Accounting for Managers (22MBA13)

Module I
Introduction to Accounting

Types of Business Organizations

Sole Proprietorship / Sole trading concern
• Its business owned by one person; The entrepreneur raised capital from personal
resources or by borrowing
• The proprietor receives any profits, suffers any losses and is personally liable for all
debts of the business
Partnership Firm
• It is a mutual agreement between two or more persons to run a business and share
profit and loss mutually;
• It is established by a written contract known as ‘Deed of partnership’ ; Maximum
number of partners -100
• Each partner has unlimited personal liability for the debts of the partnerships
• It is governed by Partnership Act, 1932
Company/Corporation/Joint Stock Corporation
• The ownership is divided into shares and owners are shareholders in the company
• A company has a separate legal existence from its owners (Body corporate)
• Owners are not personally liable for the debts of the company
• Day to day operations is run by a group of elected representatives of shareholders –
Board of directors
• Two types of joint stock companies - Private and Public

Private Company
• Shareholders of a company are also known as members; Minimum members – 2 ;
Maximum members – 200
• Member’s liability is limited to the capital they contribute
• Private companies cannot issue shares to general public and hence they are not listed
on a stock exchange

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Public Company
• Minimum number of members – 7; No maximum limit
• Can raise capital from general public and hence can have any number of shareholders
• It is listed on a stock exchange and stocks are traded publicly
• Shareholders may transfer all or part of their ownership shares to others at any time
• Shareholder’s liability is limited to the capital they contribute
• Profit is shared in the form of dividends
• Joint stock companies are governed by Companies Act of 2013 (earlier – Companies
Act of 1956)

What is Accounting
• Accounting is the language of the business. Information about the results of business
operations is communicated to those who need it, through books of accounts.
• Accounting is a discipline which records, classifies, summarizes and interprets financial
information about the activities of a business enterprise or concern.
• Accounting is the process of identifying, measuring, and recording, classifying,
summarizing, analysing, interpreting and communicating the economic information of an
organization to its users who need the information for decision making.
The Accounting Principles Board of the American Institute of Certified Public Accountants
(AICPA) enumerated the functions of accounting as follows –
“The functions of accounting are to provide quantitative information, primarily of financial
nature, about economic activities, that is needed to be useful in making economic decisions”

Functions of the Accounting

Financial transactions – Accounting deals with only those events and transactions which are
of financial nature. Transactions which are not of monetary value are not in the scope of
accounting.
Recording – This is the basic function of accounting. It is essentially concerned with not only
ensuring that all financial transactions of a business are recorded but also that they are
recorded in an orderly manner. Recording is done in a book called “Journal”.
Classifying – Classification is concerned with the systematic analysis of the recorded data,
with a view to group transactions of one nature at one place. The work of classification is
done in the book termed as “Ledger”. Ledger contains individual heads under which all

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financial transactions of similar nature are collected. E.g., Travelling expenses, Advertising
expense etc.
Summarizing – This involves presenting the classified data in a manner which is
understandable and useful to the internal as well as external users of accounting information.
This process leads to the preparation of the following statements – Trial balance, Income
Statement and Balance Sheet.
Analysing and Interpreting–the recorded financial data is analysed and interpreted in a
manner that the end-users can make a meaningful judgement about the financial condition
and profitability of the business operations.
Communicating – the accounting information after being meaningfully analysed and
interpreted has to be communicated in a proper form and manner to the concerned person.
This is done through preparation and distribution of accounting reports, which include
besides the usual income statement and the balance sheet, additional information in the form
of accounting ratios, fund flow statements, cash flow statement etc.

Book-keeping
Book-keeping is the term used to refer the process of recording the financial transactions in
an orderly manner. There are some fundamental differences between book-keeping and
Accounting.

Bookkeeping Accounting

Objective is to identify and record financial Objective is to identify, record, classify,

transactions; Hence, financial statements are not summarize financial transactions; Financial
part of book keeping statements are prepared

Book keeping is the basis of accounting It is a broader function; Book-keeping is one

part of the accounting

Business decisions can-not be made based on Accounting provides inputs required for
the data from book keeping business decision making; Financial position of
a business can be ascertained.

Accountancy
The term ‘accounting’ is the process; ‘Accountancy’ is used to refer the profession of an
accountant which also includes other duties such as auditing. ‘Accounting’ forms a part of
‘Accountancy’; Both terms are used interchangeably. It tells us why and how to prepare the
books of accounts and how to summarize the accounting information and communicate it to
the interested parties.

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Types of Accounting
In order to satisfy the needs of different people interested in the accounting information,
different branches of accounting have developed. They can be broadly classified into two
categories – Financial Accounting and Management Accounting

1. Financial accounting -It is the original form of accounting. It is mainly confined to

preparation of financial statements for the use of outside stakeholders such as shareholders,
creditors, customers and the government. The objective of financial accounting is to ascertain
the results (profit or loss) of business operations during the particular period and to state the
financial position (balance sheet) as on a date at the end of the period.
2. Management accounting - The object of management accounting is to supply relevant
information at appropriate time to the management to enable it to take decisions and effect
control. According to CIMA, London “Management accounting is the application of
professional information in such a way as to assist the management in the formation of
policies and in the planning and control of the operations of the undertaking” Management
accounting covers areas such as Cost accounting, budgetary control, inventory control,
internal audit etc. The objective of cost accounting is to find out the cost of goods produced
or services rendered by a business. It also helps the business in controlling the costs by
indicating avoidable losses and wastes.

Differences between Financial Accounting and Management Accounting

Financial Accounting Management Accounting

Main objective is to provide information to It is used principally for internal use by the
both outside stakeholders – shareholders, management of a business enterprise
creditors, government
It is concerned with the monetary record of Management accounting is concerned with
the past events (historical records) both present and future.
Financial accounting is mandatory for every Management accounting is optional and used
business on account of legislations. only if there is a need by the management
Governed by Generally Accepted No prescribed standards or formats
Accounting Principles and hence must
follow prescribed standards
Emphasis on verifiability and precision Emphasis on timelines and relevance

Objectives of Financial Accounting

• Maintaining proper records of business transactions
• Ascertaining the profit or Loss of a business
• Knowing the sources of revenue and the items of expenses

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• Ascertainment of the financial position of a business
• Ascertaining how much money is due to the business and how much is due from the
business
• Satisfying legal requirements
• Facilitating business decision making

Importance / Advantages of Financial Accounting

• Facilitates to replace memory
• Facilitates to comply with legal requirements
• Helps in assessing the tax liability
• Facilitates to ascertain net result of operations
• Facilitates to ascertain financial position
• Helpful in ascertainment value of business
• Facilitates the users to take decisions

Limitations of Financial Accounting

• Financial accounting provides only historical record of business transactions
• Financial accounting ignores important non-monetary information
• Financial accounting permits alternative treatments
• Financial accounting is Influenced by personal judgments
• It ignores the price level changes in case of financial statements prepared on historical
costs.

Users of Financial accounting information

(a) Shareholders/Investors are interested to know the welfare of the business. They can
understand the operational results and financial position of the business through financial
statements.
(b) Management of the business needs financial information for planning and controlling
operations, formulating plans and policies. They also monitor key financial indicators of the
business to compare firm’s performance with other competitors.

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(c) Employees and Trade unions are interested to know the operational results because their
salary/benefits/bonus etc. is dependent on the revenue and profit earned by the business.
Trade unions use Financial statements for negotiations for wages, bonus and other benefits.
(d) Lender: The creditors and lenders of money for the business want to know about the
financial stability of a business before lending money to the business. Banks use financial
statements for deciding the amount of loan, interest rate, repayment period and security
require.
(c) Government and Regulatory authorities: Government is interested to formulate laws to
regulate business activities and to determine taxation policies etc. Financial statements also
act as input in computing National Income statistics etc. Financial statements provide
information relating to operational results as well as financial position of the business. Tax
authorities decide the amount of tax based on the financial information reported.
(d) Suppliers: Suppliers trade financiers want information to determine whether the
enterprise will pay them on time. Lenders take a long-term view and suppliers are interested
in near-term financial condition of a business.
(f) Consumer: Consumer is interested in financial information to ascertain the continued
existence of the business and probability of the continued supply of the products, parts and
after sale services. They want to ensure continuous existence of a business, especially in case
of durable products which require after sales service and spare parts.
(e) Analysts and advisors- They serve the need of the investors by providing analysis and
interpretation of the finance reports.

Accounting principles
Objective of a language is to communicate is a manner understood by all. Since accounting is
a language of the business, it is necessary that is should be based on certain uniform
standards. These standards are termed as accounting principles.
According to Canadian Institute of chartered Accountants “Accounting principles are the body
of doctrines commonly associated with the theory and procedure of accounting. They serve
as an explanation of current practices and as a guide for the selection of conventions or
procedure where alternative exists”.
Accounting principles can be classified into the below categories
i) Accounting Concepts
ii) Accounting Conventions
iii) Accounting standards

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Accounting Concepts
Accounting concepts refers to assumptions or conditions upon which the accounting is based.
Important accounting concepts
1. Money measurement concept:
As per this concept, only those transactions, which can be measured in terms of money are
recorded. Since money is the medium of exchange and the standard of economic value, this
concept requires that those transactions alone that are capable of being measured in terms
of money be only to be recorded in the books of accounts. Transactions, even if, they affect
the results of the business materially, are not recorded if they are not convertible in monetary
terms. Transactions and events that cannot be expressed in terms of money are not recorded
in the business books. For example; employees of the organization are, no doubt, the assets
of the organizations but their measurement in monetary terms is not possible therefore, not
included in the books of account of the organization. Measuring unit for money is taken as
the currency of the ruling country i.e., the ruling currency of a country provides a common
denomination for the value of material objects.
2. Separate Entity/ Business Entity Concept:
Entity concept states that business enterprise is a separate identity apart from its owner.
Accountants should treat a business as distinct from its owner. Business transactions are
recorded in the business books of accounts and owner’s transactions in his personal books of
accounts. The practice of distinguishing the affairs of the business from the personal affairs
of the owners originated only in the early days of the double-entry book-keeping. This
concept helps in keeping business affairs free from the influence of the personal affairs of the
owner. This basic concept is applied to all the organizations whether sole proprietorship or
partnership or corporate entities.
Entity concept means that the enterprise is liable to the owner for capital investment made
by the owner. Since the owner invested capital, which is also called risk capital, he has claim
on the profit of the enterprise. A portion of profit which is apportioned to the owner and is
immediately payable becomes current liability in the case of corporate entities.

3 Cost Concept:
By this concept, the value of an asset is to be determined on the basis of historical cost, in
other words, acquisition cost. Although there are various measurement bases, accountants
traditionally prefer this concept in the interests of objectivity. When a machine is acquired by
paying ` 5,00,000, following cost concept the value of the machine is taken as ` 5,00,000. It is
highly objective and free from all bias. Other measurement bases are not so objective. Current
cost of an asset is not easily determinable. If the asset is purchased on 1.1.1995 and such

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model is not available in the market, it becomes difficult to determine which model is the
appropriate equivalent to the existing one. Similarly, unless the machine is actually sold,
realisable value will give only a hypothetical figure. Lastly, present value base is highly
subjective because to know the value of the asset one has to chase the uncertain future.

4. Accounting Period Concepts:

This is also called the concept of definite accounting period. As per ‘going concern’ concept
an indefinite life of the entity is assumed. For a business entity it causes inconvenience to
measure performance achieved by the entity in the ordinary course of business. If a textile
mill lasts for 100 years, it is not desirable to measure its performance as well as financial
position only at the end of its life. So, a small but workable fraction of time is chosen out of
infinite life cycle of the business entity for measuring performance and looking at the financial
position. Generally, one year period is taken up for performance measurement and appraisal
of financial position. However, it may also be 6 months or 9 months or 15 months.
According to this concept accounts should be prepared after every period & not at the end of
the life of the entity. Usually, this period is one calendar year. We generally follow from 1st
April of a year to 31st March of the immediately following year. The economic life of the
business is divided into different segments in order to determine the profit/loss of the
business. Accounts are usually maintained for a year i.e., 365 days. This period is considered
as the accounting period.

5. Matching Concept:
In this concept, all expenses matched with the revenue of that period should only be taken
into consideration. In the financial statements of the organization if any revenue is recognized
then expenses related to earn that revenue should also be recognized. This concept is based
on accrual concept as it considers the occurrence of expenses and income and do not
concentrate on actual inflow or outflow of cash. This leads to adjustment of certain items like
prepaid and outstanding expenses, unearned or accrued incomes.
The matching of expenses against revenues with a view to determining the profit or loss of a
business for any particular accounting period is called matching concept. To compute the
operational profits/loss of the business in a year, it is necessary to find the expenses and
revenues relating to the period. Then all the revenues of that period are matched with all the
expenses/costs incurred to earn that revenue.

6. Dual Aspect Concept:

This is the basic principle of accounting. As per this principle every financial transaction of the
business has dual effect and recorded at two places. Therefore, it is called double entry
system. Every transaction has two aspects namely (a) The receiving aspect (b) The giving

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aspect. For Ex: when a firm purchases machinery, it receives the benefit in the form of
machinery and gives the benefit in the form of cash.

7 Realization Concept:
According to this concept, revenue is considered as being earned on the date at which it is
realized. As per this principle the revenue is recorded in accounting when the sales have taken
place. If there is expectation that will be a particular transaction there in future, that is not
recorded in accounting. Revenue/sales is considered to be made when title of ownership of
goods passes from the seller to buyer and the buyer become legally liable to pay.

8. Accrual concept:
Under accrual concept, the effects of transactions and other events are recognised on
mercantile basis i.e., when they occur (and not as cash or a cash equivalent is received or
paid) and they are recorded in the accounting records and reported in the financial
statements of the periods to which they relate. Financial statements prepared on the accrual
basis inform users not only of past events involving the payment and receipt of cash but also
of obligations to pay cash in the future and of resources that represent cash to be received in
the future. For example, (1) Mr. X started a cloth merchandising. He invested ` 50,000, bought
merchandise worth ` 50,000. He sold such merchandise for ` 60,000. Customers paid him `
50,000 cash and assure him to pay ` 10,000 shortly. His revenue is ` 60,000. It arose in the
ordinary course of cloth business; Mr. X received ` 50,000 in cash and ` 10,000 by way of
receivables.
9. Going Concern Concept:
The financial statements are normally prepared on the assumption that an enterprise is a
going concern and will continue in operation for the foreseeable future. Hence, it is assumed
that the enterprise has neither the intention nor the need to liquidate or curtail materially
the scale of its operations; if such an intention or need exists, the financial statements may
have to be prepared on a different basis and, if so, the basis used needs to be disclosed.
The valuation of assets of a business entity is dependent on this assumption. Traditionally,
accountants follow historical cost in majority of the cases.
Accounting Conventions
Convention means customary practice, method, rule of usage. Accounting conventions refer
to practices followed by accountants in the preparation of financial statements to make them
clear and meaningful. It is the procedure followed by the accountants on the basis of long-
standing customs.

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Important accounting conventions
1. Convention of Materiality: material means significant. In accounting, a detailed
record is made of only those business transactions which are material. Materiality principle
permits other concepts to be ignored, if the effect is not considered material. This principle is
an exception to full disclosure principle. According to materiality principle, all the items having
significant economic effect on the business of the enterprise should be disclosed in the
financial statements and any insignificant item which will only increase the work of the
accountant but will not be relevant to the users’ need should not be disclosed in the financial
statements. The term materiality is the subjective term. It is on the judgement, common
sense and discretion of the accountant that which item is material and which is not.
2. Convention of conservatism: Conservatism states that the accountant should not
anticipate any future income however they should provide for all possible losses. When there
are many alternative values of an asset, an accountant should choose the method which leads
to the lesser value. Later on, we shall see that the golden rule of current assets valuation -
‘cost or market price whichever is lower’ originated from this concept.
3. Convention of Consistency: In order to achieve comparability of the financial
statements of an enterprise through time, the accounting policies are followed consistently
from one period to another; a change in an accounting policy is made only in certain
exceptional circumstances.
The concept of consistency is applied particularly when alternative methods of accounting
are equally acceptable. For example, a company may adopt any of several methods of
depreciation such as written-down-value method, straight-line method, etc. Likewise, there
are many methods for valuation of inventories. But following the principle of consistency it is
advisable that the company should follow consistently over years the same method of
depreciation or the same method of valuation of Inventories which is chosen. However, in
some cases though there is no inconsistency, they may seem to be inconsistent apparently.
In case of valuation of Inventories if the company applies the principle ‘at cost or market price
whichever is lower’ and if this principle accordingly results in the valuation of Inventories in
one year at cost price and the market price in the other year, there is no inconsistency here.
It is only an application of the principle.
4. Convention of Disclosure: according to this convention all accounting statements
should be honest. Therefore, all significant information should be disclosed in the accounting
statements.

Generally Accepted Accounting Principles

The conventions, assumptions, concepts and rules which defined accepted accounting
practice constitute generally accepted accounting principles (GAAP). GAAP may be defined as
those rules of actions or conduct which are adopted by the accountants universally while
recording accounting transactions.

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According to the American institute of certified public accountants (AICPA), ‘the principles
which have substantial authoritative support become a part of the generally accepted
accounting principles. It follows the below three criteria -
1. Relevance
2. Objectivity
3. Feasibility
It should be noted that GAAP differs from country to country because of legislative
requirements, local accounting practices, business environment peculiar to each country.

ACCOUNTING STANDARDS
Accounting standards specify the various methods from the wide array of accounting choices
allowed by GAAP.
The accounting concepts and conventions discussed in the foregoing pages are the core
elements in the theory of accounting. These principles, However, permit a variety of
alternative practices to co-exist. On account of this the financial results of different companies
cannot be compared and evaluated unless full information is available about the accounting
methods which have been used. The lack of uniformity among accounting practices have
made it difficult to compare the financial results of different companies. It means that there
should not be too much discretion to companies and their accountants to present financial
information the way they like. In other words, the information contained in financial
statements should conform to carefully considered standards.
Therefore, accounting standards are needed to:
a) provide a basic framework for preparing financial statements to be uniformly followed by
all business enterprises,
b) make the financial statements of one firm comparable with the other firm and the financial
statements of one period with the financial statements of another period of the same firm,
c) make the financial statements credible and reliable, and
d) create general sense of confidence among the outside users of financial statements.
Accounting Standards (ASs) provide framework and standard accounting policies for
treatment of transactions and events so that the financial statements of different enterprises
become comparable.
Accounting standards are written policy documents issued by the expert accounting body or
by the government or other regulatory body covering the aspects of recognition,
measurement, presentation and disclosure of accounting transactions and events in the
financial statements. The ostensible purpose of the standard setting bodies is to promote the
dissemination of timely and useful financial information to investors and certain other parties

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having an interest in the company’s economic performance. The accounting standards deal
with the issues of -
(i) recognition of events and transactions in the financial statements;
(ii) measurement of these transactions and events;
(iii) presentation of these transactions and events in the financial statements in a manner
that is meaningful and understandable to the reader; and
(iv) the disclosure requirements which should be there to enable the public at large and
the stakeholders and the potential investors in particular, to get an insight into what these
financial statements are trying to reflect and thereby facilitating them to take prudent and
informed business decisions.
International Accounting Standards Board (IASB) develops a single set of accounting
standards for businesses around the world. IASB issues International Financial Reporting
Standards (IFRS) and International Accounting Standards (IAS). In India, Ministry of Corporate
Affairs (MCA) notified the accounting standards knows as Indian Accounting Standards (Ind
AS). All listed companies and certain unlisted companies must comply with Ind AS for
accounting periods beginning from 1 Apr 2016.

OBJECTIVES OF ACCOUNTING STANDARDS

The whole idea of accounting standards is centred around harmonisation of accounting
policies and practices followed by different business entities so that the diverse accounting
practices adopted for various aspects of accounting can be standardised. Accounting
Standards standardise diverse accounting policies with a view to:
(i) eliminate the non-comparability of financial statements and thereby improving the
reliability of financial statements; and
(ii) provide a set of standard accounting policies, valuation norms and disclosure
requirements.
Accounting standards reduce the accounting alternatives in the preparation of financial
statements within the bounds of rationality, thereby ensuring comparability of financial
statements of different enterprises.

BENEFITS
Accounting standards seek to describe the accounting principles, the valuation techniques
and the methods of a applying the accounting principles in the preparation and presentation
of financial statements so that they may give a true and fair view. By setting the accounting
standards, the accountant has following benefits.

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(i) Standards reduce to a reasonable extent or eliminate altogether confusing variations
in the accounting treatments used to prepare financial statements.
(ii) There are certain areas where important information is not statutorily required to be
disclosed. Standards may call for disclosure beyond that required by law.
(iii) The application of accounting standards would, to a limited extent, facilitate
comparison of financial statements of companies situated in different parts of the world and
also of different companies situated in the same country. However, it should be noted in this
respect that differences in the institutions, traditions and legal systems from one country to
another give rise to differences in accounting standards adopted in different countries.

PROCESS OF FORMULATION OF ACCOUNTING STANDARDS IN INDIA

The Institute of Chartered Accountants of India (ICAI), being a premier accounting body in the
country, took upon itself the leadership role by constituting the Accounting Standards Board
(ASB) in 1977. The ICAI has taken significant initiatives in the setting and issuing procedure of
Accounting Standards to ensure that the standard-setting process is fully consultative and
transparent. The ASB considers International Financial Reporting Standards (IFRSs) while
framing Indian Accounting Standards (ASs) in India and try to integrate them, in the light of
the applicable laws, customs, usages and business environment in the country. The
composition of ASB includes, representatives of industries (namely, ASSOCHAM, CII, FICCI),
regulators, academicians, government departments etc. Although ASB is a body constituted
by the Council of the ICAI, it (ASB) is independent in the formulation of accounting standards
and Council of the ICAI is not empowered to make any modifications in the draft accounting
standards formulated by ASB without consulting with the ASB.
The standard-setting procedure of Accounting Standards Board (ASB) can be briefly outlined
as follows:
Identification of broad areas by ASB for formulation of AS.
Constitution of study groups by ASB to consider specific projects and to prepare
preliminary drafts of the proposed accounting standards. The draft normally includes
objective and scope of the standard, definitions of the terms used in the standard, recognition
and measurement principles wherever applicable and presentation and disclosure
requirements.
Consideration of the preliminary draft prepared by the study group of ASB and
revision, if any, of the draft on the basis of deliberations.
Circulation of draft of accounting standard (after revision by ASB) to the Council
members of the ICAI and specified outside bodies such as Department of Company Affairs
(DCA), Securities and Exchange Board of India (SEBI), Comptroller and Auditor General of India
(C&AG), Central Board of Direct Taxes (CBDT), Standing Conference of Public Enterprises
(SCOPE), etc. for comments.

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Meeting with the representatives of the specified outside bodies to ascertain their
views on the draft of the proposed accounting standard.
Finalisation of the exposure draft of the proposed accounting standard and its
issuance inviting public comments.
Consideration of comments received on the exposure draft and finalisation of the
draft accounting standard by the ASB for submission to the Council of the ICAI for its
consideration and approval for issuance.
Consideration of the final draft of the proposed standard and by the Council of the
ICAI, and if found necessary, modification of the draft in consultation with the ASB is done.
The accounting standard on the relevant subject (for non-corporate entities) is then
issued by the ICAI. For corporate entities the accounting standards are issued by The Central
Government of India.

LIST OF ACCOUNTING STANDARDS IN INDIA

The ‘Accounting Standards’ issued by the Accounting Standards Board establish standards
which have to be complied by the business entities so that the financial statements are
prepared in accordance with generally accepted accounting principles.
Following is the list of applicable Accounting Standards:

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List of Accounting Standards

Sl. Number of the Title of the Accounting Standard

No. Accounting Standard
(AS)
1. AS 1 Disclosure of Accounting
2. AS 2 (Revised) Policies Valuation of
3. AS 3 (Revised) Inventories
4. AS 4 (Revised) Cash Flow Statements
5. AS 5 (Revised) Contingencies and Events Occurring after the Balance Sheet Date
Net Profit or Loss for the Period, Prior Period Items and Changes in
4. AS 6 (withdrawn pursuant Accounting Policies
to issuance of AS 10 Depreciation Accounting
on Property, Plant and
7. Equipment 2016)
8. AS 7 (Revised) Accounting for Construction Contracts
AS 8 (withdrawn Accounting for Research and Development
pursuant to AS 26
9. becoming mandatory)
10. AS 9 Revenue Recognition
11. AS 10 Property, Plant and Equipment
12. AS 11 (Revised) The Effects of Changes in Foreign Exchange Rates
13. AS 12 Accounting for Government Grants
14. AS 13 Accounting for Investments
15. AS 14 Accounting for
14. AS 15 (Revised) Amalgamations Employee
17. AS 16 Benefits
18. AS 17 Borrowing Costs
19. AS 18 Segment Reporting
20. AS 19 Related Party Disclosures
21. AS 20 Leases
22. AS 21 Earnings Per Share
23. AS 22 Consolidated Financial Statements
AS 23 Accounting for Taxes on Income
24. Accounting for Investments in Associates in Consolidated Financial
25. AS 24 Statements
24. AS 25 Discontinuing Operations
27. AS 26 Interim Financial Reporting
AS 27 Intangible Assets
Financial Reporting of Interests in Joint Ventures

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NEED FOR CONVERGENCE TOWARDS GLOBAL STANDARDS
The last decade has witnessed a sea change in the global economic scenario. The emergence
of trans- national corporations in search of money, not only for fuelling growth, but to sustain
on going activities has necessitated raising of capital from all parts of the world, cutting across
frontiers.
Each country has its own set of rules and regulations for accounting and financial reporting.
Therefore, when an enterprise decides to raise capital from the markets other than the
country in which it is located, the rules and regulations of that other country will apply and
this in turn will require that the enterprise is in a position to understand the differences
between the rules governing financial reporting in the foreign country as compared to its own
country of origin
International analysts and investors would like to compare financial statements based on
similar accounting standards, and this has led to the growing support for an internationally
accepted set of accounting standards for cross-border filings. The harmonization of financial
reporting around the world will help to raise confidence of investors generally in the
information they are using to make their decisions and assess their risks.
Also, a strong need was felt by legislation to bring about uniformity, rationalization,
comparability, transparency and adaptability in financial statements. Having a multiplicity of
accounting standards around the world is against the public interest. If accounting for the
same events and information produces different reported numbers, depending on the system
of standards that are being used, then it is self-evident that accounting will be increasingly
discredited in the eyes of those using the numbers. It creates confusion, encourages error and
facilitates fraud. The cure for these ills is to have a single set of global standards, of the highest
quality, set in the interest of public. Global Standards facilitate cross border flow of money,
global listing in different bourses and comparability of financial statements.
The convergence of financial reporting and accounting standards is a valuable process that
contributes to the free flow of global investment and achieves substantial benefits for all
capital market stakeholders. It improves the ability of investors to compare investments on a
global basis and thus lowers their risk of errors of judgment. It facilitates accounting and
reporting for companies with global operations and eliminates some costly requirements say
reinstatement of financial statements. It has the potential to create a new standard of
accountability and greater transparency, which are values of great significance to all market
participants including regulators. It reduces operational challenges for accounting firms and
focuses their value and expertise around an increasingly unified set of standards. It creates
an unprecedented opportunity for standard setters and other stakeholders to improve the
reporting model. For the companies with joint
listings in both domestic and foreign country, the convergence is very much significant

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INTERNATIONAL FINANCIAL REPORTING STANDARDS AS GLOBAL STANDARDS
With a view of achieving convergence towards global reporting, the London based group
namely the International Accounting Standards Committee (IASC), responsible for developing
International Accounting Standards, was established in June, 1973. It is presently known as
International Accounting Standards Board (IASB), The IASC comprises the professional
accountancy bodies of over 75 countries (including the Institute of Chartered Accountants of
India). Primarily, the IASC was established, in the public interest, to formulate and publish,
International Accounting Standards to be followed in the presentation of audited financial
statements. International Accounting Standards were issued to promote acceptance and
observance of International Accounting Standards worldwide. The members of IASC have
undertaken a responsibility to support the standards promulgated by IASC and to propagate
those standards in their respective countries.
Between 1973 and 2001, the International Accounting Standards Committee (IASC) released
International Accounting Standards. Between 1997 and 1999, the IASC restructured their
organisation, which resulted in formation of International Accounting Standards Board (IASB).
These changes came into effect on 1st April, 2001. Subsequently, IASB issued statements
about current and future standards: IASB publishes its Standards in a series of
pronouncements called International Financial Reporting Standards (IFRS). However, IASB has
not rejected the standards issued by the ISAC. Those pronouncements continue to be
designated as “International Accounting Standards” (IAS).
The term IFRS comprises IFRS issued by IASB; IAS issued by International Accounting
Standards Committee (IASC); Interpretations issued by the Standard Interpretations
Committee (SIC) and the IFRS Interpretations Committee of the IASB.
International Financial Reporting Standards (IFRSs) are considered a "principles-based" set of
standards. In fact, they establish broad rules rather than dictating specific treatments. Every
major nation is moving toward adopting them to some extent. Large number of authorities
requires public companies to use IFRS for stock-exchange listing purposes, and in addition,
banks, insurance companies and stock exchanges may use them for their statutorily required
reports. So, over the next few years, thousands of companies will adopt the international
standards. This requirement will affect about 7,000 enterprises, including their subsidiaries,
equity investors and joint venture partners. The increased use of IFRS is not limited to public-
company listing requirements or statutory reporting. Many lenders and regulatory and
government bodies are looking to IFRS to fulfil local financial reporting obligations related to
financing or licensing.
The Institute of Chartered Accountants of India (ICAI) being the accounting standards-setting
body in India, way back in 2006, initiated the process of moving towards the International
Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board
(IASB) with a view to enhance acceptability and transparency of the financial information
communicated by the Indian corporates through their financial statements. This move
towards IFRS was subsequently accepted by the Government of India.

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The Government of India in consultation with the ICAI decided to converge and not to adopt
IFRSs issued by the IASB. The decision of convergence rather than adoption was taken after
the detailed analysis of IFRS requirements and extensive discussion with various stakeholders.
Accordingly, while formulating IFRS- converged Indian Accounting Standards (Ind AS), efforts
have been made to keep these Standards, as far as possible, in line with the corresponding
IFRS and departures have been made where considered absolutely essential. These changes
have been made considering various factors, such as, various terminology related changes
have been made to make it consistent with the terminology used in law. Certain changes have
been made considering the economic environment of the country, which is different as
compared to the economic environment presumed to be in existence by IFRS.
Indian Accounting Standards (Ind-AS) are the International Financial Reporting Standards
(IFRS) converged standards issued by the Central Government of India under the supervision
and control of Accounting Standards Board (ASB) of ICAI and in consultation with National
Advisory Committee on Accounting Standards (NACAS).
National Advisory Committee on Accounting Standards (NACAS) recommend these standards
to the Ministry of Corporate Affairs (MCA). MCA has to spell out the accounting standards
applicable for companies in India.
The Ind AS are named and numbered in the same way as the corresponding International
Financial Reporting Standards (IFRS).
Initially Ind AS were expected to be implemented from the year 2011. However, keeping in
view the fact that certain issues including tax issues were still to be addressed, the Ministry
of Corporate Affairs decided to postpone the date of implementation of Ind AS.
In July 2014, the Finance Minister of India at that time, in his Budget Speech, announced an
urgency to converge the existing accounting standards with the International Financial
Reporting Standards (IFRS) through adoption of the new Indian Accounting Standards (Ind AS)
by the Indian companies.
Pursuant to the above announcement, various steps have been taken to facilitate the
implementation of IFRS-converged Indian Accounting Standards (Ind AS). Moving in this
direction, the Ministry of Corporate Affairs (MCA) has issued the Companies (Indian
Accounting Standards) Rules, 2015 vide Notification dated February 16, 2015 covering the
revised roadmap of implementation of Ind AS for companies other than Banking companies,
Insurance Companies and NBFCs and Indian Accounting Standards (Ind AS). As per the
Notification, Indian Accounting Standards (Ind AS) converged with International Financial
Reporting Standards (IFRS) shall be implemented on voluntary basis from 1st April, 2015 and
mandatory from 1st April, 2016. Later on, in 2016 MCA notified roadmap for NBFC
announcing implementation date for Ind AS. Similarly, Banking and Insurance regulatory
authority have issued separate roadmaps for implementation of Ind AS for Banking and
Insurance companies respectively.

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LIST OF IND AS
101 First Time Adoption of Indian Accounting Standards
102 Share Based Payment
103 Business Combinations
104 Insurance Contracts
105 Non-current Assets Held for Sale and Discontinued Operations
106 Exploration for and Evaluation of Mineral Resources
107 Financial Instruments: Disclosures
108 Operating Segments
109 Financial Instruments
110 Consolidated Financial Statements
111 Joint Arrangements
112 Disclosure of Interests in Other Entities
113 Fair Value Measurement
114 Regulatory Deferral Accounts
115 Revenue from contract with customers
116 Leases
1 Presentation of Financial Statements
2 Inventories
7 Statement of Cash Flows
8 Accounting Policies, Changes in Accounting Estimates and Errors
10 Events after the Reporting Period
12 Income Taxes
16 Property, Plant and Equipment
19 Employee Benefits
20 Accounting for Government Grants and Disclosure of Government Assistance
21 The Effects of Changes in Foreign Exchange Rates
23 Borrowing Costs

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24 Related Party Disclosures
27 Separate Financial Statements
28 Investment in Associates and Joint Ventures
29 Financial Reporting in Hyperinflationary Economies
32 Financial Instruments: Presentation
33 Earnings per Share
34 Interim Financial Reporting
36 Impairment of Assets
37 Provisions, Contingent Liabilities and Contingent Assets
38 Intangible Assets
40 Investment Property
41 Agriculture

Methods of recording in Financial Accounting

Business transactions are recorded in two different ways.
1. 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.
2. 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.
The modern system of book keeping is based on the double entry system. Therefore, we are
discussing this system only. The father of this system is the Lucas Pacioli. He gave the details
of this system in his book “De Compute Set Scripturise” in Italy in 1494 A.D. As per this system
every transaction of the business has double aspects/double effect. Therefore, every
transaction must be recorded at two places or accounts. If in a transaction someone is a giver,
some other will be a receiver. (This system of accounting is also called Mercantile System or
Western System of Accounting)
This system is so organized, accurate, complete and scientific that it is now adopted
universally.

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In the words of Keller, M.J. Keller in – Intermediate Accountancy, “The most common system
of accounting data for an enterprise is the double entry system. As the name implies, the
entry made for each transaction is composed of two parts, a ‘debit’ and a ‘credit’.
Importance of Double Entry System
As we know that double entry system of accounting is a systematic and scientific system of
accounting, so it offers a number of advantages. The following are the most important
advantages of the system:
1. Complete record of transactions: Under this system, recording of all transactions is done
whether related to personal or impersonal accounts.
2. Ascertainment of profit or loss: Under this system of accounting complete profit and loss
account can be prepared by which profit or loss of a particular period can be ascertained.
3. Mathematical check on accuracy: Every debit has a credit, so it is an accurate system as far
as mathematical accuracy is concerned which may be proved by preparing trial balance
4. Check for fraud: Scope of fraud is limited as it minimizes the chances of fraud because of
scientific system.
5. Ascertainment and knowledge of financial position of the business: Under this system, it is
possible to know the financial position of the business at any time. For this purpose, Balance
Sheet can be prepared any time.
6. Possibility of full control over business: Under this system full information is available which
enables the management to exercise full control over the business.
7. Easy accessibility of information: Under this system all information is easily available and
accessible which is very helpful and useful for the management.
8. Possibility of comparative study: Under this system, it is possible to prepare comparative
statement and also compare the previous year’s results with the current year’s result and
take corrective steps as and when necessary to improve the operational results.
9. Reliable information: Under this system information received is reliable.
Steps involved in Double Entry System
1. Preparation of Journal: Journal is called the book of original entry. It records the effect of
all transactions for the first time. Here the job of recording takes place.
2. Preparation of Ledger: Ledger is the collection of all accounts used by a business. Here the
grouping of accounts is performed. Journal is posted to ledger.
3. Trial Balance preparation summarizing: It is a summary of ledge balances prepared in the
form of a list.
4. Preparation of Final Account: At the end of the accounting period to know the
achievements of the organization and its financial state of affairs, the final accounts are
prepared.

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Rules of Double Entry System
As per the principles of the double entry system, each transaction of the business is recorded
at two places. In other words, two entries are made for every financial transaction of the
business.
If someone is giving something in the business, it has two sides – one is giver and other is
receiver. The system of double entry can be understood easily by an equation which is called
accounting. Following are some transactions of the business to explain it.
For example
1. Mr. Kamlesh started business with cash of 2,00,000.
In this transaction, one side cash is coming into business and in the other side capital is
being brought by Mr. Kamlesh. Thus:
Capital = Assets (Cash)
2,00,000 = 2,00,000
2. In the next transaction, if a plant of 50,000 is purchased in cash, this transaction will also
leave two sides. In one side cash is going and in other side plant is coming. In this situation,
the accounting equation will be as follows:
Capital = Plant + Cash (Assets)
2,00,000 = 50,000 + ( 2,00,000 – 50,000)

Accounting Terminology
It is important to be familiar with the terms used in accounting and understand its meaning
in order to understand accounting concepts and practices. Some of the important terms are
explained here:
Account - An account is a record used to properly classify the activity recorded in the General
Ledger. It is the summary of the various dealings that is transactions that occur between the
person and the business during a period. An account is a summary of relevant transactions at
one place relating to a particular head. It records not only the amount of transaction but also
their effect and direction
Accounting - Accounting is recording and reporting of financial transactions, including the
origination of the transaction, its recognition, processing, and summarization in the financial
statements

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Accrual Basis -Accrual basis is a method of accounting that recognizes revenue when earned,
rather than when collected and expenses when incurred rather than when paid. The college
uses the accrual basis for its accounting
Transaction: A transaction is an event that is measurable in terms of money and is capable of
changing the balance sheet equation. In simple words transaction involves the exchange of
money or money worth from one account to another account.
Types of transactions
1. Cash transaction: Ex- purchase of goods for cash
2. Credit transaction: Ex – Purchase of goods on credit
3. Paper transaction: Ex – Depreciation on fixed assets, bad debts written off etc.
Entry: an item written or printed in a diary, list, account book, or reference book.
Journal Entry - A journal entry is a group of debit and credit transactions that are posted to
the general ledger. All journal entries must net to zero so debits must equal credits.
Debit: the term is derived from the Latin word ‘debare’ which means what is due. So, literally,
the term ‘debit’ means the amount owed by or due from an account or charged to an account
for the benefit received by that account. When it is used as a verb, it is termed ‘to debit’
means to make an entry on the debit side or the left-hand side of an account.
Credit: the term credit is derived from the Latin word credere, which means trust or belief.
So, literally, the term ‘credit’ means the amount owed to an account for the benefit given by
that account in the belief that its value will be returned at a later date. It is termed ‘credit
side’ and credit side means the right-hand side of an account.
General Ledger -The general ledger is the collection of all asset, liability, fund balance (net
assets), revenue and expense accounts. The General Ledger contains all the accounts of an
enterprise. Since the final information pertaining to the financial position of a business
emerges only from accounts and, therefore, the Ledger is also called the Principal Book.
Folio: Folio means a page in a journal or ledger. Entering the folio number of the journal or
subsidiary book in the ledger and the folio number of ledger in the journal or subsidiary book
is called folioing.
Profit and Loss Account
This is prepared to see the loss incurred or profit earned by an enterprise within specific
period. This is usually made on a yearly basis.

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Trial Balance
In accounts every amount that is placed on the debit side of an account must have a
corresponding entry on the credit side of some other account. This is the technical aspect of
the principle of double entry system. This being the case, it is but natural that the total of all
debit balances should agree with the total of all credit balances. In fact, all businesses
periodically tabulate the debit and credit balances separately in a statement to see whether
the total of debit balances agrees with the total of credit balances or not. Such a statement is
known as Trial Balance. The accountant heaves a sigh of relief when the Trial Balance drawn
by him tallies because it is a good proof that the ledger has been correctly written up.
However, it is not a conclusive proof of accuracy.
Balance Sheet
The Balance Sheet is a statement summarizing the financial position of a business on a given
date. Its summaries on the right-hand side the assets of the business and on the left-hand
side the liabilities of the business including what the business owes to the proprietor viz., the
capital invested by him. The total of all the assets must be equal to the total of all the
liabilities.
So, an accountant has to write the cash book and journal first, and then post all those entries
written in cash book and journal to general ledger. Then he prepares the Trial Balance – the
most difficult job. After this he prepares the Profit & Loss Account and Balance Sheet. He also
has to reconcile the banks, prepares other report like sale register, inventory position, list of
debtors and creditors, purchase and sales returns etc. Doing all this work manually not only
requires lot of patience but it is a time consuming and very much laborious job.
Invoice: while making a sale, the seller prepares a statement giving the particulars such as the
quantity, price per unit; total amount payable etc. such a statement is called an invoice.
Voucher: A voucher is a written document prepared in support of a transaction. It is a proof
that a particular transaction has taken place for the value stated in the voucher.
Revenue - It is monetary value of products/services sold to customers during the period. For
example-tuition, fees, rentals, income from investment.
Expense - It is the expenditure incurred by enterprise to earn revenue. An expense is funds
paid by the college. For example-pay checks to employees, reimbursements to employees,
payments to vendors for goods or services.
Gain: It refers to the earnings which are generated through the non-routine business
activities. Ex- Profit on sale of assets, winning from a lottery.
Loss: Loss means something against which the firm receives no benefits. It represents money
or money’s worth given up without any return.
Profit: Profit is the excess of revenue over the expenses during the accounting period

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Capital: The amount of money or money’s worth say stock of goods, furniture, machinery,
etc. invested or introduced by the proprietor into his business at the time of commencement
of business is called capital.
Asset: As Asset is something a business ‘owns’. The term asset is derived from the French
word ‘assez’ which means enough. So, literally, assets mean enough or sufficient economic
resources owned by a business concern for carrying on the business.
Tangible Assets: land and building, machinery, plant, motor vehicle, furniture stock of goods
etc.
Intangible Assets: Rights in certain things or certain rights having money value called
intangible. Goodwill, patent right, trademarks
Liabilities: A liability is something a business ‘owes’ to someone. Liabilities mean claims of
outsiders against a business concern which bind the business concern to others.
Proprietor: A person who makes the investment and bears the risks connected with the
business is known as proprietor.
Goods: refer to merchandise, commodities, products, articles or things in which a trader
deals. In other words, they refer to commodities or things meant for resale.
Purchases: buying of goods by the business for selling them to his customer is known as
purchases.
Sales: When goods purchased by the business are sold it is termed as sales. It can be of two
types, cash sales and credit sales.
Debtors: may be a person who owes money to the business. He owes money to the business
because he has received some benefits from the business. A debtor constitutes an asset for
the business. Trade debtors, Loan debtor, a debtor for an asset sold on credit, a debtor for
the service rendered on credit.
Debt: the amount of a business transaction due from a person.
Bad debt: a debt which is irrecoverable
Doubtful debt: a debt, the realization or recovery of which is uncertain or doubtful.
Creditors: a creditor is a person to whom the business owes money.
Inventory (stock): inventory or stock refers to raw material, work in progress, finished goods,
consumables such as grease, lubricants etc.
Drawings: refer to cash, goods or any other asset withdrawn by proprietor from his business
for his personal, private or domestic use or purpose.
Discount: When customers are allowed any type of deduction in the price of goods by the
business it is called discount.

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Carried down (c/d) and Brought down (b/d): The term carried down is used in the ledger
account at the end of the accounting period. This indicates that the balance of the accounting
period has been carried down to the next period. The term brought down is used in the ledger
account at the beginning of the accounting period. This indicates that the balance of the
accounting period has been brought down from the previous accounting period.
Carried forward (c/f) and Brought forward (b/f): The term carried forward is used in the
journal at the end of each folio or page. This indicates that the total of the page or folio has
been carried forward to the next page of folio. The term brought forward is used in the journal
at the beginning of each folio or page. This indicates that the total has been brought forward
from the previous folio or page.
Solvent: having assets in excess of liabilities; able to pay one's debts
Insolvent: Having liabilities in excess of assets; unable to pay debts owed.
Purchase returns: A purchase return occurs when a buyer returns merchandise that it has
purchased from a supplier.
Sales returns: A sales return is merchandise sent back by a buyer to the seller

Accounting Equation
A business entity undertakes a series of transactions in the course of its activity. To carry on
its activities, it requires resources i.e., assets. These resources are acquired through the funds
gathered from two sources namely, creditors i.e., liabilities other than capital and ownership
funds i.e., capital. Business treats itself as separate entity from the owners and assumes the
fund contributed by the owners as a liability. Every business transaction affects its assets and
liabilities in such a way that after every transaction there will be equality between assets and
liabilities. Therefore, at any given point in time the total assets of the business will be equal
to the liabilities and capital.
Total Assets = Total Liabilities
Total Assets = Total other liabilities + Capital
Capital = Total Assets – Total other liabilities

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Type of Accounts
Classification of Accounts as per the Traditional Approach or English Approach
Personal Accounts: Accounts relate to natural person, artificial person and representative
persons.
Ex- Natural- Shyam A/c
Artificial- Shyam & co A/c
Representative- outstanding salary a/c
Real accounts: Accounts relate to the tangible or intangible assets
Ex- Tangible- Land A/c
Intangible- Goodwill a/c
Nominal accounts: Accounts relate to expenses, losses, profit & gains
Ex- Loss- Loss by fire a/c
Profit & gains – sales a/c, Discount received a/c
Expenses- Purchases a/c
Golden Rules of accounting
Personal account
• Debit: The Receiver
• Credit: The Giver
Real Account
• Debit: What comes in
• Credit: What goes out
Nominal account
• Debit: All Expenses & Losses
• Credit: All Income & Gain

Classification of account as per the Modern Approach, American approach or Accounting

equation-based approach
• Assets account: Accounts relate to tangible or intangible real assets; E.g.- Land A/c,
Building A/c, Cash or Banks A/c, Goodwill, Patents A/c, Investment A/c etc.
• Liabilities accounts: Accounts relate to the financial obligation of an enterprise
towards outsiders. Ex-Creditors, Bank overdraft, long term loans, outstanding expenses

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• Capital accounts: Accounts relate to owners of an enterprise;
• Revenue or Income accounts: Accounts relate to the amount charged for goods sold
or services rendered or permitting others to use enterprise resources yielding interest, royalty
or dividend. E.g. - Sales A/c, Discount received A/c, Interest received A/c etc.
• Expenses and Losses accounts: Accounts relate to the amount incurred or lost in the
process of earning revenue. E.g.-Purchases A/c, Discount allowed A/c, Royalty paid A/c,
Interest payable A/c, Loss by fire A/c

Types of A/c Debit if there is Credit if there is

Assets A/c Increase Decrease
Liabilities A/c Decrease Increase
Capital A/c Decrease Increase
Revenue A/c Decrease Increase
Expenses A/c and Drawings Increase Decrease
A/c

Classification of account as per the Modern Approach, American approach or Accounting

equation-based approach with example

S No Name of the account Type of account Reason

1 Furniture account Assets account Asset
2 Salaries account Expense account Expense
3 Outstanding wages Liability account Liability, i.e., wages due
to workers
4 Creditor A/c Liability account Account of a person to
whom money is due
5 Debtor A/c Asset Account of a person
from whom money is due
6 Stationery account Expense account Expense
7 Prepaid insurance account Assets account Insurance paid in
advance
8 Capital account Capital account Money brought in by the
Proprietor
8 Interest account Expense account Expense
10 Building account Assets account Asset
11 Purchase account Expense account Expense
12 Cash account Assets account Asset
13 Bank account Assets account Asset
14 Sales account Income account Goods sold generates
revenue
15 Commission received in Liability account Commission received in
advance advance
16 Discount given account Expense account Expense
17 Drawings account Drawings account It reduces capital

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18 Loan account Asset or liability account Loan granted or loan
borrowed
19 Repairs to machinery Expense account Expense
account
20 Stock or Inventory account Assets account Asset
21 Investment account Assets account Asset
22 Loss of goods by fire Expense account Loss or expenses
account
23 Motor vehicle account Assets account Asset
24 Goodwill account Assets account Asset
25 Depreciation account Expense account Expense
26 Bad debts account Expense account Expense
27 Bad debts recovered Income account Account of a gain or
account income
28 Bank overdraft account Liability account Account of a person from
whom money has been
borrowed
29 Purchase returns Contra-Expense account Reduces expense
30 Sales returns Contra- Income account Reduces Income
31 Postage account Expense account Expense
32 Charity A/c Expense account Expense
33 Carriage account Expense account Expense
34 Rent account Expense account Expense
35 Bills receivable account Assets account Asset
36 Bills payable account Liability account Liability
37 Bank deposit account Assets account Asset

*****

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