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7/28/2019 5 to 8_Accounting Principles, Accounting Systems, Accounting Standards.pdf
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Accounting principles are the basic guidelines, which
ensures the correctness of the entry of business
transactions in the books of accounts.
Accounting principles are based on the combination of
the following (a) Accounting Concepts and (b)
Accounting Conventions.
Accounting Concepts + Accounting Conventions =Accounting Principles.
Accounting principles are also called as GAAP i.e.,
Generally Accepted Accounting Principles.
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Business Entity Concept
Going Concern Concept
Money Measurement Concept
Cost Concept
Duality Concept
Accounting Period Concept
Matching Concept
Realization & Recognition Concept
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Convention of Disclosure
Convention of Consistency
Convention of Conservatism
Convention of Materiality
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Accounting
Standards
Details
AS 1 Disclosure of accounting policies
AS 2 Valuation of inventories
AS 3 Cash flow statement
AS 4 Contingencies & events occurring afterthe balance sheet date
AS 5 Net profit or net loss for the period, priorperiod change in accounting
AS 6 Depreciation accounting
AS 7 Construction contracts
AS 9 Revenue recognition
AS 10 Accounting for fixed assets
AS 11 Changes in foreign exchange rates
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AccountingStandards Details
AS 12 Accounting for Government grants
AS 13 Accounting for investment
AS 14 Accounting for amalgamation
AS 15 Employee benefit
AS 16 Borrowing cost
AS 17 Segment reporting
AS 18 Related party disclosure
AS 19 Accounting for leasesAS 20 Earnings per share
AS 21 Consolidated financial statement
AS 22 Accounting for taxes & income
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Accounting
Standards
Details
AS 23 Accounting for investment in associates inconsolidated financial statements
AS 24 Discontinuing operations
AS 25 Interim financial reporting
AS 26 Accounting for intangible assets
AS 27 Financial reporting of interests in joint ventures
AS 28 Impairment of assets
AS 29 Provisions, contingent liabilities and contingentassets
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Underlying assumptions:
Under Indian GAAP, Financial statements are prepared
in accordance with the principle of conservatism which
basically means Anticipate no profits and provide for
all possible losses.
Under US GAAP conservatism is not considered, if it
leads to deliberate and consistent understatements.
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Prudence vs. Rules:
The Institute of Chartered Accountants of India (ICAI)
has been structuring Accounting Standards based on
the International Accounting Standards ( IAS) , which
employ concepts and `prudence as the principle in
contrast to the US GAAP, which are "rule oriented",detailed and complex.
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Format/ Presentation of financial statements
Under Indian GAAP, financial statements are prepared
in accordance with the presentation requirements of
Schedule VI to the Companies Act, 1956.
On the other hand , financial statements prepared as
per US GAAP are not required to be prepared under
any specific format as long as they comply with the
disclosure requirements of US GAAP.
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Cash flow statement:
Under Indian GAAP (AS 3) , inclusion of Cash Flow
statement in financial statements is mandatory only for
companies whose share are listed on recognized stock
exchanges and Certain enterprises whose turnover for theaccounting period exceeds Rs. 50 crore. Thus , unlisted
companies escape the burden of providing cash flow
statements as part of their financial statements.
On the other hand, US GAAP (SFAS 95) mandates furnishing
of cash flow statements for 3 years current year and 2
immediate preceding years irrespective of whether the
company is listed or not .
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Depreciation: Under the Indian GAAP, depreciation is provided based on
rates prescribed by the Companies Act, 1956. Higher
depreciation provision based on estimated useful life of the
assets is permitted, but must be disclosed in Notes to
Accounts.( Guidance note no 49) . Depreciation cannot be
provided at a rate lower than prescribed in any
circumstance.
Contrary to this, under the US GAAP , depreciation has to be
provided over the estimated useful life of the asset, thusmaking the Accounting more realistic and providing
sufficient funds for replacement when the asset becomes
obsolete and fully worn out.
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Capital issue expenses:
Under the US GAAP, capital issue expenses are
required to be written off when incurred against
proceeds of capital
Whereas under Indian GAAP , capital issue
expense can be amortized or written off against
reserves
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Long term Debts:
Under US GAAP , the current portion of long termdebt is classified as current liability.
Whereas under the Indian GAAP, there is no suchrequirement and hence the interest accrued onsuch long term debt in not taken as current liability.
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What is cash basis accounting? Most small businesses use the cash basis method of
accounting, which is based on real-time cash flow.
In cash method, you report an expense when it is paidand record income when it is received.
So, the day you receive a cheque, it becomes a cashreceipt. And you record your expenses when you payyour bills, not when the bill is received.
By the way, the word "cash" is not meant literallyit alsocovers payments by cheque, credit card, barter, etc.
In most cases, small businesses that primarily sell serviceswill choose the cash basis method of accountingbecause it is easier to track and account for.
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What is the accrual method of accounting? With accrual accounting, you record income when it is earned, not
when it is paid. Similarly, you record your expenses when theobligation arises, not when you pay it.
If you sell a product to a customer and he doesn't pay you for 30days, the sale is recorded in the books on the day that you made
the sale. When the money comes in the "accounts receivable" isthen turned into cash.
The same with expenses: if you incur an expense on one month butdon't pay until the next month, the expense will be recognized in themonth in which you incurred the expense. It is not necessary for cashto change-hands.
For example, say your business completes a job on December 15,but you haven't been paid for it. You recognize all expenses inrelation to that contract when they were incurred, regardless ofwhether you've been paid yet or not. Both the income andexpenses are recorded for the current tax year, even if payment isreceived and bills are paid the following February.
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