The accounting system

8/6/2019 The accounting system

1/15


2/15

enses also and prepare Income and Expenditure Account instead of Profit and lossAccount.2) Mercantile System of Accounting: This system is based on Double Entry principle. This Book Profit System of Accounting takes into consideration all the aspects of business transactions (BOTH CREDIT AND CASH TRANSACTIONS). This systemis followed by most of the industrial and commercial firm. This system owes itsorigin to an Italian Merchant Luco Pacioli who wrote a book entitled De Computis

et Scripturis on Double Entry Accounting in the year 1494.

SYSTEM OF BOOK KEEPING

The art and technique of recording the business transactions in a set of books is called as Bookkeeping. It is the process of analyzing, classifying and recording transactions in accordance with a preconceived plan. This recording may be done according to two ways:1) Single Entry System: which is an incomplete maintenance of books of accounts without following the Double Entry Concepts and Conventions, where some business houses maintains for their convenience keeping only some of the essentialBooks of Records. Thus it is referred as incomplete double entry recording of bu

siness transactions.2) Double Entry System: Where the transactions are recorded according to the Golden Rules of Accounting taking into consideration both the aspects of a transaction (Debit and Credit) and following the Accounting Concepts and Conventions. This system maintains both Book of Original Entry (Journal / Subsidiary Books) and Book of Final Entry (Ledger) according to the classification of Accountsinto Real, Personal & Nominal, in order to know the state of affairs of the business by preparing the Profit and Loss Account and Balance Sheet from the Trial Balance.

BRANCHES OF ACCOUNTING

The subject of accountancy has become important for all the business organization in the present time. Its subject matter has been increased and it has taken the form of accounting. Accounting subject has the following branches:

FINANCIAL ACCOUNTING1. Journal2. Ledger3. Trial Balance4. Final Accounts

COST ACCOUNTING1. Cost sheet2. Job and contract costing3. Process costing4. Operating costing

MANAGEMENT ACCOUNTING1. Ratio Analysis2. Break event Point Analysis3. Standard costing

4. Analysis Of Financial StatementsTAX ACCOUNTING

1. Sales Tax


3/15

2. Income Tax3. Wealth Tax4. Excise Duty

GOVERNMENT ACCOUNTING1. Budget2. Consolidated Fund3. Contingency Fund

4. Public AccountingSOCIAL RESPONSIBILITY ACCOUNTING

1. Social Fund2. TQM3. Environmental Accounting

HUMAN RESOURCES ACCOUNTING1. Employee Inventory Management2. HRD Operational & Administrative Aspects3. Profitability and Work Measurement

(1) Financial Accounting: Financial Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are at least in part, of a financial character, and interpretingthe results thereof. In financial accounting we record the business transactions in the books of accounts. Its object is to ascertain the profit or loss and toknow the financial position of the business. In this Journal, Subsidiary books,Ledger, Trial balance, trading account, Profit & loss account and Balance sheetare prepared.

(2) Cost Accounting: This branch of accounting has attained good importance in recent days. Under it, the raw materials, labour and other expenses incurred in the industrial production and business activities are recorded regularly so thatproduction cost and per unit cost can be ascertained and the unnecessary expenses can be checked out to control the cost. Cost accounting helps in maintaining adesirable margin between cost and price so that business can earn profit. It also include job and contract costing, process costing, operating costing and costsheet preparation.(3) Management Accounting : This branch of accounting supplies necessary information to the managers. On the basis of these information the evaluation of policies is done and decisions for future are taken. It includes Ratio Analysis, Analysis of financial statements, Fund flow Analysis, Cash flow Analysis etc.

(4)Tax Accounting: Every businessman has to pay various types of taxes such as sales tax, Income tax, excise duty etc. Financial Accounting helps only in determining the taxable income of the business. Some specific separate adjustments areneeded for determination of tax liabilities. Moreover various types of deductions and provisions of Acts are also taken into consideration for tax accounting.

(5) Government Accounting: Central government, state government and local bodiesalso undertake the work of accounting and it is called Government Accounting. It differ from financial accounting. It explains the Budget and various other types of accounts such as consolidated fund, contingent fund and public fund account.

(6)Social Responsibility Accounting: The society provides infrastructure and thefacilities without which business cannot operate at all. Therefore the businessalso has a responsibility towards the society. Social responsibility accounting


4/15

is the process of identifying, measuring and communicating the contribution ofa business to the society. The contribution of a business to the society consistof providing employment to under privileged, providing financial and manpower support for public utility programmes, environmental and ecology contribution, product quality, product safety, product durability and customer satisfaction etc.In social responsibility accounting techniques have been developed for measuring the cost of these contributions and the benefit to the society

(7) Human Resources Accounting : HR Accounting is an art and science ofevaluating the worth of human resources of a business organization in a systematic manner as a whole to the concern and the society and recording them for presenting the information in the financial statements to communicate their worth to the readers of financial statements. It is the process of identifying and measuring data about human resources and communicating this information to interested parties

OBJECTIVES OR FUNCTIONS OF ACCOUNTING

Now a days accounting becomes a subject of practical importance for every business concern that may be a marketing firm, manufacturing firm, bank, transport agency, insurance company or a professional organization. Accounting attains theimportance every where. Various persons are interested in accounting work of a business concern e.g. shareholders, investors, banks, government, creditors, employees, customers etc. Therefore accounting has to fulfill their objectives also.For this accounting perform various functions. Some of the important objectivesor the functions of accounting are as follows:(1)To keep systematic record of business transactions: The main objective of accounting is to keep complete record of business transactions according to rules.For this purpose all the business transactions are firstly recorded in the journ

al or subsidiary books and then posted into the ledger. This helps to avoid thepossibility of omission and fraud; moreover we can get the financial informationat any time during the year.

(2) To calculate profit or loss of the business: The second main objective or the functions of accounting is to ascertain the net profit earned or loss sufferedby a business concern. For this purpose a Trading and Profit and loss account is prepared at the end of each accounting period. When revenue of the business ismore than expenditure the difference is said to be profit. In addition to it, abusinessman is able to get the following information from accounting.

1. How much goods have been purchased during a particular period2. How much goods have been sold during a particular period3. How much goods have been remained unsold and what is its value.4. How much amount has been spent and earned on various heads

(3) To depict the financial position of the business: For this purpose a balancesheet is prepared on the last day of the accounting year which shows the valuesof various assets on one side and the liabilities and capital on the other side. Balance sheet shows the financial position of the business. Besides this, fromaccounting a businessman can get the following information:1. How much amounts the business has to recover from debtors.2. How much amount the business has to pay to creditors.3. Amount of opening capital and closing capital4. Amount of cash receipts and cash payments from the cashbooks.

(4) To provide informations to various parties: Various persons have vested interests in a business firm. Accounting provides useful information to all the inter


5/15


6/15


7/15

ts.(8) Assessment of progress: By knowing about the profit and loss, assets andliabilities, purchases and sales income and expenditure of last many years we can assess the progress made by a business. It is possible only by the accounting.

LIMITATIONS OF ACCOUNTING

Though accounting has a number of advantages yet it has some limitations also. Following are the major limitations of accounting.

(1) Incomplete information: In accounting only those transactions are recorded which can be expressed in terms of money. Other events, e.g. efficiency of managers, changes in tastes of consumers, popularity of product and ability of employees, Economic and political conditions of the country, level of competition etc though affect the success of business and financial position and managers continuously try to collect these information, yet they cannot be expressed in terms of money and thus not represented in accounting.

(2) Influenced the by personal judgments: In accounting some principles andconcepts are obeyed. But at the end of an accounting year to ascertain the net profit or loss some estimates are used. To charge depreciation life of an asset and its scrap value are to be estimated, Bad debts are also estimated etc. The liking and unliking of the accountant affect these estimates. Thus the results arealso affected.(3) Realizable value of business is not shown: The balance sheet which is prepared at the end of the period to present the financial position of the business, shows the assets at their historical costs and not at their realization price. Thus it is not possible to estimate the present realizable value of the business.(4) Complete control on frauds is impossible: Accountancy can check the arithmetic accuracy of books accounts but cannot check the frauds completely. The pr

ofit and loss at the end of the year can also be manipulated by manipulating thevalue of closing stock.(5) Manipulation in accounts: If an owner shows the items of his own interest in the books of accounts the result obtained by the accountant will be biasedand wrong.(6) Does not provide timely information: Final accounts are prepared at theend of the accounting year. Thus they contain the information of historical importance. While managers need current information for management and planning, which are not supplied by the accounting easily..

FINANCIAL ACCOUNTING

Financial Accounting is concerned with the provisions of informations to external parties outside the organization. The outsiders who use accounting informationhave a variety of interests. Investors and shareholders want to know the companys profit potential. The suppliers, banks, and other lenders want to know whethera business is credit worthy. Government agencies regulate and tax businesses and analyze the published financial statements to make decisions.Financial accounting is concerned with recording and summarizing financial transactions and preparing statements relating to the business according to Generally Accepted Accounting Principles agreed on by the accounting profession. Financial Accounting is the basis of external reporting.Limitations Of Financial Accounting

Financial accounting works as a postmortem of business affairs of an enterpriseduring the accounting year. It cannot fulfill the needs of modern management as


8/15

A.C.Littleton has aptly said that providing of significant data regarding marketdemand, state of competition, general business conditions, engineering, personal information, legal and regulatory limitations are out of the sphere of financial accounting. In the changed business scenario various new requirements such asfuture planning, evaluation of plans and policies, cost control, timely decisions etc. have emerged on account of increasing size of business, technical complexities, government interferences and public awareness towards social responsibil

ities of business. Financial accounting has the following limitations.

1) Financial accounting gives only limited information to the management. It is inadequate for management in the task of decision making.2) Managerial decisions relate to future. Hence they are made on the basisof estimates and projections. Financial accounting is inadequate for making future projections because it provides only historical information.3) The present day management is of three tier system. Different levels ofmanagement needs different information. Financial accounting fails to meet the information needs of different levels of management.4) Financial accounting considers only quantifiable information. Nowadays business decisions are influenced by a number of social factors. For this many of

them are ignored in financial accounting.5) The rapid change in technology and fast growth of business units have made the task of modern management highly complicated. Financial accounting with its simple structure is not in a position to cater the needs of modern management.Difference between Management Accounting and Financial Accounting.

Management accounting cannot replace financial accounting. It takes a major partof the information from financial accounting and modifies the same for managerial uses .ThereforeBoth branches of accounting are complementary to each other. But there are certain points of differences between the two. They are given below.(1) The primary objective of financial accounting is recording business tran

sactions in a systematic way and ascertain the business results and financial position of a business concern. The objective of management accounting is to provide necessary information to the management for the efficient discharging of itsfunctions.(2) Financial accounting is an external accounting because it presents information to the external parties like shareholders, creditors, bank etc. Management accounting is an internal accounting because it presents information to the management.(3) Financial accounting is concerned with historical records relating to the past, where as Management accounting is mainly concerned with future plans andpolicies.(4) Financial accounting is compulsory, while Management accounting is optional.(5) Financial accounting relates to the business as a whole. Management accounting deals with reports about a particular department or division of an enterprise.(6) In financial accounting there is more emphasis on precise data. In Management accounting there is less emphasis on precision. Estimates and future dataare mostly used.(7) Financial accounting is prepared in accordance with the GAAP. Management accounting is prepared according to the internal requirements of the management .(8) Financial accounting presents annual reports, while management accounting reports are of both shorter and longer durations.(9) Financial accounting is based on measurements while management accountin

g is based on judgment. Thus financial accounting is more objective and management accounting is more subjective.(10 ) Financial accounting records only those transactions which can be


9/15

expressed in terms of money. On the other hand management accounting recordsnot only monetary transactions but also non-monetary events like technical changes, government policies etc(11) The scope of financial accounting is not vast as compared to management accounting. It does not include the techniques like costing, statistics, management accounting etc. It is a part of management accounting. The scope of management accounting is most wide because financial accounting, cost accounting,

statistics and other techniques are used in it.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

What is GAAP ?Generally Accepted Accounting Principles (GAAP) includes accounting conventions,rules, procedures and accounting standards, accepted accounting practices bothpromulgated and non-promulgated . GAAP are those principles, which have substantial authoritative support.In order to maintain uniformity and consistency in accounting records, certain

rules or principles have been developed which are generally accepted by the accounting profession the ICAI. These rules are called by different names such asprinciples, concepts, conventions, postulates, assumptions and modifying principles.The term principles has been defined by AICPA as A general law or rule adopted orprofessed as a guide to action, a settled ground or basis of conduct or practice. The word generally means in a general manner i.e., pertaining to many persons orcases or occasions. Thus, GAAP refers to the rules or guidelines adopted for recording and reporting of business transactions in order to bring uniformity in the preparation and the presentation of financial statements.

The GAAP have evolved over a long period of time on the basis of past experiences, usage or customs, statements by individuals and professional bodies and regulations by the government agencies and have general acc

eptability among most accounting professionals. However the principles of accounting are not static in nature. These are constantly influenced by changes in thelegal, social, and economic environment as well as the needs of users. These principles are also referred as concepts and conventions. The term Concept refersto the necessary assumptions and ideas that are fundamental to accounting practice, and the term convention refers to customer or tradition as a guide to the preparation of accounting statements. In practice the same rules and guidelines have been described by on author as a concept by another as a postulate and stillby another as convention. This at times becomes confusing to the learners. Instead of going into the semantics of these terms, it is important to concentrate onthe practicability of their usage. From this practicability view point it is observed that the various terms such as principles, postulates, conventions, modifying principles, assumptions etc have been used inter changeably and are referred to as basic accounting Concepts and Conventions.Basic Accounting ConceptsThe basic accounting concepts are referred to as the fundamental ideas or basicassumptions underlying the theory and practice of financial accounting and are broad working rules for all accounting activities and developed by the accountingprofession. The important concepts have been listed as below:

Conditions on which the accounting system is based are called accountingassumptions or concepts.

Accounting system is based on certain assumptions or concepts. These assumptions

constitute the foundation of accounting process. No concern can prepare financial statements and accounts without considering these assumptions. Although thereis no authoritative list of assumptions, some major assumptions are as follows.


10/15

Accounting entity Concept Money measurement Concept Going concern Concept Accounting period Concept Historical cost Concept Dual aspect Concept Revenue recognition/Realization Concept

(1) Accounting entity concept:

The concept or assumptions that business has a separate entity or existence apart from the owners is an entityThis concept assumes that the entity of business is distinct from the its owners. Owner is a creditor in accordance with this concept. That is why capital account is shown on the liability side of the balance sheet. Moreover business is treated as a unit or entity separate from the persons who control and associate with it. So accounts which are prepared and maintained for business entity are distinct from all categories of persons associated with it.(2) Money Measurement concept :

Under money measurement concept, only transactions expressed in terms of money are recorded in the books of accounts.

Money is common denominator in terms of which all transactions can be expressed in a better manner. Hence under the concept of monetary expression or money measurement concept only those transactions which can be expressed in terms of money are recorded in the books of account. This facilitates in recording variouskinds of economic activities on a uniform basis. For instance, plant, furniture,land etcWhich are generally expressed in terms of quantity, area etc are recorded in terms of money value. A transaction or an event which is not measurable in terms of money cannot be recorded in the books of account. For instance dismissal of worker, strikes etc are very important events, but do not find their place in the

books of account. This concept suffers from the following limitations.(1) It does not consider the changes in the value of money.(2) Human resources cannot be recorded in the books of accounts, although itis greatest asset of a concern.

(3) Going concern concept:

The concept that the business will continue for a fairly long period is a going concern concept.

Under this concept it is assumed that the business concern will continue to exist for a fairly long period. There is no intention to shut down the particular business concern in the near future. However this concept does not implya permanent existence of the business. But this indicates stability and continuity of a business for a long period to carry out its plan.

(4) Accounting period concept: The period of interval for which accounts are prepared and presente

d for ascertaining the result of business is an accounting concept.The going concern concept implies that the business has a long perio

d of life. But however the owners and others who are interested in the businesscannot wait for such an indefinite period to know its results. Moreover such belated computation of financial position of a business will not serve its very purpose. Hence the accountants specify an accounting period (say 12 months, 6months

, 3months,etc ) for preparing financial statements.

(4) Historical/ Cost concept:


11/15

Accounting based on the actual cost of a transaction is the principle of historical cost.

Under this principle all the transactions should be recorded at theirrequisition cost. The cost of acquisition is the cost of purchasing theassets and includes expenses incurred in bringing them to the intended condition and location of use. However this concept does not mean that the assets are al

ways shown at cost but will be reduced by decrease in value known as depreciation.

(5) Dual aspect:

The concept of double aspects in every transaction is a duality concept.

According to this concept every transaction has two aspects. In case there is a debit then there is corresponding credit of the amount. Accountingequation is developed on the strength of dual aspect concept. For instance whenthere is an increase in one asset there is a corresponding decrease in other assets or increase in liabilities.

Thus assets and liabilities are equal at all the times i.e. [Asset = Capital +liabilities]. The system of recording transactions with its dual concept is knownas double entry system.

(6) Revenue recognition

Unless money has been realized (either cash has been realized or a legal obligation to pay has been assumed by the customer) no sale can be said to have taken place and no profit or income can be said to have arisen.(7)Accrual ConceptNormally all transactions are settled in cash , but even if cash settlement hasnot taken place, it is proper to bring the transactions or the event concerned into the business books during the particular accounting period as it relates to

that period. For eg: Rent accrued fro the last month. Rent for the last month ofthe accounting period may be paid only in the next accounting period, but stillas the event is related to the current period it will be considered as accruedand debited in the current period itself.

The International Accounting Standards Committee (IASC) of which the Institute of Chartered Accountants of India (ICAI) is an associate member, treats Going concern, Consistency and Accrual as the fundamental accounting assumptions.

Accounting Conventions regarding financial statements.

Conventions are the customs or practices, which were following for a long period. They are the practices or traditions, which guide the accountant while preparing the accounting statements. In order to make the message contained in the financial statements (Profit and Loss Account & Balance Sheet) clear and meaningfulthe following conventions are used:(1)Conservatism

Financial Statements are usually drawn up on the assumption that anticipate no profit but provide for all possible losses i.e., showing a position betterthan what it is, is not permitted (which is called as Window-dressing). It is also not permitted to show a position substantially worse than what it is. In other words, secret reserves are not permitted. It is based on this convention thatthe inventory is valed at cost or market price whichever is less(2)Consistency

The accounting practices should remain the same from one year to another

- for instance, it would not be proper to value stock-in-trade according to onemethod one year and another method next year. If a change is required, the change& its effect should be stated clearly.


12/15

(3)Materiality/DisclosureThis convention suggests that the accountant should attach importance to

material details and ignore insignificant details. The accountant should regardan item as material if there is reason to believe that knowledge of it would influence the decision of the informed investor. For e.g., while sending each debtor

a statement of his account, complete details up to paise have to be given. Goodaccounting practices demands that all significant matters or information shouldbe disclosed.ACCOUNTING STANDARDSAccounting Standards are written documents, policies issued by expert accountingbody or Government or other regulatory body covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transactionin the financial statement. The Institute of Chartered Accountants of India issues accounting Standards in India.Objective of Accounting StandardsThe main objective of AS is to standardize the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability o

f financial statements and add the reliability to the financial statements.. TheInstitute of Chartered Accountants of India, recognizing the need to harmonizethe diverse accounting policies and practices, constituted an Accounting Standard Board (ASB) on 21st April 1977.Compliance with Accounting Standards issued by ICAISub-section (3A) to Section 211 of The Companies Act, 1956 requires that every Profit and Loss Account and Balance Sheet shall comply with the Accounting Standards. Thus Accounting Standards means the standard of accounting recommended by the ICAI and prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards (NACAS) constituted under section210A(1) of Companies Act, 1956.Accounting Standards and the AuditorsAuditors are duty bound while discharging their attest function to ensure that t

he Accounting Standards issued are made mandatory by the ICAI. Section 227(3) ofCompanies Act, 1956 requires the auditors to report whether in his opinion theProfit/Loss Account and Balance Sheet comply with the Accounting Standards referred in Section 211(3C) of the Companies Act, 1956.Section 217(2AA)(1) of the Companies Act, 1956 states that Directors Responsibility Statement should include that, in the preparation of the annual accounts theapplicable Accounting Standards had been followed along with proper explanations relating to material departure.

So far the ICAI has issued 29 Accounting Standards, as given below:AS-1 . Disclosure of Accounting PoliciesAS-2 . Valuation of InventoriesAS-3 . Cash Flow StatementAS-4. Contingencies and Events Occurring After Balance Sheet DateAS-5. Net Profit or Loss for the Period, Prior Period Items and Change in Accounting Policies.AS-6. Depreciation AccountingAS-7. Construction ContractsAS-8. (Withdrawn)AS-9. Revenue RecognitionAS-10 Accounting for Fixed AssetsAS-11 The Effects of Changes in Foreign Exchange Rates.AS-12 Accounting for Government Grants.AS-13 Accounting for InvestmentsAS- 14 Accounting for Amalgamations

AS- 15 Accounting for Retirement benefits in financial Statements of EmployersAS-16 Borrowing CostsAS-17 Segment Reporting


13/15

AS-18 Related Party DisclosuresAS-19 LeasesAS- 20 Earning Per SharesAS- 21 Consolidated Financial StatementsAS- 22 Accounting for Taxes on IncomeAS-23 Accounting for Investments in Associates in Consolidated Financial Statements

AS-24 Discontinuing OperationsAS-25 Interim Financial ReportingAS-26 Intangible AssetsAS-27 Financial Reporting of Interests in Joint VenturesAS-28 Impairment of AssetsAS-29 Provisions, Contingent Liabilities and Contingent Assets

Advantages and Disadvantages of AccountingStandardsStandards reduce to a reasonable extent or eliminate altogether confusing variation in the accounting treatments used to prepare the financial statements.There are certain areas where important information are not required by law to b

e disclosed, standards may call for disclosure beyond that required by law.It facilitates comparison of financial statements of different companies situated at different places.

Disadvantages of setting Accounting Standards are:There may be a trend towards rigidity and away from flexibility in applying Accounting Standards.Differences in Accounting Standards are bound to be because of differences in the traditions and legal system from one country to another.Accounting Standards cannot override the law. The Standards are required to be framed within the ambit of prevailing statute even though it is not an acceptablestandard.

International Accounting StandardsInternational Accounting Standards Board (IASB) issues International AccountingStandards. International Accounting Standards Committee (IASC), the London basedgroup responsible for developing IASs has been in existence for over 20 years.The IASC comprises of the professional accountancy bodies of over 75 countries (including the Institute of Chartered Accountants of India) IASB so far have issued 41 IASs and 6 IFRS (International Financial Reporting Standards)The list of IAS includes:IAS 1 Presentation of Financial StatementsIAS 2 InventoriesIAS 7 Cash Flow StatementsIAS 8 Accounting Policies, Change in Accounting estimates and errorsIAS10 Events after the Balance Sheet DateIAS11 Construction ContractsIAS12 Income TaxesIAS14 Segment ReportingIAS16 Property, Plant and EquipmentIAS17 LeasesIAS18 RevenueIAS19 Employee BenefitsIAS20 Accounting for Government Grants and disclosure of Government AssistanceIAS21 The effect of Changes in Foreign Exchange RatesIAS23 Borrowing costsIAS24 Related Party DisclosureIAS26 Accounting and Reporting by Retirement Benefits Plan

IAS27 Consolidated and Separate Financial StatementsIAS28 Investments in AssociatesIAS29 Financial Reporting in Hyper Inflationary Economies


14/15

IAS30 Disclosure in the Financial Statements of the Banks and similar FinancialInstitutionsIAS31 Interest in Joint VenturesIAS32 Financial Instruments: Disclosure and PresentationIAS33 Earnings Per ShareIAS34 Interim Financial ReportingIAS36 Impairment Assets

IAS37 Provisions, Contingent Liabilities and Contingent AssetsIAS38 Intangible AssetsIAS39 Financial Instruments: Recognition and MeasurementIAS40 Investment PropertyIAS41 Agriculture

IASB has issued the following six IFRS (International Financial Reporting Standards): -IFRS-1 First time Adoption of IFRSIFRS-2 Share Based Payments

IFRS-3 Business CombinationIFRS-4 Insurance ContractsIFRS-5 Non-current assets held for sale and discontinued operationsIFRS-6 Exploration for and evaluation of mineral resources.

Regulatory Framework of Financial Reporting in India

The regulations that govern Financial Reporting by a business entity can vary depending on the entitys legal form. Thus regulations governing the financial reporting by limited liability companies can differ considerably from the regulationsgoverning Partnerships. Partnership reports will cover the provisions mentionedunder the Indian Partnership Act 1932. Companies registered under The CompaniesAct 1956 can be of several types. For example, companies registered under secti

on 25 of the Act are essentially nonprofit entities, similarly special provisions may be applicable to Government Companies under Section 617 of the Act, and Section 3 will be applicable to Public Limited Companies. Some of the public Limited companies under the Act will also be listed on one or more stock exchanges. Such companies will cover the special provisions applicable to Financial Reporting enunciated by the SEBI (Securities Exchange Board of India) and by the variousstock exchanges. Financial reports that are put by business entities in the public domain can be classified as:a) Regular Financial Reports such as the Annual Report and the Half YearlyReport andb) Financial Reports issued at the time of public offering of shares.Section 209 Sub section 3 of the companies Act 1956 requires that the Books of Account should be kept on accrual basis and according to the Double Entry Systemof Accounting. Sub section 4 of Section 209 requires companies to preserve theirbooks for a period of at least eight years. Under Section 210 of the Act it isthe duty of the Board of Directors to lay before the Annual General Meeting (AGM) the Balance sheet and Profit and Loss Account of the company. Section 211 of the Act deals with the form and contents of the Financial Statements. The BalanceSheet is required to be prepared in accordance with form setout in Part I Schedule VI to the Act and the Profit and LossAccount is to be prepared in accordance with Part II of Schedule VI of the Act.Section 212 to 214 of the Act deals with accounts of Subsidiary companies. The Balance Sheet and Profit and Loss Account have to be signed by the Company Secretary and at least two of the directors of the Company. The Auditors Report like the Board of Directors report under Section 217 must cover all the annexure to the

Balance Sheet and shall be attached to the Balance sheet. A Copy of the AnnualReport is required to be sent to the companys shareholders at least twenty-one days before the date of the AGM. Three copies of the Balance Sheet and the Profit


15/15

and loss account should be filed with the Registrar of Companies within 30 daysform the date of the AGM at which financial statements were laid. According toSection 220(1), only Balance Sheet of a Private Ltd., Company is a public document. The Profit and Loss account of a private limited company is open only to theshareholders of the company. Under section 226 of the Act only Chartered Accountants within the meaning of the Chartered Accountants Act, 1949 are qualified tobe appointed as the auditors of a company. Section 227 of the Act defines the p

owers and duties of auditors. Companies Act requires to disclose , whether its Accounting Policies are in accordance with Accounting Standards issued by the ASBof the ICAI.Sections 205 to 208 of the Act deals with the payment of Dividends,which also have bearing on the Financial Reports of Companies; which could be paid only out of profits arrived at after providing for Depreciation in accordance with the provisions of subsection 2 of Section 205.SEBI regulations also influence the contents of periodic reports of listed companies.

The accounting system

Documents

Transcript of The accounting system