Accounting Concepts,

Conventions and Standards

Dr. Mehul Raithatha

Accounting Concepts and Conventions

Accounting Concepts are those basic
assumptions or conditions upon which
accounting is based.
It helps to bring uniformity while preparing
financial statements
Accounting conventions refer to the common practices
that are followed in recording and presenting
accounting information. They are followed like
customs, traditions, etc., in a society. Accounting
conventions are evolved through the regular and
consistent practice over the years to facilitate
appropriate recording in the books of accounts.
Dr. Mehul Raithatha

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.
Dr. Mehul Raithatha

Concept #1:
Money Measurement
Accounting records are recorded in monetary
terms at value at time transaction is recorded.
limitation.
Some items cant be easily valued.
E.g., CEOs health, effect of strike.

Price changes ignored.

Dr. Mehul Raithatha

Concept #2: Entity

Organization or activity for which accounting
records 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

Dr. Mehul Raithatha

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.

Dr. Mehul Raithatha

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 revaluation
is allowed under certain circumstances
Dr. Mehul Raithatha

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).

Dr. Mehul Raithatha

Dual Aspect
Fundamental accounting equation:
Assets = Liabilities + Owners equity

For a corporation:
Assets = Liabilities + Stockholders equity
Assets = Liabilities + Paid-in cap. + Ret. earnings

Dr. Mehul Raithatha

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.
Dr. Mehul Raithatha

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

Dr. Mehul Raithatha

Accounting Period
Interim Reports.
Reports on periods less than fiscal year.
SEBI/IT department requires quarterly.
Management may require monthly (or weekly, or
daily).

Dr. Mehul Raithatha

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.

Dr. Mehul Raithatha

Conservatism
Formally:
Recognize revenues when reasonably certain.
Recognize expenses when reasonably possible.

Informally:
anticipate no profits but anticipate all losses.
Sometimes requires judgment.

Dr. Mehul Raithatha

Concept #8:
Realization/Accrual
Revenue is recognized only when, an
agreement is reached or sale is
made.
Cash may or may not have been
received
Also applicable to expenses

Dr. Mehul Raithatha

Accrual Basis versus Cash Basis

The accrual basis of accounting recognizes
revenues and expenses when they occur
instead of when cash is received or disbursed.
The cash basis of accounting recognizes revenue
and expense when cash is received and
disbursed

Dr. Mehul Raithatha

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.

Dr. Mehul Raithatha

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.

Dr. Mehul Raithatha

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.

Dr. Mehul Raithatha

Fundamental accounting assumptions

Going Concern,

Consistency, and
Accrual

Dr. Mehul Raithatha

Accounting Policies
Accounting policies encompass the principles,
bases, conventions, rules and procedures
adopted 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 these
principles for the preparation and presentation of
financial statements of an enterprise.
Dr. Mehul Raithatha

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
Dr. Mehul Raithatha

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 of
accounting transaction and events in the financial
statements.
Accounting Standards provide framework and standard
accounting policies so that financial statements of
different enterprises become comparable.

ACCOUNTING STANDARDS (Contd.)

The Accounting Standards seek to ensure that the financial
statements of an enterprise should give a true and fair view
of its financial position and working results.
Accounting Standards not only prescribe appropriate
accounting treatment of complex business transactions but
also foster greater transparency and market discipline.
Accounting Standards promote
Uniformity
Rationalization
Comparability
Transparency

ACCOUNTING STANDARDS
IN INDIA
The Institute of Chartered Accountants of India (ICAI) being
apex accounting body in India, has constituted the Accounting
Standards Board (ASB).
ASB was constituted on 21st April, 1977, with a view to
harmonies the diverse accounting policies and practices in use in
India and to formulate Accounting Standards.
While formulating accounting standards, the ASB takes into
consideration the applicable laws, customs, usages and business
environment 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.

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 Accounting
Policies
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 Recognition
AS 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

AS 21 Consolidated Financial Statements

AS 22 Accounting for Taxes on Income.
AS 23 Accounting for Investments in Associates in Consolidated Financial
Statements
AS 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 Assets
AS 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

AS & IND AS
ASB has issued 34 AS till October 2011.
In accordance with Indias assurance to converge with
IFRS, a new set of standards namely, Ind AS (Indian
Accounting Standards) are now being issued.

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).

IND AS: SIMILAR TO IFRS

Ind AS 101: First-time Adoption of Indian Accounting
Standards
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

OTHER IND AS

Ind AS 1: Presentation of Financial Statements

Ind AS 2: Inventories
Ind AS 7: Statement of Cash Flows
Ind AS 8: Accounting Policies, Changes in
Accounting Estimates and Errors
Ind AS 10: Events after the Reporting Period
Ind AS 11: Construction Contracts
Ind AS 12: Income Taxes
Ind AS 16: Property, Plant and Equipment

OTHER IND AS (Contd.)

Ind AS 17: Leases

Ind AS 18: Revenue
Ind AS 19: Employee Benefits
Ind AS 20: Accounting for Government Grants and
Disclosure 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
Dr. Mehul Raithatha

OTHER IND AS (Contd.)

Ind AS 27: Consolidated and Separate Financial
Statements
Ind AS 28: Investments in Associates
Ind AS 29: Financial Reporting in Hyperinflationary
Economies
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
Dr. Mehul Raithatha

OTHER IND AS (Contd.)

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

Dr. Mehul Raithatha

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 have
accepted 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.
Dr. Mehul Raithatha

INTERNATIONAL ACCOUNTING
STANDARDS (Contd.)
IASB was constituted in 2001 to prescribe norms for
treatment of items on preparation and presentation of
Financial statements.
ISAB adopted all 41 standards issued by IASC and
are designated International Accounting Standards
(IASs).
IASB publishes its Standards called International
Financial Reporting Standards (IFRSs).

Dr. Mehul Raithatha

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 Estimates
and 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
Dr. Mehul Raithatha

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
Dr. Mehul Raithatha

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
Dr. Mehul Raithatha

GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP)
To avoid confusion and to achieve uniformity, accounting
process is applied within the conceptual framework of
GAAP.
The Financial Statements of entity cannot be said to be
showing a true and fair view, unless these Financial
Statements 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 )
Dr. Mehul Raithatha

GENERALLY ACCEPTED ACCOUNTING

PRINCIPLES (GAAP) (Contd.)

Each country has its own GAAP like US GAAP, Indian

GAAP. Though the term GAAP is used predominantly in
the US.
GAAP are the backbone of the accounting information
system, without which whole system cannot even stand
erect.
With current efforts of harmonisation in Accounting
Standards, one may hope that by 2015:
Most of the countries will converge their Standards to
global standards
All larger corporate would make their financial statements
in conformity with International Standards.
Dr. Mehul Raithatha

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.

Dr. Mehul Raithatha

List of IFRS
IFRS 1: First-time Adoption of International Financial
Reporting Standards
IFRS 2: Share-based Payment
IFRS 3: Business Combinations
IFRS 4: Insurance Contracts
IFRS 5: Non-current Assets Held for Sale and Discontinued
Operations
IFRS 6: Exploration for and Evaluation of Mineral Assets
IFRS 7: Financial InstrumentsDisclosures
IFRS 8: Operating Segments
Dr. Mehul Raithatha

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 accounting
point of view?

Dr. Mehul Raithatha

 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 and
this will be reflected in the market price of the
company shares. Will this have any effect as
far as the accounts of the company are
concerned? Give appropriate reasons.
Dr. Mehul Raithatha

 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 the
year 2003. Is this practice right? Give reasons.

Dr. Mehul Raithatha

 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 of
his being away in a foreign country. Should the
rent payable be taken into account for
computing the firms profit for the accounting
year? Give reasons.
Dr. Mehul Raithatha

 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 the
accounting year on 31st March. Should the
businessman take the revenue of Rs 10,000
into account for computing the net profit of
the period?
Dr. Mehul Raithatha

 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 fifth
year and so on. Is this practice justified? Give
reasons for your answer.

Dr. Mehul Raithatha