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Accounting Concepts,

Conventions and Standards

Dr. Mehul Raithatha

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Accounting Concepts and Conventions

• Accounting Concepts are those basicassumptions or conditions upon whichaccounting is based.

• It helps to bring uniformity while preparing

financial statements• Accounting conventions refer to the common practices

that are followed in recording and presentingaccounting information. They are followed likecustoms, traditions, etc., in a society. Accountingconventions are evolved through the regular andconsistent practice over the years to facilitateappropriate recording in the books of accounts.

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Basic Concepts

1. Money measurement.2. Entity.3. Going concern.4. Cost.

5. Dual aspect.6. Accounting period.7. Conservatism.8. Realization.

9. Matching.10.Consistency.11.Materiality.

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Concept #1:

Money Measurement

• Accounting records are recorded in monetary

terms at value at time transaction is recorded.

• limitation.

 – Some items can’t be easily valued. 

• E.g., CEO’s health, effect of strike. 

 – Price changes ignored.

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Concept #2: Entity

• Organization or activity for which accountingrecords are prepared.

• Need distinction between entities.

 – Entity vs. owner.

 – Entity vs. other entities

• Business has separate status and personal

transactions of owners can not be merged

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Concept #3: Going Concern

• Assumed to continue in operation for an

indefinite period.

• Due to this we record receivables, payables,

depreciation etc.

• Opposite assumption:

 – Liquidation/bankruptcy.

• Only liquidation values would be meaningful.

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Concept #4: Cost

Terminology

• Assets.

 – economic resources of an entity.

 – recorded at cost (i.e., price paid).

•

Book value of assets. – recorded value.

• Fair value of assets.

 – amount for which asset could be currently purchased or

sold.• Currently in India all assets are recorded at cost

(acquition price) not at fair value, however revaluationis allowed under certain circumstances

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Concept #5: Dual-Aspect

• Assets = economic resources.

• Equities = claims against assets.

 – Liabilities = claims of creditors (everyone other

than owners).

 – Owners’ equity = claims of investors

(Shareholders’ or stockholders’ equity for a

corporation).

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Dual Aspect

• Fundamental accounting equation:

Assets = Liabilities + Owners’ equity 

• For a corporation:

Assets = Liabilities + Stockholders’ equity 

Assets = Liabilities + Paid-in cap. + Ret. earnings

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Dual Aspect

• Transactions are events that affect accounting

records.

• Every transaction has a dual impact on

accounting records.

• Dual impact:

 – Results in maintaining equality of accounting

equation.

 – Double-entry accounting system.

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Concept #6:

Accounting Period

• Measurement of activities for a specified

arbitrary interval of time.

• A one-year timeframe is commonly used:

 – Fiscal year,

 – business year

 – May or may not coincide with calendar year.

• We follow 1st April to 31st March

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Accounting Period

• Interim Reports.

 – Reports on periods less than fiscal year.

 – SEBI/IT department requires quarterly.

 – Management may require monthly (or weekly, or

daily).

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Concept #7:

Conservatism

• “… prudent reporting based on healthy

skepticism…” 

• “… builds confidence in the results....” 

• Preference for understatement  rather than

overstatement of assets and earnings.

• If two estimates are equally likely, use the one

that results in smaller assets and earnings.

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Concept #8:

Realization/Accrual

• Revenue is recognized only when, anagreement is reached or sale ismade.

• Cash may or may not have beenreceived

• Also applicable to expenses 

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Concept #9:

Matching

• When an event affects both revenues and

expenses, the effect should be recognized in

the same accounting period.

 – First determine revenues for period.

 – Then expense matching items of cost.

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Concept #10:

Consistency

• Once an accounting method is selected, use

for all subsequent events of same character.

• Can change if there is sound reason to change.

• But must be disclosed to users.

• Consistency over time, not for different types

of transactions.

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Concept #11:

Materiality

• Full disclosure of all important information.

• But, insignificant events may be disregarded.

• Overriding concern: Would knowledge of

event affect decisions of users?

• Application of judgment and common sense.

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Fundamental accounting assumptions

• Going Concern,

• Consistency, and

• Accrual

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Accounting Policies

• Accounting policies encompass the principles,bases, conventions, rules and proceduresadopted by managements in preparing and

presenting financial statements.• There are many different accounting policies in

use even in relation to the same subject.

• Accounting policies are the specific accounting

assumptions and the methods of applying theseprinciples for the preparation and presentation offinancial statements of an enterprise.

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Different Accounting Policies

 – Valuation of inventories

 – Treatment of goodwill

 – Valuation of fixed assets

 – Treatment of contingent liabilities

 – Valuation of investments

 – Treatment of retirement benefits

 – Treatment of depreciation

 – Treatment of foreign exchange transactions

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ACCOUNTING STANDARDS

• Accounting Standards (AS) are written policy document

issued by expert accounting body or by government or

regulatory body covering the aspects of recognition,

treatment, measurement, presentation and disclosure ofaccounting transaction and events in the financial

statements.

• Accounting Standards provide framework and standard

accounting policies so that financial statements of

different enterprises become comparable.

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ACCOUNTING STANDARDS (Contd.)

•

The Accounting Standards seek to ensure that the financialstatements of an enterprise should give a true and fair view

of its financial position and working results.

• Accounting Standards not only prescribe appropriateaccounting treatment of complex business transactions but

also foster greater transparency and market discipline.

Accounting Standards promote

Uniformity Rationalization

Comparability Transparency

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ACCOUNTING STANDARDS

IN INDIA 

• The Institute of Chartered Accountants of India (ICAI) beingapex accounting body in India, has constituted the AccountingStandards Board (ASB).

• ASB was constituted on 21st April, 1977, with a view to

harmonies the diverse accounting policies and practices in use inIndia and to formulate Accounting Standards.

• While formulating accounting standards, the ASB takes intoconsideration the applicable laws, customs, usages and businessenvironment prevailing in the country.

• The ASB also gives due consideration to International Standards(IFRSs/ IASs) and tries to integrate them, to the extent possible,in the light of conditions and practices prevailing in India.

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AS 1 Disclosure of Accounting Policies

AS 2 Valuation of Inventories

AS 3 Cash Flow Statements

AS 4 Contingencies and Events Occurring after the Balance Sheet Date

AS 5 Net Profit or Loss for the period, Prior Period Items and Changes in AccountingPolicies

AS 6 Depreciation Accounting

AS 7 Construction Contracts (revised 2002)

AS 8 Accounting for Research and Development (AS-8 is no longer in force since it

was merged with AS-26)

AS 9 Revenue RecognitionAS 10 Accounting for Fixed Assets

AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003),

AS 12 Accounting for Government Grants

AS 13 Accounting for Investments

AS 14 Accounting for Amalgamations

AS 15 Employee Benefits (revised 2005)AS 16 Borrowing Costs

AS 17 Segment Reporting

AS 18 Related Party Disclosures

AS 19 Leases

AS 20 Earnings Per Share

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AS 21 Consolidated Financial Statements

AS 22 Accounting for Taxes on Income.

AS 23 Accounting for Investments in Associates in Consolidated Financial

StatementsAS 24 Discontinuing Operations

AS 25 Interim Financial Reporting

AS 26 Intangible Assets

AS 27 Financial Reporting of Interests in Joint Ventures

AS 28 Impairment of Assets

AS 29 Provisions, Contingent` Liabilities and Contingent AssetsAS 30 Financial Instruments: Recognition and Measurement and Limited Revisions

to AS 2, AS 11 revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28 and AS 29

AS 31, Financial Instruments: Presentation

AS 32, Financial Instruments: Disclosures, and limited revision to Accounting

Standard (AS) 19, Leases

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AS IND AS

• ASB has issued 34 AS till October 2011.

• In accordance with India’s assurance to converge with

IFRS, a new set of standards namely, Ind AS (IndianAccounting Standards) are now being issued.

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IND AS

• The Ministry of Corporate Affairs (MCA) has notified the Ind AS

on 25 February 2011.

• These are being implemented in phased manner. To begin with they

are applicable to companies listed abroad and large companies.

• Several of the requirements of Ind AS are considerably dissimilar

from policies and practices presently followed by Indian

companies.

• Further, while finalising the Ind AS, the Indian standard setters have

modified individual IFRS, wherever necessary, to suit Indian

requirements. This has resulted in differences between Ind AS and

equivalent requirements under IFRS (referred to as ‘carve outs’). 

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IND AS: SIMILAR TO IFRS

•Ind AS 101: First-time Adoption of Indian AccountingStandards

• Ind AS 102: Share based Payment

• Ind AS 103: Business Combinations

• Ind AS 104: Insurance Contracts

• Ind AS 105: Non-Current Assets Held for Sale and

Discontinued Operations

• Ind AS 106: Exploration for and Evaluation of Mineral

Resources

• Ind AS 107: Financial Instruments: Disclosures

• Ind AS 108: Operating Segments

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• Ind AS 17: Leases• Ind AS 18: Revenue

• Ind AS 19: Employee Benefits

•

Ind AS 20: Accounting for Government Grants andDisclosure of Government Assistance

• Ind AS 21: The Effects of Changes in Foreign Exchange

Rates

• Ind AS 23: Borrowing Costs

• Ind AS 24: Related Party Disclosures

OTHER IND AS (Contd.)

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• Ind AS 27: Consolidated and Separate FinancialStatements

• Ind AS 28: Investments in Associates

•

Ind AS 29: Financial Reporting in HyperinflationaryEconomies

• Ind AS 31: Interests in Joint Ventures

• Ind AS 32: Financial Instruments: Presentation

• Ind AS 33: Earnings per Share

• Ind AS 34: Interim Financial Reporting

OTHER IND AS (Contd.)

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• Ind AS 36: Impairment of Assets

• Ind AS 37: Provisions, Contingent Liabilities and

Contingent Assets

• Ind AS 38: Intangible Assets

• Ind AS 39: Financial Instruments: Recognition and

Measurement

•

Ind AS 40: Investment Property

OTHER IND AS (Contd.)

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INTERNATIONAL ACCOUNTING

STANDARDS (IAS)

• International Accounting Standards Committee

(IASC) was constituted in 1973 to formulate global

accounting standards.

•Barring Canada, Japan and US all countries haveaccepted these standards. The US Financial

Accounting Standards Board (FASB) is in process of

eliminating differing in standards.

• Standards Interpretations Committee was formed in

1997, to give proper direction and interpretations.

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INTERNATIONAL ACCOUNTING

STANDARDS

THE LIST 

• IAS 1 Presentation of Financial Statements

• IAS 2 Inventories

• IAS 7 Cash Flow Statements

•

IAS 8 Accounting Policies, Changes in Accounting Estimatesand Errors

• IAS 10 Events After the Balance Sheet Date

• IAS 11 Construction Contracts

•IAS 12 Income Taxes

• IAS 16 Property, Plant and Equipment

• IAS 17 Leases

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INTERNATIONAL ACCOUNTING STANDARDS

THE LIST (Contd.) 

• IAS 18 Revenue• IAS 19 Employee Benefits

• IAS 20 Accounting for Government Grants and Disclosure of

Government Assistance

• IAS 21 The Effects of Changes in Foreign Exchange Rates

• IAS 23 Borrowing Costs

• IAS 24 Related Party Disclosures

• IAS 26 Accounting and Reporting by Retirement Benefit Plans

• IAS 27 Consolidated and Separate Financial Statements

• IAS 28 Investments in Associates

• IAS 29 Financial Reporting in Hyperinflationary Economies

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INTERNATIONAL ACCOUNTING

STANDARDS

THE LIST (Contd.) 

• IAS 31 Interests in Joint Ventures

• IAS 32 Financial Instruments: Presentation

• IAS 33 Earnings per Share

• IAS 34 Interim Financial Reporting

• IAS 36 Impairment of Assets

• IAS 37 Provisions, Contingent Liabilities and Contingent Assets

• IAS 38 Intangible Assets

•

IAS 39 Financial Instruments: Recognition and Measurement• IAS 40 Investment Property

• IAS 41 Agriculture

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GENERALLY ACCEPTED

ACCOUNTING PRINCIPLES (GAAP) 

• To avoid confusion and to achieve uniformity, accounting process is applied within the conceptual framework ofGAAP.

• The Financial Statements of entity cannot be said to beshowing a true and fair view, unless these FinancialStatements have been drawn up on GAAP.

• GAAP consists of four components: – The requirements of law

 – The judgments by courts of law – Pronouncement by the governing bodies (Like ICAI, FASB

in US)

 – Requirements of regulatory authorities (Like RBI, SEBI,SEC in US )

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GENERALLY ACCEPTED ACCOUNTING

PRINCIPLES (GAAP) (Contd.) 

• Each country has its own GAAP like US GAAP, IndianGAAP. Though the term GAAP is used predominantly inthe US.

• GAAP are the backbone of the accounting informationsystem, without which whole system cannot even standerect.

• With current efforts of harmonisation in AccountingStandards, one may hope that by 2015:

 – Most of the countries will converge their Standards toglobal standards

 – All larger corporate would make their financial statementsin conformity with International Standards.

Dr. Mehul Raithatha

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International Financial Reporting Standards

(IFRS)

• International Financial Reporting Standards (IFRS)

are a set of accounting standards, developed by the

International Accounting Standards Board (IASB),

London, that are becoming the global standard for the

 preparation of public company financial statements.

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List of IFRS

• IFRS 1: First-time Adoption of International FinancialReporting Standards

• IFRS 2: Share-based Payment

• IFRS 3: Business Combinations

• IFRS 4: Insurance Contracts

• IFRS 5: Non-current Assets Held for Sale and DiscontinuedOperations

• IFRS 6: Exploration for and Evaluation of Mineral Assets

• IFRS 7: Financial Instruments — Disclosures

• IFRS 8: Operating Segments

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Short questions

• The proprietor of a firm withdrew Rs 56,000

for his personal use. This was shown as an

expense of the firm. Profits were reduced to

pay a lower tax. Is this right from accountingpoint of view?

Dr. Mehul Raithatha

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• The CEO of a company is killed in a plane

crash. To the extent “an organisation is the

lengthened shadow of a man”, the real value

of the company will change immediately andthis will be reflected in the market price of the

company shares. Will this have any effect as

far as the accounts of the company areconcerned? Give appropriate reasons.

Dr. Mehul Raithatha

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• A company revalues its buildings, which were

purchased at a cost of Rs 10, 00,000 in 1995 to

Rs 90, 00,000 in 2010, and records the

difference of Rs 80, 00,000 as profit for theyear 2003. Is this practice right? Give reasons.

Dr. Mehul Raithatha

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• The accounting year of a firm closes on 31st

December each year. The rent for business

premises of Rs 45,000 for the last quarter

could not be paid to the owner on account ofhis being away in a foreign country. Should the

rent payable be taken into account for

computing the firm’s profit for the accountingyear? Give reasons.

Dr. Mehul Raithatha

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• A government contractor supplies stationery

to various government offices. Some bills

amounting to Rs 10,000 were still pending

with various offices at the close of theaccounting year on 31st March. Should the

businessman take the revenue of Rs 10,000

into account for computing the net profit ofthe period?

Dr. Mehul Raithatha

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• A company had been charging depreciation on

a machine at Rs 10,000 per year for the first

three years. Then it began charging Rs 9,000

for the fourth year and Rs 7,800 for the fifthyear and so on. Is this practice justified? Give

reasons for your answer.