of the investors who are exploring investment

opportunities in other geographical areas as well". Thus, this move by India will harmonise its

accounting standards with the internationally accepted accounting standards, which will lead to a

globally accepted accounting system for the companies in India.

Generally Accepted Accounting Principles (abbreviated GAAP), are the general rules,

regulations and guidelines that are followed in the United States by accountants to ensure their

practices are legal and ethical. It sets out the standard for managing accounts, preparing financial

statements and accounting methods and techniques. GAAP are issued and governed by the

Financial Accounting Standards Board (abbreviated FASB) and the International Accounting

Standards Board (IASB) to provide equal and comparable standards the world over.

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The main principals that ensure fair and accurate, free from inconsistencies accounting are listed

and explained below:

1) Regularity: To ensure books and accounts are updated in a timely manner, but more

importantly that tax returns and information is provided within the time given.

2) Consistency: Accounting methods and techniques must remain the same throughout the

financial year to remain consistent.

3) Sincerity: Accountants should remain truthful and accurately express the true financial

stability of their client(s) without excessive window dressing and PR.

4) Permanence of Methods: Financial information and the methods used must be clear and

presented coherently.

5) Non Compensation: All financial information must be present and therefore a negative must

not be compensated by a positive; both must be shown in full.

6) Prudence: Accounts should know reality and shouldn‟t list financial data that is based on

probability or assumption.

7) Continuity: It is accepted that over time an assets value changes and it is fair to represent this

with depreciation.

8) Periodicity: Revenue should be allocated over the entire span of its income/expenditure and

not just on the final date of a transaction. For example a subscription has several payments.

9) Full Disclosure & Materiality: Absolutely everything financially related to the business must

be presented in the records.

All countries have their own variation of these guidelines, but are generally the same.

Dr. THULASI KRISHNA. K, M.Com., M.B.A (F), M.Phil., M.B.A (HR), M.Com., (Accounting), Ph.D.

Head, Dept. of Management Studies

SRI SAI INSTITUTE OF TECHNOLOGY & SCIENCE, Rayachoty.

http://www.financialdictionary.net/define/Tax+Return/

http://www.financialdictionary.net/define/Asset/

http://www.financialdictionary.net/define/Depreciation/

http://www.financialdictionary.net/define/Revenue/

http://www.financialdictionary.net/define/Income/

Basic concepts in Financial Accounting

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