Transcript PRINCIPALS OF BOOK KEEPING.

JAIIB / Diploma in Banking & Finance
ACCOUNTING AND FINANCE FOR
BANKERS.
Book Keeping - MODULE – B
CA R. C. JOSHI
B.Com(Hons.),LL.B,CAIIB,FCA
DEFINITION AND SCOPE ACCOUNTING
STANDARDS.
• ACCOUNTING IS LANGUAGE OF BUSINESS.
• COMMUNICATE THE RESULT OF BUSINESS
OPERATIONS AND ITS OTHER ASPECTS.
• ACCOUNTING IS AN ART OF RECORDING
CLASSIFYING AND SUMMARIZING IN A
SIGNIFICANT MANNER AND IN TERMS OF
MONEY TRANSACTIONS AND EVENTS WHICH
ARE IN PART AT LEAST OF FINANCIAL
CHARACTER AND INTERPRETING THE RESULTS
THEREOF.
DIFFERENCE BETWEEN ACCOUNTANY
AND BOOKKEEPING.
• BOOK KEEKPING IS MERELY RECORDING THE BUSINESS
TRANSACTIONS IN BOOKS AND LEDGERS .
• ACCOUNTANCY IS WIDER CONCEPT: COMPILATION OF
ACCOUNTS IN SUCH A WAY THAT ONE IS IN A POSITION TO
UNDERSTAND STATE OF AFFAIRS OF BUSINESS.
• USERS OF FINANCIAL STATEMENTS ARE INCOME TAX DEPT.,
S.T DEPARMENT SHAREHOLDERS, INVESTORS,BANKS AND
FIS AND SO ON APART FROMMANAGEMENT OF ENTITY FOR
MAKING POLICY DECISIONS.
• IT IS IN THE INTEREST OF ALL THAT FINANCIAL
STATEMENTS REFLECT TRUE AND FAIR VIEW OF STATE OF
AFFIAIRS OF A BUSINESS ENTITY.
ACCOUNTANCY
• ACCOUNTANCY INVOLVES:
• SYSTAMATIC(including regulatory compliance)
CLASSIFICATION OF BUSINESS TRANSACTIONS
IN TERMS OF MONEY AND FINANCIAL
CHARACTER.
• SUMMARIZING : TRIAL BALANACE AND B/S
• INTERPRETING THE FINANCIAL
TRANSACTIONS.
PURPOSE OF ACCOUNTANCY
• TO KEEP A SYSTAMATIC RECORD
• TO ASCERTAIN THE RESULTS OF OPERATIONS
• TO ASCERTAIN FINANCIAL POSITION OF
BUSINESS.
• TO FACILITATE RATIONAL DECISION MAKING
• TO RAISE FINANCE.
• TO SATISFY REQUIREMENT OF LAW AND
USEFUL IN MANY RESPECTS.
CONCEPTS OF ACCOUNTANCY.
• COST CONCEPT: BUSINESS TRANSACTIONS ARE
RECORDED IN BOOKS AT COST PRICE.
• FIXED ASSETS ARE KEPT AT COST OF PURCHASE
AND NOT AT THEIR MARKET PRICE.
• EVERY TRANSACTION IS RECORDED WITH
PRESENT VALUE AND NOT ANY FUTURE VALUE.
• UNREALIZED GAINS ARE IGNORED.
• COST OF AN ASSET THAT HAS LONG BUT LIMITED
LIFE IS SYSTAMATICALLY REDUCED BY A PROCESS
CALLED DEPRECIATION. BUT SUCH DEPRECIATION
HAS NO RELATION TO MARKET VALUE OF ASSET.
MONEY MEASUREMENT CONCEPT
• MONEY MEASUREMENT CONCEPT: EVERY
TRANSACTION IS MEASURED IN TERMS OF
MONEY. VIZ PRODUCTION/SALES/WAGES ETC
ALL CONVERTED TO MONEY.
• INFLATION OR DEFLALTION NOT INCLUDED IN
VALUE OF ANY ASSET.
BUSINESS ENTITY CONCEPT
• THIS CONCEPT SEPARATES THE ENTITY OF PROPRIETOR
FROM THE BUSINESS TRANSACTION.
• CAPITAL CONTRIBUTED BY THE OWNER IS LIABILITY
FOR BUSINESS BECAUSE BUSINESS IS DIFFERENT FROM
OWNER.
• ANY MONEY WITHDRAWN BY PROP. IS DRAWINGS.
• PROFIT IS LIABILITY AND LOSS IS AN ASSET.
• ALL ENTRIES ARE KEPT DISTINCT FROM THE POINT OF
VIEW OF BUSINESS AND NOT FROM OWNER.
• AN ENTERPRISE IS ECONOMIC UNIT SEPARATE FROM
OWNER.
REALISATION CONCEPT.
• THIS CONCEPT TELLS US WHEN REVENUE IS
TREATED AS REALISED OR EARNED. IT IS
TREATED AS REALIZED ON THE DATE WHEN
PROPERTY IN GOODS PASSES TO BUYER AND
HE BECOMES LEGALLY LIABLE TO PAY.
• NO FUTURE INCOME IS CONSIDERED.
• GOODS SOLD ON APPROVAL WILL BE
INCLUDED IN SALES BUT ON COST ONLY.
GOING CONCERN CONCEPT
• BUSINESS IS A GOING CONCERN AND
TRANSACTIONS ARE RECORDED ACCORDINGLY.
• IF AN EXPENSE IS INCURRED AND UTILITY IS
CONSUMED DURING THE YEAR, THEN IT IS
TREATED AS AN EXPENSE OTHERWISE IT IS
RECORDED AS AN ASSET.
• RESERVES AND PROVISIONS ARE CREATED FOR
ANY FUTURE LIABILITY.
• DEFERRED REVENUE EXPENDITURE IS WRITTEN
OFF OVER A NUMBER OF YEARS.
• WHY LOSS IS SHOWN UNDER ASSETS SIDE ?
DUAL ASPECT CONCEPT
• EVERY TRANSACTION HAS DOUBLE EFFECT.
• ACCOUNTING EQUATION: ASSETS= CAP+
LIABILITY.
ACCOUNTING PERIOD CONCEPT.
• BUSINESS WILL RUN THROUGH LONG PERIOD. HENCE
ACCOUNTS OF EACH PERIOD IS RECORDED.
• RESULTS OF OPERATIONS CAN BE KNOWN PRECISELY
ONLY AFTER BUSINESS CEASES TO OPERATE AND
ENTIRE ASSETS ARE SOLD AND ENTIRE LIABILITIES PAID.
• BUT ONE IS INTERESTED IN KNOWING PERIODICALY
OPERATING RESULTS OF BUSINESS SAY YEARLY OR HALF
YEARLY OR QUARTERLY.
• HENCE ALL THE EXPENSES OR INCOME DURING THIS
ACCOUNTING PERIOD HAS TO BE TAKEN INTO
CONSIDERATION IRRESPECTIVE OF WHETHER THEY
ARE REALISED IN CASH OR PAID IN CASH.
ACCOUNTING FOR FULL DISCLOSURE
• DISCLOSURE OF MATERIAL FACTS.( MATERIAL
AND IMMATERIAL FACT IS A MATTER OF
JUDGEMENT)
• CONTINGENT LIABILITY
• MARKET VALUE OF INVESEMENTS.
• CHANGE IN METHOD OF
DEPRECIATION/VALUATION OF GOODS ETC.
CONVENTION OR PRINCIPLES OF
CONSERVATISM
• ALL POSSIBLE LOSSES TO BE TAKEN INTO
CONSIDERATION AND ANTICIPATED PROFITS
TO BE IGNORED.
• CREATION OF PROVISION FOR DOUBTFUL
DEBTS.
• VALUE OF STOCK
• CONVENTION OF CONSISTENCY: METHOD OF
DEPRECIATION.
DOUBLE ENTRY SYSTEM
• SCIENTIFIC SYSTEM:
• EVERY TRANSACTION HAS TWO ASPECTS.
• CRUX OF ACCOUNTANCY IS TO FIND OUT
WHICH TWO ACCOUNTS ARE EFFECTED AND
WHICH IS TO BE DEBITED AND WHICH IS TO
BE CREDITED.
JOURNAL
• JOURNAL RECORDS EACH AND EVERY
RECORD BY WAY OF JOURNAL ENTRY.
• BUT TO FIND OUT A TRANSACTION EFFECTING
A PERSON, EXPENSES ACCOUNT OR ASSET
ONE HAS TO TURNOVER ALL PAGES OF
JOURNAL.
• HENCE TRANSACTIONS ARE POSTED FROM
JOURNAL TO PARTICULAR PAGES OF LEDGER.
• HENCE JOURNAL CONTAINA COLUMN L.F
JOURNAL FORMAT
DATE
PARTICULARS
L.F
DEBIT RS.
CREDIT RS.
CASH BOOK
• CASH BOOK KEEPS RECORDS OF ALL CASH
TRANSACTIONS I.E CASH RECEIPTS AND CASH
PAYMENTS. ALL RECEIPTS ARE RECORDED ON
RIGHT SIDE AND ALL PAYMENTS ON LEFT SIDE.
• CASH BOOK IS BOOK OF ORIGINAL ENTRY.
CASH BOOK FORMAT
DR.
DATE
CR
PARTI
CULA
RS
VR.
NO
L.F
CASH
Rs.
BANK
Rs.
DISCO
UNT
DATE
PARTI
CULA
RS
VR.N
O.
LF
CASH
Rs.
BANK
Rs.
DISCO
UNT
RECORD KEEPING BASIS
• RECORDING: JOURNALISING AS AND WHEN TRANSACTION TAKES PLACE.
JOURNAL IS BOOK OF ORIGINAL OR FIRST ENTRY.
• CLASSIFYING: ALL ENTRIES IN JOURNAL OR SUBSIDIARY BOOKS ARE
POSTED TO LEDGER ACCOUNT(POSTING) TO FIND OUT AT A GLANCE THE
TOTAL EFFECT OF ALL SUCH TRANSACTIONS. LEDGER IS BOOK OF
SECONDARY ENTRY.
• SUMMASRISING: LAST STAGE IS TO PREPARE THE TRIAL BALANCE AND
FINAL ACCOUNTS WITH A VIEW TO ASCERTAIN THE PROFIT OR LOSS
DURING PARTICULAR PERIOD.
• IT IS CUSTOMARY TO USE TO AND BY WHILE POSTING LEDGER.
• BALANCING AN ACCOUNT MEANS EQUALIZING TWO SIDES.
• IF DEBIT SIDE OF ACCOUNT EXCEED CREDIT SIDE, DIFFERENCE IS PUT ON
CREDIT SIDE AND IT IS SAID TO HAVE DEBIT BALANCE AND VICE VERSA..
LEDGER
DR
DATE
CR
PARTICU
LARS
J.F
AMOUN
T(RS)
DATE
PARTICU
LARS
J.F
AMOUN
T RS.
Questions.
• CREDIT BALANCE IN CAPITAL ACCOUNT IS
LIABILITY OR AN ASSET:
• A. LIBILITY
• B. A REVENUE
• C. AN EXPENSE
• D. NONE OF THESE.
QUESTION
• AMOUNT BROUGHT IN BY PROPRIETOR IN
BUSINESS SHOULD BE CREDITED TO
• A.DRAWINGS ACCOUNT
• B.CAPITAL ACCOUNT OF PROPRIETOR.
• C.ASSET ACCOUNT
• D. NONE OF THE ABOVE
ANS: B
QUESTIONS
•
•
•
•
•
WAGES PAID TO RAJU TO BE DEIBED TO
A. RAJU
B WAGES
C. CASH
D. BANK
ANS: B
QUESTIONS.
• Q. CREDIT SALES MADE TO ROHIT TO BE
DEIBTED TO
• A. SALES
• B. PURCHASE
• C. CASH
• D. ROHIT
ANS: D
QUESTIONS
• FURNITURE PURCHASED BY ISSUING CHEQUE
• WHAT ENTRIES TO BE PASSED
• A. DEBIT FURNITURE AND CREDIT BANK
ACCOUNT.
• B.DEBIT BANK ACCOUNT AND CREDIT
FURNITURE.
• C.DEBIT FURNITURE AND CREDIT CASH.
• D.DEBIT BANK AND CREDIT FURNITURE SHOP
ACCOUNT
Ans:A
QUESTIONS
• ENTRY FOR RETURN OF GOODS, IN RESPECT
OF SALES EFFECTED ON CREDIT, SHOULD BE
CREDITED TO :
• A. SALES RETURN
• B PURCHASE RETURN
• C.CUSTOMER ACCOUNT
• D. GOODS ACCOUNT
Ans:C
MATCH FOLLOWING
A
B
A
RAMESH
1
REAL
B
DENA BANK
2
PERSONAL
C
RENT
3
NOMINAL
D
COMPUTER
4
REAL
E
LAND
5
NOMINAL
F
DISCOUNT
6
PERSONAL
QUESTION
•
•
•
•
•
WHAT IS JOURNAL ENTRY
A. ORIGINAL ENTRY
B. DOUBLE ENTRY
C DUPLICATE ENTRY
NONE
Ans: A
QUESTION
• TRANSACTION IN BANK COLUMN ON CREDIT
SIDE OF THREE COLUMNAR CASH BOOK
INDICATE
• A. AMOUNT PAID FROM THE BANK A/C.
• B.AMOUNT DEPOSITED IN BANK
• C.BOTH A AND B
• D. NONE
Ans: A
QUESTION
• PASS JOURNAL ENTRY:
• RENT PAID FOR OFFICE PREMISES RS.30000
OUT OF WHICH PART AMOUNT OF RS.10000
PAID BY CHEQUE AND REST BY CASH.
Ans: By RENT A/c. Dr. Rs.30,000
To Cash Cr.
Rs.20,000
To Bank Cr.
Rs.10,000
QUESTION
• PASS JOURNAL ENTRY:
• PURCHASED 100 SHARES OF CENTRAL BANK
OF INDIA FOR RS.100 PER SHARE.
Ans:By Investment A/c. Dr. Rs.10,000
To Bank Cr.
Rs.10000
QUESTIONS
• PASS JOURNAL ENTRIES:
• SOLD GOODS TO TENDULKAR RS.15000
A) When Sold on Cash.
B) When Sold on Credit.
A) By Cash A/c Dr. Rs.15000
To Sales A/c. Cr.
Rs.15000
B) By Tendulkar A/c.Dr. Rs.15000
To Sales A/c. Cr.
Rs.15000
QUESTIONS
• PASS JOURNAL ENTRY:
• DRAVID SOLD GOODS FOR RS.12000 TO us.:
A) On Cash Purchase
B) On Credit Purchase
A) By Purchase A/c Dr. Rs.12000
To Cash A/c Cr.
Rs.12000
B) By Purchase A/c. Dr. Rs.12000
To Dravid A/c. Cr.
Rs.12000
QUESTIONS
• PASS JOURNAL ENTRY:
• RECEIVED DUES( Which was sold on Credit at
Rs.15000) AMOUNT FROM TENDULAKAR AND
ALLOWED HIM DISCOUNT OF 10%
Ans: By Bank A/c. Dr. Rs.13,500
By Discount A/c Dr. Rs. 1500
To Tendulkar
Rs. 15000
QUESTIONS
• PASS JOURNAL ENTRY:
• PAID SALARY AND RENT RS.1200 AND 1500
RESPECTIVELY.
Ans:
• By Salary A/c. Dr. 1200
• By RENT A/c. Dr. 1500
To Cash A/c. Cr.
Rs.2700
QUESTIONS
• PASS JOURNAL ENTRY:
• KIRAN BECAME INSOLVENT. HE HAD TO PAY
10000 TO US. BUT WE RECEIVED ONLY 25
PAISE A RUPEE.
• By Cash A/c Dr. Rs.2500
• By Bad Debts Rs.7500
To Kiran A/c. Cr.
Rs.10000
QUESTION
• PASS JOURNAL ENTRY:
• PAID MONTHLY CAR INSTALMENT OF
PROPRIETOR’S PERSONAL CAR RS.12000
By Drawings A/c. Dr. Rs.12000
To Bank A/c Cr.
Rs.12000
QUESTION
• PASS JOURNAL ENTRY:
• BOUGHT FURNITURE FROM GODREJ AND
PAID BY CHEQUE RS.50000
• By Furniture A/c. Dr. Rs. 50000
To Bank Cr.
Rs.50000
QUESTION
• PASS JOURNAL ENTRY:
• DEPOSITED CASH IN BANK RS.1000
• BY Bank A/c. Dr Rs.1000
To Cash A/c. Cr.
Rs. 1000
QUESTION
JOURNALIZE FOLLOWING:
COMMENCED BUSINESS WITH Rs.15000 OF
WHICH RS.5000 WAS BORROWED FROM HIS
WIFE AT 12% INTEREST P.A.
By Cash Rs. 15000
To Capital A/c. Cr. Rs.10000
To Loan A/c Cr. Rs. 5000
QUESTIONS
• PASS JOURNAL ENTRY:
• PURCHASED GENERATOR FROM RAMA & CO.
RS.50000 on credit.
•
BY Generator A/c. Dr. Rs. 50000
(furniture)
•
To Rama & Co. Cr.
Rs.50000
QUESTIONS
• PASS JOURNAL ENTRY:
• PAID CARRIAGE AND CARTERAGE of Rs.1,000
ON GOODS SOLD TO NAYAN ON HIS BEHALF.
By Nayan A/c. Dr. Rs. 1000
•
To Bank Cr.
Rs.1000
QUESTION
• PASS JOURNAL ENTRY:
• A.BOUGHT GOODS FROM SATISH AT ONE
MONTHS CREDIT RS.6000
• B. OUT OF WHICH HALF WAS INVOICED TO
MR. RAM AT 30% ABOVE COST ON CREDIT.
A. Purchase A/c. Dr. Rs.6000
To Satish A/c. Cr.
Rs.6000
B. Mr. RAM A/c. Dr. 3900
To Sales A/c. Cr.
Rs.3900
Adjusting and closing entries.
• While preparing trading and profit and loss
account all expenses and income for the full
period are to be taken into consideration. If
expenses have been incurred but not paid
during that period ,liabilities for unpaid
amount should be created before the
accounts can be said to show the actual profit
and loss. All expenses and income should
properly be adjusted through accounting
entries.
Adjusting and closing entries.
• Trial balance is prepared from the books of
accounts of organiztion. Final accounts are the
final process of accounting. Once the trial
balance is prepared the books are half way
closed.
• Now all adjusting entries passed at the time of
preparing the final accounts have dual effect
i.e both debit and credit.
• Hence all adjusting entries passed after Trial
balance drawn will have two effects.
Adjusting and closing entries.
• One in either trading and profit and loss
account and other in Balance sheet or one in
trading account and other in Profit and loss
account.
Adjusting and closing entries.
• Some examples:
• Closing stock adjustment:
• Will be shown in asset side of balance sheet
and will be shown in credit side of trading
account.
• Goods lost by fire:
• Will be shown in credit side of trading
account.
• Will be shown on debit side of profit and loss
Adjusting and closing entries.
• Outstanding expenses:
• Will be shown in debit side of profit and loss
account.
• Will be shown in liabilities side of balance
sheet.
• Prepaid expenses:
• Prepaid expenses shown in Asset side ( Dr Pre
paid expenses) and Credit P&L Expenditure as
they do not pertain to current year.
Adjusting and closing entries.
• Depreciation: It is fall in value of asset due to
use or passage of time.
• Depreciation Dr.
• To asset account.
ACCOUNTING STANDARDS.
• INSTITUTE OF CHARTERED ACCOUNTANTS OF
INDIA RECOGNISING THE NEED TO
HARMONISE THE DIVERSE ACCOUNTING
POLICIES AND PRACTICES CONSTITUTED AN
ACCOUNTING STANDARDS BOARD IN THE
YEAR 1977.
• ASB FORMULATE ACCOUNTING STANDARDS
SO THAT COUNCIL OF ICAI MAY MANDATE
SUCH STANDARDS.
ACCOUNTING STANDARDS
• IT MAY BE NOTED THAT THE ACCOUNTING
STANDARDS MENS THE ACCOUNTING
STANDARDS AS PROMULGATED BY THE
ACCOUNTING (ACCOUNTING STANDRADS)
RULES ,2006.
• SO IT A PART OF COMPANY LAW NOW.
ACCOUNTING STANDRADS
• WHERE P&L AND B/S OF THE CO. DO NOT
COMLY WITH ACCOUNTING STANDRDS SUCH
COS. SHOULD DISCLOSE:
• THE DEVIATION FROM THE ACCOUNTING
STANDARDS:
• THE REASON FOR SUCH DEVIATION : AND
• FINANCIAL EFFECT IF ANY DUE TO SUCH
DEVIATION.
OBJECTIVES QUESTIONS ON
ACCOUNTING STANDARDS
• Q. MANDATORY ACCOUNTING STANDARD IF
NOT FOLLOWED REQUIRES AUDITORS WHO
ARE MEMBERS OF ICAI TO :
• A. QUALIFY THEIR AUDIT REPORTS.
• B. INFORM TO MANAGEMENT OF COMPANY
• C. INFORM TO ICAI
• D. NEED NOT REPORT ANYTHING.
• Ans: A
QUESTIONS
• SEBI AND COMPANY’S ACT REQUIRE AUDITORS
TO QUALIFY AUDIT REPORTS THAT
• A. THAT DO NOT CONFORM TO MANDATORY
ACCOUNTING STANDARDS.
• B. CONFORM TO MANDATORY ACCOUNTING
STANDARDS.
• C. DO NOT CONFORM TO ACCOUNTING
STANDARDS.
• D . NO RESPOSIBILITY ON AUDITORS.
• Ans: A
QUESTIONS.
• Q WHICH SECTION OF COMPANIES ACT CAST
RESPONSIBILITY ON BOARD OF DIRECTORS TO
COMPLY WITH MANDATORY ACCOUNTING
STANDARDS:
• A. SECTION 217(2AA)
• B. SECTION 215
• C. SECTION 125
• D. SECTION 44.
• Ans: 217(2AA)
DAY BOOK AND GLB POSTING IN A
BANK..
• IN THE CONTEXT OF ACCOUNTING IN BANKS
DAY BOOK OR CASH BOOK (BOTH ARE USED IN
SAME CONTEXT : SOME BANKS CALL IT CASH
BOOK SOME BANKS CALL IT DAY BOOK) HAS
SUMMARY OF TOTAL TRANSACTIONS IN
RESPECT OF EACH ACCOUNTING HEAD OF
BALANCESHEET AND PROFIT AND LOSS
ACCOUNT.
• THE AMOUNT OF EACH OF TRANSACTIONS
DONE IN BRANCH OF BANK IN THE DAY ARE
DAY BOOK AND GLB POSTING IN A
BANK..
• SUMMARIZED AND RECORDED HERE. FOR
INSTANCE ALL THE TRANSACTIONS IN SAVINGS
ACCOUNTS OR ALL TRANSACTIONS IN
CURRENT DEPOSITS ACCOUNTS ARE
RECORDED IN SUMMARIZED FORM WITH
REGARD TO BOTH DEBIT AND CREDIT SIDE.
WHICH ARE BROUGHT FROM
SUPPLEMENTARY BOOKS WHICH ARE AGAIN
SUB SUMMARY OF TRANSACTIONS IN AN
ACCOUNT SAY SAVINGS OR CD.
DAY BOOK AND GLB POSTING IN A
BANK..
• FROM DAY BOOK THE FINAL DEBITS AND CREDITS
ARE POSTED IN THE RESPECTVE LEDGERS WHICH IS
KNOWN AS GENERAL LEDGER. GENERAL LEDGER IS
NOTHING BUT BOOK CONTAINING INDIVIDUAL
LEDGERS FOR EACH INDIVIDUAL TYPE OF ASSET OR
LIABILITIES. FOR INSTANCE ENTIRE CURRERNT
DEPOSIT TRANSACTIONS ARE POSTED IN CURRENT
ACCOUNTING HEAD IN GENERAL LEDGER. SIMILARLY
FOR SAVINGS ACCOUNT OR FURTNIUTE ACCOUNT
OR STATIONERY ACCOUNT AND SO ON.
DAY BOOK AND GLB POSTING IN A
BANK..
• THE GENERAL LEDGER BALANCE IS VIRTUALLY
TRIAL BALANCE OF THE BANK ON A
PARTICULAR DAY. IT REFLECT THE BALANCES
OF ALL ACCOUNTS . WHILE PREPARING
BALANCESHEET AND PROFIT AND LOSS
ACCOUNT OF BRANCH OF BANK THE GLB
BALANCES ARE TAKEN.
• BALANCE SHEET OF ALL BRANCHES TOGETHER
WHEN CONSOLIDATED BECOMES THE
BALANCE SHEET OF BANK.
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES.
• The common set of accounting principles,
standards and procedures that companies use
to compile their financial statements. GAAP
are a combination of authoritative standards
(set by policy boards) and simply the
commonly accepted ways of recording and
reporting accounting information.
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
• GAAP are imposed on companies so that
investors have a maximum level of consistency
in the financial statements they use when
analyzing companies for investment purposes.
GAAP cover such things as revenue
recognition, balance sheet item classification.
Companies are expected to follow GAAP rules
when reporting their financial data via
financial statements.
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
That said, keep in mind that GAAP is only a set
of standards. What is important that its
underlying objectives are followed in true
perspective.
ACCOUNTING STANDARDS
• AS -1
• ALL SIGNIFICANT POLICIES ADOPTED IN
PREPARATION OF FINANCIAL STATEMENTS
SHOULD BE DISCLOSED.
• ANY CHANGE IN ACCOUNTING POLICIES
WHICH HAS MATERIAL EFFECT IN CURRENT
PERIOD OR IN LATER PERIOD SHOULD BE
DISCLOSED.
AS 2
• DEALS WITH DETERMINATION OF VALUE AT
WHICH INVENTORIES ARE CARRIED/VALUED
• INVENTORIES TO BE VALUED AT LOWER OF
COST OR NET REALISABLE VALUE.
• AVERAGE COST OR FIFO METHODS ARE
PERMITTED IN CASE WHERE GOODS ARE
INTERCHANGEABLE.
AS-3
• PREPARATION OF CASH FLOW STATEMENT
AND ITS PRESENTATION ALONGWITH
FINANCIAL STATEMENTS
• CASH FLOW TO BE CLASSIFIED BY
OPERATING/INVESTING/FINANCING
ACTIVITIES.
AS 4
• TREATMENT OF CONTINGENCIES AND EVENTS IN FINANCIAL
STATEMENTS.
• EG. CASES IN HIGH COURT OR PENALTY PROCEEDINGS UNDER
LAW.
• CONTINGENCIES MUST BE PROVIDED IF LOSSES CAN BE
ESTIMATED.
• EVENTS AFTER BALANCE SHEET DATE AND BEFORE APPROVAL
OF BOARD OF DIRECTORS SHOULD BE APPROPRIATELY
ADJUSTED IN VALUE OF ASSETS AND LIABILITIES.
• IF INSUFFECIENT EVIDENCE, DISCLOSURE TO BE MADE
• CONTINGENT GAINS ARE NOT RECOGNIZED.
AS-5
• DEALS WITH TREATEMENT OF PRIOR PERIOD
AND EXTRAORDINARY EVENTS.
• DEBITS OR CREDITS WHICH ARISE IN
CURRENT YEAR OR AS A RESULT OF
OMMISSION/MISTAKES IN PRIOR YEAR.
• ALSO EXTRAORDINARY ITEMS LIKE WRITING
OFF INVENTORIES.
• DISPOSAL OF FIXED ASSETS.
AS -6
• DEPRECIATION IS A MEASURE OF WEARING
OUT ASSETS.
• DEPRECIATION METHOD SHOULD CAREFULLY
BE SELECTED AND CONSISTENCY APPLIED FOR
YEAR TO YEAR.
• TREATMENT FOR REVALUATION OF ASSETS
• DEPRECIATION METHOD TO BE DISCLOSED.
AS-7
• ACCOUNTING OF CONSTRUCTION CONTRACTS
.CONTRACT FOR CONSTRUCTION EXCEED ONE YEAR
OR SO.
• ACCOUNTING ISSUES OF REVENUE, TREATMENT OF
ADVANCE RECEIVED, WORK IN PROGRESS, IN
FINANCIAL STATEMENTS.
• TYPES OF CONTRACTS: FIXED PRICE CONTRACT +
ESCALATION COST OR COST PLUS A FIXED FEE.
• AMOUNT AND METHOD USED TO DETERMINE
REVENUE RECOGNIZED.
AS-8
• STAND DELETED FROM 1.4.03 R&D EXPENSES
ARE NOW COVERED IN AS-10
AS-9
• BASIS FOR RECOGNITION OF REVENUE I.E
INCOME AND TIME WHEN INCOME IS SAID
TO HAVE ARISEN
• WHEN REVENUE RECOGNITION POSTPONED ,
DISCLOSURE OF CIRCUMASTANCES TO BE
MADE.
AS-10
• ACOUNTING OF FIXED ASSETS AND DISCLOSURE
THERE OF.
• COMPONENTS OF COST.
• PURCHASE PRICE: + IMPORT DUTY+TAXES+DIRECT
COST TO BRING ASSET TO ITS WORKING CONDITIONTRADE DISCOUNTS.
• FINANCING COST TO THE EXTENT SUCH COST RELATE
TO PERIOD AFTER SUCH ASSETS ARE READY TO USENOT TO BE CAPITALIZED.
• TEST RUN EXPENSES CAPITALIZED.
AS-11
• TRANSLATION OF ACOUNTING TRANSACTION IN
FOREIGN CURRENCIES IN REPORTING CURRENCY.
• FINANCIAL STATEMENT OF FOREIGN OPERATIONS
• FORWARD EXCHANGE CONTRACTS.
• EXCHANGE DIFFERENCE INCLUDED I.E PROFIT OR
LOSS TO BE DISCLOSED.
AS-12
• GOVERNMENT GRANTS RECEIVED BY AN
ENTITY.
• SUBSIDIES/CASH INCENTIVE/DUTY DRAWBACK
• DOES NOT INCLUDE ANY TAX EXEMPTION OR
TAX HOLIDAY.
AS-13
• ACCOUNTING FOR INVESEMENTS MADE BY
AN ENTITY.
• CURRENT AND LONG TERM.
AS-14
• AMALGAMATION OF TREATMENT OF
RESULTANT GOODWILL OR RESERVES
• TAKE OVER OF EXISTING BUSINESS AND
FORMATION OF NEW BUSINESS.
AS-15
• ACCOUNTING OF RETIREMENT BENEFIT TO
EMPLOYEES IN FINANCIAL STATEMENTS
• PF/PENSION/GRATUIITY LEAVE ENCASHMENT
POST RETIREMENT WELFARE SCHEME
• METHOD BY WHICH RETIREMENT BENEFITS
VALUED.
AS-16
• CAPITALIZATION OF BORROWING COST
ATTTRIBUTABLE TO
ACQUISITION/CONSTRUCTION OR
PRODUCTION WHERE QUALIFYING ASSET
TAKES SUBSTANTIAL PERIOD TO GET IT READY
FOR INTENDED USE OR SALE.
AS-17
• SEGMENT REPORTING
• REPORTING OF INFORMATION ABOUT
DIFFERENT TYPES OF PRODUCT AND
SERVICES OF AN ENTERPRISE AND ITS
OPERATIONS IN DIFFERENT GEOGRAPHICAL
AREAS.
• FOR ASSESSING RISK AND RETURN OF
DIVERSIFIED OR MULTILOCATIONAL
ENTERPRISE.
AS-18
• REPORTING OF RELATED PARTY RELATIONSHIP
AND TRANSACTIONS BETWEEN A REPORTING
ENTERPRISE AND RELATED PARTY.
• NAME OF RELATED PARTY AND RELATIONSHIP
WHERE CONTROL EXIST TO BE DISCLOSED.
AS-19
• LEASE: A LEASE AN AGREEMENT WHEREBY
THE LESSOR CONVEYS TO THE LESEE IN
RETURN FOR A PAYMENT OR SERIES OF
PAYMENTS THE RIGHT TO USE AN ASSET FOR
A AGREED PERIOD.
• ACCOUNTING POLICIES FOR LESSOR AND
LESSEE AND DISCLOSURE IN RELATION TO
FINANCIAL LEASE AND OPERATING LEASE.
AS-20
• PRINCIPLES & DETERMINATION OF EARNING
PER SHARE
• COMPARISON BETWEEN ENTERPRISES.
• NET PROFI(LOSS)/ WEIGHTED AVERAGE
NUMBER OF SHARES.
AS 21
• CONSOLIDATED FINANCIAL STATEMENT OF
PARENT AND SUBSIDARIES.
AS-22
• METHOD OF DETERMINATION OF AMOUNT
OF EXPENSES OR SAVING RELATING TO TAXES
ON INCOME IN RESPECT OF AN ACCOUNTING
PERIOD.
• DEFERRED TAX ASSETS AND LIABILITIES
SHOULD BE DISTINGUISHED FROM CURRENT
TAX ASSETS AND LIABILITIES
AS-23
• ACCOUNTING FOR INVESTMENT IN
ASSOCIATES.
AS-24
• DISCONTINUATION OF OPERATION OF
PARTICULAR SEGMENT.
• DISCLOSURE OF PRE TAX PROFIT OR LOSS
FROM ACTIVITIES ATTRIBUTABLE TO
DISCONTINUING OPERATIONS.
AS-25
• INTERIM REPORTING WHICH IS NOT FOR
COMPLETE REPORTING PERIOD.
• CONDENSED B/S
• CONDENSED P&L
• CONDENSED CASH FLOW STATEMENT
• EXPLANATORY NOTES.
AS-26
• OTHER THAN INTANGIBLE ASSETS COVERED IN AS22( DEFERRED TAX ASSETS)
• RELATE TO START UP COST ( EG ADVT ETC)
• R&D
• PATENTS AND COPY RIGHT
• GOODWILL
• DISCLOSURE: USEFUL LIFE OR AMORATIZATION RATE
• AMORATIZATION METHOD.
AS-27
• TWO OR MORE PARTIES UNDER TAKE
ECONOMIC ACTIVITY WITH JOINT CONTROL
• ACCOUNTING FOR JOINT VENTURE IN A
CONSOLIDATED FINANCIAL STATEMENT.
• DISCLOSURE: ANY CONTINGENT LIABILITY
INCURRED BY VENTURER AND ITS SHARE.
• ANY CAPITAL COMMITMENT AND ITS SHARE.
AS-28
• EQUITY OR DEBT LISTED
• TURNOVER EXCEED RS.50 CRORES
• PRINCIPLE OF THIS A.S IS TO ENSURE
CARRYING COST OF ASSET IS NOT MORE THAN
RECOVERABLE VALUE OF ASSET.
• NOT APPLIED TO INVENTORIES AS 2
• CONSTRUCTION CONTRACT AS 7
• FINANCIAL ASSETS AS 13 & DEF TAX AS 22
AS-29
• AS-29 DEALS
• ACCOUNTING FOR PROVISIONS,CONTINGENT
LIABILITIES AND CONTINGENT ASSETS WITH
EXECEPTIONS AS TO EXECUTORY CONTRACTS,
THOSE ARISING IN INSURANCE FROM
CONTRACT WITH POLICY HOLDERS AND
THOSE COVERED UNDER ANOTHER
ACCOUNTING STANDARD.
•
THANK YOU.