Professional Documents
Culture Documents
DAccounting Principles:
Accounting Entity Money Measurement Accounting Period
>Full Disclosure Materiality Prudence or Conservatism
Cost or Historical Cost Matching9 Dual Aspector Duality
Following Accounting Principles are not prescribed in syllabus but have been discused:
Revenue Recognition (Realisation) Verifable Objective
OAccounting Standards
Meaning of Accounting Standards
Nature of Accounting Standards
Concept of Accounting Standards
Objectives and Utility of Accounting Standards
International Financial Reporting Standards(FR5) and indian Accounting Standards (ind AS)
epreclated over their expected useful life. Accounting Principles are the basie o
ransactions
follow the accounting concepts because it enables the users of financial statements to
understand them better and in the same manner.
2.Accounting Conventions
Accounting Conventions are the outcome of accounting practices or principles being
followed by the enterprises over a period of time. Conventions may undergo a change
with time to bring about improvement in the quality of accounting information.
(i) Objective
Accounting Principles are objective if they are not influenced
the persons preparing the
accounting information. by the personal bias of
(iit) Feasible
Accounting Principles are feasible if they can be applied
without undue
complexity and cost.
Standards and Ind-AS
Accounting 3.3
Theory Base ofAccounting,
NECESSITY OF ACCOUNTING PRINCIPLES
Aeounting Principles uniformly. It means the same Accounting Principles are followed
L all entities in preparing their final accounts. Accounting information is meaningful
and useful for users of accounting intormation if the accounting records and financial
statements are prepared following generally accepted accounting principles.
the assumption, method once chosen and applied should be applied consistently year
after year to make the financial statements comparable.
Accounting Standard requires t
Thetheaccounting practice may be changed if the law
or
or
an obligation to pay
for them. Similarly, expense to pay 1or
t h e m 1s assumed
Entries are recorded in the books of account from the point of view of business.
4. Full Disclosure Principle
According to the Business Entity Principle, business is considered to be separate from
its owners. Business transactions are recorded in the books Disclosures should be made of items required under
law and those items which are
companies.
and Ind-AS
Accounting Standards
3.6 the user Theory Base ofAccounting, 3.7
decision of
the
5. Materiality Principle influence
AcCc Concept or Matching Principle
material ifit will or an
event,
8. Matching
disclosure is
importance
of an item
regarded as
mno Expenses incurred to earn the revenue shoutd be recognised as expense in the year
Anitem or relative should be
refers to "an item
Principle Association, the d e c i s i o n q revenue is recognised.
Materiality influence
Aceounting
of it
would
depend on its n an to determine profit periodicall t
to the
American
to believe
that knowledge
material or
not will natu An important objective of business is
de
is j u d g m e n t to
of the period with the
expenses to detord e
of that period
reason
is a whether an item revenues
ifthere investor." Thus, matter of exerciSing
be discl
to match
eorrect profit (or loss) for the accounting perod. Profit earned by the business durin
informed means that it is a
those
items
should
amount. It, thus, not. And only be material a Deriod can be correctly measured only when tne revenue earned during the d fis
and which is
and/or item may
material user. An
which item is
are
relevant to the example,
a m o u n t spene
ent matched with the expenditure incurred to earn that revenue, It is not relevant when
effect or
significant another. For the payment was made or received. Theretore, as per this concept, adjustments are
that have material for naving a turno
but may not be
material for
an
enterprise
over prepaid expenses
oneenterprise 2,50,000, is having
a turnover
sa of made for all outstanding expenses and
say an enterprise
repairs building,
of is material for even temporarily In brief, according to this concept, the expenses tor an accounting period are matched
ofsay?
10,00,000 but it not
closure ofa
production plant, ,say
R15,00,00,000. On other hand,
the against related revenues, rather thancash received and cash paid. This concept should
environmental
is material.
problem he followed while preparing thnancial statements to have a true and fair view of the
because of an and financial position of a business firm.
Conservatism Principle
not account anticipate profitability
6Prudence or and losses bul do
anticipated expenses 9. Dual Aspect o r Duality Principle
Provide for all Every transaction entered into has two aspects 'debit' and 'eredit' of equal amount.
incomes and profits described using the phra.
time
many a
Conservatism Principle is Stating different According to the Dual Aspect Concept, every transaction entered into by an enterprise
Prudence or all possible losses.
"Do not anticipate a profit, but provide for but not the
prospective profits, Th
has two aspects, a debit and a credit of equal amount. Simply stated, for every debit
losses
considerationall prospective statements do
not paint a betto there is a credit of equal amount in one or more accounts. It is also true vice versa. For
it takes into the financial
e n s u r e s that at lower of cost
application ofthis concept
closing stock is valued example, Rahul starts a business with a capital of F 1,00,000. There are two aspects
it actually is. For example, tor doubtful debts and
to the transaction. On one hand, the business has an asset
what
picture than
value (market value) or making
the provision d of
1,00,000 (cash) while
or net realisable
debts and discount. on the other hand, it has a liability towards Rahul of R 1,00,000 (capital of Rahul).
of bad
discount on debtors in anticipation and
expenses losses Thus, we can say
book value (ie., cost at which it was purchased minus depreciation provided up-to-date). 10. Revenue Recognition Concept
For example, an asset is
purchased for 5,00,000 and if at the time of preparing the Revenue is recognised when the'right to receive is established.
final accounts, even if its market value is
say, 4,00,000 or 7,00,000, yet the asset is considered to have
shall continue to be shown at its According to the Revenue Recognition Concept, revenue
purchase price of 5,00,000. into and the obligation to
Cost concept brings objectivity in the preparation and been realised when a transaction has been entered
statements. They are not influenced by the personal bias orpresentation of financial receive the amount is established. It is to be noted that recognising revenue
us take an example
to
judgments. and receipt of an amount are two separate aspects.
Let
Double Entry Book Keeping-Coe.
XI
2021 and
receives the Theory Baseof Accounting, AECöthtMg Standards andInd AS
3.8
in April, 2021. Revenue of this sales in February,
should
goods be recognised in February, amount
20o,t amou
is
u n d e r s t a n d it.
An enterprise sells 3.9
to receive the amou, ASB submits the draft Accounting Standards to the Council, the Institute af (c
obligation Accountants of India which issues it tor the comments
established (upon sales) in because legalLet
February,the2021. us take another example, Sun
nade i of the
when the goods are
sold
an enterprise has received an advance in February, 2021 for the sales to be momade
and professionals,etc. The Council of ICAI gives due government, industry
consideration to t comments
received by amending the draft Accounting Standards, if neceseethe
m it. In the case of Companie8,
2021, upon
sales having been Accounting Standards are recommended to Nati
Financial Reporting Authority (NFRA)
shall be recognised in May, an authority under
the
May, 2021,
revenue
amount
established in May, 2021,
is which notifies the standards to be applicable to companies Companies Act. 20o14
to receive the
because the legal obligation Tt should be noted that in the
case of companies, accounting standards notified under
the Companies Act, 2013 are followed.
Concept
11. Verifiable Objective
is recorded on the basis ofevidence Scan QR Code for the List of Standards notified
should be free from perso
Transaction
holds that accounting onal under the
The Verifiable Objective Concept are regarded as objecti
Companies Act, 2013
that are based on verifiable evidences
tive
bias. Measurements evidenced and supported by business
transactions should be
It means all accounting
memo, invoices5,
sales bills, ete MEANING OF ACCOUNTING STANDARDS
documents are cash
These supporting
documents.
Accounting Standards are a set of guidelines, i.e., Generally
Accepted Accounting
Principles, that are followed for preparation and presentation of Financial
ACCOUNTING STANDARDS
They are accounting rules and Statements.
procedures relating to measurement, recognition,
made the studu
treatment, presentation and disclosure of accounting transactions
business in the financial
and globalisation of statements issued the by Council of the Institute of Chartered
The rise in diversity, complexity diverse accounting policies beina Accountants of India.
information important and essential. But the
accounting and events made the accountin NATURE OF ACCOUNTING STANDARDS
followed and the accounting
treatment of transactions ting
also incomparable. A need was, thus, felt that certain
information less meaningful and Following points highlight the nature of Accounting Standards:
minimum standards should be universally
applicable, so that the accounting statements 1. Accounting Standards are
relevance, understandability and
guidelines providing the framework so that credible
have the qualitative characteristics of reliability, Financial Statements are prepared.
International Accounting Standards Committee (LASC) 2. The objective of setting
comparability. Therefore, an
set up in the
Accounting Standards is to bring uniformity in accounting
(now renamed as International Financial Reporting Board)
was year practices and to ensure transparency, consistency and comparability.
3. Accounting Standards are
1973. The objectives of this committee are: prepared keeping in view the business environment
and laws of the country. It, therefore, naturally means that the
1. to formulate and publish in public interest, Accounting Standards to be observed in
with
guidelines change
change in business environment and laws. It is because of this that Accounting
the presentation of Financial Statements and also their worldwide acceptance; and Standards are being revised from time to time. It may be noted that whenevera
conflict arises between law and Accounting Standards, law will
2. to work for the improvement and harmonisation of regulation of Accounting prevail
Standards and procedures relating to the presentation of financial transactions.
4. Accounting Standards are mandatory in nature.
5. Accounting Standards have also been made flexible in the sense that where
Institute of Chartered Accountants of ndia (ICA) and the Institute of Cost and
The
Works
alternative accounting practices are acceptable, an enterprise may adopt anyof
Accountants
of India (now Institute of Cost Accounting of India) are members the practices with a suitable disclosure. For example, an enterprise may charge
of this committee. depreciation on the Written Down Value Method or Straight Line Method.
ICAI had set up the
Accounting Standards Board (ASB) in April 1977 to identity cONCEPT OF ACCOUNTING STANDARDS
areas of
accounting where alternative and diverse practices were followed. ASB,
with a purpose to bring Accounting Standards prescribe the accounting rules and procedures for recognition,
uniformity in practices, was to develop draft Accounting
Standards keeping in view the business measurement, treatment, presentation and disclosure of accounting transactons in
environment and legal provisions of the financial statements. They are prescribed to be followed in preparing and presenting
country and after diseussions with various
Federations, etc.).
stakeholders (Government, Industry the financial statements, so that the financial statements are based on common rules
and principles for better understanding by the users.
Double Entry Book Keeping-CR
ng-CBSE X
Theory Base of Accounting, Accounting Standards and Ind-AS 3.11
3.10
STANDARDS
ACCOUNTING (oh At the end of the accounting period, 1actory rent of the
OF company is outstand:
O8/ECTIVES
for 10,000. nding
Accounting
Standards are:
to elimi.
with the aim to eliminate (v) At present, market price ot the nxed assets ot the company is very hiol
Objectives of and practices
the diverse
accounting policies compared to the bok value and directors are interested to show the fixed as
1. Minimise in accounts at their current market price. asse
8sets
extent possible.
them to the financial statements.
understanding of (uit During the year, the company purchased pencils of 50.
Promote better applied. These had all boo
2 Policies adopted and issued from stock and were still in use at the end of the year. been
significant Accounting
3 Understand statements of two or more
4. Facilitating
meaningful comparison offinancial tities
entits.
(vii) Directors are interested to adopt Written Down Value (WDV) Method of choworine
statements. depreciation in place of Straight Line Method (SLM) in the current ng
5 Enhancing reliabilhity of financial period to show higher profit. accounting
OF ACCOUNTING
STANDARDS (ix) A debtor who owes an amount to the company is likely to be
UTILITY declared insolvent.
You are required to (a) state which accounting
the following purposes: concept you would follow in
dealing with
Accounting Standards
serve each of the above problems and (6) explain briefly what each
basis of which financial statemens concept means.
1. AcountingStandards provide the norms on the ents Ans.
should be prepared. ) Money Measurement Concept
and presentation
uniformity in the preparation of
2. Accounting Standards ensure Transactions and events that can be measured in money or in money terms are recorded
the effect of diverse accounting practices. Tho
financial statements by removing more in the boks of account. Since, good industrial relations cannot be
Standards make financial
statements meaningil measured in money
application of Accounting terms, they will not be reflected in the accounts.
and comparable. (i1) Going Concern Concept
information
Accounting Standards create oonfidence amongStandardsofisaccounting
the users
3.
considered reliable h
The business will continue for an indefinite period and there is no
information based on Accounting
intention to close
Accounting the business or downsize its operations
significantly. The doubt of success does not
users of such information. lead to the inference that business will not continue for indefinite
the accounts. They help accountants period and also the
4. Accounting Standards help auditors in auditing intention that the business will be downsized significantly.
to follow uniform practices and policies. ii) Realisation Concept
Revenue is recognised when sale has been made or service has been
rendered.
LIMITATIONS OF ACCOUNTING STANDARDS Therefore, the revenue will be recognised when sale has been affected and not when
the order is placed.
1. Accounting Standards are man made. Hence, it does not pass the verification
(iv) Business Entity Concept
test alway Business is treated as a separate and distinct entity from its owners. The investment
2 Accounting Standards are based on business environment and laws of the country in another company's shares is by a shareholder who is distinct from the business.
Hence, they change often to meet the changes. () Accrual Concept
NOTE This and expenses
Accounting Standards (AS) are applicable on companies on which Ind-AS is not applicable or are not
concept recognises revenues as they are earned or incurred
respectively ignoring the date of receipt payment. Since, the factory rent of the
or
company is outstanding, it will be recorded in the books of account.
adopted voluntarlybythecompanies.
Problem. While preparing the accounts of company, following issues are faced: (vi) Historical Cost Concept
G Production Manager is interested in recording good industrial relations in the According to the Historical Cost Concept, the asset must be shown at its cost price,
accounts. which is the cost of acquisition less depreciation. As a good accounting practice, they
should be continued to be shown at cost.
(44) Long-term success of the company is doubtful due to market
competition. (vi) Materiality Concept
(2) Although sales have not yet taken place, few reliable customers of the
have placed large orders from which
company An item is recorded in the books of account on the basis of materiality. Purchased
huge profit is expected. stationery (Pencil) is in use but, the amount and nature is not material. Therefore, it is
(io) One of the shareholders of the
company has invested his savings in shares ou debited to Stationery Account.
another company.
Standards and Ind-AS
Theory Base of Accounting. Accounting 3.13
3.12
or Concept ar
similar way from
way from one (iD In ful6lling the objectives associated with ) and (i), to take accOunt
Assumption
be applied
in a
(ei) Consistency methods should be compared appropriate, the special needs of small and medium-sized entities andemert
and
accounting principles data reported in financial
All
statements
can
the
for
company economies; and
next so that be changed by but
period to the period. Method may
with that of another or loss. (i) To bring about convergence of national accounting standards and
one period
with its impact on
profit
Financial Reporting Standards to high-quality solutions.
International
disclosed along
itshould be
Convention o r Concept for all losses
es" possible
(ix)
Conservatism
no profit,
but provide Meaning
of debtors
is often stated as, "Anticipate against the amount
The concept for doubtful debts should be made IFRS are a set of accounting standards developed by the International Accountine
Thus, provision
STANDARDS (IFRS)
Standards Board (LASB), the international accounting standard-setting body. The
INTERNATIONAL
FINANCIAL
REPORTING
standards issued by IASB are based on sound and clearly stated principles. Therefore,
IFRS are referred to as principles-based accounting standards. This contrasts with
set of standards, like Indian Accounting Standards, which contain
Introduction
econom significantly more
economies into the
international
application guidance. These standards are often reterred to as rule-based accounting
national
Globalisation integrates the flow, ete. In this age
of globalisatio standards.
direct investments, capital also understand
through trade, foreign worldwide. We
businesses
a r e carrying
on Accounting Standards Issued by the IASC and Standing Interpretation Committee (SIC)
and technology, enterprises business enterprises around the
of business. Thus, IASC had issued 41 accounting standards, known as the International Accounting
that accounting is the language while sharing
financial information
different languages Standards (LAS), and a Framework for the Preparation and Presentation of Financial
world should not be speaking standards that can unify the
of single set of accounting Statements, out of which 12 LASs have been superseded and a large number of them
Therefore there is a need and compare worldwide
to understand have been revised. Standing Interpretation Committee (SI) was the interpretive
worldwide. I is difficult
accounting practice of accounting and
financal reporting
without a c o m m o n set body of the IASC. The interpretation of LAS issued by the SIC are described as
financial information would facilitate
quality accounting standards SIC-1, SIC-2, etc.
standards. The use single set
ofa of high market efficiency
economic decisions across
borders, increase
investment and other
Accounting Standards (LAS) were IASB has adopted all outstanding IAS and SIC issued by the IASC as its own standards
Thus, International
and reduce the cost of capital. International Financial Those IAS and SIC continue to be in force to the extent they are not amended or
withdrawn or superseded by
developed, which are being withdrawn by the IASB. New standards issued by the IASB are known as IFRS.
Reporting Standards (IFRS). New interpretations issued by the International Financial Reporting Interpretations
Committee (LASC) established in 1973 was Committee (IFRIC) are known as IFRIC Interpretations. When referring collectively
The International Accounting Standards
Standards Board (LASB) in the year 2001 which to IFRS, that term includes IAS, SIC, IFRS, and IFRIC Interpretations
replaced by International Accounting
now issues International Financial Reporting Standards (IFRS). LASB initially adopted
Assumptions in IFRSs
the accounting standards issued LASC to be replaced by IFRS upon their issuance.
by
The objective behind setting up the IASC and later LASB was to develop accounting The underlying assumptions in IFRS are:
standards that would be acceptable worldwide to produce and present financial 1. Accrual Assumption
information based an similar accounting standards. Thus, it is the process to improve The transactions are recorded in the books of account on acerual basis, ie, as and
financial reporting internationally. when they occur and not when the settlement of transactions takes place.
2. Going Concern Assump tion
Objectives of IASB
It is assumed that the life of the business is infinite, ie., the entity will continue its
The objectives of LASB are:
operations for an indefinite period.
( Todevelop, in the public interest, a single set of high-quality, understandable, and
3. Measuring Unit Assumption
enforeeable global accounting standards that
require high-quality, transparent, Measuring unit for valuation of capital is the current purchasing power. It means
andcomparable information in financial statements and other financial reporting assets should be reflected at current, i.e., fair value.
to help participants in the
various capital markets of the world and other users
of the information to make economic
4. Constant Purchasing Power Assumption
)
statements
produced
(c) Realisable (Settlement) Value
financial
The Assets are carried at the amount of cash or cash equivalents that could currently be ohtainad
Position
ancial
Statement ofFin
1.
contents of the
s t a t e m e n t are: by selling the asset in an orderly disposal. laabilties are carried at their settlement values
or
The elements that is, the undiscounted amounts of cash or cash equivalents expected to be paid to e
() Asset
controlled by the enterprise
as a result ofpast events and one the liabilities in the
normal course of business.
Assets are the
resources
Assets are carried at the amount of on the cost of the asset but it
is
cash or cashequivalents that would have to be Sheet. Thus, in effect, depreciation is not charged
paid if the same or an equivalent asset was valued as on that date and the difference in opening and closing valuation is
debited
at the undiscounted
acquired currently. Liabilities are carried
amount of cash or cash equivalents that would be and also liability will have
required w
or credited to Profit and Loss Account. It means every asset
settle the obligation currently.
to be valued or discounted every year to be shown in the Balance Sheet.
3.16
differences, there ces in
are differences a
a Theory BaseofAccounting. Accounting Standards and Ind-AS
However, besides the
above two principal numbe 3.17
ofareas and are
hereunder: Ind-AS are notified under the Companies Act, 2013 and are
( Listed on the Stock Exchange in India; applicable to companies:
Revenue Recognition
Service Sector (i) Having net worth of 250 crores or more; and
Inventory Valuation in
Income (i) Their holding, subsidiary, associate and joint venture companies
Accounting for Taxes on
the above
Besides companies, other companies may adopt Ind-AS voluntaril.
Useful Life of Intangible Assets The obiective behind issuing
Classification Ind- AS 1s toprepare hinancial statements of a
Current and Non-current the lines of internationally accepted
accounting principles and practices andcompanv.
comnl
on
Prior Period Items with the country's business environment and laws. mplyir
Extraordinary Items Difference between Indian Accounting Standards (Ind-AS) and
principal differences between Ind-AS and Accounting AccountingareStandards (ASI
The
Regrouping/Reclassification
1. Ind-AS are Principle based while
Standards as folows:
Impact on Fixed Assets Accounting Standards are Rule based
Balance Sheet is prepared by a company (on
to Schedule III of the
which Ind-AS is not applicable) according
India and lIFRS Companies Act, 2013. It means, a
() Expense Q.2. Which accounting principle requires that personal expenses of proprietor or partners
should be debited to Drawings Account?
It is a decrease in economic benefits in the form of outflows during the accounting period
Ans. Accounting Entity or Business Entity Principle.
as a result of business operations or decrease in value of assets or increase in
liabilities Q.3. Production at a factory hadto stop for a week due to a labour strike. The owner estimated
It results in decrease in the value of shareholders' equity. the loss of production and the likely loss of profit arising out of the situation. He directed
4. Statement of Cash Flow. the accountant to record the loss in the books of account. Is the owner correct in recording
5. Notes and Significant Accounting Policies. the likely loss? Give reasons.
Ans. No, the owner is not correct because transactions and events are recorded in the books
Valuation Principles of account if they can be measured in money terms and on the basis of evidences. In
the
of which
Ind-AS prescribes that every company shall value its financial assets present case, evidence to the effect of loss or profit does not exist on the basis
(securities) at the owner can measure the loss in money terms.
Fair Value whereas other assets can be valued at historical cost or at Fair Value. But,
recorded in the books of
whichever of the two methods is adopted, shall have to be
consistently
followed: Q.4. Under which accounting principle, quality of manpower is not
account?
Fair Value means the
price that would be received when an asset is sold or paid Ans. Money Measurement Principle
totransfer a liability in an orderlytransaction between market participants at the acquired by the Government on 1st April, 2000
measurement date. Stating differently, it is a Q.5. The assets of Standard Sugar Co. were
have
price which a buyer would be willing to and the company received compensation of R 10 crores. The company did not
a
any
pay for an asset and a seller would be ventured into any other
willing to accept. other business as on the date of acquisition and has also not
amount so received in a fixed
However, for the purposes of Ind-AS in many cases, fair value is business after acquisition of assets. The company placed the
the case of estimated, (except in a bank, which is lying deposited with the
bank as on date also. It has also
quoted financial securities) for which Valuation Rules are notified. deposit with
in the Court seeking higher compensation. Is the company going concern
a
filed a case
CHAPTER4
Bases of Accounting
LEARNING OBJECTIVES
This chapter would enable students to understand:
Bases of Accounting:
Cash Basis
Accrual Basis
Difference between Accrual Basis of Accounting and Cash Basis of
Accounting
The most significant function of
accounting is to determine profit earned or loss
incurred by a business
during an accounting period.
Profit earned or loss incurred by the business can be determined
either by 1. Cash
Basis of Accounting or 2. Accrual or Mercantile Basis of
Accounting.
1. Cash Basis of Accounting
Transactions are recorded in the books of account on cash
being received or paid.
Cash basis of accounting is a system in which transactions are recorded when cash
is transacted, whether received or paid. It means, is
of cash.
revenue recognised on receipt
Likewise, expenses are recorded as incurred when they have been paid. The
difference between the total incomes and total expenses represents Profit or Loss of a
business for the accounting period. Thus, when Cash Basis of
Accounting is followed,
Outstanding and prepaid expenses and income received in advance or accrued incomes
are not considered. Receipts and Payments Account prepared in case of Not-for-Profit
Organisations, such as charitable institutions, clubs and schools, is an example of
accounting on cash basis.
Outstanding Expenses are those expenses which have become due during the accounting
period but which have not yet been paid.
Prepaid Expenses are those expenses which have been paid in advance.
Accrued Income is an income which has been earned during the accounting period but has not
yet become due and, therefore, has not been received.
income Received in Advance is an income which has been received before it has been earned,
ie, goods to be sold or services to be rendered in future
Advantages
Advantages of Cash Basis of Accounting are:
() Itis a simple basis of accounting as adjustments for outstanding expenses, prepaid
expenses, accrued income and income received in advance is not made
4i) This approach is more objective as very few estimates and judgments are required.
(ii) This basis of accounting is suitable for those enterprises where most of the
transactions are on cash basis.
Double Entry book Keeping
true and
fair view of the and prepaid nses and
expenses
and accruej Gi) It reflects true profit or loss during the accounting period and, therefore, has wide
It does not
give a outstanding
0 because it ignores acceptability.
enterprise
ofan income
received in
advance.
accounting. Tt reflects true financial position at the end of the accounting period by adjusting
income and
Principle of
not follow
the Matching and revenue items and,
an outstanding expenses, prepaid expenses, accrued income and income received
(i) It does between capital as a
not distinguish advance, etc.
system does
two years.
(iin) This in the profits of the
consistency
result, there is
no Disadvantages
of Accrual Basis of
Accounting are:
During the financial
Illustration 1. year 2020-21, Ashok had cash sales of? 3,90,000 and credit.
st The disadvantages
80,000 i sales
This system is not as simple as Cash Basis of Accounting
for the year w e r e
2,70,000, out of which
the Cash Basis of Accout The accounting process is too elaborate.
of 1,60,000. His
be paid. Find out
expenses
Net Income
be considered under Cash
Basis of
2,
Accounting.
00,000 of Accounting.
expenses will not
Note: Credit sales and outstanding Solution:
Total Sales = Cash Sales 3,90,000) + Credit Sales 1,60,000) 5,50,000
2. Accrual Basis of Accounting
books of account when entered, whether cash i Less: Total Expenses for the Year 2,70,000
Transaction is recorded in the
received/paid or nof. Net Income 2,80,000
unlike under Cash Basis of Accounting, income 1s
Under Acrual Basis of Accounting, credit sale is recognised
Note: R80,000 expenses stillto be paid belong to this year and hence are to be charged to the revenue of this year
as income when it is
earned or accrued. For example,
recorded Similarly, credit sales of R 1,60,000 are taken in the year in which sales transaction is done
whether amount has been received
or not. Similarly, if an
as sale irrespective of the fact Illustration 3.
but payment has not been made, it will
be recorded as an
expense has been incurred Michael gives following information about his income and expenses for the year ended
for the month of March, 2021 has not been paid. It will still
expense. For example,
rent
31st March, 2021:
become due.
be recorded as an expense because it had Expenses paid 1,60,000
realisation and expiration and
Acerual Basis of Accounting is based on the concept of Expenses paid in advance (included in 7 1,60,000) 40,000
and Matching
follows two basic accounting principles, i.e., Revenue Recognition Principle Expenses not yet paid 20,000
the Accrual Basis of Accounting, outstanding and prepaid
Principle. Thus, under Income received 2,40,000
and income received in advance are
expenses are adjusted. Similarly, accrued income Income received in advance (included in 2,40,000) 30,000
recognised for ascertaining correct profit or loss for the accounting period. Income not yet received 24,000
It may be noted that the Companies Act, 2013 requires companies to follow accrual Determine his income if he adopts () Cash Basis of Accounting, and (ii) Accrual Basis
basis of accounting in maintaining the books of account.
of Accounting.
Advantages Solution:
The advantages of Accrual Basis of Accounting are: ) f Cash Basis of Accounting is adopted:
(0 ltis
more scientific compared to Cash Basis and hence is preferred
of Accounting Revenue:
by accountants. Income received (A) 2,40,000
(7) This basis of accounting shows a complete Expenses:
picture of financial transactions or tnt
business as it takes into account the effect of all transactions Expenses paid (B) 1,60,000
relating to a perou
as well as
adjustments like outstanding expenses, prepaid expenses, accru ed Net Income (Profit) as per Cash Basis (A- B) 80,000
income and income received in advance.
4.4 Bases of Accounting
Accounting is adopted: 4.5
Accrual Basis of
i) If Gi When Acerual Basis of Accounting is followed:
Revenue:
Income received 2,24
40.0 Revenue:
Sales (Cash +Credit) 5,00,000 +R2,00,000)
264 0
received
Add: Income not yet
Add: Income earned (Income Received+ Income earned but 7,00,00
2,330,4 000
advance not received 5,000+7 3,000)
in (A)
Less: Income received 8,000
(A)
Expenses 7,08,000
Purchases (Cash + Credit) ( 2,75,000+7 1,25.000)
Expenses:
Expenses paid
paid
1,60,0
20,00 Salary andWages (Paid + Outstanding) 44,000+7 4,000) 4,00,000
Add: Expenses not yet 48,000
Revenue 8. Suitability Accrual Basis of Accountingis suitablefor businesses Cash Basls of Accountingissuitable for Not-for
Cash Sales as it requires information that is complex. t can be Profit Organisations and Professionals such as
5,00,000 made available by Accrual Basis af Accounting chartered accountants, lawyers, etc, since they
Add: Income received require comparatively less information
Income received in advance
5,000
1,000 6,000
(A) 5,06,000 QUESTIONS
Expenses:
Cash Purchases
2,75,00 Higher Order Thinking Skills (HOTS) Questions
Salary and Wages paid
44,000 Q.1. Dr. Arvind Kishore, a homeopath doctor in practice has been advised by his Acountant
Electricity Expenses paid
Insurance Expenses Paid 11,000 to maintain his accounts on Accrual Basis instead of the presently followed Cash Basis
10,000 of Accounting. Do you agree with the advice of the Accountant? Give reasons.
Net Income (B) 3,40,000 Ans. No, I do not agree. Cash Basis of Accountingis more appropriate for Dr. Arvind Kishore
(Profit) as per Cash Basis (A- B) 1,66,000 because a medical practitioner receives his fee immediately after giving consultancy.