ACCOUNTING Evolution: Accounting can be traced back to the evolution of the number system itself.

It has been there in one form or the other, since the human beings started exchanging things. In ancient times the ³kings´ or ³monarchs´ used to maintain ³treasury records´. They used to keep records of the incomes and expenses to the treasury. However, the real beginning can be traced to the reference to double entry system in the book published about 500 years ago. It was the great Italian Mathematician, Luca Pacioli, who authored the book and got it published in 1494. Every transaction has two aspects. The double entry system provides for recording both aspects of a transaction in such a manner as to establish an equilibrium. Barter System: A system, in which goods are exchanged for goods, is called ³Barter System´. For example, A to A has some surplus wheat and he wants to have a goat. A to B has some goats and he wants some wheat. Now, when they meet, the wheat is exchanged for goat .This is called ³Barter´. This system of exchange was prevailing before the invention of money. Money: In order to overcome the limitations of barter system the ³money´ was invented. Money is a medium of exchange. In ancient times a piece of leather served as money. Later, gold coins, copper coins, iron coins with the stamp of the King etc., were used as money. In the modern times, paper money is used. For example, Rupees, dollars etc., in the form of printed paper act as money. Now A to A can sell wheat to some body and get money and with this money or a part of it, he can buy goat. A to A need not go in search of a person who can exchange goat for wheat. Definitions: Business: An entity which carries on trading /manufacturing and selling of goods and services for a profit is called µbusiness¶. The main intention of a business is to make profit, while trading /manufacturing and selling. For example, a retail shop owner who sells a variety of goods is carrying on business. Transactions: An event in which an exchange of things takes place or a condition occurs is called a transaction. For example, the cash paid for purchasing stationery, salary paid, interest received etc. Business transactions are the transactions relating to a business such as, sale, purchase, receipt of cash etc. A machinery is subject to wear and tear due to usage, which is a condition, considered as a transaction to be recorded.


Accounting: Accounting is a body of knowledge which provides essential information about the financial activities of an entity to facilitate informed judgments and decisions .It is connected with identifying how transactions and events should be described in financial reports. Book keeping: Book keeping is the part of accounting that records transactions and other events manually or with computers. It is the writing part of accounting. It is concerned with how the transactions are recorded in the books. Double entry system: For each transaction there are two aspects. A system which provides for the recording each of the two aspects of a transaction, separately, to facilitate equilibrium is called ³double entry system´. It is called double entry because two entries have to be made in the books for every transaction. Service Rendering: From the business point of view, rendering service refers to providing an utility to the customer for a ³fees´ or ³fare´, for example Laundry service, Transportation, consultancy by Doctors, professionals etc. Merchandising (Trading): An activity of buying and selling of goods and services is called ³Merchandising´/ ³Trading´. For example, a merchant buys Shoes from the manufacturer and sells them to the ultimate customers. He is merchandising /trading the shoes. Manufacturing: The process of converting raw materials in to the finished goods ready for use is called ³manufacturing´. The material is converted in to usable finished product with the help of labor and machines. Finally they are sold to consumers. For example manufacturing shoes in a factory. Profit: The difference in money between the selling price (being higher) and the cost of sales of goods or services in a business entity during a period is called ³profit´. However, if cost of sales is more than the selling price, the difference is called ³loss´. For example, if a retailer buys a pair of shoes at Rs. 80 and sells it for Rs.100, he makes a profit of Rs. 20. On the other hand, if he sells the same for Rs. 75, he incurs a loss of Rs. 5. FORMS OF BUSINESS OWNERSHIP A business can be carried on by either a single person or a small group of persons or very large group of persons. Accordingly, the main forms of business owner ship are 1) Sole proprietorship 2) Partnership firms 3) Joint stock companies /Corporations. They are discussed as below:



Sole proprietorship: A business is called proprietorship business, when it has only one owner. A single Person as owner carries on the business. Only one person contributes money, called capital, to the business. However, he takes the help of others for the manufacturing, Administration, & selling activities of the business. It is also called proprietary concern. In sole proprietorship form of business, the entire profit/ loss goes to the only owner. The criterion is not the size of the business but the number of owners. A sole proprietorship business may have billions of Rs. transactions also. A small petty retail store is also a sole proprietary concern. The condition is that only one person should be the owner of the business.

2. Partnership firms: A group of two or more persons to carry on a business and to share the profit or loss, under an agreement is called a ³Partnership firm ". In this form of organization two or more persons combine together and contribute capital to carry on the business and the profit/loss is shared among them. Partnership agreement is the most important binding factor. The partners enter in to an agreement relating to capital contribution, ratio of profit/loss to be shared, business to be carried on, interest on loan and capital, salary to partners, nature of liability, dissolution, admission of a partner, etc. These partnership concerns are governed by the ³partnership acts´ formulated by the government. 3. Share Company or Joint Stock Company or corporation: An association of two or more persons having a separate legal entity, to carry on a business, registered under a state or federal statute with a common seal and in which ownership is divided in to shares of stock, is called ³corporation´ or ³Joint Stock Company´ or ³Share Company´. When huge capital is required to carry on the business, this form of business ownership is formulated. The capital is contributed by a large number of persons called Share holders. Since there is a large number of share holders, the management is separated from the ownership .The business is carried on by a board of directors, elected by the share holders. These directors have to report the result of the business operations back to the share holders every year. Types of Business operations A business is carried on for the purpose of making profit. There are various types of business operations. They are: (1) Trading/Merchandising: Buying and selling of goods for profit is called Trading/Merchandising. A whole seller buys goods from manufacturers and sells them to retailers. The retailers buy goods form wholesalers and sell them to ultimate consumers. Generally, they deal with the finished goods/merchandise. In the process they make profit.


they want good return for their capital. They are also required to take managerial decisions. Under this. A careful verification and analysis of financial data reveals this information. They are required to know the financial results in the form of profit /loss. 2) Shareholders: In the joint stock form of organization. They are more concerned with the return of the amount lent and the interest income. Cement.e. Because. knowledge. health and wealth of the company. Following are the users of accounting information: 1) Management: The proprietor. the board of directors is all the people concerned with the management of the business. 5) Creditors and suppliers of goods and services: The creditors and suppliers of goods and services need to know the credit worthiness of the business i. can feel and utilize the service. time. they enquire about the financial condition of the enterprises. the growth and safety of the investment. what is the share of profit. USERS OF ACCOUNTING INFORMATION: Accounting is designed to suit the needs of many users. instead a utility-place. For this operation a Commission/Brokerage is charged. financial position and the progress made from year to year. is provided to the customer. One cannot physically see a service but only. (4) Agency/Brokering: This is a type of business operation where the buyers & sellers are brought together to exchange goods & services. Example: Manufacturing cycle. Accounting supplies crucial information to them. the capacity to pay for the supplies within the specified time. 4 . shareholders are the owners. They wish to know how the business is managed. physical goods are not supplied to the consumers. 4) Bank and financial institutions: Banks and financial institutions lend money to the business. 3) Investors: Individuals and institutions. the partners. Education. require information about organization.(2) Manufacturing & Selling: Conversion of Raw Materials in to finished goods ready for consumption is called manufacturing. The manufacturers sell the goods at a price which is fixed after adding a certain percentage of profit. Bank. (3) Rendering Service: This is a type of business operation where a service is rendered to the customers. Transportation. Shoes etc. consultancy etc. who want to take part in the ownership. For example. Therefore. They elect and authorize the directors to manage the affairs and report back. how is the financial position. It is a system to provide useful information to the users to make informed judgments.

For example. Therefore. industry and service need proper direction. The data relating to profit. amalgamations collaborations inter-firm comparison and bench marking of the firms and companies. for all practical purposes. from time to time. help the employee unions to bargain with the management to get bonus and other benefits. it is treated as independent of its owner. for accounting purpose. franchises and investments. Every business is assumed to have a continued existence with profit for an indefinite period of time. liquidity position and solvency status. 5 . money is collected from the public through taxes. or death. academics and accountants need the accounting information for the purpose of evolving standard accounting practices.6) Government: The government is responsible for the socio-economic development of a country. 2) Going Concern: When a business is started.Based on this assumption the accounting entries are made. 7) Employees: Employees need monetary and non monetary incentives to improve the productivity and relationship with the management. Accounting provides the information about the profit and financial positions of the businesses on the basis of which the tax is collected. 10) Standardization: The professional bodies. when a machine is purchased for business. Once the owner invests capital to start a business. the multinational companies need accounting information for collaborations. Various sectors like agriculture. every event of the owner with the business is treated as a transaction that must be recorded in the books of the business. Government provides regulation and formulates policies to show the path of development. the business is considered as a separate unit having its own identity. For these purposes. This is called business entity concept. 9) Other enterprises: Accounting analysis is very useful for mergers. a separate entity or unit or a person. distinct from its owner who created it. 8) International organizations: In the wake of globalization movement. The business is expected to be continuing even if the owner is changed due to transfer from father to son. it is expected to exist for a long period of time. the machine is expected to be with the business for an indefinite period of time and so it is recorded as an asset at purchase cost. A business cannot be physically seen. Accounting Concepts 1) Business Entity: When a business is started. This is called going concern concept (continuing business). It is conceptually and legally. It is run by natural persons.

120 each and 100 liters of oil at 20 Rs. bank statement for bank balance etc. evidence of the expense or income is required. Imagine expressing the information only in terms of 100 shoes and 100 liters of oil. every month.3) Objective evidence: In business transaction. sales for the period. commission received etc. For is the expression of their value in terms of Rs. For example. 2010 (a period of twelve months). namely Rs. 120 20 Total Total Amount Rs. 1 2 Details Shoes purchased Oil purchased Quantity 100 pairs 100 liters Unit Price Rs. are stated . For example. For example. if a business purchases 100 pairs of shoes at Rs. 6 . Ethiopian birr etc. Examples of evidences are invoice and vouchers for purchases. salary paid. rent paid etc. Indian rupees. individual judgments are made in some cases where estimates are involved. the details of other units of measurement such as number of shoes. to make an entry in the books. For example the year from April 1. every business enterprise will express the amounts in the country¶s currency. 2009 to March 31. Adoption of objective evidence principle will minimize the accounting errors. In case of Assets. Any way the user of the accounts must believe the entries. Each country will have its own currency as common unit of measurement. While recording and presenting accounting data. the usage is expressed in terms of expired cost and not the purchase cost of assets. 4) Unit of measurement: All business transactions are recorded on terms of money. In modern times. This is called accounting period. Comparing the revenue with that of expired cost during the period results in profit or loss. Does it convey any uniformity in information? Can you draw any inference out of it? Therefore. Objective evidence means. bias and frauds. No. business results are reported as frequently as needed. all these transactions are entered in a common unit of measurement. For example.000 2. per liter. 6) Matching revenue and expired cost: Expired cost refers to the money spent relating to an item in an accounting period. One cannot show the purchase invoice as the evidence for payment of salary. then the recording is done as below: Sr. the proof of a transaction that can be verified with the relevant support documents. that is significant. This helps to measure the success/failure as well as the health of the business. The universally accepted standard time period is ONE YEAR. 100 liters of oil. US dollars. say. The business profit and financial position are expressed for one year. However. 12. Revenue is the regular income that is generated out of business transactions.000 14.000 Though. Kenyan shilling. 5) Accounting period: The growth of a business has to be measured over a period of time frame. Japan yen. physical verification report with respect to materials acts as an evidence of material purchased and stored.

while valuing the inventory at the end of the year. wherever individual judgments are involved. In fact it saves labor. if any for safeguarding the future uncertainty. refers to the process of comparing the revenue with that of expense during an accounting period so as to determine the profit or loss for the business. If the method is changed in any year. Only necessary data are reported. the market price or the cost whichever is less. This will not facilitate to form an opinion about the progress of the business.01. The value has an effect on the profit position. change made only if it could be justified. care is taken to see that only lesser profit is shown in the current year. ignoring. Whenever the individual judgment is involved. then it is not worth the effort of recording. 7) Adequate disclosure: Accounting is a system to provide useful information to the user.If revenue is more than the expense the result is the profit and if the revenue is less than the expense. it could as well be rounded off to Rs. Comparison of the results is meaningful to the user only when the same accounting principles are followed year after year. same accounting practice is followed every year. if the amount is Rs. time and energy. The materiality concept speaks about the feasibility of recording and reporting of an item of expense or income. . In case of businesses. while presenting the financial results. 198. Some times it provides clarity also. However. 7 . 198. Therefore. The comparison helps to know the direction in which the business is moving. there is no 100% guarantee that there will always be profit. This is called consistency. Therefore.01. This is called conservatism concept. therefore. there are several methods of valuing the inventory. 10) Conservatism: Future is most uncertain. A higher value results in higher profit and lower value in lower profit. 0. the resulting profit is the result of change in the method and not necessarily due to business operations. This is called adequate disclosure. If the administrative and stationery expenses of recording a fraction of amount are more than the amount itself. For example. it should be disclosed. the practice followed is stated to avoid any misinterpretation. 8) Consistency: The result of one accounting period is compared with the result of the next accounting period to know the progress made. if the method of valuing inventory is changed. is taken. When non disclosure of an item does not affect the required information to be given. This is called materiality concept. 9) Materiality: In the business records. A standard practice is followed to disclose all the relevant material facts in the report. the result is loss. the amounts are normally rounded off to the nearest Rs. then there is no need to disclose the same. According to this concept. For example. Matching concept. No body can predict the future perfectly. lower value is considered. This is to reserve the rest of the profit. For example. It does not matter much. For example. if it has no significant impact. It is better to ignore.

Various properties are purchased to carry on the business. Assume that. the creditors and suppliers have the claim over the money or goods etc. normally. the cash coming to business forms the ³asset´ of the business and the owner has the right over this cash contributed by him called . partners and shareholders. we can establish the relation between the two as below: Cash (asset) = Capital (owner¶s equity). the owners have the right over the properties. 1) A started a business with cash of Rs. bills and amount receivables stock of goods. On credit means. Assets = Liabilities + Owner¶s Equity Now. started with cash.ACCOUNTING EQUATION A business is. Liabilities: That part of equities which is represented by the claims of the creditors is called ³Liabilities´. Accounting Equation: According to the double entry principle each transaction has two aspects and each aspect has to be recorded separately to provide for the equilibrium. For example. For example. For example. bills payable and amounts payable by the business on account purchases.000 and 2) the business has purchased supplies like stationeries ³on credit´ for Rs. plant and machinery. 8 . In the first. land etc. As the cash contributed is equal to owner¶s right over it. cash is not paid to suppliers now but will be paid later. cash at bank. Therefore. µcapital¶. Owner¶s equity: That part of the equities which is represented by the rights of the owner/s is called ³owner¶s equity´. For example. let us take an example. There are two transactions. cash in hand. owned by the business. They are defined as below: Assets: The cash and other properties owned and moneys receivable by a business enterprise are called ³Assets´. Equities: The rights or claims on the assets of the business are called ³Equities´. which forms the ³Owner¶s equity´.000. 10. In the course of the business. it may have to owe money to others and may have to receive money from others. capital contributed by the proprietor. 6.

In the second transaction. the above example can be summarized and presented in the equation form as below: Assets Cash + Supplies 10. is called ³Statement of accounting Equation´. Statement of accounting equation: A statement prepared to know the effect of each business transaction on assets and equities and balances at the end. As the amount of supplies is equal to the amount of the claim over the supplies.000). The relation among these can be stated as below: Liabilities + Owner¶s equity Assets = Equities The relation between the three can be expressed in the form of equation as below: Assets = Liabilities + Owner¶s equity This is called ³Accounting equation´.) coming in to business becomes the ³asset´ called µsupplies¶. Effect of transactions on the accounting equation: Each business transaction has two-fold effect on the accounting equation the effect could be as below: a) b) Increase in asset and increase in equities (liabilities or owner¶s equity) Decrease in asset and decrease in equities (liabilities or owner¶s equity). which sets the equilibrium according to double entry concept.000) is equal to the total of the right hand side of the equation (16.000. called µaccount payable¶.000 + 10. and the claim over this by the suppliers on this (since the money is not yet paid) becomes the ³liability´ . 9 . the relation between the two can be established as below: Supplies (asset) = Account payable (liabilities) The liabilities and owner¶s equity are together called as ³equities´. Observe that the total of the left hand side of the equation (16. Now.000 = Liabilities + Owner¶s equity = Accounts Payable + A¶s Capital = 6.000 + 6. the supplies (stationery etc.

rent received. sale of goods. The accounting equation is only a fundamental relation between the assets. 3) Balance Sheet and 4) Cash flow statement. Financial statements: The accounting statements prepared for communicating essential information to the users are called µfinancial statements¶. It includes items of actual or accrued payments. Such an effect will always maintain equilibrium. professional fees earned. The criteria are the regularity and recurring (repeating) inflow of revenue on a day-to-day basis. utilities paid etc. Note that the income on the sale of asset and lottery are not considered as revenues. Increase in one liability and decrease in another liability or owner¶s equity. interest received etc. the total of assets will be equal to the total of equities. payments for the purchase of assets /properties are not considered as expenses. For example. 10 . The excess of expenses over the revenues is called ³net loss´. After the record of each transaction. fares received commission received. Note that. 2) what is the financial position of the organization at the end of a period. They are also called expired costs. They are 1) Income statement 2) Statement of owner¶s equity. Financial Statements for Sole Proprietorships The users of accounting information need to know 1) what profit the organization has made during a period. Expense refers to the regular spending by the organization on day-today recurring transactions for earning revenue. liabilities. rent. supplies expense. and services. For example. It includes actual receipts or accrual due to be received. and owner¶s equity. The excess of revenue over the expenses is called ³net income´/ ³profit´. Revenue refers to the regular income to the organization on day-today recurring transactions. It does not indicate the financial operations. salary. 1) Income Statement: A statement prepared to show the result of operation with respect to revenues and expenses for a specific accounting period is called ³income statement´.c) d) Increase in one asset and decrease in another asset. 3) what is the progress made year after year.

Capital expenditure: The money spent other than towards the expenses are called capital expenditure. furniture etc. actual cash receipts and payments during the period and cash balance at the end of the period is called ³Cash flow statement´. liabilities and owner¶s equity as on the last date of the accounting period is called ³Balance Sheet´. money spent on purchasing assets such as. additional investment to and withdrawals from the business by the owner.Capital receipt: The money received other than the revenue is called capital receipt. 2) Statement of owner¶s equity: Finally. It contains the details of the balances of assets. The equity changes due to the revenues. money received on sale of assets. Cash flow statement: A statement showing the cash at the beginning of a period. liabilities and owner¶s equity on a specific date. Balance Sheet: A statement showing the position of assets. The ultimate effect is either a net increase or a net decrease in equity. 3) 4) 11 . For example. the owner of the business has to enjoy the result of business operations. In other words. For example. expenses. Only revenues and expenses enter the income statement directly. machinery. the difference between the capital at the end and the capital at the beginning of a period is either an increase or decrease in the equity. The statement prepared to know the increase or decrease in owner¶s equity over a period is called ³Statement of owner¶s equity´. land.

It may not help to draw any inferences. For example. liabilities and owner¶s equity are very few. Amount Title of the account is written on the top center. if there are hundreds and thousands of transactions with respect to each item. an account is divided in to two sides. Post ref. recording looks very clumsy and confusing. capital account etc.ACCOUNTING CYCLE FOR SERVICE RENDERING BUSINESSES Introduction: Business operations can broadly be divided in to three categories. which provide specific utility to the user. expenses. taxi service. A professional Accountant solves the problems of the clients. rent account. 2) Statement form(Standard form) 1) An account in T form is as below: Supplies account Account No Date Item Post Amount Date Item ref. Banks collect deposits and lend loans. for example. A place in the business book where all the related transactions of a specific item are recorded is called an ³Account´. of expense. goods and passengers are moved from one place to another place called place utility. the transactions relating to revenues. bank etc. For example. then it is better to put them all in one particular place to have a complete picture about that item. Imagine. For example. relating to a specific item. For example. education. plant account. revenue. there is a need to have a systematic approach that is uniformly acceptable.left hand side and right hand side. Therefore. calculating the tax liability. supplies account. They are 1) Service rendering 2) merchandising (trading) 3) Manufacturing and selling Service rendering businesses are the businesses. transportation. consultancy. liability and owner¶s equity. The systematic accounting approach is discussed as below: Account: When several transactions occur. etc. The entries are written on both the sides of the account depending on the effect of a transaction. In order to provide space for recording these two aspects. asset. assets. We have seen in the preceding pages that. Service can only be felt and cannot be seen. An account can be written in two forms: 1) T form. 12 . In transportation. Probably. A doctor cures the diseases. educational institutions make the students graduates. to have an idea of the total purchases during the period. supplies purchased on different dates can be put in one place of recording. account payable. Nature of an account: Each transaction has two aspects.

Account number: Each account is given a separate number for the purpose of identification. refers to the amount of debit in excess over the credit.2) An account in the statement form: Supplies account No: Date Item Account Post. the year. 13 . refers to the amount of credit in excess over the debit.ref. Balance: The amount remaining at the end of the period or at the end of each entry is called ³balance´. Debit balance. c) Credit entry: Credit entry refers to ³an entry´ on the an account. which is affected in written in this column. ways. b) Credit side : Credit side refers to the ³right hand account´. right side of side of an right side of Name of the account: The name of the account is written on the top center/left corner. ³to make an entry´ on the left hand side of an account. Posting reference (post. which is understood in three ways: a) To debit: To debit means. Item: The name of the opposite account. month.ref. Debit Credit Balance Debit Credit Debit and Credit: The effect on an account due to a transaction is expressed in two ways for recording. which is understood in three a) To Credit: To credit means ³make an entry´ on the an account. Date: In this column. b) Debit side : Debit side refers to the ³left hand side of an account´.): The page number of the journal (explained later) is written in this column. c) Debit entry: Debit entry refers to ³an entry´ on the left hand side of an account. Debit: This is an accounting term. and date on which the transaction occurred is written. Debit and Credit: The respective amounts are written in these columns. Credit balance. Credit: This is an accounting term.

14 . B) Income statement Accounts. There are two types: 1) Based on personal or impersonal: Personal accounts are the accounts indicated by the names of persons related to the business through business transactions. They can be i) Tangible Assets. ABC Company account etc. Ledger : A ledger is a book in which all the accounts are written . Furniture. the balance is found out after recording each entry. creditors. Some times a separate book is maintained for each account.Specified number of pages are ³earmarked´(kept apart) for each account depending on the number of entries. 2) Based on financial Statements: According to this. fares received account. Ato Clinton¶s account. plant account. a) Assets Accounts: The properties owned and accounts receivable by the business are called ³Assets´. Real or asset accounts are the accounts indicated by the names of the assets. commission received account. Nominal accounts are the accounts indicate d by the names of the expenses or revenues related to the business through business transactions. A¶s account. machinery account. related to the business through business transactions.Balancing an account is an act of determining the excess of debit or credit in each account. For example.This book will have a number of pages . CLASSIFICATION OF ACCOUNTS Classification of accounts refers to grouping of accounts according to some common characteristics. For example. Impersonal accounts are divided in to two parts. (i) Tangible Assets are the assets which can be physically seen . In T form. They are further divided in to a) Assets accounts. Account payable. For example.Machinery etc. and c) Owner¶s Equity Accounts.For example. sales account. land account etc. rent account. A) Balance Sheet Accounts: The accounts that appear in a balance sheet are called balance sheet accounts. b) Liabilities accounts. the balance is determined at the end of the period and in the statement form. debtors. etc. Land . salary account. A ledger is a book of ³second entry´. the accounts are classified as A) Balance Accounts. or ii) Intangible.

Current liabilities are the liabilities which are to be paid within one year. interest received. Example. For example. For example.interest payable etc. supplies expense etc. sales.For example. discount received etc. etc.(ii) Intangible Assets are the rights obtained by the business. They are paid out of current assets. good will etc. Capital account. interest paid. fees received. They are not physically seen but only felt. the assets are divided in to i) Current Assets and ii) Plant Assts i) Current Assets are the assets including cash. sales tax . which are converted in to cash within one year. land . For example. notes payable. b) Expenses accounts are the accounts relating to the moneys spent to get the revenues to the business . bills and notes receivables. such part of long term liability which falls due for payment within a year is categorized as current liability. b) Liabilities Accounts: The amounts that the business has to give to others are called ³Liabilities´. copy right etc. ending inventory. For example. ii) Plant assets. For example. Patent right. are the assets which are expected to be permanently with the . 15 .patent right. c) Owner¶s Equity Accounts: The Accounts that are related to the owners of the business are called ³owner¶s equity Accounts´. For example. prepaid expenses etc. cash. For the purpose of presenting in the balance sheet. depreciation. It means. a) Revenue accounts are the accounts relating to the regular incomes to the business. mortgage note payable. long tem loans. However. the business clears the outside debt first and afterwards owners can claim the residual property. (these are explained at a later stage). They are further divided in to a) Revenue Accounts b) Expenses Accounts. salary. B) Income Statement Accounts: The accounts that appear in the income statement are called income statement accounts. ii) Long term Liabilities . They are also called ³Fixed assets´. The owner of the business has the last claim over the properties. They are not expected to be sold within one year.Long term liabilities are the liabilities which are due for payment beyond an accounting period. Accounts payable. rent. Drawings Account etc. There are two categories: i) Current Liabilities .

Debit what comes in. decrease. The gap between a transaction and the ledger is filled by a book called ³Journal´. Post. credit the giver. Date Account Title/Description Page No. Personal Account Real Account Nominal Account The effect of a transaction is as below: Assets: Liabilities: Owner¶s Equity: Owner¶s drawing: Revenues: Expenses: Debit Debit Debit Debit Debit Debit increase decrease decrease increase decrease increase Credit Credit Credit Credit Credit Credit decrease. Debit the receiver. It is not advisable to directly enter the transactions in to the ledger accounts situated in different places in a ledger. Debit All expenses and losses Credit All incomes. increase. there is a need for an intermediate device. decrease. the accounts are given individual code numbers. credit what goes out. Every day several transactions take place. It is a book of ³Prime entry´.No.ref. Debit and Credit Rule: General Rule Debit the Account which receives. A transaction may not relate to an immediate previous transaction. increase.Code or Index numbers: For the purpose of easy identification. A journal is a book in which the transactions are first entered in the chronological order in which the transactions take place. increase. Therefore. Credit the account which gives. gains and profits. JOURNAL: Many transactions occur during a period. Debit Credit Sl No: In this column the serial number of the transactions are written. Format of a two column journal: Journal Sl. 16 .

ref. if the total of debit is equal to total of credit. At the end of an accounting period. Account Title/Description: The names of the account to be debited and credited are written in this column. A separate space (page) is provided for each account in the ledger. date of the transactions are written here. the next step in the accounting cycle is to transfer this entry to the respective account in the ledger.Date: The year. that is. A small description of the transaction could be written in the next row which is called ³Narration´. However. is called ³passing the entries´. 2) Identify only the two relevant accounts affected by the transaction. whether the amount in the account is increasing or decreasing. in the beginning. For example. 4) Write the serial number. 5) Write the amount of debit and credit against the respective accounts and in their columns. then there will be no balance at all. all the cash related entries in the journal on different dates are posted to cash account in the ledger. Post. month. The ending balance of an account becomes the opening balance of that account in the beginning of the next period. Passing the entries in a journal: The process of entering the transactions in a journal in a chronological order . or a year. that is Nil balance at the the order in which they occur. 3) Apply the rule and decide which account to be debited and which to be credited. Debit and credit: The amounts are written here. This is an act of grouping the related entries. write the name of the account to be credited (opposite account). Compound Journal entry: When two or more accounts are debited and credited simultaneously. a month.that is . 17 . write firstly the name of the account to be debited and below that in the next row. Or ³Journalizing´. Posting: The process of transferring the entries in the journal to the respective accounts in the ledger is called ³Posting´. the balance is shown in each account. month and the date and in the account title column. Steps: 1) Go through the transactions one by one.: (posting reference):The account number of each account is written here. The entries in an account give the complete picture about what is happening with respect to that account. with a small space left. year. then such a journal entry is called ³Compound Journal Entry´. Posting the journal entry to ledger: After passing the entry in the journal. say. A consolidated picture of cash is obtained at one place.

7) Finally. Supporting documents like purchase invoice. and write the amount in the amount column of debit side. Accounting class. 18 . Distinction between Journal and Ledger Particulars Purpose Nature Journal Book for recording journal entries Two columns. 5) Write the year. 4) Repeat this for all the other entries.Steps: 1) Provide enough place for each account in the ledger book. debit and credit or four columns debit. Book of second entry Order of transactions relating to respective account Bridge between the journal and the trial balance. credit and balances. payroll etc Ledger Book for recording ledger accounts Two sides. month and date in the date column. take the account to be credited. go to the relevant page number in the ledger and enter in the credit side of that account. 2) After passing an entry in the journal. 6) Write the page number of the journal in the post ref. at the end of the period(in case of T form account) or at the end of each posting (in case of Statement form ) . Journal entries Entry Order Bridge Reference Comparison : Journal is like a general assembly of all the students in a college auditorium and ledger account is like a class for each faculty such as. Management class. 3) Next.determine the balance and write this balance amount in the debit side(column) or credit side(column) as the case may be. go to the relevant page in the ledger enter in the debit side the name of the opposite account in the account title column. the account to be debited. construction class etc. column of the respective account in the ledger. Automotive class. one for debit and another for credit Book of original or prime or first entry Chronological order of transactions in general Bridge between transactions and the ledger. the name of the opposite account in the account title column and write the amount in the credit column. take first.

While performing these tasks errors may occur. 3) Find the total of debit column and credit column. Jan. posted to accounts and all the accounts are balanced properly. Thus a trial balance helps to trace the error of arithmetic accuracy in the accounting. If there is any error at any point of entry. account number. 2) to get the accurate financial results. This is also called ³Pre-closing trial balance´. amounting Rs. posting by another and so on. A doctor has provided service to a patient on Dec. ACCOUNTING CYCLE Basis of reporting accounting data: During an accounting period several business transactions take place. A trial balance acts as a bridge between ledger accounts and the financial statements. They must be equal. When all the transactions are correctly journalized. debit balance and credit balance. It is to check this that a trial balance is prepared as on the last date of the accounting period The trial balance contains the names of all the accounts and their respective debit and credit balances. It contains the ending balances of all the accounts. the question arises as to how to report the accounting data. the debit total must be equal to credit total. there are two bases for reporting the data. Cash is received for revenues and cash is paid for expenses. the debit total will not be equal to credit total. Debit column total is equal to credit column total so that the equilibrium is established. next year. This is the case of revenue earned for the year but not actually received in that same year. cash might not have been actually received. But the patient has requested the doctor that he would pay the money in the next month. They are: 19 . In large firms. Each task is performed by a different accounting clerk. Journalizing could be done by a clerk. for two important reasons:1) to uphold the purpose of double entry principle. assume that the accounting period is Jan 1 to Dec31. It is prepared as on a specific date for the period ended and not for the period. Accordingly. even the journalizing task is shared by several persons. Under such circumstances.10. Errors could occur at the time of journalizing or posting or at the time of balancing. It becomes necessary to verify the accuracy of the entries made. i. 100. For example.e.TRIAL BALANCE Every day numerous transactions are entered in the journal and posted to ledger accounts. Steps: 1) Draw a Trial balance providing columns for serial number.. account balances. Similarly the expenses are incurred in a year but paid in the next year. 2) Transfer the balance in each account to the trial balance to the appropriate places. during an accounting period. Some times though revenues are earned. A statement prepared at the end of an accounting period to verify the arithmetical accuracy of the amounts in the books is called ³Trial Balance´.

Other examples are prepaid insurance. shown in income statement and supplies stock unused at the end is called ³supplies on hand´. Adjustments: At the end of an accounting period. Supplies used is called ³supplies expenses´. the accounting practice is to record the exact amount of cash received and paid during the period. Accrual basis: Under this.Similarly. 20 . irrespective of whether revenue is earned or not and expenses are incurred or not. Therefore. cash paid may be more or less than the expense incurred. prepaid interest. supplies remaining unused at the end of the period is Rs. Illustration: Assume that the supplies purchased during a period (say.200). 300 (1. They are subject to wear and tear due to usage. before preparing the financial statements . The gradual reduction in the value of an asset due to usage is called ³depreciation´.the actual receipt and payment of cash is important. Therefore .500 1. This also provides for ³matching´ the revenue with the related expenses. depreciation etc. They are called deferrals because the recognition of expense or revenue is postponed (deferred) for the next is necessary to determine the exact amount of revenue earned and expenses incurred for the period. The practice is to express this rate of reduction in the form of percentage.500. revenues and expenses are reported on the basis of actual receipt and payment of cash. Most of the businesses use the accrual basis for reporting accounting data. amounted to Rs. revenues and expenses are reported on the basis of revenue earned and expenses incurred in the period . are called ³deferrals´. They act as bridge between the trial balance and the adjusted trial balance. shown in the balance sheet as current asset. Case (i): Prepaid expenses: the expenses which are already paid but not actually used by the end of the period are called ³prepaid expenses´.Cash basis: Under this. 1.irrespective of whether cash is received or not and cash is paid or not.200. Therefore .earning of revenue or incurring of expense is important and not the actual receipt or payment. January to December) amounted to Rs. Because. But the actual supplies consumed by the end of December. The process of bringing the amounts up to date for the accounting period is called ³Adjustments´. Cash received may be more or less than the revenue earned . Depreciation: The plant assets are continuously used for the purpose of business operations to get revenues. 1. These adjustments are discussed as below: A) Deferrals: The cases where i) cash paid is more than the actual expense of the period and ii) cash received is more than the actual revenue earned of the period.

000. Case (ii): Revenue received in advance (revenue unearned): Revenue which are already received but not actually earned by the end of the period are called ³revenue received in advance´ or ³revenue unearned. Other examples are. that is still to be paid.000(30.000-3. 5. 10. is shown as salary payable under current liabilities. etc. and shown in income statement as salary. Illustration: Assume that the rent received is Rs. Illustration: Assume that the interest for the year on the note receivable amounted to Rs. 2.000 is shown in income statement and rent unearned. the salary still to be paid.This is shown in the balance sheet as plant asset. stationery purchased on credit. The cost of the machine at the end of the period is Rs. the depreciation could also be credited to ³accumulated depreciation account´ and shown as current liability in the balance sheet. Therefore. 1.000. 27.000 (5. However.000-10. 1. insurance premium received in advance.000). 30.000.500 (8. the rent received in advance is Rs. the depreciation for the year is 10% of Rs. Case (ii): Accrued revenue: The revenues which are already earned but not actually received at the end of the period are called ³accrued revenue´.000 X 12 = Rs. 1.000 per month is Rs.000). Salary for the period Rs. Illustration: Assume that the salary for the year at Rs. but the actual rent for the period is only Rs. Therefore. 12. Salary accrued. Therefore. 1. Case (i): Accrued expense: the expenses which are already incurred but not actually paid at the end pf the period are called ³accrued expenses´. college fees received in the beginning of the year. But actual salary paid is only Rs. 12. 3. This depreciation is an expense for the period and shown in income statement.000). B) Accruals: The cases where. i) cash paid towards an expense is less than the actual expense for the period and ii) cash received towards a revenue is less than the actual revenue earned for the period are called ³accruals´. rent payable.000-6. Therefore. the interest still receivable (accrued) for the period is Rs. 6. 21 . 4. Rs.Illustration: Assume that machinery is purchased for Rs. called ³salary payable´ is Rs. 4. Rs.000.000 that is. 8. Rs.500). Depreciation rate is 10% per year. Other examples are. 2. called ³book vale´ .500 at the end of the period.000. Rent earned. subscriptions to magazines etc. They will be paid or received in the next period.000 but the actual interest received is only Rs.000-4.000 during the period.000. 30.000. whether paid or not. is an expense.000. They are called accruals because they are due for payment or due to be received. Rs.000 (12. 1. is shown in the balance sheet as current asset.

fares WORK SHEET WITH ADJUSTMENTS Prior to the preparation of financial statements it is necessary to incorporate all the adjustments in to the trial balance.500.Interest for the year. commission receivable. verify arithmetical accuracy . 1. bridge the gap between the adjustments and financial statements. Other examples receivable etc. 22 . Draft income statement. is a revenue whether received or not and shown in income statement as interest. and Draft balance sheet. arrange the data systematically. It helps to: a) b) c) d) e) record all the adjustments . Rs. are. Adjustments. provide a basis for preparing balance sheet and income statement. is shown as current asset. consultancy fees. A worksheet contains 10 columns.000. Interest receivable Rs. two columns each for 1) 2) 3) 4) 5) Trial Balance. A sheet prepared to make all the adjustments is called ³worksheet´. 8. It is a working paper. Adjusted trial balance.

Chairman committee of Corporate Governance for Financial Disclosures Also initiated by Chair person of NACAS What are Accounting Standards? Accounting Standards are the statements of code of practice of the regulatory accounting bodies that are to be observed in the preparation and presentation of financial statements. This paved the way for Accounting Standards to come into existence. issued by ICAI on 21st April. The intricacies of accounting policies permitted Companies to alter their accounting principles for their benefit.1977 Initiated by Kumar Mangalam Birla. In order to avoid the above and to have a harmonized accounting principle.Accounting Standards in India Introduction Financial statements are prepared to summarize the end-result of all the business activities by an enterprise during an accounting period in monetary terms. These guidelines are generally called accounting policies. Accounting is the art of recording transactions in the best manner possible. treatment. 23 . accounting standards are the written documents issued by the expert institutes or other regulatory bodies covering various aspects of measurement. They intent to harmonize the diverse accounting policies followed in the preparation and presentation of financial statements by different reporting enterprises so as to facilitate intra-firm and inter-firm comparison. so as to enable the reader to arrive at judgments/come to conclusions. presentation and disclosure of accounting transactions. Accounting Standards in India are issued By the Institute of Chartered Accountants of India (ICAI). To compare the financial statements of various reporting enterprises poses some difficulties because of the divergence in the methods and principles adopted by these enterprises in preparing their financial statements. and in this regard it is utmost necessary that there are set guidelines. Standards needed to be set by recognized accounting bodies. Written Documents issued by Government or Regulatory Body In India. In layman terms. At present there are 30 Accounting Standards issued by ICAI. In order to make these methods and principles uniform and comparable to the extent possible ± standards are evolved. These business activities vary from one enterprise to other. What are the objectives of Accounting Standards? The basic objective of Accounting Standards is to remove variations in the treatment of several accounting aspects and to bring about standardization in presentation. This made it impossible to make comparisons.

1956 provides that every profit and loss account and balance sheet of the company shall comply with the accounting standards. 1956 requires that every Profit/Loss Account and Balance Sheet shall comply with the Accounting Standards. 1956. Accounting Standards in Different Nations : Accounting Standards in Different Nations In India. The main role of ASB is to formulate Accounting Standards from time to time. Compliance with Accounting Standards issued by ICAI Sub-section (3A) to section 211 of Companies Act. constituted at Accounting Standard Board (ASB) on 21st April. 1956 requires an auditor to report whether. However. The institute of Chattered Accountants of India. the profit and loss account and balance sheet are complied with the accounting standards referred to in Section 211(3C) of Companies Act. Who issues Accounting Standards in India? The Institute of Chartered Accountants of India (ICAI) recognizing the need to harmonize the diverse accounting policies and practices at present in use in India constituted Accounting Standards Board (ASB) on April 21. 1956.Objectives Standardize the diverse Accounting Policies Add the reliability to the Financial Statement Eradicate baffling variation in treatment of accounting aspects Facilitate inter-firm and intra-firm comparison Objective of Accounting Standards is to standardize the diverse accounting policies and practices with a view to eliminate to the extent possible the noncomparability of financial statements and the reliability to the financial statements. 32 Accounting Standards as IAS under NACAS As per International. 'Accounting Standards' means the standard of accounting recommended by the ICAI and prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards(NACAs) constituted under section 210(1) of companies Act. 24 . The statutory auditors are required to make qualification in their report in case any item is treated differently from the prescribed Accounting Standard. recognizing the need to harmonize the diverse accounting policies and practices. In addition to this Section 227(3)(d) of Companies Act. there are 41 Accounting Standards called as IFRS Adopted by 8 countries in the world 70 to 80 countries planning to adhere IFRS Clause 50 added to the listing agreement mandatory. 1977. 1977. in his opinion. they should consider the materiality of the relevant item. Duty of Statutory Auditor for Compliance with Accounting Standards Section 211(3A) of Companies Act. while qualifying.

Financial Reporting on Interest in joint Ventures. Segment Reporting. Accounting For Fixed Assets. Financial Instruments. The Effect of Changes in Foreign Exchange Rates. Depreciation accounting. Accounting for Investment in associates in Consolidated Financial Statement. Valuation of Inventories: The objective of this standard is to formulate the method of computation of cost of inventories / stock. Impairment Of assets. Accounting For Investments. Related Party Disclosures. Prior period items and Changes in accounting Policies. Discontinuing Operation. determine the value of closing stock / inventory at which the inventory is to be shown in balance sheet till it is not sold and recognized as revenue. Contingent. Revenue Recognition. Disclosure of Accounting Policies: Accounting Policies refer to specific accounting principles and the method of applying those principles adopted by the enterprises in preparation and presentation of the financial statements. Employee Benefits. Construction Contracts. Provisions. Accounting For Amalgamation. Accounting For Taxes on Income. Financial Instrument: presentation.Accounting Standards Issued by Accountants of India are as below: y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y the Institute of Chartered Disclosure of accounting policies: Valuation Of Inventories: Cash Flow Statements Contingencies and events Occurring after the Balance sheet Date Net Profit or loss for the period. Accounting For Government Grants. Interim Financial Reporting. Borrowing Cost. Disclosures and Limited revision to accounting standards. Financial instrument. 25 . Intangible assets. liabilities and Contingent assets. Earning Per Share. Accounting For Leases. Consolidated Financial Statement.

Prior Period Items and change in Accounting Policies: The objective of this accounting standard is to prescribe the criteria for certain items in the profit and loss account so that comparability of the financial statement can be enhanced. consumption or other loss of value of a depreciable asset arising from use. the provision is made for all known liabilities and losses even for those liabilities / events. This statement exhibits the flow of incoming and outgoing cash. This statement assesses the ability of the enterprise to generate cash and to utilize the cash. accounting estimates and extraordinary items. accounting is done by following accrual basis of accounting and prudent accounting policies to calculate the profit or loss for the year and to recognize assets and liabilities in balance sheet.Cash Flow Statements: Cash flow statement is additional information to user of financial statement. There may be following two ways to determine profit or loss: On year-to-year basis based on percentage of completion or on completion of the contract. Objective of this standard is to prescribe the accounting of contingencies and the events. Profit and loss account being a period statement covers the items of the income and expenditure of the particular period. Depreciation Accounting : It is a measure of wearing out. Depreciation is nothing but distribution of total cost of asset over its useful life. which are probable. The Accounting Standard deals with Contingencies and Events occurring after the balance sheet date. Net Profit or Loss for the Period. which take place after the balance sheet date but before approval of balance sheet by Board of Directors. Professional judgment is required to classify the like hood of the future events occurring and. As the period of construction contract is long. This statement is one of the tools for assessing the liquidity and solvency of the enterprise. This accounting standard also deals with change in accounting policy. work of construction starts in one year and is completed in another year or after 4-5 years or so. Construction Contracts: Accounting for long term construction contracts involves question as to when revenue should be recognized and how to measure the revenue in the books of contractor. therefore. Contingencies and Events occurring after the balance sheet date: In preparing financial statement of a particular enterprise. passage of time. While following the prudent accounting policies. Therefore question arises how the profit or loss of construction contract by contractor should be determined. 26 . the question of contingencies and their accounting arises.

27 . Accounting for Government Grants: Government Grants are assistance by the Govt. in the form of cash or kind to an enterprise in return for past or future compliance with certain conditions. This accounting standard is not applicable to cases of acquisition of shares when one company acquires / purchases the share of another company and the acquired company is not dissolved and its separate entity continues to exist. interest and rentals. an enterprise should disclose following aspects: y Amount Exchange Difference included in Net profit or Loss. which cannot be valued reasonably. revenue is a charge made to customers / clients for goods supplied and services rendered. Accounting for Amalgamation: This accounting standard deals with accounting to be made in books of Transferee Company in case of amalgamation. which is held with intention of being used for the purpose of producing or providing goods and services.integral and also accounting for forward exchange. This accounting Standard applicable to accounting for transaction in Foreign currencies in translating in the Financial Statement Of foreign operation Integral as well as non. Effect of Changes in Foreign Exchange Rate. which cannot be distinguished from the normal trading transactions of the enterprise. y Reconciliation of opening and closing balance of Foreign Exchange translation reserve. y Amount accumulated in foreign exchange translation reserve. and Use of enterprises resources by other yielding interest. for capital appreciation or for other benefits. Rendering of Services. Accounting for Investments: It is the assets held for earning income by way of dividend. dividend and royalties.Revenue Recognition: The standard explains as to when the revenue should be recognized in profit and loss account and also states the circumstances in which revenue recognition can be postponed. Accounting for Fixed Assets: It is an asset. In other words. Those transactions with Government. are not considered as Government grants. receivable or other consideration arising in the course of ordinary activities of an enterprise such as: The sale of goods. Government assistance. expected to be used for more than one accounting period. Revenue means gross inflow of cash. is excluded from Govt. The Effects of changes in Foreign Exchange Rates: Effect of Changes in Foreign Exchange Rate shall be applicable in Respect of Accounting Period commencing on or after 01-04-2004 and is mandatory in nature. The standard is applicable when acquired company is dissolved and separate entity ceased exists and purchasing company continues with the business of acquired company. grants. Not held for sale in the normal course of business.

This accounting standard gives computational methodology for the determination and presentation of earning per share. Hence disclosure of related party transaction is essential for proper understanding of financial performance and financial position of enterprise. It is very important financial ratio for assessing the state of market price of share. It involves two parties. 28 . to include accounting for short-term employee benefits and termination benefits. Related Party Disclosure: Sometimes business transactions between related parties lose the feature and character of the arms length transactions. Multiple products / services and their operations in different geographical areas are exposed to different risks and returns. whether the cost of borrowing should be included in the cost of assets or not. these assets take time to make them useable or saleable. Information about multiple products / services and their operation in different geographical areas are called segment information. Such information is used to assess the risk and return of multiple products/services and their operation in different geographical areas. Segment Reporting: An enterprise needs in multiple products/services and operates in different geographical areas. build and install the fixed assets and other assets. Accounting for leases: Lease is an arrangement by which the lesser gives the right to use an asset for given period of time to the lessee on rent. which will improve the comparison of EPS. a lessor and a lessee and an asset which is to be leased. The lessor who owns the asset agrees to allow the lessee to use it for a specified period of time in return of periodic rent payments. The statement is applicable to the enterprise whose equity shares or potential equity shares are listed in stock exchange. the scope of the accounting standard has been enlarged. Related party relationship affects the volume and decision of business of one enterprise for the benefit of the other enterprise. Disclosure of such information is called segment reporting. therefore the enterprises incur the interest (cost on borrowing) to acquire and build these assets. Earning Per Share: Earning per share (EPS) is a financial ratio that gives the information regarding earning available to each equity share. The objective of the Accounting Standard is to prescribe the treatment of borrowing cost (interest + other cost) in accounting. Borrowing Costs : Enterprises are borrowing the funds to acquire.Employee Benefits: Accounting Standard has been revised by ICAI and is applicable in respect of accounting periods commencing on or after 1st April 2006.

The focus of the disclosure of the Information is about the operations which the enterprise plans to discontinue rather than disclosing on the operations which are already discontinued. tax should be accounted in the period in which corresponding revenue and expenses are accounted. 'Joint control' is the contractually agreed sharing of control over economic activity. not on liability to pay basis. the consolidated balance sheet if prepared should be prepared in the manner prescribed by this statement. Traditionally. so that the effect of investment in associates on the financial position of the group is indicated. Intangible Assets: An Intangible Asset is an Identifiable non-monetary Asset without physical substance held for use in the production or supplying of goods or services for rentals to others or for administrative purpose. According to this concept. In other words the holding company and its subsidiary (ies) are treated as one entity for the preparation of these consolidated financial statements. Discontinuing Operations: The objective of this standard is to establish principles for reporting information about discontinuing operations.Consolidated Financial Statements: The objective of this statement is to present financial statements of a parent and its subsidiary (ies) as a single economic entity. amount of tax payable is determined on the profit/loss computed as per income tax laws. tax on income is determined on the principle of accrual concept. 29 . Accounting for Investments in Associates in consolidated financial statements: The accounting standard was formulated with the objective to set out the principles and procedures for recognizing the investment in associates in the consolidated financial statements of the investor. Financial Reporting of Interest in joint ventures: Joint Venture is defined as a contractual arrangement whereby two or more parties carry on an economic activity under 'joint control'. As per clause 41 of listing agreement the companies are required to publish the financial results on a quarterly basis. However. Consolidated profit/loss account and consolidated balance sheet are prepared for disclosing the total profit/loss of the group and total assets and liabilities of the group. In simple words tax shall be accounted on accrual basis. As per this accounting standard. According to this accounting standard. Interim Financial Reporting (IFR): Interim financial reporting is the reporting for periods of less than a year generally for a period of 3 months. the disclosure about discontinued operation is also covered by this standard. Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefit from it. This standard covers "discontinuing operations" rather than "discontinued operation". Accounting for Taxes on Income: This accounting standard prescribes the accounting treatment for taxes on income.

and the circumstances in which financial assets and financial liabilities should be offset. into financial assets. financial liabilities and some contracts to buy or sell non-financial items. industrial and business Entities except to a Small and Medium-sized Entity. This Accounting Standard will become mandatory in respect of Accounting periods commencing on or after 1-4-2011 for all commercial. It applies to the classification of financial instruments. Provision: It is a liability. Provision for restructuring cost. the classification of related interest. Contingent Liabilities And Contingent Assets: Objective of this standard is to prescribe the accounting for Provisions. from the perspective of the issuer. As per AS-28 asset is said to be impaired when carrying amount of asset is more than its recoverable amount. Contingent Liabilities. Liability: A liability is present obligation of the enterprise arising from past events the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Requirements for presenting information about financial instruments are in Accounting Standard. Financial Instrument: Recognition and Measurement. issued by The Council of the Institute of Chartered Accountants of India. The principles in this Standard complement the principles for recognizing and measuring financial assets and financial liabilities in Accounting Standard Financial Instruments: 30 . which can be measured only by using a substantial degree of estimation. Financial Instrument: presentation: The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. Provisions. losses and gains. dividends.Impairment of Assets: The dictionary meaning of 'impairment of asset' is weakening in value of asset. Contingent Assets. comes into effect in respect of Accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. The objective of this Standard is to establish principles for recognizing and measuring Financial assets. financial liabilities and equity instruments. In other words when the value of asset decreases it may be called impairment of an asset.

iv) Financial Institutions v) Enterprises carrying on insurance business. i) 31 . Disclosures and Limited revision to accounting standards: The objective of this Standard is to require entities to provide disclosures in their financial statements that enable users to evaluate: y the significance of financial instruments for the entity¶s financial position and performance. industrial and business reporting enterprises. How many Accounting Standards have been prescribed? Are these applicable to all companies irrespective of its size? In all 29 Accounting Standards have been prescribed. and y the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date. vii) All commercial. industrial and business reporting enterprises having borrowings. are classified as Level I enterprises: Enterprises whose equity or debt securities are listed whether in India or outside India. in excess of Rs. Level II Company: Enterprises. iii) Banks including co-operative banks. viii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period. including public deposits. 100 million at any time during the accounting period. which are. ii) Enterprises. which fall in any one or more of the following categories. 500 million. The following table lists out the Accounting Standards and its applicability. but does not exceed Rs. vi) All commercial. Turnover does not include µother income¶. at any time during the accounting period. whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. which are in the process of listing their equity or debt securities as evidenced by the board of directors¶ resolution in this regard. 500 million. not Level I enterprises but fall in any one or more of the following categories are classified as Level II enterprises. industrial and business reporting enterprises whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 4 million. Level I Company: Enterprises. However their applicability is dependent on its size ± Level I / II / III Company. Turnover does not include µother income¶. i) All commercial. and how the entity manages those risks.Financial Instruments.

II. III I I. II. III I. II. 100 million at any time during the accounting period. II. II.f. Depreciation Accounting Construction Contracts Accounting for Research and Development (This standard has been withdrawn w.No. III I. Level III Company: Enterprises. iii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period. I. I.04. 01. industrial and business reporting enterprises having borrowing. Level II and Level III enterprises are fully exempted from certain accounting standards. 1 2 3 4 5 Particulars Disclosure of Accounting Policies Valuation of Inventories Cash Flow Statements Contingencies and Events Occurring After the Balance Sheet Date Net Profit or Loss for the period. II. which are not covered under Level I and Level II are considered as Level III enterprises. Prior period Items and Changes in Accounting Policies. relaxations from certain disclosure requirements are given. III III III III 32 . Relaxations are provided with regard to disclosure requirements. in excess of Rs. which lay down recognition. I. No relaxation is given to Level II and Level III enterprises in respect of recognition and measurement principles. III AS WITHDRAWN 9 10 11 12 13 14 15 I. II. II.e. III 6 7 8 I. measurement and disclosure requirements.2004 for all levels of enterprises and AS 26 is applicable) Revenue recognition Accounting for Fixed Assets The Effect of Changes in Foreign Exchange Rates Accounting for Government Grants Accounting for Investments Accounting for Amalgamations Accounting for Retirement Benefits in Applicability I. Applicability Level II and Level III enterprises are considered as SMEs Level I enterprises are required to comply fully with all the accounting standards. Sr. III I. II. Accordingly. II. 10 million but not in excess of Rs. which mainly lay down disclosure requirements. III I. II.ii) All commercial. II. III I. II. III I. In respect of certain other accounting standards. including public deposits.

with modification I II-with modification III.Raw Materials Work in progress Finished goods Spares.with modification I I. duties & taxes.Accounting for Inventories: AS 2. freight inwards) Cost of conversion Determination of Net realizable value Comparison of cost and net realizable 33 . II.r.t Depreciation AS 2.Better understanding of FS Better comparison analysis Mostly needed w.16 17 the Financial Statements of Employers Borrowing Costs Segment Reporting 18 Related Party Disclosures 19 Leases 20 Earning Per Share 21 22 23 24 25 26 27 Consolidated Financial Statements Accounting for Taxes on Income Accounting for Investments in Associates in Consolidated Financial Statements Discontinuing Operations Interim Financial Reporting Intangible Assets Financial Reporting of Interests in Joint Ventures Impairment of Assets I. Contingent Contingent Asset Liabilities and I I I. III I 28 29 Provisions. etc Measurements of Inventories :Measurements of Inventories Determination of Cost of Inventories Cost of purchase (Purchase price. II. III I-with clarification II-with clarification III-with clarification I-with clarification II-with clarification III-with clarification I Evolution and Types of AS : Evolution and Types of AS AS 1-Disclosure of Accounting Policies: AS 1-Disclosure of Accounting Policies Specific policies adapted to prepare FS Should be disclosed at one place Purpose :.Accounting for Inventories Used for computation of Cost of inventories and to show in BS till it is sold Consists of:. III I II-with modification III. II.with modification I II-with modification III-with modification I II-with modification III.

Effect of change in FOREX Rates Classification for Accounting treatment:. AS 5.Accounting for Depreciation A non-cash expenditure Distribution of total cost to its useful life Occurs due to obsolescence Different methods of computation Straight line method ( SLM ) Written-down value or diminishing value (WDV) AS 7.Category I: Foreign currency transactions: a) buying and selling of goods or services b) lending and borrowing in foreign currency c) Acquisition and disposition of assets Category II: Foreign operations: a) Foreign branch b) Joint venture c) Foreign Subsidiary Category III: Foreign Exchange contracts: a) For managing Risk/hedging b) For trading and Speculation 34 .Construction Contract specifically negotiated for construction of Asset or combination of Assets closely interrelated AS 8. identify items of cost which comprise R&D costs lays down condition R&D cost may be deferred and requires specific disclosures to be made regarding R&D costs.Revenue Recognition Means gross inflow of cash and other consideration like arising out of :. building.Cash Flow Statements Incoming and outgoing of cash Act as barometer to judge surplus and deficit Explain Cash flow under 3 heads :.Sale of goods Rendering services Use of enterprise resources by other yielding interest.Net profit or loss for the period.Accounting for R&D To deal with treatment of Cost of research and development in the financial statements.Accounting for R&D :AS 8.Accounting for Fixed Assets :AS 10. dividend and royalties.Accounting for Depreciation :AS 6.Construction Contract: AS 7.Cash Flow Statements :AS 3.Revenue Recognition: AS 9.AS 3. AS 10.Cash flow from operating activities Cash flow from financing activities Cash flow from investing activities AS 4.Net profit or loss for the period. P/M.Contingencies and events occurring after BS date :AS 4Contingencies and events occurring after BS date For maintaining Provision of Bad debts Generally uses Conservative concepts of Accounting like Bankruptcy.Effect of change in FOREX Rates :AS 11.Accounting for Fixed Assets Called as Cash generating Assets Expected to used for more than a Accounting period like land. frauds & errors. AS 9. etc Shown at either Historical or Revalued value AS 11. prior period items and change in Accounting policies: AS 5. prior period items and change in Accounting policies Ascertain certain criteria for certain items Include income and expenditures of Financial year Consists of 2 component Profit and loss of ordinary activities Profit and loss of extra ordinary activities AS 6.

Employees Benefits All forms of consideration given by enterprise directly to the employees or their spouses.Classification of Investment Cost of Investment Valuation of Investment Reclassification of Investment Disposal of Investment Disclosure of Investment in FS AS 14.Accounting for Investments :AS 13.Accounting for Govt. interest. etc It involves:. AS 17.Related party disclosure Related party are those party that controls or significantly influence the management or operating policies of the company during reporting period Disclosure: Related party relationship Transactions between a reporting enterprises and its related parties. Availed for acquiring building. Disclosures: Names and nature of amalgamating companies Effective date of amalgamation Method of Accounting used Particulars of scheme sanctioned under a statute AS 15. to other such as trust.AS 12.Earning per share :AS 20.Business segment Geographical segment Information and different risk and return reporting.Accounting for Govt. rental for capital appreciation. AS 16.Related party disclosure :AS 18.Accounting for Investments Assets held for earning incomes like dividend.Borrowing Costs Interest and cost incurred by an enterprise in connection to the borrowed funds.Consolidated Balance Sheet Accounting for Parent and Subsidiary company in single entity Disclosure:List of all subsidiaries Proportion of ownership interest Nature of relation whether direct or indirect 35 .Borrowing Costs :AS 16.Accounting for Amalgamation Section 391 to 394 of Companies Act. AS 18.Segment Reporting :AS 17. etc Grants related to depreciable FA Tax exemptions in notified area AS 13.Consolidated Balance Sheet :AS 21.Accounting for Amalgamation: AS 14.Employees Benefits :AS 15. children or other dependants. 1956 governs the provision of amalgamation. installed FA to make it useable and saleable. Grants Assistance provided by Govt.Earning per share Earning capacity of the firm Assessing market price for share AS gives computational methodology for determination and presentation of EPS 2 types of EPS AS 21.Accounting for Leases :AS 19. Grants :AS 12. in cash or in kind like Grants of Assets like P/M. insurance companies in exchange of services rendered. Land. Volume of transactions Amt written off in the period in respect of debts AS 19.Segment Reporting It consists of 2 segment:.Accounting for Leases Agreement between Lessor And Lessee Two types of leases: Operating lease Finance lease Different from Sale Classification to be made at the inception AS 20.

3 months Clause 41 says publish financial results on quarterly basis Objective is to provide frequently and timely assessment AS 26.e. i. AS 24.It is a Liability Settlement should result in outflow Liability is result of obligating event Contingent liabilities:Obligation arises of past event Existence confirmed when actually occurred of uncertain future Contingent Asset Same as Contingent liability Financial Instruments :Financial Instruments AS 30 ± Recognition and Measurement AS 31 ± Presentation AS 32 ± Disclosures Has not been made mandatory (expected in 2009) 36 .Financial Reporting of interest in Joint Venture :AS 27Financial Reporting of interest in Joint Venture What is joint venture? Three types of JV in case of Financial reporting AS 28.Impairment of Assets :AS 28.Provision.Discontinuing operations Establishes principles for reporting information about discontinuing operations Covers discontinuing operations rather than discontinued operation AS 25-Interim Financial Reporting (IFR) :AS 25-Interim Financial Reporting (IFR) Reporting for less than a year.AS 22.Intangible Assets :AS 26.Discontinuing operations :AS 24. so that effect of investments in associates on financial position of group is indicated. contingent liabilities and assets Provisions:.Current tax Deferred tax AS 23.Provision.Accounting for taxes and income Tax accounted for period in which are accounted It should be accrued and not liability to pay Deals in 2 measurements:.Accounting for investments in Associates in CFS :AS 23Accounting for investments in Associates in CFS Objectives to set out principles and procedures for recognizing the investment associates in CFS of the investors..Accounting for taxes and income :AS 22. contingent liabilities and assets :AS 29.Impairment of Assets Weakening of Assets value Occurs when carrying cost more than recoverable amt Carrying cost = Cost of assets ±Accumulated Depreciation AS 29.Intangible Assets No physical existence Can not be seen or even touched 3 featured as per AS Identifiable Nonmonetary assets Without physical substance AS 27.

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