[1.

] Accounting Standards in India:

# What are Indian Accounting Standards?
As per popular definitions, Indian accounting standards are nothing but guidelines to be followed
in the accounting system. It means rules & regulations that are to be followed while recording
accounting & financial transactions. It governs the manner in which financial statements are
prepared & presented in a company.
In India, Institute of Chartered Accountants formulates & issue accounting standards. These
standards are followed by accountants of all the companies registered in India. As we have
mentioned before, these accounting standards help in preparation and presentation of financial
statements.

# Objectives of the Indian Accounting Standards:

There is always a reason for any mission. Similarly, there are certain objectives for having
accounting standards.
1. Ensure companies in India adopt these standards to implement internationally recognized
best practices.
2. To increase the reliability of the financial statements.
3. To provide standards which are transparent for users.
4. To define the standards which are comparable over all periods presented.
5. To provide a suitable starting point for accounting.
6. To formulate standardized accounting policies.
7. To bring about full disclosure and transparency in accounting.
8. To provide the basis of measurement of various items.

# Need / Utility of A.S.:

 Easy Comparability of Financial Statements:
Accounting standards has made it simplified the comparison of different financial
statements. Financial statements of two companies can be easily compared.
 Makes Accounting Informative Easy & Simple:
Simplifying the whole accounting information is important advantage of accounting
standards. It provides standard rules for each & every accounting transaction. It removes
all complexity in the accounting process. Standard & uniform process is followed. It helps
the users in easy understanding & avoids any misleads from it.
 Avoids Frauds & Manipulations:
Accounting standards establishes different accounting rules & principles. These accounting
principles govern the whole accounting procedure. These principles are not optional to be
followed but are mandatory to be followed. It becomes almost impossible to
 misrepresent & manipulate any financial data on part of management. Committing any
fraud also become harder for them.
 Measures Management Performance:
Accounting standards make it easy in determining accountability of management. It
makes it easy to measure the performance of management team & provide any
suggestions. It helps in analyzing management ability in maintaining solvency of the firm,
increasing the company’s profit & various other important roles.
 Reduces Confusion: 
If certain standards are followed during the creation of financial reports, then it can
reduce confusion due to multiple people creating the reports in their own way.
 Reliability: 
Financial Statements and Reports that follow accounting standards allow stakeholders to
take important decisions regarding investment easily, as the company’s financial reports
are a major source to make decisions for them. Accounting standards ensure that the
financial reports and statements of an organization are fair and transparent.

# Limitations of Accounting Standards:

Accounting Standards have various limitations too. These are:
 Lack of Flexibility: 
In accounting, there are many alternatives for valuations. It becomes very difficult to use
different valuation methods to create reports, as a particular method can only be followed
at a particular time instead of multiple methods, which may make the valuations lengthy
and difficult.
 Difficulty for Management: 
As stated, there may be many methods for a particular valuation, so it becomes difficult for
management to choose one particular method, as each method has its own benefits and
limitations.
 Restricted Scope:
Accounting Standards cannot override the statute and needs to be framed within the
boundaries of the law that is prevalent at that time.
 High Cost:
There are two ways of looking at this limitation of accounting standards. Firstly, as we have
just discussed, changing accounting standards where necessary is a process that involves
many moving parts. There are great costs involved in the process of creating accounting
standards.

#Formulation of Accounting Standards in India:

Since 1977 after the government passed a statute, the Accounting Standard Board (ASB) a
committee of the ICAI has been responsible for the formulation of accounting standards in India.
ICAI is the highest accounting body in the country. And the ASB is a committee of the ICAI. But to
ensure maximum transparency and independence, the ASB is a completely independent body.
The ASB formulates all the accounting standards for the Indian companies. This process is fully
transparent, very thorough and completely independent of any government involvement. 

# Procedure for Formulation of Accounting Standards:

 First, the ASB will identify areas where the formulation of accounting standards may be
needed
 Then the ASB will constitute study groups and panels to discuss and study the topic at
hand. Such panels will prepare a draft of the standards.
 The ASB then carries out deliberations of the said draft of the standard. If necessary
changes and revisions are made.
 Then this preliminary draft is circulated to all concerned authorities. This will generally
include the members of the ICAI, and any other concerned authority.
 Then the ASB arranges meetings with these representatives to discuss their views and
concerns about the draft and its provisions
 The exposure draft is then finalized and presented to the public for their review and
comments
 The comments by the public on the exposure draft will be reviewed. Then a final draft will
be prepared for the review and consideration of the ICAI
 The Council of the ICAI will then reviews and consider the final draft of the standard. If
necessary they may suggest a few modifications.
 Finally, the Accounting Standard is issued. In the case of standard for non-corporate
entities, the ICAI will issue the standard. And if the relevant subject relates to a corporate
entity the Central Government will issue the standard.

# International Financial Reporting Standards (IFRS):

International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial
statements of public companies that are intended to make them consistent, transparent, and
easily comparable around the world.

IFRS currently has complete profiles for 167 jurisdictions, including those in the European Union.

RS specify in detail how companies must maintain their records and report their expenses and
income. They were established to create a common accounting language that could be
understood globally by investors, auditors, government regulators, and other interested parties.

The standards are designed to bring consistency to accounting language, practices, and
statements and to help businesses and investors make educated financial analyses and decisions.
2.] Final Accounts of a Company:
Every businessman enters into business activities to make a profit. The role of accounting is to
compile the financial records of a business in such a manner that yields its profit or loss.
All transactions of a business are, in the first instance, recorded in the books of original entry.

These transactions are posted into ledgers in classified form and summarized before arithmetical
accuracy is checked by means of a trial balance. After the preparation of the trial balance, the next
step is preparing the final accounts.

These accounts consist of the following:

1. Trading Account
2. Profit and Loss Account
3. Balance Sheet
 #Feature of Final Accounts:
 To know the Profitability of the business: Final accounts help to business to get know
the profitability of the business in a particular accounting year.
 Financial Strength: – Final account provides information about the financial strength of
the business. It means, help in deciding whether the business can purchase new assets with
its own fund or not.
 Forecasting and Budgeting: – Final Accounts are the basis of the forecasting and the
budgeting for the top management. On the basis of last year’s final accounts, management
decides the business new goal for the current year and preparing the budget for expenses.
 Communication: - We need final accounts or financial Statements to communicate our
financial position with different parties (i.e. Investors, Lenders of Money, Supplier and Trade
Creditors and Government etc.)
 Growth Rate of business: – With the help of the final account can calculate the growth
rate or our business by comparing the financial statement of the current year with last year.

# Preparation of final accounts:

Steps in the Process of Finalization of Accounts

A. For Trading Concerns: B. For Manufacturing and Trading Concerns:

I. Trading Account. I. Manufacturing Account.

II. Profit and Loss Account. II. Trading Account.

III. Balance Sheet III. Profit and Loss Account.

IV. Balance Sheet.

I. Trading account:

Trading account is a statement which is prepared by a business firm. It shows the gross profit
of business activities during a specific period. It is a part of the final accounts of the entity. In
other words, the trading account gives details of total sales, total purchases and direct expenses
relating to purchase and sales.
II. Profit and Loss A/C:
A profit and loss account provides you with an overview of your company’s revenue and
expenses over a given period of time. These figures will show you whether your business
made a profit or loss over that period. As a result, it’s one of the most important financial
documents your business will need to produce.

III. Balance Sheet:

The term balance sheet refers to a financial statement that reports a company's assets,
liabilities, and shareholder equity at a specific point in time. Balance sheets provide the
basis for computing rates of return for investors and evaluating a company's capital
structure.

# Components of a Balance Sheet:

 Assets:

 Cash and cash equivalents are the most liquid assets and can include Treasury bills and
short-term certificates of deposit, as well as hard currency.
  Marketable securities are equity and debt securities for which there is a liquid market.
 Accounts receivable (AR) refer to money that customers owe the company. This may
include an allowance for doubtful accounts as some customers may not pay what they
owe.
 Inventory refers to any goods available for sale, valued at the lower of the cost or market
price.
 Prepaid expenses represent the value that has already been paid for, such as insurance,
advertising contracts, or rent.
 Long-term assets

 Liabilities:
A liability is any money that a company owes to outside parties, from bills it has to pay to
suppliers to interest on bonds issued to creditors to rent, utilities and salaries. Current
liabilities are due within one year and are listed in order of their due date. Long-term
liabilities, on the other hand, are due at any point after one year.

# Types of balance sheets:

 Classified Balance Sheet:

The classified balance sheet format presents information about an entity's assets,
liabilities, and shareholders' equity that is aggregated (or "classified") into subcategories of
accounts. It is the most common type of balance sheet

 Common Size Balance Sheet

The common size balance sheet format presents not only the standard information
contained in a balance sheet, but also a column that notes the same information as a
percentage of the total assets (for asset line items) or as a percentage of total liabilities
and shareholders' equity

 Comparative Balance Sheet

The comparative balance sheet format presents side-by-side information about an entity's
assets, liabilities, and shareholders' equity as of multiple points in time. For example, a
comparative balance sheet could present the balance sheet as of the end of each year for
the past three years. It is useful for highlighting changes over time.

 Vertical Balance Sheet

The vertical balance sheet format is one in which the balance sheet presentation format is
a single column of numbers, beginning with asset line items, followed by liability line
items, and ending with shareholders' equity line items.
 Profit and loss appropriation a/c:
It is a special account that a firm prepares to show the distribution of profits/losses among the
partners or partner’s capital.

This account should not be confused with the typical Profit and Loss Account but rather seen as
an extension of it as it is made after making the Profit and Loss Account.

Overall the firm uses it to show the allocation and distribution of Net Profit among the
partners, reserves, and dividends.

A partnership form of business organizations creates such kind of special account.

B. Manufacturing a/c:

The main purpose of preparing the manufacturing account is to ascertain the cost of goods
manufactured during the financial year and to ascertain the amount of any profit or loss
occurred during the manufacturing process.
The manufacturing account provides information of all the expenses and costs incurred in the
preparation of the goods to be sold. It includes the expenses incurred in preparing the goods
but not the finished goods. All the expenses including the cost of raw materials, the cost of
machines and their maintenance, the salaries and wages of both skilled and unskilled
workers, depreciation of the assets are also included under this account.
 
 3.] Accounts of holding companies:

 Holding company:
A holding company is a corporation that doesn't produce or sell anything, but makes its
money from owning shares of other businesses.

Holding companies, which are sometimes called "parent companies," control the assets of
other companies, known as subsidiaries. Though they hold financial control of these
businesses (and make a lot of money from them), they generally don't make any day-to-day
decisions in running them.

A holding company is a separate parent company created to own a controlling interest in

subsidiary companies. A holding company doesn’t trade itself; its main purpose is to form a
corporate group.

 Subsidiary company:

A subsidiary is a company that is owned or controlled by a parent or holding company.

Usually, the parent company will own more than 50% of the subsidiary company. This gives
the parent organization the controlling share of the subsidiary.

Subsidiary companies are a common way for corporations to expand into international
markets. As independent entities, the risk for the wider corporation is minimized. Subsidiary
companies are often distinct brands, positioned under an overall holding company. 
 # The advantages of a subsidiary company:

 Brand recognition: As subsidiaries grow in size, they can establish their brand
recognition and increase the overall share of the market.
 Increased efficiencies and diversification: By creating subsidiary silos, they’re able
to achieve greater operational efficiency through building a management style and
corporate culture that works for them.
 Tax benefits: Subsidiaries can receive tax advantages, especially if a subsidiary is
organized in a different state or country.
 Easier mergers and acquisitions: Subsidiaries can merge or sell company subdivisions
easier and cheaper than if it was a parent company.
 Nonprofit benefits: Nonprofit organizations can engage in for-profit activities while
maintaining the parent’s nonprofit status.

 Calculation of goodwill/capital reserve:

The goodwill or capital reserve is Cost of share (majority) -
calculated as under
Share of holding company in share capital Less: share capital -
subsidiary company – Profit & loss sold out -
+ Share in pre acquisition profits –
- Share in pre acquisition loss – General reserve part -
+ Share in pre acquisition reserve – -
+ Share in revaluation profit on assets –
- Share in revaluation loss on assets –
Goodwill (+)/capital reserve (-)
- Cost of Share (Purchase consideration)
Ans. (+ ) Capital Reserve - Ans. (-)
Goodwill

 Calculation of minority interested:

Share capital (remaining) -

Share capital -

Profit and loss remaining -

General reserve -

Minority interested ( add)

 Consolidated profit & loss(add the p&l of both companies)

 consolidated general reserve (add the general reserve of both companies)
 calculation of consolidated balance sheet:
 4.] Internal & External Reconstruction:
A. internal reconstruction:
Reconstruction is a process of the company’s reorganization, concerning legal, operational,
ownership and other structures, by revaluing assets and reassessing the liabilities. It refers to the
transfer of company or several companies’ business to a new company.
Internal reconstruction refers to the internal re-organization of the financial structure of a
company. It is also termed as re-organization which permits the
existing company to be continued. Generally, share capital is reduced
to write off the past accumulated losses of the company.

Significance of Internal Reconstruction Internal reconstruction is done

by the company when:
1. There is an overvaluation of assets and undervaluation of liabilities.
2. There is a difficulty to meet the financial crisis and there are
continuous losses.

# Accounting Treatment:
 Journal Entries:
 On the debit side, we record:-

1. The increase in the value of assets

2. Decrease in liabilities

 On the credit side, we record:-

1. Capital Reduction Account

2. Capital Reconstruction Account

We can avoid the debit balance of the Profit and Loss Account and the overvaluation of
assets. For this, we have to:

 Debit the Capital Reconstruction/Reduction Account.

 Credit the concerned account.

Note: We transfer the balance in the Capital Reduction A/c to the Capital Reserve A/c.
 Balance Sheet

1. Companies must add the word “and Reduced” after its name on the Balance Sheet.
2. The Balance Sheet of the reconstructed company must show the written-off amount for 5
years under respective assets.

#Method of internal reconstruction:

a) Alteration of Share Capital: Section 61 to 64 of Companies Act, 2013 deals with alteration of
share capital. It may take the form of fresh issue of new shares, conversion of fully paid
shares with stock, cancellation of unissued capital, consolidation of existing shares and
subdivision of existing shares.

b) Reduction of Share Capital (Section 66, 67 Company Act 2013)

In this type of internal reconstruction, there is a reduction in the share capital. For capital
reduction, the companies have to take confirmation from the tribunal.
B. External reconstruction:
When a company is suffering losses for the past several years and facing financial crisis, the
company can sell its business to another newly formed company. Actually, the new company is
formed to take over the assets and liabilities of the old company. This process is called external
reconstruction. In other words, external reconstruction refers to the sale of the business of
existing company to another company formed for the purposed. In external reconstruction, one
company is liquidated and another new company is formed.
Old company is called as Vendor company and new company which takes over is called as
Purchasing company
Old company (usually loss making or sick companies) is liquidated

# Amalgamation:
An amalgamation is a combination of two or more companies into a new entity.
 Amalgamation is the combination of two or more companies into a brand new entity by
combining the assets and liabilities of both entities into one.

Pros
 Can improve competitiveness
 Can reduce taxes
 Increases economies of scale
 Potential to increase shareholder value
 Diversifies the firm

Cons
 Can concentrate too much power into a monopolistic firm
 Can lead to job losses
 Increases the firm's debt load

#Objectives of Amalgamation:
i) To reap economies of scale

(ii) To eliminate competition

(iii) To build up goodwill

(iv)To reduce the degree of risk through diversification

(v) Managerial effectiveness.

#Types:

 Amalgamation in the nature of merger :

Is an amalgamation which satisfies all the following conditions.

(i) All the assets and liabilities of the transferor company become, after amalgamation, the
assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately
before the amalgamation, by the transferee company or its subsidiaries or their
nominees) become equity shareholders of the transferee company by virtue of the
amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee company is
discharged by the transferee company wholly by the issue of equity shares in the transferee
company, except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the
transferee company except to ensure uniformity of accounting policies.

 Amalgamation in the nature of purchase:

If any one or more of the above conditions are not satisfied in an amalgamation, such
amalgamation is called amalgamation in the nature of purchase.

#Steps in Accounting :

1. Calculation of Purchasing Consideration.

2. Closing Entries in the books of selling co.

3. Opening Entries in the books of purchasing co.

4. New Balance Sheet in the books of Purchasing Co.

# Purchase Consideration:

Purchase consideration means the price payable by the Purchasing co. to the shareholders of the
Selling co. for the Business taken over by the Purchasing co.
 IN THE BOOKS OF TRANSFEREE COMPANY(PURCHASING COMPANY):
 5.] A. Social account and Environment account:
Social accounting may be defined as identification and recording of business activities regarding
social responsibility. Social responsibility concept is the one of the important concept of
management. It is the duty of enterprise to do some social activities for completing their social
responsibility.
Social accounting is very important tool to measure the performance of any company in view of
 social responsibility. Company has to make social responsibility income statement and balance
sheet. But it is not compulsory to make these statements.

#Objectives of social accounting:

1. Effective utilization of natural resources:

Main objectives of making social accounting is to determine whether company is properly utilize
their natural resources or not .

2. Help to employees:
Company can help employees by providing the facility of education to children of employees,
providing transport free of cost and also providing good working environment conditions.

3. Help to society:
Because companies' factories spread the pollution in natural society which is very harmful for
society . So, enterprise can help to society by planting the trees, establishing new parks near
factory area and also opening new hospitals

4. Help to customers:
In social accounting this the part of benefits given by company to society , if company provides
goods to customers at lower rate and with high quality .

5. Help to investors:
Company can help to investors by providing transparent accounting information to investors.
Because of many objectives are related to safeguarding of natural resources so this accounting is
also known as social and Environmental Accounting, 

B. Human resource accounting:

It is easy to define human resource accounting. Human Resource Accounting tracks and manages
employees’ costs and values, including performance, compensation, benefits, and training. HR
professionals use various tools to track and analyze data, such as employee surveys,
performance reviews, and compensation and benefits reports. In addition to tracking employee
performance, HR professionals also need to track the performance of the organization as a
whole. 

The HR accounting process involves the following:

 Identifying and understanding the needs of the organisation and its employees
 Identifying and developing the appropriate human resources
 Implementing effective recruitment, selection, training, development, and compensation
programs
 Maintaining an accurate and up-to-date HR system
 Ensuring that all employees are treated equally and fairly
 Maintaining an accurate and up-to-date payroll system
C.) Responsibility accounting:

Responsibility Accounting is an accounting system where different individuals are assigned

accounting responsibilities in distinguishing areas of cost control. 

There are four types of responsibility centers, namely the cost center, revenue center, profit center,
and investment center. 

The components of responsibility accounting include inputs and outputs, identification of

responsibility center, target, and actual information, responsibility between organization structure
and responsibility center, etc.

Although responsibility accounting is a method that establishes a system of control and

accountability, it also requires skilled manpower, which increases its cost. Additionally, such a type
of accounting also applies only to controllable costs, making it tough to be convenient always. 

#Objectives of Responsibility Accounting: 

See below for the major objectives or principles of responsibility accounting –

 Each responsibility center is given a target, which is communicated to the relevant

management level. 
 At the end of the time period, there is a comparison between the target and the actual
performance.
 The variations that are detected in the budgeted plan are examined for fixing responsibility to
the center. 
 Due measures are taken by the top management which is communicated to the responsible
personnel.
 The responsibility for costs does not include the policy costs and various other apportioned
costs.

#Different Types of Responsibility Centres:

A responsibility center is a functional business entity that is given definite objectives and goals,
dedicated personnel, procedures and policies as well as the duty for generating a financial
report.
Managers are vested with specific responsibility in terms of expenses incurred or revenue
generation or the investment of funds. Let us take a look at the four types of responsibility
centers. 

 Profit center :
It contributes to both revenue and expenses, resulting in profit and loss, respectively. For
example – The product line is a profit center, and the responsible person is the product
manager.

 Cost center: 
 The center only contributes to specific costs that have been incurred. For example – The
housekeeping department will only incur costs.

 Revenue center: 
The revenue center only leads to the generation of sales. For example – Sales department of
an organization.

 Investment center :
The center is responsible for profits and returns on investment. The latter includes the fund
which is invested in the organization's operations. For example – A subsidiary entity of a
company is an investment center. The responsible person in that instance would be the
president of the subsidiary.