Book- keeping

Book- keeping is the art of recording business transactions in a systematic manner.

Accounting

The art of recording, classifying and summarizing the financial data, in a systematic
way.

BRANCHES OF ACCOUNTING

The changing business scenario over the centuries gave rise to specialized branches
of accounting which could cater to the changing requirements. The branches of
accounting are;

i) Financial accounting;

ii) Cost accounting; and

iii) Management accounting.

Accounting concepts:

The term ‘concept’ is used to denote accounting postulates, i.e., basic assumptions
or conditions upon the edifice of which the accounting super-structure is based. The
following are the common accounting concepts adopted by many business concerns.

1. Business Entity Concept 2. Money Measurement Concept

3. Going Concern Concept 4. Dual Aspect Concept

5. Periodicity Concept 6. Historical Cost Concept

7. Matching Concept 8. Realization Concept

9. Accrual Concept 10. Objective Evidence Concept

BASES OF ACCOUNTING

There are three bases of accounting in common usage. Any one of the following
bases may be used to finalize accounts.

1. Cash basis

2. Accrual or Mercantile basis

3. Mixed or Hybrid basis.

Single Entry: It is incomplete system of recording business transactions. The business

organization maintains only cash book and personal accounts of debtors and
creditors. So the complete recording of transactions cannot be made and trail
balance cannot be prepared.

Double Entry: It this system every business transaction is having a twofold effect of
benefits giving and benefit receiving aspects. The recording is made on the basis of
both these aspects. Double Entry is an accounting system that records the effects of
transactions and other events in at least two accounts with equal debits and credits.

Debit

Entry on the left side of a double-entry bookkeeping system that represents the
addition of an asset or expense or the reduction to a liability or revenue.

Account

It is a statement of the various dealings which occur between a customer and the
firm.

It can also be expressed as a clear and concise record of the transaction relating to a
person or a firm or a property (or assets) or a liability or an expense or an income.

Capital

It means the amount (in terms of money or assets having money value) which the
proprietor has invested in the firm or can claim from the firm. It is also known as
owner’s equity or net worth.

Owner’s equity means owner’s claim against the assets.

It will always be equal to assets less liabilities, say:

Capital = Assets - Liabilities.

Liability

A liability is a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources embodying
economic benefits.

It means the amount which the firm owes to outsiders that is, excepting the
proprietors.

In the words of Finny and Miller, “Liabilities are debts; they are amounts owed to
creditors; thus the claims of those who are not owners are called liabilities”.

In simple terms, debts repayable to outsiders by the business are known as liabilities.
Asset An asset is a resource controlled by the entity as a result of past events and
from which economic benefits are expected to flow to the entity.

Revenue Income from the trading activities of the business. (normally Sales.)

Goods

It is a general term used for the articles in which the business deals; that is,

only those articles which are bought for resale for profit are known as Goods.

Expense

The terms ‘expense’ refers to the amount incurred in the process of earning

revenue. If the benefit of an expenditure is limited to one year, it is treated as an

expense (also know is as revenue expenditure) such as payment of salaries and rent.

Expenditure

Expenditure takes place when an asset or service is acquired. The purchase of

goods is expenditure, where as cost of goods sold is an expense. Similarly, if an asset

is acquired during the year, it is expenditure, if it is consumed during the same year,
it

is also an expense of the year.

Purchases

Buying of goods by the trader for selling them to his customers is known as
purchases.

Sales

When the goods purchased are sold out, it is known as sales.

Stock

The goods purchased are for selling, if the goods are not sold out fully, a part

of the total goods purchased is kept with the trader unlit it is sold out, it is called
stock.

If there is stock at the end of the accounting year, it is called the closing stock.

This closing stock at the yearend will be the opening stock for the subsequent year.
Opening stock: The stock at the beginning of an accounting period is called opening
stock.

Purchases: The total value of goods purchased after deducting purchase returns is
debited to trading a/c. Purchases comprise of cash purchases am credit purchases.

Direct expenses: Direct expenses are incurred to make the goods sale able. They
include wages, carriage and freight on purchases, import duty, customs duty, clearing
and forwarding charges etc.

Sales: It includes both credit and cash sales. Sales returns are reduced from sales and
net sales are shown on the credit side of trading account. The sales and returns are
extracted from the trial balance.

Closing stock: Closing stock is the value of goods remaining at the end of the
accounting period.

Drawings

It is the amount of money or the value of goods which the proprietor takes for his
domestic or personal use. It is usually subtracted from capital.

Proprietor

The person who makes the investment and bears all the risks connected with the
business is known as proprietor.

Debtor

A person who owes money to the firm mostly on account of credit sales of goods is
called a debtor.

For example, when goods are sold to a person on credit that person pays the price in
future, he is called a debtor because he owes the amount to the firm.

Creditor

A person to whom money is owed by the firm is called creditor. For example, Madan
is a creditor of the firm when goods are purchased on credit from him.

Account Payable

Amount owed to a creditor for delivered goods or completed services.

Account Receivable

Claim against a debtor for an uncollected amount, generally from a completed

transaction of sales or services rendered.
Discount

When customers are allowed any type of deduction, in the price of goods by the
businessman it is called discount.

When some discount is allowed in prices of goods on the basis of sales of the items,
that is termed as trade discount, but when debtors are allowed some discount in
prices of the goods for quick payment, that is termed as cash discount or Settlement
Discount.

Statement of Financial Position A statement that shows the financial position of a

business at a particular point in time. It records the assets, liabilities and capital of
the business.

Income Statement A statement reporting on the financial performance of a business

over a period of time. It records the income and expense of the business.

Meaning of Debit and Credit

The term ‘debit’ is supposed to have derived from ‘debit’ and the term ‘credit’ from
‘creditable’.

For convenience ‘Dr’ is used for debit and ‘Cr’ is used for credit.

Recording of transactions require a thorough understanding of the rules of debit and

credit relating to accounts. Both debit and credit may represent either increase or
decrease, depending upon the nature of account.

Duality Concept:

Every transaction that occurs within a business has two equal and opposite effects
on the accounting equation.

Personal Accounts: Accounts recording transactions with a person or group of

persons are known as personal accounts. These accounts are necessary, in particular,
to record credit transactions. Personal accounts are of the following types:

(a) Natural persons: An account recording transactions with an individual human

being is termed as a natural persons’ personal account. eg., Kamal’s account,

Maria’s account. Both males and females are included in it

(b) Artificial or legal persons: An account recording financial transactions with an
artificial person created by law or otherwise is termed as an artificial person,
personal account, e.g. Firms’ accounts, limited companies’ accounts, educational
institutions’ accounts, Co-operative society account.

(c) Groups/Representative personal Accounts: An account indirectly representing a

person or persons is known as representative personal account. When accounts are
of a similar nature and their number is large, it is better tot group them under one
head and open a representative personal accounts. e.g., prepaid insurance,
outstanding salaries, rent, wages etc.

When a person starts a business, he is known as proprietor. This proprietor is

represented by capital account for all that he invests in business and by drawings
accounts for all that which he withdraws from business. So, capital accounts and
drawings account are also personal accounts.

The rule for personal accounts is: Debit the receiver

Credit the giver

Real Accounts

Accounts relating to properties or assets are known as ‘Real Accounts’, A separate

account is maintained for each asset e.g., Cash Machinery, Building, etc.,

Real accounts can be further classified into tangible and intangible.

(a) Tangible Real Accounts: These accounts represent assets and properties which
can be seen, touched, felt, measured, purchased and sold. e.g. Machinery account
Cash account, Furniture account, stock account etc.

(b) Intangible Real Accounts: These accounts represent assets and properties which
cannot be seen, touched or felt but they can be measured in terms of money.

e.g., Goodwill accounts, patents account, Trademarks account, Copyrights account,

etc.

The rule for Real accounts is: Debit what comes in

Credit what goes out

Nominal Accounts

Accounts relating to income, revenue, gain expenses and losses are termed as
nominal accounts. These accounts are also known as fictitious accounts as they do
not represent any tangible asset. A separate account is maintained for each head or
expense or loss and gain or income. Wages account, Rent account Commission
account, Interest received account are some examples of nominal account

The rule for Nominal accounts is: Debit all expenses and losses

Credit all incomes and gains

Invoice

While making a sale, the seller prepares a statement giving the particulars such as
the quantity, price per unit, the total amount payable, any deductions made and
shows the net amount payable by the buyer. Such a statement is called an invoice.

Voucher

A voucher is a written document in support of a transaction.

It is a proof that a particular transaction has taken place for the value stated in the
voucher. Voucher is necessary to audit the accounts.

Solvent

A person who has assets with realizable values which exceeds his liabilities is
insolvent.

Insolvent

A person whose liabilities are more than the realizable values of his assets is called
an insolvent.

Journal

The journal is a record containing details of non-routine double entry to the ledgers
i.e. generally those that don’t arise from other books of original entry.

Ledger Folio: This column is meant to record the reference of the main Book.

SUB-DIVISION OF JOURNAL

When innumerable number of transactions takes place, the journal, as the sole book
of the original entry becomes inadequate. Thus, the number and the number and
type of journals required are determined by the nature of operations and the volume
of transactions in a particular business.

Books of prime entry/ Books of Original entry

The books in which all transactions are initially recorded.

1. Sales Day Book- to record all credit sales.

2. Purchases Day Book- to record all credit purchases.

3. Cash Book- to record all cash transactions of receipts as well as payments.

4. Sales Returns Day Book- to record the return of goods sold to customers on credit.

5. Purchases Returns Day Book- to record the return of goods purchased from
suppliers on credit.

6. Bills Receivable Book- to record the details of all the bills received.

7. Bills Payable Book- to record the details of all the bills accepted.

8. Journal Proper-to record all residual transactions which do not find place in any of
the aforementioned books of original entry.

LEDGER

Ledger is a main book of account in which various accounts of personal, real and
nominal nature, are opened and maintained.

General ledger

It is the central storage system where all accounting transactions are ultimately
recorded.

It is, effectively, the accounting equation in real life.

Personal Ledger

It holds individual accounts for each of the business’s credit customers and suppliers.

Kinds of Cash Book: From the above it can be observed that the Cash Book serves as
a subsidiary books as well as ledger. Depending upon the nature of business and the
type of cash transactions, various types of Cash books are used. They are:

a) Single Column Cash Book

b) Two Column Cash Book or Cash Book with cash and discount columns.

c) Three Columnar Cash Book or Cash Book with cash, bank and discount columns.

d) ‘Bank’ Cash Book or Cash Book with bank and discount columns.

e) Petty Cash Book.

Trail balance is a statement containing the balances of all ledger accounts, as at any
given date, arranged in the form of debit and credit columns placed side by side and
prepared with the object of checking the arithmetical accuracy of ledger postings.

Total Method

According to this method, debit total and credit total of each account of ledger are
recorded in the trail balance.

Balance Method

According to this method, only balance of each account of ledger is recorded in trail
balance. Some accounts may have debit balance and the other may have credit
balance. All these debit and credit balances are recorded in it. This method is widely
used.

Operating expenses: These expenses are incurred to operate the business efficiently.
They are incurred in running the organization. Operating expenses include
administration, selling, distribution, finance, depreciation and maintenance
expenses.

Non operating expenses: These expenses are not directly associate with day to day
operations of the business concern. They include loss on sale of assets, extraordinary
losses, etc.

Operating incomes: These incomes are incidental to business and earned from usual
business carried on by the concern. Examples: discount received, commission
earned, interest received etc.

Non operating incomes: These incomes are not related to the business carried on by
the firm. Examples are profit on sale of fixed assets, refund of tax etc.

Types of Assets:

Assets are properties of business. They are classified on the basis of their nature.
Different types of assets are as under:

(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently
and used in the business with the objective of making profits. Land and building,
Plant and machinery, Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank
balances, bill receivable and stock are called current assets as they can be realized
within an operating cycle of one year to discharge liabilities.

(iii) Tangible assets: Tangible assets have definite physical shape or identity and
existence; they can be seen, felt and have volume such as land, cash, stock etc.

Thus tangible assets can be both fixed assets and current assets.

(iv) Intangible assets: The assets which have no physical shape which cannot be seen
or felt but have value are called intangible assets. Goodwill, patents, trademarks and
licenses are examples of intangible assets. They are usually classified under fixed
assets.

(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or
expenses which are capitalized for the time being, expenses for promotion of
organizations (preliminary expenses), discount on issue of shares, debit balance of
profit and loss account etc. are the examples of fictitious assets.

(vi) Wasting assets: These assets are also called depleting assets. Assets such as
mines, Timber forests, quarries etc. which become exhausted in value by way of
excavation of the minerals, cutting of wood etc. are known as wasting assets. Such
assets are usually natural resources with physical limitations.

(vii) Contingent assets: Contingent assets are assets, the existence, value possession
of which is based on happening or otherwise of specific events. For example, if a
business firm has filed a suit for a particular property now in possession of other
persons, the firm will get the property if the suit is decided in its favor. Till the suit is
decided, it is a contingent asset.

Types of Liabilities

A liability is an amount which a business firm is ‘liable to pay’ legally. All the amounts
which are claims by outsiders on the assets of the business are known as liabilities.
They are credit balances in the ledger. Liabilities are classified into four categories as
given below.

(1) Owner's capital: Capital is the amount contributed by the owners of the business.
In addition to initial capital introduced, proprietors may introduce additional capital
and withdraw some amounts from business over a period of time. Owner’s capital is
also called ‘net worth’. Net worth is the total fund of proprietors on a particulars
date. It consists of capital, profits and interest on capital subject to reduction of
drawings and interest on drawings. In case of limited companies, capital refers to
capital subscribed by shareholders. Net worth refers to paid up equity capital plus
reserves and profits, minus losses.

(2) Long term Liabilities: Liabilities repayable after specific duration of long period of
time are called long term liabilities. They do not become due for payment in the
ordinary ‘operating cycle’ of business or within a short period of lime.

Examples are long term loans and debentures. Long term liabilities may be secured
or unsecured, though usually they are secured.

(3) Current liabilities: Liabilities which are repayable during the operating cycle of
business, usually within a year, are called short term liabilities or current liabilities.

They are paid out of current assets or by the creation of other current liabilities.

Examples of current liabilities are trade creditors, bills payable, outstanding

expenses, bank overdraft, taxes payable and dividends payable.

(4) Contingent liabilities: Contingent liabilities will result into liabilities only if certain
events happen. e.g. Bills discounted and endorsed which may be dishonored.

Types of Errors in Accounting

Accounting errors can occur in double entry bookkeeping for a number of reasons. Accounting
errors are not the same as fraud, errors happen unintentionally, whereas fraud is a deliberate
and intentional attempt to falsify the bookkeeping entries.

An accounting error can cause the trial balance not to balance, which is easier to spot, or the
error can be such that the trial balance will still balance due to compensating bookkeeping
entries, which is more difficult to identify.

Accounting Errors that Affect the Trial Balance

Errors that affect the trial balance are usually a result of a one sided entry in the accounting
records or an incorrect addition.

As a temporary measure, to balance the trial balance. the difference in the trial balance is
allocated to a suspense account, and a suspense account reconciliation is carried out at a later
stage.

For example, suppose the trial balance showed total debits of 84,600 but total credits of 83,400
leaving a difference of 1,200 as shown below.

Suspense Accounts – Trial Balance Difference

Account Debit Credit

 Trial Balance Totals 84,600 83,400

Difference 1,200

Total 84,600 84,600

To make the trial balance balance a single entry is posted to the accounting ledgers in a
suspense account.

Suspense Account Posting

Account Debit Credit

Suspense account 1,200

When the accounting error is identified a correcting entry is made. Suppose the difference was
an addition error on the rent account, then the correcting entry would be as follows:

Suspense Account Reconciliation Posting

Account Debit Credit

Suspense account 1,200

Rent 1,200

Errors Which do not Affect the Trial Balance

Accounting errors that do not affect the trial balance fall into one of six categories as follows:

1. Error of Principle in Accounting

2. Errors of Omission in Accounting

3. Error of Commission

4. Compensating Error

5. Error of Original Entry

6. Complete Reversal of Entries

Error of Principle in Accounting

An error of principle in accounting occurs when the bookkeeping entry is made to the wrong type
of account. For example, if a £1,000 sale is credited to the sundry expenses account instead of
the sales account, the correcting entry would be as follows:

Accounting Errors – Error of Principle in Accounting

 Example

Account Debit Credit

Sundry expenses 1,000

Sales 1,000

Errors of Omission in Accounting

Errors of omission in accounting occur when a bookkeeping entry has been completely omitted
from the accounting records.

If the payment £2,000 to a supplier has been omitted then the correcting entry would be as
follows:

Accounting Errors – Errors of Omission in

Accounting Example

Account Debit Credit

Accounts payable 2,000

Cash 2,000

Error of Commission
An accounting error of commission occurs when an item is entered to the correct type of account
but the wrong account. For example is cash received of £3,000 from Customer A is credited to
the account of Customer B the correcting entry would be.

Accounting Errors – Error of Commission

Account Debit Credit

Accounts receivable – Customer B 3,000

Accounts receivable – Customer A 3,000

Compensating Error
A compensating error occurs when two or more errors cancel each other out. For example, if the
fixed assets account is incorrectly totalled and understated by £600, and the rent account is
incorrectly totalled and overstated by £600, then the posting to correct the error would be as
follows:

Accounting Errors – Compensating Error

 Account Debit Credit

Fixed assets 600

Rent 600

Error of Original Entry

An error of original entry occurs when an incorrect amount is posted to the correct accounts.

A particular example of an error of original entry is a transposition error where the numbers are
not entered in the correct order. For example, if cash paid to a supplier of £2,140 was posted as
£2,410 then the correcting entry of £270 would be.

A good indicator for a transposition error is that the difference (in this case 270) is divisible by 9.

Accounting Errors – Error of Original Entry

Account Debit Credit

Cash 270

Accounts payable 270

Complete Reversal of Entries

Complete reversal of entries errors occur when the correct amount is posted to the correct
accounts but the debits and credits have been reversed. For example if a cash sale is made for
£400 and posted incorrectly as follows:

Accounting Errors – Incorrect posting

Account Debit Credit

Sales 400

Cash 400

Then to correct the accounting error the original entry must be reversed and the correct entry
made, this can be achieved by doubling the original amounts as follows:

Accounting Errors – Complete Reversal of Entries

Account Debit Credit

Sales 800
 Cash 800

The type of accounting errors that do not affect the trial balance are summarized in the table
below.

Summary of Accounting Error Types

Accounting Errors Description

Error of Principle in Accounting Correct amount, wrong type of account

Errors of Omission in Accounting Entry missed from accounting records

Correct amount and type of account but wrong

Error of Commission
account

Compensating Error Two or more errors balance each other out

Error of Original Entry Correct accounts, wrong amounts

Complete Reversal of Entries Correct amount and account, entries reversed

1. Business Entity
A business is considered a separate entity from the owner(s) and should be treated separately.

Any personal transactions of its owner should not be recorded in the business accounting book,

vice versa. Unless the owner’s personal transaction involves adding and/or withdrawing resources

from the business.

2. Going Concern
It assumes that an entity will continue to operate indefinitely. In this basis, assets are recorded

based on their original cost and not on market value. Assets are assumed to be used for an

indefinite period of time and not intended to be sold immediately.

3. Monetary Unit
The business financial transactions recorded and reported should be in monetary unit, such as US

Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or non-monetary information that

cannot be measured in a monetary unit are not recorded in the accounting books, but instead, a

memorandum will be used.

4. Historical Cost
All business resources acquired should be valued and recorded based on the actual cash equivalent
or original cost of acquisition, not the prevailing market value or future value. Exception to the rule

is when the business is in the process of closure and liquidation.

5. Matching
This principle requires that revenue recorded, in a given accounting period, should have an

equivalent expense recorded, in order to show the true profit of the business.

6. Accounting Period
This principle entails a business to complete the whole accounting process of a business over a

specific operating time period. It may be monthly, quarterly or annually. For annual accounting

period, it may follow a Calendar or Fiscal Year.

7. Conservatism
This principle states that given two options in the valuation of business transactions, the amount

recorded should be the lower rather than the higher value.

8. Consistency
This principle ensures consistency in the accounting procedures used by the business entity from

one accounting period to the next. It allows fair comparison of financial information between two

accounting periods.

9. Materiality
Ideally, business transactions that may affect the decision of a user of financial information are

considered important or material, thus, must be reported properly. This principle allows errors or

violations of accounting valuation involving immaterial and small amount of recorded business

transaction.

10. Objectivity
This principle requires recorded business transactions should have some form of impartial

supporting evidence or documentation. Also, it entails that bookkeeping and financial recording

should be performed with independence, that’s free of bias and prejudice.

11. Accrual
This principle requires that revenue should be recorded in the period it is earned, regardless of the

time the cash is received. The same is true for expense. Expense should be recognized and

recorded at the time it is incurred, regardless of the time that cash is paid.

A negotiable instrument is a document guaranteeing the payment of a specific amount of

money, either on demand, or at a set time, with the payer named on the document.

A promissory note is a legal instrument, in which one party (the maker or issuer) promises in
writing to pay a determinate sum of money to the other (the payee), either at a fixed or
determinable future time or on demand of the payee, under specific terms.

Bills of Exchange

A bill of exchange is an unconditional order in writing, addressed by one person to another,

signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or
at a fixed or determinable future time, a sum certain in money to or to the order of a specified
person, or to bearer.

Parties of bill of Exchange

A bill of exchange requires in its inception three parties—the drawer, the drawee, and the payee.
The person who draws the bill is called the drawer. He gives the order to pay money to the third
party. The party upon whom the bill is drawn is called the drawee.One to whom money is paid is
called the payee.

OBJECTIVES, SCOPE AND

DEFINITIONS OF IAS 1
Objectives, Scope and Definitions of IAS 1

The purpose of financial statements is to provide information about financial position,

financial performance and cash flows.

The objective of IAS 1 is to set out the basis for the presentation of financial statements
and to ensure comparability with previous periods and with other entities. The standard
identifies a minimum content of what should be included in a set of financial statements as
well as guidelines as to their structure, although rigid formats are not prescribed.

Scope:

IAS 1 applies to all general purpose financial statements prepared and presented in

accordance with international standards. [IAS 1.2]

“General purpose” financial statements are statements that have been prepared for use by
those who are not in a position to require an entity to prepare reports tailored to their own
information needs.

Reports prepared at the request of an entity’s management or bankers are not general
purpose financial statements, because they are prepared specifically to meet the needs of
management/bankers.

The Complete Set of Financial Statements

 Statement Statement of Statement Statement Notes
of of of
comprehensive
financial changes cash flows
income
in
position
equity

Assets, Income All Summary Significant

changes of
liabilities & (including accounting
in equity major cash
equity gains) and policies and
inflows and
expenses other
outflows
(including explanatory
dealt with
losses) notes
in

IAS 7

Reporting period
It is normal for entities to present financial statements annually and IAS 1 states that they
should be prepared at least as often as this. If (unusually) the end of an entity's reporting
period is changed, for whatever reason, the period for which the statements are presented
will be less or more than one year. In such cases the entity should also disclose:

(a) The reason(s) why a period other than one year is used

(b) The fact that the comparative figures given are not in fact comparable

For practical purposes, some entities prefer to use a period which approximates to a year,
eg 52 weeks, and the IAS allows this approach as it will produce statements not materially
different from those produced on an annual basis.

Timeliness
If the publication of financial statements is delayed too long after the reporting period, their
usefulness will be severely diminished. An entity with consistently complex operations
cannot use this as a reason for its failure to report on a timely basis. Local legislation and
market regulation imposes specific deadlines on certain entities.

Fair presentation and compliance with IFRS

IAS 1 requires that the financial statements should present fairly the financial position,
financial performance and cash flows of the entity.

Fair presentation is defined as representing faithfully the effects of transactions, other

events, and conditions in accordance with the definitions and recognition criteria in
the IASB Framework. Under IAS 1 application of international standards along with any
relevant interpretations and disclosures is presumed to result in a fair presentation. [IAS
1.15]

Offsetting
Assets and liabilities should not be offset against each other unless this is specifically
required or permitted by a standard. This is because the offsetting or netting of items is
assumed to make it more difficult for the users of financial statements to understand past
transactions and assess future cash flows. [IAS 1.32]

Other considerations
In order for financial statements to be comparable, certain overall considerations need to be
followed in the preparation of the financial statements, as set out below.

Going concern
When preparing a set of financial statements, management should assume, unless there are
specific reasons to believe otherwise, that the business will continue to operate for the
foreseeable future. This is known as the going concern concept. This is particularly relevant
when management make estimates about the expected outcome of events, such as the
recoverability of trade receivables and the useful lives of non-current assets. [IAS 1.25]

Accrual concept
Financial statements should be prepared by applying the accrual concept. In its simplest
form the accrual concept means that assets are recognised when they are receivable rather
than when physically received, and liabilities are recognised when they are payable rather
than when actually paid. This is not relevant for the preparation of the statement of cash
flows which is based purely on cash flows. [IAS 1.27

Consistency of presentation
To aid comparability of financial statements year on year and across different entities it is
important that a consistent presentation and classification of items is followed. The
presentation should only be changed where a new or revised standard requires such a
change or where there has been a significant change in the nature of the entity’s operations
and a new presentation would therefore be more appropriate. [IAS 1.45]

Materiality and aggregation

IAS 1 requires that items that are of importance to the users of the financial statements in
making economic decisions should be separately identified within the financial statements.
Such items are defined as being “material”. In assessing whether items are considered to be
material, the entity should consider both the nature and size of the item. For example, the
purchase of large tangible assets may be common for a particular entity, and therefore it
would generally be appropriate to aggregate such items together as the purchase of plant.
However, a fairly small transaction with a director may be considered as important
information for users of the financial statements. [IAS 1.7, 1.29]

Comparative information
Comparative information for the previous period should be disclosed for all amounts reported
in the financial statements unless a particular standard does not require such information.
This includes the requirement to show comparative information in narrative disclosures
where it is relevant to the full understanding of the explanation. [IAS 1.38] If adjustments to
prior periods have been made as a result of a change in accounting policy or of correction of
errors, a statement of financial condition at the beginning of the previous period should be
presented. [IAS 1.10]

Additional disclosures

A number of additional disclosures are required by IAS 1 to ensure that users of the financial
statements understand the basis on which the information presented in the financial
statements has been prepared. These additional disclosures which should be presented
include: the measurement basis used in the preparation of the financial statements,
judgments that have been made in applying an entity’s accounting policies, and assumptions
that an entity has made over the uncertainty of making estimations.

USERS OF FINANCIAL
INFORMATION
Users of financial information and why the information is of interest to them:
1. Investors
Investors require information on risk and return on investment and hence an entity’s ability to
pay dividends.
2. Employees
Employees assess an entity’s stability and profitability. They are interested in their employer's
ability to provide remuneration, employment opportunities and retirement and other benefits.
3. Lenders
Lenders assess whether an entity is able to repay loans and its ability to pay the related
interest when it falls due.
4. Suppliers and other trade payables
Suppliers assess the likelihood of an entity being able to pay them as amounts fall due.
5. Customers
Customers assess whether an entity will continue in existence. This is especially important
where customers have a long-term involvement with, or are dependent on, an entity, for
example where product warranties exist or where specialist parts may be needed.
6. Governments and their agencies
Government bodies assess the general allocation of resources and therefore activities of
entities. In addition information is needed to determine future taxation policy and to provide
national statistics.
7. The public
The financial statements provide the public with information on trends and recent
developments. This may be of particular importance where an entity makes a substantial
contribution to a local economy by providing employment and using local suppliers.

IAS 1 - Presentation of Financial Statements (detailed review)

Wednesday, May 7, 2014 Print Email
Objective
This standard prescribes the guide lines to be used by the entity, in the presentation of general purpose financial statements, to
make sure that financial statement of the entity are comparable both with its previous periods financial statement and with the
financial statements of the other entity. For this purpose, it provides overall requirements for the structure and contents of
financial statements along with some general features.
Scope
The requirements of this standard are applicable to all the general purpose financial statements (individual and consolidated
both) which are prepared and presented in accordance' with 'International Financial .Reporting Standards (IFRSs).
However, this standard is not applicable to the structure and contents of statement of cash flows and interim financial
statements.
Definition
General Purpose Financial Statements
These are financial statements which are prepared and presented to satisfy the information needs of the general users, who
are not able to require the reporting entity to prepare accounting reports according to their particular information needs.
Complete Set of Financial Statements
The complete set of financial statements entails the following:
 Statement of profit or loss and other comprehensive income
 Statement of financial position
 Statement of changes in equity
 Statement of cash flows
 Notes to accounts
 Comparative year information
 Opening Statement of financial position in respect of retrospective application or restatement of a change in accounting
policy or error, or when entity first adopts the IFRSs
International Financial Reporting Standards (IFRSs)
These are accounting standards and related Interpretations, which are issued and regulated by the International Accounting
Standards Board (IASB) and these encompasses:
 International Financial Reporting Standards (IFRS)
 International Accounting Standards (IAS)
 Interpretations issued by IFRIC and
 Interpretations issued by SIC
Impracticable
It is when the entity is not able to apply the requirement of a particular standard, after any reasonable effort to do so.
Notes
These are one of the essential component of financial statements and include the information (financial and non-financial) in
addition to the information which is presented in the other components of financial statements such as statement of profit or
loss and other comprehensive income, statement of changes in equity, statement of financial' position and statement of cash
flows. These are in the form of narrative descriptions
Other comprehensive income
It entails the incomes and expenses which are not permitted to be recognized in profit or loss as per the requirements of the
other standards. It also includes the reclassification, adjustments
Reclassification Adjustments
It is the reclassification of certain amounts to profit or loss during the current accounting period, which were previously
recognized in statement of other comprehensive income
Total comprehensive income
It is the increase or decrease in the equity in the current accounting period resulting due to the events and transactions, which
are other than the transactions with shareholders in their capacity as owners.
General Features
Fair Presentation
This standard requires that the financial. Performance, financial position and cash flows of an entity should be fairly presented.
Fair presentation of financial statements, the events and transactions should be reported to financial statements in accordance
with the recognition and measurement principle for the elements of financial statements, given in the IASB’s framework, and
financial statements should be prepared in accordance with IFRS with related disclosure requirements.
To achieve the fair presentation the entity should make sure the following:
 The selection and application of accounting policies as per IAS8
 The information contained in financial statements should have all the qualitative characteristics of financial statements
 Complete disclosure should be given as per the IFRS
Un-reserved Statement
The entity which prepares financial statements in compliance with all the lFRSs, should place an un-reserved statement in the
notes to accounts, in respect of such compliance with IFRSs. This is termed as un-reserved statement. However, the entity
cannot make such a statement unless the financial statements are in compliance with all the requirements of IFRSs.
Disagreement with IFRSs
If in very rare situations, the management identifies that compliance with a particular requirement of a specific standard or
Interpretation will result in the information, which is in conflict with the objectives of financial statements as laid down in the
Framework, the entity will account for such situation as follows:
a) If the regulatory frame work permits departure from such requirement, the entity will take departure from that requirement
and will disclose the following:
 The financial statements fairly present the financial performance, financial position and cash flows of the entity, as per the
judgment of management
 The financial statements of the entity are in compliance with all the relevant IFRS’s other than the departure from the
particular requirement
 The title of the standard from which departure is taken, the details of departure and related reason for the departure
 The financial effect on financial statements due to such departure
b) If the regulatory frame work does not permit departure from such requirement, the entity will reduce the related impact of
such compliance by giving following disclosures:
 The title of the standard from which departure is taken, the details of departure and related reason for the departure
 The adjustment which is required as per the judgment of the management to achieve fair presentation
Going Concern
At the end of each reporting period, when entity will prepare its financial statements, the management is required to assess of
whether the entity has ability to continue its business as a going concern. If management identifies that it has ability to continue
its business as a going concern then its financial statement will be prepared on a going concern basis.
The entity will be treated as going concern, if it can continue its operations for the foreseeable future such that neither the
management has intention nor the circumstances are there that the entity will have to curtail its business activities
Accrual Basis of Accounting
The entity is required to report all the events and transactions in the financial statements in the period to which these relate
except for the cash flows
Consistency of Presentation
The entity should use the same accounting policies in the preparation and presentation of financial statements for the similar
events and transactions, from one period to the next in order to ensure the comparability of financial statements unless the
change is required by the circumstance laid down in IAS 8
Materiality and Aggregation
The entity is required to present each material class of items separately in the financial statements, unless these are
immaterial.
Offsetting
The entity should not offset any assets and liabilities or any income and expense, except it is required by a IFRS
Frequency of Reporting
An entity shall present a complete set of financial statements (including comparative
information) at least annually. When an entity changes the end of its reporting period and presents financial statements for a
period longer or shorter than one year an entity shall disclose, in addition to the period covered by the financial statements
(a) The reason for using a longer or shorter period, and
(b) The fact that amounts presented in the financial statements are not entirely comparable.
Comparative Information
This standard requires an entity to disclose the comparative information in respect of the previous accounting period similar to
those amounts which are presented in the financial statements of the current accounting period
Identification of Financial Statements
The financial statements of the entity should be identified and distinguished from the other information using the following:
 The title of the entity presenting financial statements
 Whether these are the financial statements of an individual entity or consolidated financial statements for the group of
entities:
 The reporting date for which financial statements are presented
 The presentation currency for the amounts reported in financial statements
 The level of rounding up for the amounts reported in financial statements
Contents of Financial Statements
Statement of Financial Position
Assets
The assets of the entity will be presented into current and non-current assets as per the definition on the face of statement of
financial position, unless the presentation on the basis of liquidity is more appropriate
Current assets
The entity will present an asset as current asset, if it meets any of the following criteria:
 It is held for trading in the normal course of business
 It will be realized within a period of 12 months from the reporting date
 It is expected to be sold or consumed in the normal course of business
 It is cash or cash equivalent as defined in IAS 7
The entity will present all other assets as non-current assets.
Liabilities
The liabilities of the entity will be presented into current and non-current liabilities as per the definition on the face of statement
of financial position as follows:
Current Liabilities
The entity will present a liability as current liability, if It relates to the normal course of the business and will be paid within 12
months from the reporting date
The entity will present all other liabilities as non-current liabilities
Statement of Profit or Loss and other comprehensive income
The entity the all items of incomes and expenses relating to the current accounting period in the form of either:
 A single statement of profit or loss and other comprehensive income or
 Two separate statements, one is the statement of profit or loss and another statement of other comprehensive income
Statement of profit or loss
The entity will present the following Information in the statement of profit or loss at minimum:
 Entity’s Revenue for the current accounting period
 Interest costs
 Entity’s share of the profit or loss from associates or joint ventures
 Any reclassification adjustment recognized during the current accounting period
 Income tax
 Net profit or loss for the current accounting period
Other comprehensive Income
The entity will present the line items of statement of comprehensive income into two sections as follows:
a) Items that are not reclassify to profit or loss
b) Items that may be reclassify to profit or loss, when certain conditions will meet
The line items of statement of comprehensive income may be presented either
 Net of tax or
 Before tax with the tax effect being presented as a separate line item under the respective section
The entity is required to disclose the allocation of profit or loss and comprehensive Income as follows in addition to the
statement of profit or loss and other comprehensive income:
a) Profit or loss for the current accounting period attributable to:
 Owners of the group
 Non-controlling interests in the entity
b) Total comprehensive income for the current accounting period attributable to:
 Owners of the group
 Non-controlling interests, and
Statement of Changes in Equity
The entity is required to present the following in respect of each component of entity, in the statement of changes in equity:
 Changes in the elements of equity due to transaction with owners in the current accounting period
 Changes in the elements of equity due to the total comprehensive income for the year
 Changes in the components of equity due to the change in accounting policy
 Changes in the components of the equity due to the requirement of a standard
Notes
These contain the information (financial and non-financial) in addition to the information which is presented in the other
components of financial statements such as statement of profit or loss and other comprehensive income, statement of changes
in equity, statement of financial' position and statement of cash flows. These are in the form of narrative descriptions and
include the following:
 Basis used by the entity for the preparation of the financial statements
 Accounting policies of the entity
 Disclosures required by the standards
Format of Statement of financial position
AB Ltd
Statement of financial position
As on …
ASSETS $ $
Non-current assets
Plant and Machinery x
Other Intangible assets x
Investments x x
Current assets
Closing Stock x
Receivables x
Cash x x
Total assets xx
EQUITY AND LIABILITIES
Equity
Issued Share capital x
Other reserves x
Accumulated earnings x x
Non-current liabilities
Long term Loans x
Long term provision x x
Current liabilities
Trade Creditors
Bank Overdraft x
Tax payable x x
Total equity and liabilities xx
Format of Statement of profit or loss and other comprehensive income
AB Ltd
Statement of Profit or Loss
For the year ended…
Statement of profit or loss $ $
Sales Revenue x
Cost of sales (x)
Gross profit x
Administration Costs (x)
Selling expenses (x)
Operating profits x
Interest costs (x)
Profits before tax x
Income tax (x)
Profit/(loss) after tax (A) x/(x)
OTHER COMPREHENSIVE INCOME
Items that are not reclassify to profit or loss
Revaluation Surplus/(Loss) x/(x)
Fair Value gain/(loss) financial asset x/(x)
Income tax relating to other comprehensive income (x) x/(x)
Items that may be reclassify to profit or loss
Fair value gain/(loss) on cash flow hedge x/(x)
Exchange gain/(loss) on foreign operation x/(x)
Reclassification adjustment (x)
Income tax relating to other comprehensive income (x)
Total of other comprehensive income (B) x/(x)
Total comprehensive Income for the year (A+B) x/(x)