UNIT-I : THEORETICAL FRAMEWO! RIK AND ACCOUNTING PROCESS (wT CHAPTER :1 i ACCOUNTING : AN INFORMATION SYSTEM Q. 1. What are the Qualitative Features of Accounting Information ? ‘Ans. Qualitative Characteristics of Accounting Information ; Qualitative characteristics are the attributes of accounting information, which enhance its understandability and usefulness + Reliability : Reliability implies that the information must be free from material error and personal bias. * Relevance : Accounting information must be relevant to the decision- making requirements of the users. * Understandability : Information should be disclosed in financial statements in such a manner that these are easily understandable. + Comparability ; Both intra-firm and interfirm comparison must be possible over different time periods. Q. 2. Who are the users of Accounting Information ? Ans. Explain the Users of Accounting Information : Users may be categorised into users and external users. Internal Users : © Owners : Owners contribute capital in the busin ess and thus they are exposed to maximum risk. So, they are always interested in the safety of their capital. + Management: Accounting information is used by management for taking various decisions. * Employees : Employees are interested in the financial statements to assess the ability of the business to pay higher wages and bonuses. External Users : © Banks and financial institutions : Banks and Financial Institutions provide loans to business. So, they are interested in finaicial information to ensure the safety and recovery of the loan. jt ; * Investors: Investors are interested to know the earning capacity of business and safety of the investment. * Creditors: Creditors provide the: goods on credit. so they to ascertain the financial soundness of the firm. * Government: The government needs accountin, tax liability of the business entity. oe need information g information toassess theay AMAR: B, Com. (Financial Accounting) TYear(Sem.1) ing | ation in their research «Researchers : Researchers use accounting informatio work. * Consumers : They Se ae accounting control, which will reduce the 1 ‘ Q.3, Whatis ee ficial Intelligence ? Explain its role i Acoma Le ites Ans. Artificial Intelligence has made a significant impale Ot ay for and accounting, In fact. Al-enabled finance and accounting sys titive market becauise enterprises to stay strong contenders in ms increasingly competi they save time and provide deep insights. 5 The two major reasons for the rapid growth of Al in Industry 4.0 aré fe exponential growth of data generated by the Internet and loT devices computation of this data. ¥ Role of Al in finance and accounting : New technology is shaping saa 4.0 in every vertical with intelligent responses to changing expectations ae cme suppliers, vendors, and partners. Automation enables a reduction of 80-90% o he time previously taken by the workforce in performing disparate and repetitive tas manually, It also enhances the quality of the output by reducing human error, Almost all accounting tasks, including payroll, tax, banking, and audits, have become automated with Al, disrupting the accounting industry, and bringing, about a big change in how business is done. * Alprovides a broad range of opportunities and minimizes the traditional time-consuming responsibilities of the finance team to look at more venues for business growth. Al helps in forecasting accurate financial statements. With machine learning. (ML), finance professionals can predict future trends based on historical data records. Robotic Process Automation (RPA) can complete repetitive tasks in the enterprise's business processes with amazing efficiency, including document or data analysis. With RPA in place, the finance team can break free of getting bogged down by non-value-added tasks. Instead, they can focus more on taking up strategic and advisory responsibilities. Let's look at a few applications of RPA and Intelligent Automation in accounting: ng information for establishing good we the cost of praduction. « Al processes documents in real-time using natural language processing and computer vision to generate reports also in real-time, Such reporting provides insight, ensuring that the enterprise can be proactive and change course if necessary, Al enables the processing and automated authorization of documents to enhance internal accounting processes such as procurement and. purchasing, invoicing, purchase orders, expense reports, accounts payable and receivables, etc, Al-enabled systems support auditing and compliance with corporate, state, and federal regulations by monitoring the pertinent documents and raising alerts where necessary, sta sy thiAccounting : An information System 7 ey esa, agg ake ee MLalgorithms sift through volumine Mis tents Sy GILT Ot Ge Sa ae 4. What are the inherent challenges of artficial intelligence ? ‘ans. Inherent Challenges of adopting al in acccounting : No doubt, the sakenolders of an enterprise have recognized the value of adopting Alpowered ot jesne and applications. However talon requires a shirt alia mindset or mote than the CFOs. The finance and accounting professionals need to make the shift that quip themselves with the necessary skills and knowledge. ‘The finance teams must appreciate that they are now free to contribute to new uasiness relationships, improve existing partnerships, and work from a position of strength, thanks largely to Al and the resulting critical insights. Enterprises must not only invest in technology butalso the workforce required tohandle said technology. It means that they must also provide proper raining and 1 pport for the teams to use Al to optimize productivity efficiently. “As advanced technology evolves, it will only become more sophisticated, with more tools and systems becoming available to finance and accounting, The rapid {xpansion into digital transformation with Aland automation sets the pace for quick jearning and the adoption of new ways of time and cost-cuiting Finally, finance and accounting teams adopting Al to their practice will be better able to analyze a tremendous amount of data, identify patterns and trends. Even better, they will be able to use the latest technology and tools to support various working modes and geographies by taking over routine tasks that are better suited to machines. Q.5. Explain the maning of users of accounting information ? ‘Ans, Users of Accounting Information : The accounting process provides financial data for a broad range of individuals whose objectives in studying the data vary widely. Thereare three primary users of accounting information: internal ‘icon external users, and the goverment (which is a specific form of an external tiser), Each group uses accounting information differently and requires the in formation to be presented differently. Internal Users : Internal users are owners and mangers involved in the day-to- day operations of the business in long term. rategic planning. They are the ones who are making de-cisions such as whether to lease or buy equipment or to keep the old equipment and simply keep repairing it. They also decide what products or services to produce and how much of each to supply: ‘They decide on the price to charge to customers, and they want to know how much it costs to make a product. External Users : The external users ‘of accounting information fall into five groups; each has different inter ests in the company and wants answers to’unique Questions. The groups and some of their possible questions are + * Prospective and current board members or investors : Has the company earned satisfactory income on its total investment? Should an investment be made in this company? Should the present investment be increased, decreased, or retained at the same evel? Can the company install costly pollution control equipment and still be profitable?aceotinting) Lxeer Oar D) {eS 8 Joan be grante: as they become due? aes he company? Will the e .d to the company’ Creditors and lenders. Should a company be able to pay its debts have the ability to pay : islsrees and their unions. Does the say abe to provide long-term increased wages? Is the ee pany finance ae employment for its workforce’ ir prices? Will the ici teaiiess Dou esompany/oties Geeta pronase H com-pany survive long enough to honor its pro fat prdducts and gaint + General public. Is the company providing useful PONT biome? employment for citizens without causing serious er OT gaerinar Government : The government is a separate type of oe Bene the pron interested in a company’s performance, mainly for purposes @" ©) © company smount of tax, butalso for other regulatory purposes In fact, @SinBi CoP may be reporting to several state and local governments an‘ ee governments, depending on where they are doing business Q. 6. What is data analytics ? Explain its need in accounting. Ans. Accounting & Data Analytics: What You Need To Know Companies today have access to more information than ever before. In fact, ‘SeedScientific estimates that every day 2.5 quintillion bytes of data are generated. But what does that mean for an accountant? It means opportunity: Companies need strong accounting leaders to translate their portion of that data into valuable insights that can help a company improve business outcomes and adjust sales all in real time. rranties? Collecting and collating large amounts of data takes time, discipline and a certain set of skills. These skills can be found in an accountant with a background in data analytics. Their knowledge and experience enables them to dive deep into the data and extract the value in it. As the amount of available information increases so does the need to have skilled accountants who can analyze and contextualize it, which puts a particular importance on the need for accountants with strong data analytic skills. What Is Data Analytics in Accounting : According to the Journal of Accountancy data analytics “...includes sourcing relevant data and performing analyses..and using the insights gained from analytics in decision-making.” Data analytics are used by accountants to do things like discern patterns in customer spending, identify market behavior, anticipate trends and predict regulatory reactions. Accountants who specialize in data analytics manage, analyze and mine multiple streams of data. Doing so provides them graniular-level details that can be used to answer questions, identify patterns and make fact-based predictions. Using data analytics, accountants can help a company : > * Evaluate Perforinance : The performance of every area of the busines can be evaluated using predetermined metrics. An accountant may look at revenue data, quarterly goal performance or production numbers. * Mitigate Risk : Areas of current or potential risk can be uncovered and managed in real-time. Funding needs, Process flows and investment opportunities are all areas that an accountant may look at.the: ay rm he ful is? er ny Accounting : An Information System 9 Understand Behaviors : Tracking and reviewing consumer and internal behavior patterns and employee productivity waves enable accountants to drive business decisions and growth plans. Build Business Plans : With a detailed understanding of past and present business patterns, a company can confidently make plans for its future. An accountant would look at factors like historical sales numbers, employee qetention patterns, organizational spending and equipment life-cydes. Structure Business Improvements : When an area of the company isn’t performing up to expectations, data analytics can pinpoint where Improvements might be needed. In order to create an effective strategy, an . accountant may review sales forecasts, historical sales performance numbers and operating costs. Find Opportunities : Opportunities to grow and develop a competitive advantage can be uncovered by analyzing past performance and looking at current trends. These include operational capabilities, current customer breakdowns and market patterns. Maximize Profits : With the clear insight that data analytics can provide, a company can rrvke decisions that will build up their bottom line, To help with this, accountants will look at a number of data points including past purchasing behaviors, current market trends, inventory management and customer orders. . oei CHAPTER : 2 FINANCIAL ACCOUNTING : INTRODUCTION Q. 1. Explain the Need of Accounting in Modern Business ? Ans. Importance of Accounts to a Modern Business i ‘ Ina competitive market a modern business has to know about what is going in and what is going out, without this a business is useless. All businesses, whatever their size, need to keep accurate records - particularly about money. Initially one of the key points of keeping track of a company’s accounts is to find out if you are making profit. Therefore, by assessing the income and expenditure aspects of the accounts, profit can be calculated and this should help you to analyse your ‘business Progress, by comparing with previous years accounts. Accounting can also highlight individual areas of your business so that you can discover what the successful and unsuccessful areas of your business are. These can then be rectified to improve Profits. Accounts can also show the debts the business owes. This may be important as the business needs to know if they are in debt and if so, they can decrease expenditure in other places, Also managers and owners can see the accounts where they can “decrease expenditure. The business may be spending too much money ina certain area and it may not be necessary. We can also see where you are spending your money and how much you are spending. You may want to resources the business has. This can be important when an individual is checking yours accounts to make sure they are up to standards. If the business has credit facilities, then they will need to know which customers owe them money and how much, Some companies let their customers have a couple of months credi: so this must be checked and kept up to date. Q. 2. Define Accounting. Discuss the Nature and Scope pf Accounting. Ans, Meaning of Accounting, Accounting may be defined as the process of collecting, recording, summarising and communicating financial information. Accounting is nothing but a means of communicating the results of business operations to various parties interested in or connected with the business, viz., the owner, creditors, investors, government, financial institution and other agencies. Accounting is, therefore, rightly called as the language of business. The basis purpose of a language is to serve as a means of communication. Accounting also serve this purpose. Accounting isnot only associated with business but also with every body who is interested in keeping an account for the money received and money spent. Really speaking Accountancy is an art as well as the science of recording, classifying and summarising of business transaction which are of a financial character and are expressed in terms of money, It also includes interpretation aspect of the recorded information. (10)EE we Financial Accounting : Introduction Nature and Scope of Financi u Accounting. The nature and scope of. “ia ceounting is the art of recording, classifying and tit MaKe sha eee rs ees ae tra financial character, and interpreting the results thereof.’ ‘ = Thus, accounting covers the following activities : 1. Identifying the Transactions and Events. Accounting identifies transactions | and events of a specific entity. A transaction is a particular type of extrenal event, | 2ifichean be expressed in terms of money and bring change in the financial position bf a business unit. An event (whether internal or external) is a happening of consequences to an entity (e.g., use of raw material for production). Anentity means Sn economic unit that performs economic activities (eg., Birla Industries Ltd, ; TISCO). 2, Measuring the Identified Transaction and Events. Accounting measures the transaction and events in terms of money. : 3. Recording. It is the process of entering the transaction and events in the books of original entry in the chronological manner e.g., date wise. 4, Classifying. It is the process of posting of entries in the ledger so that transaction of similar types are accumulated at one place. 5, Summarising. It is concerned with the preparation of Financial Statements such as Income Statement, Balance Sheet and Cash Flow Statement. 6, Analysing. It is concerned with the establishment of relationship between the various items or group of items taken from Income statement or Balance Sheet | or both, Its purpose is to identify the financial strengths and weaknesses of the | enterprise. It provides the basis for interpretation. | 1 Interpreting, Interpreting is the last stage of accounting process. Itis concerned with explaining the meaning and significance of the relationship established by the ’ analysis. In fact, interpretation is the main function of accountants in the present | Condition since the routine work of recording, classifying and summarising business transactions can be easily handled by the electronic devices like } computers. 8. Communicating, It is concerned with the transmission of summarised, analyzed and interpreted information to the users to enable them to make reasoned. decisions Q.3, Explain the Purpose/Objectives and Limitations of ‘Accounting. Ans. Purpose of Accounting : (1) To maintain records of business : Most business transactions and events are expressed through accounting. Its main purpose istokeep a systematic record of these financial transactions. This purpose has gained importance owing to the limitation of human memory which cannot possibly maintain record of a very large number of day to day business transactions. (2) Calculations of profit or loss: The chief objective of accounting is ascertain the net result of the day-to-day transactions for a period, in other words, ascertain whether during the period the firm earned a profit or suffered a loss for its purpose, the profit and loss account is preparedem. I) ae .g not sufficient only ascrtain | positions of the firm for d the owner's capital jg 1 Accounting) 1 Year 6 12 AMAR: B. Com, (Financial rae idle Sets (3) To know financial position: In the bu: siness, iti nancial the profit or loss, itis also necessary to know te ie af this purpose, a statement showing assets, Tae) te Jed the balance she prepared such a statement is ca : nerious groups and users : The (4) To make the information available (0 yay a enterprsethe function of accounting isto communicate the financia! (aero arent various interested parties iike owners, investors, creditors SMP” research scholars etc. Limitations of Accounting : ; (@) Financial accounting is not fully exact : Although ete eae are recorded on actual basis such as sale or purchase oF FoSSPE Oe oe estimate must also be made for ascertaining profit or loss such as a ; ice of the stock of goods people an asset, possible bad debts, the probable market pri eck of soot are bound to have different ideas in respect of such things and the estimates wi naturally differ from person to person. This will also lead to a different Tesre of profit or loss being shown by different persons. Thus, the profit figure cannot be treated as exact. FE a (2) Financial accounting does not indicate what the business will realise if sold : The balance sheet should not be taken to show the amount of cash which the firm may realise by the sale of all the assets. This is becasue many assets are not meant to be sold, they are meant for use and are shown at cost less depreciation that may have been written off.~ (3) Financial accounting does not tell the whole story : Only such transactions and events are recorded which can be expressed in terms of money. Many other important factor which are not recorded in the books of accounts, may make or made the firm suchas relations with the workers, popularity of the goods produced, quality and calibre of the management, integrity, forsightedness. etc. Unless such factors are kept in mind, it would be very difficult to asses the future of the firm. (4) Accounting statements may be drawn up wrongly : Because of adopting different method of valuing closing stock, it is possible to arrive at different figures of profit and to give a different financial picture. In spite the various principles, there have been attempts in the past to show a false financial position, One should, therefore always apply some checks to establish whether or not the financial ‘statements can be taken to be reasonably correct. It is better to get them audited. The method of valuation of closing stock may also differ from one firm to another. The results obtained from the comparison of the financial statements of such firms may give misleading picture. (6) Difficulty in forecasting ; Financial statements are a record of past events and historical facts. In the facts changing and developing modern busines, the analysis of past information may not be of much use in future forec Continuous changes take place in the demand of the product, policies adi the firm the position of competition do. Q. 4, Discuss the Role of An Accountant in Society ? Ans. A Role Model for Entrepreneurs — accountant is a role model for entrepreneurs. A great treasure inside of accountant ‘asting, opted by In a modern organization, an whict exper alway entre the d emp! the high can | of ar the s ‘acco pro he v inte teac fing fun ofCe 4 Financial Accounting : Introduction 13 ‘in | «hich ean grow the entrepreneur. By doing his accounting work and by becoming oF Ff expertinaccountings he shows the way to entrepreneur. His accounting records are always updated. He analyzes where did entrepreneur do mistake. He taught to ae renews, “By deep learning of accounting reports, entrepreneur should take he | tne decision of their investment. “He should never exploit the labours and he | employees. Capital w ill not increase such a way but capital will increase with reduce age and losses. He wants to grow the financial position instead of making St profits through all wrong ways whose end is bankruptcy. Few Qualities of Accountant in Modern Organization which an Entrepreneur ns | can learn— ne (@) Modern accountants does not do the full time employment under the control of | of any organisation. He learned accounting, So, he starts his business of providing te | she service of accounting, Millions of organisations take help by getting modern ill | ccountant’s professional service after giving him fees. of () Heworks so hard. He never lives his life an idle person. He handles the big 2 | roject of banks and companies. If same hard work will be done by entrepreneurs, | he will also get success in his business. if |) Today, Modern accountants are operating lots of enterprises. ‘Through his € | intelligence, they write the books, operate online websites and operating accounting ot | teaching institutes. Through raw material of their knowledge in maths, economics at | finance and accounting, they have become the role model for entrepreneur. > Role as the Founder of Business Organisation—We know there are lots of 1S | functions of business organisation like production, marketing, sales, administration °F | of employees, management of cash flow and accounting. 5 3, Role for Using Accounting Software Efféctive Ways— Accountant in modern crganisntion knows every accounting software, He is expert in accounting software technology. Whole organisation is dependent on.the accountant for recording all transactigns in accounting software. He is the master of Ms. Excel, Tally. BRP 9, Ms. g | Access, ERPand Quickbooks and lots of other accounting software whose list you s | can see at Wikipedia. By updating his knowledge in these accounting software, | organisation takes special service for solving problems in their accounting software. i 4. Role of Tax Manager—Modern accountant works also as tax manager. He 1} secords all the tax matters like VAT, Service Tax, TDS, Income Tax and Excise. Heis also expert to file their e-return. ; 5. Role as Financial Advisor—If business organisation thinks that it can do everything on the basis of money alone, then it is wrong, ‘Accountant's financial adviceis important. When business organisation will take the financial advice from his accountant instead of taking any decision, accountant will use his brain for checking each financial fact. He will make his own financial strategy. He will also review all the past financial facts. On the basis, he will give his financial advice | which will be helpful for business organisation. 6 Rolein Investment Decision Making— Accountant knows advance financial management and Finance. He helps in better investment decision. He studies the risk and reward of each investment decision. By hedging the risk, he tries to give the advice for investment decision.alAccounting) Fear Sem.) jes who are interested in are lots of parties who are ; rw ublic represent a society. Business Pre By making and publishing accounting Heit {ts to know who maintaing 14 AMAR :B. Com. (1 7, Role in Public Relation—There accounting record. One of a is pul organisation takes all resources from soc : el Seance public relation, All the public wan! these books of accounting. Q.5. What do you mean by Financial Account use? : Tord Ans. Financial Accounting Information. Accounting information is useful fg : i siness enterprise. Management many persons, both with in and outside a busines: To io ae accounting also called internal accounting provides eae foduet poate the enterprise for such decisions as to the cost and set prices of the p ae ; of fixed assets, marketing costs ete. Accounting is a language, Or of ne is often referred to as the language of business. As the primary aim of language ila serve as a means of communication, accounting is used to communicate financial and other information to people, organization, Governments etc., about various aspects of business and non-business entities and also to some technical information processing and storage devices. : The accounting is, therefore, also an information system necessitated by the great complexity of modern business, In today’s society, many persons and agencies outside the management are involved in the economic life of an organisation. These person frequently require financial data which is provided by accounting information. Finanacial accounting is primarily concerned with preparation of accounting information for the outsiders who do not have direct access to accounting record. They obtain accounting information from the annual. reports of the business enterprises reports published by Government departments and information published in financial dialies e.g. the Economic Times, Financial Express etc. or business magazines (e.g, Business India, Business World etc), Further more some users of accounting have direct interest in the financial accounting information, other users have indirect interest. Direct users require accounting data for their own financial decisions and including owners, creditors and potential investors, managers, taxing authorities, employees, customer and so on. Indirect users of financial accounting information use the information to assist or protect the interest of direct users and include Government regulatory agencies (MRTPC), Stock exchanges, Labour unions, trade associations, lawyers, financial advisors, financial press and others, Q. 6, What are the branches of a accounting ? Ans, Branches of Accounting —Accounting can be classified into the following categories; 1, Financial Accounting. The basic Purpose of this type of accounting is to zecord business transactions in the books of accounts in such a way that operating results for a particular period and financial position on a particular date can be known for the information of the various groups of persons, 2. Cost Accounting, It is the process of accounting and controll product, operation or function. The purpose of this branch of ing Information ? What is its ling the cost ofa accounting, is to |Financ’ | Accounting : Introduction 15 ascertain the cost, to control the cost and to communicate informations for decision- making. 3, Social Responsibility Accounting. Itis concerned with social responsibility aspects of a business. Management is held responsible for what it contributes to the social well being and progress. It is the process of Identifying, measuring and communicating the social effects of business decision to permit informed judgement and decision by the users of information. 4, Tax Accounting, This branch of accounting is related to taxation field such as income-tax, sales-tax, VAT ete. An accountant is required to be full aware of various tax legislations. 5, Management Accounting, It relates to the use of accounting data collected with the help of financial accounting and cost accounting for the purpose of policy formulation, planning control and decision-making by the management. Q.7. Explain the Mercantile System of Accounting. ‘Ans. Mercantile System of Accounting. The matching ofeXpenses, with revenue js based on mercantile system of accounting. In mercantile system of accounting, revenue is recognised when sale is complete or services are rendered, rather than when cash is received. Similarly, expenses are recognised not when cash is paid but when assets or services have been used to generate revenues during a period. In mercantile system of accounting, the following are the implications of this principle: (@) When an item of revenue is entered in the profit and loss account, all expenses incurred should be set down on the expense side, (b) Ifanamountis spent but againstit revenue will be earned in thenext period, the amount should be carried down to the next period and then in the next year treated as an expenses. Example— (i) [fan amount of revenue nature is received but againstiit service is to be renedered or goods are to be supplied in future, the amount must be not be treated as revenue this year but only next year it will be shown. asa liability. (i) At the end of year some of goods purchased remain unsold. Then the cost of goods concerned should be carried towards to thenext year and set against the sales of next year. = (ii) Machinery purchased will last for ten years. Then only one tenth of the cost should be treated as an expenses and the remaining amount should be shown in the balance sheet as an asset. 0.8, Distinguish between ‘book-keeping’ and ‘accounting’. ‘Ans, Meaning of Accounting, Accounting may be defined as the process of collecting, recording, summarising and communicating financial information. Accounting is based on a careful and efficient book-keeping. In fact, the process of accounting begins where that of book-Keeping ends. Meaning of Book-Keeping, Book-keeping isa part of accounting, Itis concerned with record Keeping or maintainence of books of accounting, which is often routine and clerical in nature.(Financial Accounting) 1 Year (Sem. 1) 16 AMAR: B. Com. a i counting, Distinction Between Book-Keeping and Ac tte i .ccounting ji istincti Book-Keeping : oe Jp maintain systematic| 1. Toascertain operating ee 1. To matt of financial | _ results (Net Profit/Net r Loss) and financial aul, position and to communicate finan- cial information to various users. 2, Knowledge level__| 2. Thebook-keeperisnot | 2. The accountant must ired to have| have higher level of renee level of| knowledge than that knowledge than that} of book-keeper. of an accountant. 3. Scope 3. Book-keeping _is| 3. In addition to Book- concerned with| —_keepeing, accounting (i) Identifying the| is concerned with transaction,(ii) mea- summarized the suring the identified classified transaction, tran-sactions,(iii)reco-| analysis and inter- rding the measured] pretation of summ- tran-sactions, and (iv)| arized results and classifying the re-| communicating the corded tran-sactions. interpretated infor- mation to the interested parties. 4. Nature of Job 4. The Job of book-| 4. Therole of an accoun- keeperisoftenroutine] tant is analytical in and clerical in nature, nature. 5, Stages 5. Book-keeping is | 5. Accounting is the primary stage. secondary stage. It begins where book- keeping ends. Q.9. Differentiate between Accural Basis and Cash Basis of Accounting, Ans. Distinction between Accural Basis and Cash Basis of accounting : The major difference between accural-basis of accounting and cash basis of accocintin, is in timing of recognition of revenues, expenses, gains and losses, The accural basic of accounting takes into account the monetary effect of the events or transactions in the period in which they are earned. In the cash basis, the financial effect of the transactions is recorded only in the period in which cash is actually received or paid by the business enterprise. It would be found in practice that cash receipts ina Particular period may largely reveal the effect of the business activities in the earlier period while cash payments may relate to business activities expected in future Periods i.e, rent paid in advance. Thus an account showing cash receipts and Payment of a business unit for a short period can not indicate how much cash received in the return of investment and how much is the return on investment andFinancial Accounting : Introduction 17 thus cannot indicate whether or to what extent an enterprise is successful or unsuccessful. This is made clear by the discussion given above. Q.10, Capital and revenue expenditure and receipts ? ‘Ans. 1. Capital and Revenue Expenditures and Receipts : ‘The main functions ofaccounting include the ascertainment of profit/loss for an accounting, period and financial position as at the end of that period. The distinction between capital and revenue itemsis important both ftom the Income Statement (Profitand Loss Account) 5 well as the Position Statement (Balance Sheet) point of view. For example, if a depreciable asset is purchased, the depreciation on that asset is charged to the Profit and Loss Account, and the written down value of the asset (or original cost of the ascot ess accumulated depreciation) is shown in the Balance Sheet. If the purchase éf a depreciable asset, which is a capital expenditure, is treated as revenue expenditure it will understate the profit of the current year and overstate the profits of the subsequent years. Similarly, the Balance Sheet will not give a true and fair View of the assets and equity of the enterprise till the useful life of the asset is over assuming that the asset is not sold earlier. Capital and revenue item is divided into: 1. Capital and revenue expenditure; 2. Capital and revenue receipts. Capital and Revenue Expenditure : According to Guidance Note on terms used in financial statements issued by ICA1, “Expenditure is incurring a liability, disbursement of cash ot transfer of property for the purpose of obtaining assets, goods or services”. Thus expenditure may or may not involve outflow of cash. Tt ficludes the purchase of capital or long-lived asset, goods for the purpose of sale or for getting services. Expenditures are divided into three categories. 1. capital expenditure 2. revenue expenditure, and 3, deferred revenue expenditure Q.11 Explain the meaning of subsquent events ? ‘Ans. Subsequent events definition : Asubsequent event isan event that occurs after a reporting period, but before the financial statements for that period have been issued or are available to be issued. Depending on the situation, such events josure in an organization's financial statements, The may or may not require discl two types of subsequent events are noted below. Additional Information : An event provides adi conditions in existence as of the balance sheet date, inch prepare the financial statements. for that period. New Events : An event provides new information abot not exist as of the balance sheet date. Subsequent Event Reporting : Generally accepted accounting principles state that the financial statements should include the effects ofall subsequent events that provide additional information about conditions in existence as of the balance sheet date, This rule requires that all entities evaluate subsequent events through the ditional information about iuding estimates used to ut conditions that didpy fal Accounting) I Year (Sem. 1) 18 AMAR: B. Com. (Finanel: anil 4, while a pub it company i ‘statements are actually Jes of situations calling Le to be issued, date when financial statements are avai Peer nein should continue to do so through ti Se ail filed with the Securities and Exchange for the acljustment of financial ee ne * Aiie es ie before © Lawsuit ; If events take place vent, consider adjusting lawsuit, and lawsuit settlement Is a ab earleat to mmatch the amotil the amount of any contingent loss already of the actual settlement, fore the bala + Bad debt : Ifa company issues invoices 10 2 ones Es int eoaactaa sheet date, and the customer goes pa ae to match the amount of at natalie receivables that will likely do i ; If there are subsequent events that provide new nora 20 that did not exist as of the balance sheet date, and for which the i ee before the financial statements were available to be issued or wares oe events should not be recognized in the financial statements. Fee S a ase ee that do not trigger an adjustment to the financial statements if they eu ee balance sheet date but before financial statements are issued or are available to be issued are: * Abusiness combination * Changes in the value of assets due to changes in exchange rates * Destruction of company assets * Entering into a significant guarantee or commitment * Sale of equity * Settlement of a lawsuit where the events causing the lawsuit arose after the balance sheet date, Acompany should disclose the date through which there has been an evaluation of subsequent events, as well as either the date when the financial statements were issued or when they were available to be issued. There may be situations where the non-reporting of a subsequent event would result in misleading financial statements. If so, disclose the nature of the event and an estimate of its financial effect. If business reissues its financial statements, disclose the dates through which it has evaluated subsequent events, both for the previously issued and revised financial statements. Consistency in Disclosing Subsequent Events : The recognition of subsequent events in financial statements can be quite subjective in many instances. Given the amount of time required to revise financial statements at the last minute itis . worthwhile to strongly consider whether the circumstances can be construed as not requiring the revision of financial st There is a danger in inconsistently applying the subse similar events do not always result in the same treat Consequently, itis best to adopt internal rules reg; Jead to the revision of financial statements; ofa subsequent event atements, quent event rules, so that ment of the financial statements, arding which events will always these rules will likely require continualFinancial Accounting : Introduction 19 updating, as the business encounters new subsequent events that had not previ been incorporated into its rules. oe Q.22. Explain the meaning of events occuring after the balance sheet date Ans, The standard particularly deals with following four specific items: Net Profit or Loss for the Period : Two broad categories of net profit and loss for the period are profit or loss from ordinary activities and Profit or loss from extraordinary activities. Profit or loss from ordinary activities is such which arise jn the normal course of business. These activities are a part of business and related activities. Examples: Profit/loss on.sale of goods, services. The transactions and qesults under this category are shown as usual items in the financial statements for theaccounting period. Profit or loss from extraordinary activities is such which do jotarise under the normal course of business, These activities donot occur regularly. Fxample: - Profit on sale of fixed assets, loss due to theft. The transactions and results under this category are to be disclosed separately in financial statements. The disclosure should be in a mariner which clearly shows the effect on overall profits/losses due to these activities, The standard also specifies that ifthe results of ny activity are substantial on the overall performance of the enterprise, then it Should be disclosed separately in financial statements as a separate head. Example: “fixed assets disposal, Restructuring of activities, Settlement of litigations. Prior Period Items : While preparing the financial statements, there are certain, items which actually correspond to prior accounting periods. The income or losses que to these items are a result of error or omission in the financial statements of the prior period. By nature, these items are not frequent and can be easily identified, The current period’s financial statements should clearly show the effect of such prior period items. : 0.13 Explain the meaning of : (i) Accounting estimates (ii) Accounting policies ‘Ans. Changes in Accounting Estimates : There are certain estimates which are used while preparing, the financial statements for any period. For example estimate on the useful life of a machinery, estimate on the realizable value of an. item in inventory. At times, these estimates are required to be revised due to any of the following reasons (inclusive list): zi (i) Change in circumstances (ii) New information (i (iv) Experience Theeffect of such change in estimates is to ‘be taken into account while preparing financial statements, Ifthe change in estimate affects ordinary activities itis disclosed under ordinary activities other under extraordinary activities. s ; Accounting policies are the accounting cose principles while preparing the financial icy should be undertaken only in two cases: Subsequent developments _ Changes in Accounting Policies principles and method of applying th Statements. A change in accounting PO)sem. 1 20 :B. Com. (Financial Accounting) I Year (Sem: ) Sa sia ha ae eo (i) If the change is required by law or a iil change helps in better presentation 7 ote sarang polly weil Tus o abril catetal 69% he ot be shown ii disclosed necessarily. The impact of such change a een dake financial statements. Ifthe impact can’t be assessed, disclosed. Q. 14 Discuss the concept Extraordinary item. ; 5 ‘Ans, Extraordinary items : Extraordinary items In accounting frre ae to as any kind of abnormal loss or gain that is not generated from the regular Dusiness ‘operations. Such types of events are infrequent in nature and are Done The accounting for extraordinary Items are done separately in the financial statements of the business entity. ‘These items are excluded by the financial analysts while determining the profit to earnings ratio for obtaining the real profitability of the business. Features of Extraordinary Items : Let us look at some of the features of extraordinary items: 1. Materiality : Transactions that fall above the material limit of the organisation are considered as extraordinary items. Materiality is dependent on the industry and the size of the company for example for a bakery, selling a cake for Rs.1 lakh is beyond its usual price and is thys considered as an extraordinary item. 2. Rare or Unusual Nature: The items that are considered as extraordinary do not appear on a regular or frequent basis in the operations of the business. Current Status : As of today, the two accounting standards GAAP and IFSC do not entertain the category of extraordinary items in the financial statements. It was not considered an important part of financial statements since January 2015. This step was taken to reduce the complexity and also the associated costs while making the financial statements, ecounting standard; or of financial statements. Any change oe WCHAPTER : 3 FINANCIAL ACCOUNTING : CONCEPTS AND CONVENTIONS Q. 1. What do you mean by Accounting Standard ? Also Explain their importance ? "Ans. Preparation and presentation of corporate financial statement are governed by the companies act, 1956 and accounting standards, In India the institute of by lhered accountants of India had established in 1977 an Accounting Standard Board (ASB). Meaning of Accounting Standards —In this respect main purpose of standards js to provide information to the users as to the basis on which the accounts have been prepared. The objective of setting standards is to bring about uniformity in nancial reporting and to ensure consistency in the data published by enterprises. For accounting standards, to be useful tool to enhance the corporate governance and responsibility, two criteria must be satisfied, i.e. (@ Astandard must provide generally understood and accepted measure of the phenomena of concern. (i) Asstandard should significantly reduce the amount of manipulation of the reported numbers and is likely to occur in the absence of the standards. Significances of Accounting Standards— Accounting standards facilities uniform preparations and reporting of general purpose financial statements published annually for the benefit of shareholders, creditors, employee and public atlarge. They are very useful to the investors and other external groups in assessing ‘he progress and prospects of alternatives investment in different companies in different countries. Need for Accounting Standards—Accounting standards can be seen as providing an important mechanism to help in the resolution of potential financial conflicts of interests between the various important groups in society. It is essential that accounting standards should command the greatest possible credibility among shareholders, creditors, employee and public at large. Q. 2. Explain the Objectives & Advantages of Accounting Standard ? Ans, Objectives of Accounting Standard : Accounting standards are written policy documents issued by expert accounting body or by Government or its regulatory body covering such aspects as recognition, measurement, presentation and disclosure of accounting transactions in the financial statements. ‘These are policy documents aimed primarily at producing a set of uniform financial statements. Therefore, accounting standards may also be termed as codified forms of generally accepted accounting principles. : nf Th The essence of the accounting standards is that they provide specific guidelines as to how to the various items which goto make up the financial statements should pas1 (Sem. 1) (Financial Accounting) 1 Year ( 4 22 AMAR: B. Com. orts relating to net income 4 Le} be dealt within accounts and disclosed in the anuual rep‘ a sal Poston ise diverse accounting practices, snarl ee dei tama de oun rg ie, methods and procedures, by curbing flexibi pe conistency in internal and extemal reporting practices, tion and in ‘They also limit the area within which, the accountant, this manner, they are similar to some type of laws. aay They reduce or bring down the number of alternative accounting practices, i mple, accounting for recording and presenting the business Fe Ee e Gepreciation standard on Depreciation Accounting (AS-6) limits methods. Ms 7 ae (2) They improve the quality of financial reporting in the sense ae ane a ; formats but also easily understandal reports are prepared using not only standards te, the Come comin on terms with same meanings attached to them. For example, i Pi : Act prescribes a common balance sheet format for all companies engaged in general business, _ (3) Accounting standards facilitiate or help in comparing financial statements of various years and among various enterprise in the same industry. Thus, they are helpful in inter-firm and intra firm comparisons of operating results and financial positions, 5 (4) The accounting standards create a sense of confidence amongst the ‘users of the accounting information by providing a definite structure of uniform guidelines which impart credibility and realibi tity to the financial information, Q. 3. What is Utility of Accounting Standards ? Ans. Accounting standards codify the generally accepted accounting principles They lay down the norms of accounting policies and practices by way of codes or guidelines to direct as to how the items appearing in the financial statements should be delay with in the books of account and shown in the financial statements and annual reports. They present the general principles to be put to application using conclusions, Accounting standards bring about uniformity of assumptions, rules and policies adopted in financial reporting and thus they ensure consistency and comparability in the data published by the business enterprises, “Accounting Standard in India—Realising that there wasa need of accountin; standards in india and keeping in view the international developmentsin the fielde of accounting, the Council of the Institute of Chart constituted the Accounting Standards Board (ASB) in A, Standards Boards is performing the function of fo standards. Q. 4. Explain different Concepts and Conventions issued in India, Ans, Accounting principles involve both accounting a 5: ‘oncept: ii conventions. Here are brief explanations : pitas increFinancial Accounting : Concept and Conventions 23 ee na as ‘Accounting Concepts Business entity concepts—A business and its owner should be treated separately 25 faras their financial transactions are concerned. Mfoney measurement concept—Only business transaclions that can be expressed in terms of money are recorded in accounting, though records of other types of transactions may be kept separately. ‘Dual concern concept—For every credit, a corresponding debit is made. The recording of a transaction is complete only with this dual aspect. ‘Going concern concept—In accounting, a business is expected to continue for a fairly long time and carry out its commitments ‘and obligations. This assumes that aie business will not be forced to stop functioning and liquidate its assets at “fire- sale” prices. Cost concept—The fixed assets of a business are recorded on the basis of their original cost in the first year of accounting. Subsequently, these assets are recorded or is depreciation. No rise or fall in market prices taken into account. The concept applies only to fixed assets. "Accounting year concepts—Each business chooses @ specific time period to complete a cycle of the accounting process— fer example, monthly, quarterly, or annually —as pera fiscal or a calender year Matching concept—This principle dictates that for every entry of revenue recorded in a given accounting period an equal expense entry hhas to be recorded Fercorrectly calculating profit or loss ina given period Realisation concept— According to this concept, profits recognised only when stis eared. An advance or fee paid is not considered a profit until the goods or service have been delivered to the buyer. ‘Accounting Conventions—There are four main conventions in practice in accounting: conservatism; consistency; full disclosure; and materiality. ‘Conservatism is the convention by which, when two values ofa transaction are available, the lower-value transaction is recorded. By this convention, profit should never be overestimated, and there should always bea provision for losses. Consistency prescribes the use of the same accounting principles from one od of an accounting cycle to the next, so that the same standards are applied to calculate profit and loss: Materiality means that all material facts should be recorded in accounting. ‘Accountants should record important data and leave out insignificant information. Full disclosure entails the revelation of all information, both favourable and detrimental to a business enterprise, and which are of material value to creditors and debtors. ‘Accounting Concepts and Principles are a set of broad conventions that have been devised to provide a basic framework for financial reporting. As financial reporting involves significant professional judgements by accountants, these concepts and principles ensure that the users of financial informations are not mislead by the adoption of accounting policies ‘and practices that go against the spirit of the accountancy treatments adopted are consistent with the accounting concepts and principles. In order to ensure application of the accounting concepts and principles, major accounting standard-setting bodies have incorporated them into their reporting frameworks such as the JASB Framework.ing) 1 Year (Sem. I) ¢nancial Accounting) 24 AMAR KER tism’. Does it lead Q. 5. Write a note on the ‘convention of conserva ‘o 5 understatement of income? is the policy of ‘playing safe’. Tt takes into 2 rvatism Concept : This ve profits, For example— ean all prospective losses but leaves all prospective P (1) Charging of small capital items, e i ritten-down-value metho (3) Amortization of intangible assets like eee ee air eaial . Showing joint life policy at surrender value as against the (4 Principle of conservatism is applied : = 2 When there is an uncertainty inherent in the activity, ¢.8- meee tg remaining useful life of an asset, occurrence of loss, realisation of income, utility of an asset, estimated liability. lg (5) When there is judgement based on estimates and doubt exists as the general estimates is correct. like crockery, to revenue, i of depreciation as against straight The principle of conservatism, however should be applied cautiously. If the principle is stretched without reservation it results in the creation of Secret reserves Which is in direct conflict with the doctrine of full disclosure. Since the main aim of published accounts is to convey and not to conceal the information policy of secrecy isbeing abandoned in favour of the modern and more logical policy of the disclosure. Q. 6, Write short notes on any two of the following: () Business entity concept; (ii) Convention of consistency; (iii) Accounting equation. Sol. (i) Business Entity Concept— According to this concept, Business is treated as a unit or entity apart from its owners, creditors, managers and others. In other words, the proprietor of an enterprise is always considered to beseparate and distinct from the business which he controls. All the transactions of the business are recorded in the books of the business from the point of view of the business. Even the proprietor is treated as a creditor to the extent of his capital. Upon investment of money in the business by the proprietor, itis deemed that the proprietor has given money and the business has received money. The concept of separate entity is applicable to all forms of business organisations, For example, from legal point of view a body corporateis a separate entity and we regard thesole trader and his business as one and the same thing. But for accounting Purposes, it is the business which is the entity and with which we are concerned. ‘The concept of business as a separate legal entity as distinct from its owners, has been well accepted in relation to companies all over the world since the legal decision in the case ofSalomon Vs Salomon & Co, (1897). Though this leg has not been extended to sole trader and partnershi of accounting, all transaction should specifically of the entity itself foes al concept ip business firms, yet for Purposes telate to the business operations who atta have desc he r asol But!Financial Accounting : Concept and Conventions 25 ees b Ina partnership business, the firm is quite separate from the indi ia ete members bd WhO Have eee to corte Vogue lca feral tay 6 d objective. Still tee ane pate attain an agreed obj ill, each partners has his own separate life and may have many interests ~ financial and otherwise/outside the partnership. Tt is most describe that the dealings: and transactions of the partnership business alone should he recorded in firny’s books. If any partner enters into private financial dealings, tig.- To purchase or sell equity shares ina limited company, Ithas no relevance to the partnership business and so it should.pot be recorded in firm’s books. Similarly, " asole proprietor may have many interests apart from or in addition to his business. "But these should not be included in the firm’s books if they are unconnected with it. In brief, () Only the business transaction are recorded and reported and not the | personal transactions of the proprietor; and (ij) The personal assets of the ownets or shareholders are not considered while reporting, the assets of the business entity. | Gi) Income is the property of the business unless distributed to the owners. (ii) Consistency Concept—In order to enable the management to draw important conclusions regarding the working ofa company over a number of years. It is essential that accounting practices and methods remain unchanged from one accounting period to another. The comparison of one accounting period with that in the past is possible only when the concept of consistency is adhered to. But the idea of consistency does not imply non-flexibility as not to permit the introduction of improved technique of accounting. The principle of consistency plays the role particularly when alternatives accounting method is equally acceptable. For example, In applying the principle that fixed asset is depreciated over its useful life, a company may adopt any of the several methods of depreciation. But keeping with the concept of consistency itis expected that the company would consistently follow the method of depreciation ‘which is once chosen. Any change from one method to another would result in inconsistency. Similarly making the provision for doubtful debts on the percentage ‘of sales basis in one year and age-old basis in another year will result in inconsistency. In the following cases, however there is no inconsistency although apparently \ey may look inconsistent. (@ The application of principle for stock valuation ‘at cost or market price whichever is lower’ will result in the valuation of stock sometimes at cost price and sometimes at market price. But there is no inconsistency here because the shift from the cost to market is only the application of the principle. (6) Similarly, if investments are value at cost or market price whichever is ! lower, itis only an application of the principle. .7. Write Short note on Generally Accepted Accounting Principles? Ans, There are general rules and concepts that govern the field of accounting. se general rules-referred to as basic accounting principles and guidelines-form groundwork on which more detailed, complicated, and legalistic accountingpar (Sem. | inancial Accounting) 1 Year (Sem. 1) 26 AMAR : B, Cot rile are based For e=a Standards Boards (FASB) asis for their own detailed generally of rules are based, For example, the Financial Accountin Me fe beale accounting pHneiples and guidelines 28 : ee and comprehensive set of accounting rules and stancrt et cant accepted accounting principles” (or “GAAP”) consist bea 1d guidelines, (1) the basic accounting principles and gu! Pe ald edecessor the (2) the detailed rules ae standards iesued by FASB and its preciecessor th Accounting Principles Board (APB), and ‘ (3) the generally accepted industry practi financial statements to the public, itis reaui accounting principles in the preparations of those s| stock is ectlias Pained, fevleral law requires the company's NT ie a independent accountants must certify that the financial statements and the rete noter to the financial statements have been prepared in accordance with GAAP GAAP is exceedingly useful because it attempts to standardize and regulate accounting definitions, assumptions, and methods. Because of generally accountilg principles we are able to assume that there is consistency from year to year in the methods used to prepare a company’s financial statements. ‘And although variations may exist, we can make reasonably confident conclusion when comparing one company to another, or comparing one company’s financial statistics to the statistics for its industry. Over the years the generally accepted accounting principles have become more compiex because financial transactions have become more complex. Q. 8. Explain AS-1 related with full disclosure of material information. ‘Ans. Convention of full disclosure : The full disclosure principle “specifies that there should be complete and understandable reporting on the financial statements ofall significant information relating to the economicaffairs of the entity”. ‘To meet the requirements of this principle, all financial statements are supported by footnotes. Apact from legal requirements, good accounting practice should also demands that all significant information should be disclosed. Not only various assets. For example, have to be stated but all the mode of valuation should be disclosed. Various types of revenue and expenses properly grouped must also be disclosed. Whether something should be disclosed or not will depend on whether it is material or not the purpose of this principle is to communicate all material and relevant facts concerning financial position and the results of operations to the users. It emphasises that the financial statements should make full disclosure of material financial information. ‘AS-1 : While preparing the financial statement there are many areas, which have more than one method of accounting treatment such as ; 1..Method of depreciation (Straight Line Method or WDV Method). 2. Treatment of Expenditure during construction (written off, capitalization). 3. Valuation of Inventory (FIFO, LIFO, Weighted Average Method etc.) 4, Treatment of Investment (cost of fair value) etc. Hence accounting policies contain the information about the method adopted for the preparation of financial statement, AS-1 deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements, The main requirement of AS-1 are : ces. If a company distributes its ‘ed to follow generally accepted tatements. Further, ifa companyoy Financial Accounting : Concept and Conventions 2. ar eset = 1. Disclosure of fundamental assumptions namely; going concer consistency 3) | fe d | and accrual, is necessary if they are not followed. y | 2. Disclosure of all significant policies followed in the preparation of profit & of Joss account and the balance sheet. 43, An enterprise can change either all or some of these accounting policies fanure. But if change in an accounting policy has material effect on the 1e | opernting results or financial position in the current year or may have oPMerial effect in subsequent years the same must be disclosed together Z with reason 3 4, Accounting policies should be followed in such a way that a true and fair x A vof the financial positions as at balance sheet date and of the profitand 2 joss for the period ended on that date. a 5, The major considerations governing the selection and application of substance over form and (¢) accounting policies are (a) prudence () § materiality. | 6. Disclosure of accounting policies should form part of the financial | Ditements ie, they should be disclosed at one place instead of being écattered over several statement, schedules and notes. .9, State giving reasons whether the following; statements are either “True” nt ’s | or “False”. ly | ‘Ans. (i) The consistency conventions emphasis that : “Anticipate no profits but al provide for all losses.” (The money measurement conceptassumes astability in the value of money. (ii) Accounting records the qualitative aspects of the business unit. es (io) Since the life of the firm is assumed to be indefinite the going concern al concept provides that income statement should be prepared only when it eZ (the firm) is dissolved. ed (@) Book-Keeping and Accounting are synonymous terms. @ (ci) Accounting, as a language, is used to communicate financial information d. d. al to Government only. (@ii) Revenues should be recorded as early as possible and expenses as late as possible. 3. (citi) Lower of cost or market value rule should be followed only in the valuation It of fixed assets. ; al () Accounts help in determining the tax liability. (x) Accounting is only an art and not a science, h (ai) Accounting informations can be presented for non-monetary events also. (xii) The Separate entity is considered to be separate and apart from its (Business) owner(s). (vill) Assets are always valued at market price because of going concern concept. (xiv) All assets owned by an enterprise are its goods. (xv) Accounting involves communication. ; d (xvi) In accounting, all business transactions are recorded according to dual of concept, al (xvii) The cost concept relates only to the Income statements. accounting on cash basis. (xviii) Accural concept impliesi a ‘om. (Financial Accounting) T Year (Sem. I) 28 AMAR: B. ism, convention and not te False. This statements is relevant for conservat ee stability in the value of money, if) st assumes a (i) True. Money meaurement ree Sa (iii) False. Accounting has nothin; v transactions which are capable of being exPTess! included in the accounting records. dinutty of busi ing concern concept assumes continuity 88 i Sionie Ione Statement has to be prepared at the end of each accounting period. (0) False, Boole Keeping and Accounting are not eae eect a Keeping is part of accounting. Accounting starts where bos Hi ie i (0i)_ False, Accounting is done not only by the Government. itis required for al entities-business or non business where finances are involve . (oi) False, According to conservatism concept always provide for losses but never anticipted about revenue. ; (viii) False. Lower of cost or market value rule is applicable to the valuation of stock and not the fixed assets. ‘ (ix) True. Accounting helps in the calculations of profits which are subject to tax liability, () False. Accounting is both a science and an art, Accounting is science because ut has to follow certain generally accepted accounting principles or rule while recording the transaction, Actual recording of transaction is an art. (i) False. Non-monetary events caanot be recorded because accounting is essentially money base discipline. (if) True. In this way the private activities of the owner(s) would not be mixed up with their business activites. Gsiii) False, Infact, going concern concept assumes that business is a continuing entity. Market value is taken for valuation purpose only when the business is assumed to be liquidated. : (xiv) False. Only those assets which are purchased for immediate Gx) True. Accounting is the process of identifying, communicating economic information to permit informe decisions by the users of accounts. Hence acc. communication. (xvi) True. The double entry book-kee corresponding equal credit. (xvii) False. The cost concept is applicable to both the income statement on connection with the expenses and balance sheet in respect of assets, (viii) False. Accrual concept implies accounting on “accrual basis.” qualitative aspect. Only with ed in terms of money are sale are goods. measuring and :d Judgements, and ‘ounting involves ping requires that each debit must have a ooCHAPTER : 4 FINANCIAL ACCOUNTING : ACCOUNTING STANDARDS AND IFRS Q.1. Define the term ‘accounting standard’. How does a standard differ from aconcept ? ‘Ans. Compliance with the Accounting Standards: The Accounting standards jesued by the ICAI are recommendatory in character in the initial years, During, this recommendatory period, it is expected that the accounting practices of a corporate enterprise should be brought in line with the standard. The process of transition would became easy and smooth so that the enterprise will have no difficulty in complying with the accounting standards once they are made mandatory. After an secounting standard becomes mandatory, itis applicable to all corporate enterprises Whose accounts are audited by the qualified auditors. Even when accounting, Mandards are recommendatory, the auditors of companies are expected to recommend and persuade their clients to comply with the accounting standards. Regarding the mandatory standards, it is duty of the auditors to make sure that accounting standards are followed in the preparation and presentation of the financial statements. If the company fails to comply with mandatory accounting standards, the auditor is required to make complete disclosure in his report so that the users of financial statements :are aware of non- compliance on the part of the business enterprise. = It should be noted that accounting standards have legal backing, ICAI expects that its members implement the accounting standards issued by it through their attest function. ASB has been entrusted with the responsibility of propagating the ‘counting standards and of persuading the concerned parties to adopt them in the preparation and presentation of financial statements. Guidance notes on accounting standards may be issued by ASB and clarification on issues arising therefrom may be given. Even it may review the accounting standards at periodical intervals. Q.2. Explain the need, benefits and limitations of accountinfg standards. ‘Ans. Accounting is a process of recording an organisation’s financial exchanges inorder to retain data that can be referred to in future to make important decisions. But itis very necessary that the records are maintained in a proper format and all the firms follow some specific rules to maintain the records for ease and to create uniformity in the format of records all over the country. r Indian Accounting Standards : Institute ‘of Chartered Accountants of India (ICAI) lays down the standards to be followed in India, which is known as the Indian Accounting Standard, and these standards were laid under the oversight of the Accounting Standards Board. These standards ensure uniformity, transparency, consistency and comparability across firms. (29)i Flere otamt (Financial Accounting) I pes Con) ‘om. AMAR: B.C 30 nting Standardsare needed due to the ing Standards Accoul Need for Accou following reasons: 5 é et + ‘These standards ensure uniformity ip 10 so that the investors can understans i ent. approriate decisions about the investi ting standards are followed thre * Ifthesame accounting rs ainaccounting in any P can explore career opportunities pee steer ranteetiem + Accounting standards guide business ounting language across the account reports, which establish a common globe. * It lets everyone hay transactions. , Benefits of Accounting Standards : The benefits of Accounting Standards are as follows: aia 4. 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. 2. Comparability : Accounting Standards ensure that the reports of any organisation can be compared with that of others across the globe. 3, Uniformity ; Each transaction can be easily identified with the use of Accounting standards, asa particular type of transaction will follow certain. tules and standards to record it in the reports and statements. 4, 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 organisation are fair and transparent. Limitations of Accounting Standards ; Accounting Standards have various limitations too. These are: cial statements across the firms easily and clearly, and can take throughout the world, anyone art of the world. fea single framework for recording all the business 1. 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 ke followed at time instead of multiple methods, and difficult, Difficulty for Management : As stated, there may be many methods fora particular valuation, so it becomes difficult for management to choose one particular method, as each method has its own benefits and limitations, 3. Restricted Scope : Accounting Standards cannot override the coul e statute and needs to be framed within the boundaries of the law that i aan : jaw that is prevalent at Q. 3. What is IFRS? Explain its Need. Ans, IFRS: or International Financial Rey set of accounting and financial reporting | a particular which may make the valuations lengthy porting Standards toa globally accepted Buidelines for preparing and presenting, financial records it has en It w Accoun and cou howeve of accot in regu 1 finan relial with accu ace cou Asi juri the for fin is | fir ce in wel —~a nancial Accoun| atements. Itensures uniformity in accounting practice that makes financial ng : Accounting Standards and IFRS 31 financial finae comparable across different reporting entities worldwide, Over the years fms 7) jhasemersed a8 the new world standard in accounting. . it was first published in the year 2003. It was designed by the International Accounting Standards Board (IASB) and is adopted by more than 144 jurisdictions ene and countries worldwide, including the European Union. The US. government, , | meyer uses the US. Generally Accepted Accounting Principles (GAAP) system pein ees canting rules, Before IFRS, the International Accounting Standards (IAS) were the) jn regulation: oe The full form of IFRS is the International Financial Reporting Standards. It ess ‘punique set of rules and regulations followed worldwide for recording financial transactions of a business entity. At present, it is adopted by 144 rd | jurisdictions. | Injune 2003, its first copy was published by IASB. IASB is aboard of finance on a and accounting experts with responsibility for designing and issuance of ple the standards. | «IFRS is often confused with IAS (International Accounting Standards), ny | which were in practice before. IFRS superseded IAS. + The US.govemment déesn’t follow IFRS and has its own rules and protocols called U.S, Generally Accepted Accounting Principles (GAAP). Both standards are effective and serve the same purpose. However, there is always ‘a comparison of IFRS ys GAAP. ng, The purpose of financial statements to provide information on a company’s 1g financial performance and position to help current or prospective stakeholders make to reliable financing decisions. It is a company’s primary means of communication al with them. So, the information presented in the records should be relevant, reliable, 18 accurate, and comparable. To ensure it, companies started observing regionally accepted accounting standards. However, comparing different companies across i countries became difficult due to a lack of uniformity in their accounting guidelines. ° ‘Asaresult, companies had to prepare several sets of financial statements for different r jurisdictions. 5 y With the emergence of multinationals having a presence in multiple countries, the need for a global accounting, framework gained momentum. It gave rise to the a formation of IASB. The IASB is an independent group with hybrid experts in e finances, auditing, accounting standards, and education. The task of board members isto issue and publish financial accounting standards. i ‘The IASB was created with the sole purpose of designing an_ international t financial reporting system that will ensure smooth processing, interpretation, and comprehension of financial statements, business transactions, and foreign investments, IASB introduced IAS and later IFRS that laid down a framework of universally recognized priciples for accounting The IFRS establishes accounting standards and practices that every companyi ear (Sem. ‘financial Accounting) 1 Year (' a = oe be followed while recongy st be ‘ t obsel ebook that ms ea a adhering to it mus! F B 2 books o ulate directand indjg’ accu business transactions in the bool :. consistency in financial reporting, 6 foreign investments. titates the free flow of capital. In other woyg, of Se il y Ni ide as it facil fi se, an Indian compa’ PY isaccepted worldwideas it fac Ist in, SUPPOSE, i ms ete etm will be more cone pie {in conformity with this aco oa } . inanc rds cout ater sertinizing its finance wag ene nternationally-approved stan ards eliming, ; ard, This is beca \ i é te that the US. governt nt TERS vs US GAAP when it co Fe ctor avwideapred debate on Wee retaeite pring) ™ to compliance. IFRS is lengthy and flexible compat Ot TERS and GAsy paced, fs rules are open tomultiple interpretations. ohovet bo Sao serve a common objective of uniformity and opennt Me statements. ; A mal ). 4, Discuss the impotance of IFRS. : = Importance of IFRS : Its treated as an international accounting standard, w/t and holds great importance for many countries and the world economy. Hereisity pre significance: ee Ke Transparency : It encourages transparency and accountability of financial > statements prepared by companies, small firms, and government agencies, Asa result, it minimizes the margin of error and manipulation of any holdings and irregularities of funds, transactions, and balances. Besides, it also motivates consistency and clarity of work. ar its * Uniformity and Comprehensive : The International Financial Reporting Standards are developed to set uniformity in the presentation and jg understandability of statements. When everyone follows and recognizes 4, the standards, it becomes easy for companies and agencies to follow a common law that helps world economies compare their growth comprehensively. Also, itis easy to read for everyone. Security and Flow : It helps track the flow of transactions, records funds information, and works towards attaining a security level for direct and indirect foreign investments across nations. This accou: essential when we are dealing with signi transactions. * Accountability ; It strengthens accountabilit incompetent financial reporting. If not compl may face penalties. For example, last year, the Johannesburg Stock Exchange fined a sugar firm Tongaat Hulett Ltd. Its financial statements, account Teports, and other information details did not comply with IFRS and were incorrect: Q.5. How is the IFRS uses ? Ans. Uses of IFRS : This standard is a multi-lay i J ; a yer set of rules and guideli prepared like a blueprint to follow in accounting, Its main uses are as ine i t ) inting standard is ificant assets or getting into heavy y by bridging the gap of ied with it, the companies— Financial Accounting : Accounting Standards and IFRS 33 ecg _ ency } Financial Tool : The International Financial Reporting Standards bring efficiency, dindiggip accuracy, and data transparency to serve public interests for growth, trust and Ssstainability of the world economy. For example, the International Organization -r Wo) Sfgecurities Commissions (TOSCO) is working with the IFRS to set up a new body sont rds) py November 2021 to postulate mandatory global standards son climate change in SOmpany | Company disclosures, The [OSCO will als eliminateany extorsor conflicts by going slim interoperable with the global baseline. inate priciples and guide : The companies run their whole busines and represent "panies, it comes tandard ere is its inancial es. Asa igs and otivates porting on and ognizes sllow a srowth. : funds sct and dard is yheavy gap of panies change ccount i were elines S: | their financial data and information as per the IFRS accounting principles, If they fp failtodoso, they may be penalized for it, Hence, itassures the trustworthiness ofa company. promotes Decision Making : The standards help investors make wise decisions regarding their investment by providing a clear picture of company reports and francial statements. It is possible because of its singular and universal language, | making it easy to comprehend. | _ Improves Economy :Globally, investors are more open to investing in companies | with IFRS- compliant financial records. Again, it is because such reports are vesumed to be authentic, easily understandable, and comparable. This .credibility pens the economy to foreign investment and thereby paves the way for ecoiomic progress. 46. Explain the objectives of IFRS ? ‘Ans. Objectives of IFRS : International Financial Reporting Standards represents an international financial reporting system and serves multiple purposes. Some of its significant goals in the financial world are as follows: Create a Common Law : One of its key objectives is to ensure that common law is introduced and adopted by as many jurisdictions and countries as possible to bring everyone on the same page. It ensures that everyone follows the same guidelines and adopts a universal way of reporting business activities. Aid analysis : It helps stakeholders in analyzing a company’s performance and interpreting its financial position. For example, corporations and governments use these standards to make credible financial statements. It aids in categorizing and reporting financial data with accuracy and consistency. Such financial records promote better comprehension and help decision-making. Assist in preparation of reliable financial records : By following, International Financial Reporting Standards, the data presented in the books of account's aye likely tobe accurate, reliable, uniform, and appropriate within the bounds of its rules, The high quality of financial records assists investors in making informed economic decisions, Ensure comparability, transparency, and flexibility in reporting : The consistency in reporting accounting pratices enables easy comparison of the financial records of compliant companies across nations. Such comparisons allow investors to identify risks and opportunities before investing, Asaresult, it promotes foreign trade and investment. Also, it requires full disclosure of all relevant information to its stakeholders.(tinancial Accounting) 1 Year (Sem. 1) oe - 34 AMAR: B. Com: not very rigid and allow compan, However, being principle-based) the ules aI to adapt to them in their own way: ATE x accounting? is the accouting standards apP ae Roe aie ot Accouti@eeamemme o” accounting «andere Ans. Applicability 0! Sia ‘allenterprises are classifies five i ee categoria seat eve lar level, Let us see-the list of accounting 6 and applicable to a p: Which level they are applicable i List of accountig standars issued by ICAI: Standard 7 ing policies All ‘Ast | Disclousure of accounting po ‘As? _| Valuation of Inventories 8 Ass | Cash flow statements a t Ast Contigencies and Events All ’ Occurring After the balance sheet Date AS Net profit or loss for the All Period, Prior period items and changes in Accounting Policies As6 _| (Withdrawn Depreciation Accounting, FY 2016-17) All As7 | Construction Contracts As8 | Accounting for research and Devolopment All ‘As9 | Revenue Recognition All As10 | Accounting for fixed assets All As11__ | The effects of changes in All Foreign Exchange Rates All As 12 Accounting for Goverment Grants All As13 | Accounting for Ivestments All As14 | Accounting for Amalgamations All As15 _ | Accounting for Retirment Benefits in the All Financial statments of Employers As16 | Borrowing Costs All As17 | Segment Reporting As18 | Related Party Disclousers All As19 | Leases Al As20 | Earnings per share All As 21 Consolidated Financial Statements see note SeFinancial Accounting ; Accounting Standards and IFRS 35 As 22 As23 As 25 As 26 As27 As 28 : As 24 , As 29 ‘Accounting for taxes on Income All Accounting for investments Associates See note in Consolidated Financial statements Discontinuing operations All Interm Financial Reporting All Intangible assets Financial Reporting of All Interests in joint ventures All All Impairment of assets Provisions, Contingent Liabilities and contingent Assets All Note: AS 21, AS 23 and AS 27 for the preparation of consolidated financial statements are required to be complied with by a non-corporate entity if the son corporate entity voluntarily prepares and presents the consolidated financial statements. oeae CHAPTER: 5 ‘ACCOUNTING PROCESS : in it advantages, kee] ing ? Explain i ges. a Manes Dentin ae ne Taner See ae Ans, Double Entry System of Boole htop oth the aspects (i.e, debit or Keeping refers toasystem of accountng ne ese other words, cri of every transactions are recordin te aecouns fave} OE Ns iisasystem of recording business tansactionvohich recognises that ear Waneaction has a dual aspect. Under this system, each transaction is seen #5 # Bow OF value frm oneaccoun io another. The receiving account is debited withthe amount and the giving accountis credited. Therefore, every debit has an the total of all debits must be equal to the total of all credits. Advantages of the Double Entry System : : 1. A complete record of all the transactions relating to a business unit are maintained systematically. 2. ‘The arithmetical accuracy of the books of account can be ensured. 3. The profits earned or losses suffered for an accounting period can be ascertained. ‘The financial position of the firm can be ascertained. Location and rectification of error are possible. 6. Amount due te supplier and due from customers can be easily ascertained, Q. 2. What is an account ? Discuss traditional and equation based classification of accounts, Ans. Transaction of a similar nature when recorded at one place is known as account, In other words, an account is a summary of relevant transactions at one place relating to a particular head, It records not only the amount of transactions but also their effect and direction. 1, Personal Account. Personal Accounts are the accounts of persons natural or artificial. For example, the accounts of customers, suppliers, firms, companies, institutions, bank and owner are personal accounts. When an account represents 4 person. It is a repersentative personal account. Accounts of outstanding expenses, repaid expenses, accrued income or income received in advance are example of representatives personal accounts, 2. Real Accounts, The real accounts assets. The example of tangible assets a Furniture & Fittings, stock cash in hat goodwill, trade mark and patents. are the accounts of tangible or intangible ire: Land é& Building, Plant & Machinery, ind. The example of intangible assets are 3. Nominal Accounts. Nominal accounts are those which rel; losses, revenueand gains. Example of nominal accounts are wages, allowed and discount received ate to expenses, salaries, discount, (36) -Modern or Accounting Equation based classification of Accounts ‘According to this approach accounts are classified as under : 1. Assets Accounts; 2, Liabilities Accounts; 3, Capital Accounts; 4, Revenue Accounts; 5, Expenses Accounts, 1, Assets Accounts. Assets accounts are those which relate to economic resources of an enterprise, such as cash in hand, cash at bank, stock, debtors; plant and machinery, furniture, etc. 2, Liabilities Accounts. Liabilities accounts relates to the amourft payable by an enterprise to outsiders such as creditors, bank overdraft, outstanding expenses, Joan taken etc. 3, Capital Accounts. Capital Accounts relate to the owner of an enterprise such as capital, drawings, current accounts of partners etc. 4, Revenue Accounts. These accounts relate to the sale of goods, rendering of service or permitting others to use enterprise's resources yielding interest, royalty, and dividend. Example of revenue accounts are: Sales A/c, Discount Received A/c, Discount Allowed A/c, Interest or Royalty A/c. 5, Expense Accounts. The accounts which show the amount spent or even loss in carrying on business operations. Example are : purchases, wages paid, depreciation, rent etc. Q.3. What is Journal ? Give its advantages. Ans, Journal. AJournal is a book of original record where every trasnsaction is recorded. It is the book in which transations are recorded first under the double- entry system, The process of recording transactions in a journal is termed as Joumalising, In a journal a separate entry is recorded for each transaction. ‘Advantages of Journal 1. Chronological records. Journal is a chronological record in the sense that it records the transaction in the order in which they occur. 2, Explanation of transaction. Each journal entry carries narration which gives a brief explanation of the.transaction. 3, Recording of notes aspects : Both the aspects (je, debit and credit) of a transaction are recorded in the journal. Since the amount recorded is both debit column and credit column must be equal, the possibility of commiting error is reduced and it becomes easy to detect errors. Q.4. Whatis meant by a trial balance ? What are the main objectives ofa trial balance ? ‘Ans. Meaning of Trial Balance. Before taking the account ‘balances to prepare Final Accounts, an attempts is made to prove that the total of accounts with debit balances is in fact equal to the total of accounts with credit balances. This proof of the equality of debit and credit balance is called a Trial Balance.sae Com. (Financial Accounting), TYear (Sem. . Com ants which appeared in the ledger showing reef debit and credit items. taken out from ledger. jt ‘ash Book. Trial Balance is a statement of either the balances or total amounts of rs alee Trial Balance isthe list of debit and erecit DE TT, also includes the balance of cash and bank takes Characteristics of a Trial Balance 1, Ttisa statement not an account which sho ledgers accounts and cash book. 2. It is not a part of the double entry system working paper. 3. It can be prepared at any time F 4. Ari ince accuracy of posting of entries from journal to ledger can be ensured. Some error are not detected by the trial balance, for example, errors of principle. 6. Final accounts and business i.e., trading and profit and loss account and Balance Sheet are prepared with the help of Trial Balance. Objective of Drawing up a Trial Balance The main objectives of preparing trial balance are as follows: 1. To check the arithmetical accuracy of the books of accounts. The main object of prepartion of trial balance is to check the ledger posting which has been made on the basis of principles of double entry system of book-keeping. If all the entries are correctly made than total of Debit and Credit columns of Trial Balance will be equal. 2, To help in detecting the errors. Some of the errors in the books of accounts can'be detected by the trial balance and they can be rectified before the preparation of the final accounts. ws the name and balances of all 1 of Book-Keeping. It is a just a a 3. To facilitates the preparation of financial statement. i. .e., Trading and Profit & Loss Account and Balance Sheet. It is a summary of all transactions of an accounting period. In Trial Balance some accounts are related to income which are recorded in Trading and Profit & Loss Account and others assets and liabilities which are placed in Balance Sheet. 4. Summary of each Account. The Trial Balanc. contained in the ledger. The ledger may have to detail is required is respect of an account. Q. 5. Differentiate between Errors of Omission and Commission. Ans, Distinguish between Errors of Commission and Errors of Omission. Errors of Commission. Ifa wrong amountis entered either in the} i Err 0 journal in the subsidiary books, the tral balance will tally because the same amount (thewee wrong) willbe posted in both the accounts affected by the transaction, For exagcs sale of goods to Harish on credit for S £20 has been entered in thejoureal gc ee {When the entry is posted to ledger, Double entry will becomplete with 280, eg, being debited with S280, and sale account being credited withS 280, lnepneenan inaccuracy in both the accounts the ral balance will tally. pe and expenses are related to e serves asa summary of whatis be referred to only when much error’ been accou affect du meppasewing er. Tt of all ust a n be s of and ofit an ses 1 to tis Accounting Process eee of Omission :Tfa transaction remains altogether unrecorded either in the ° n subsidiary books, it will be termed as an error of omission. Such an not affect the agreement of a‘Trial Balance, as neither the transaction has eal on the debit side of an account nor on the credit side of any other ,000 have been sold to Hari on credit at the transaction was omitted to be recorded in the books. The omission will not balance in any way, because neither has it been recorded on the debit affect the trial afferi Ram's account nor on the credit ide of the sales account (0.4, Distinguish between Trade Discount and Fash Discount. ‘Ans, Distinguish between Trade Discount and Cash Discount. Erro journal 0 error will been ente betpunt. For example, suppose goeds for S 5 Basis of Distinction Tradg Discount Cash Discount 7, Purpose Tit is allowed to| 1. It is allowed to promote the sales or| encourage prompt asa Trade practice. payment. 2. Origin 2, It is allowed when| 2. It is allowed at the goods are sold or time of making purchased. payment. 3, Recording 3, It is not recorded in| 3. Itis rewarded in the the books of| books of account. accounts. 4, Disclosure in the| 4. Itisshownbywayof| 4 Itisnotshown in the invoice deduction in the| invoice. invoice itself. 5, Variation 5, It may vary with the| 5. Itmay very with the quantity purchased. period within which payment is made. accounting equation. Explain its main components. ‘Ans, Accounting Equation All transactions of a business recorded as having @ dual aspect. According to this, every transaction has two fold effect. So, Assets = Liabilities + Capital {f Asset. Asset has been defined in different ways by different writers But a point comton to all definitions is that itis an expenditure for acquiring valuable resources which benefit the future activities of the concern. Buildings, land, machinery, furniture, bills receivable, cash in hand and cash at bank, goods in trade (or inventory), debtors, tre few examples of assets. Without these assets no business tt be started or run. Itis a different matter whichbusiness would need which assets and in what proportion. Each business must have assets to make profit. (ii) Capital. It has been seen that no business cay be run without assets. Now the question arises: Where these asset come from ? One source of assets is the proprietor’s capital. The proprietor of the business, for his selfish ends, brings capital into the business out of which the business (a separate entity) purchases assets for its use, Thus the amount of assets of the ‘business is equal to the amount of capital contributed by the proprietor of the business. In other words, it can be said that when the proprietor on the asset of business (let us say cash) increases andl claim Q.7. Explain the meaning ofi (Sem. I AR: B. Com. (Financial Accounting) I Year (Sem. 1) 40 AM. . ml othe tn iness is recognised. Since this system 4 rotor on the asst of ee ont or double =. aspects, itis cal re tt vent ean be expressed #8 ital = Assets Soe Me tributed by the proprietor is insufficiy, (29 Cotto nae he a ee ay give loan the business takes to borrowing from ke Pegoods. When looked from businay so ri facitesatthe tine of purchase f goods, 70 See sv fie each of tes even gierise toto fer We ne ss Cie oocrrmreases the goods-in-trade of the business, jy the assets of the busines Be itors and lender of money on the Y Tae a er err orca aubsanceof the whole discussion is thatthe creas the assets Of the business is always equal to teenie of ei age) sted thom, Since total assets of the business are acquired out i by the proprietor(s) and ereditor(s) of the business. It is easy to express effects f the transaction as under : : Liabilities (Equities) = Assets or Capital + Liabilities = Assets The term ‘equities’ denotes the claims of various parties against the assets of the business. Equities are two types :() owner’s equity and (i) outsiders equity Owner's equity is also called capital ofthe business which isthe claim of the owners against the assets of the business. All moneys owed to outsiders and which have to be paid are called liabilities or outsiders equity. ‘The equality of total assets and total liabilities is called Accounting equation or balance sheet equation. From the equation, it follows that capital is equal to assets minus liabilities, ie,, Capital = Assets - Liabilities of the proprietor thinking gives rise to system, In this case the given by the ou! e facility granted by the suppliers increa Inother words, capital is what remains to the owner when all outside liabilities are paid off from the available assets of the business, ‘The equation given above can be elaborated a litle more by replacing the terms “liabilities” and “assets” by the various types of liabilities and assets. Q.8, Discuss GST accounting. What are the: Pre-requisites to maintain records according to GST ? Ans: GST: Under the GST re ime, multiple tax levies have been replaced by a single GST tax. This has led to m jajor changes in the accounts the business owners must maintain, Previously, you would have maintained individual accounts for VAT, excise, CST and other service taxes with separate input, output, and credit entries for each. Now, the new tax regime means a completely new list of accounts, featuring the components of GST, Prerequisites for maintaining records and accounts The maintenance of records and accounts is handled by : * The business owner or the oy erator of the premises used for sto: f goods : They should maintain na accounts regarding the time period for which registere: oi ‘ =a Accounting Process } — n of | the goods were in thestorage location (example warehouse), This includes ney} details regarding dispatch, movement, receipt, and disposal of goods. t «The transporter of goods and services: They should maintain records of the goods transported, delivered, and the goods stored in transit by them. all the records and accounts should be maintained nae «+ Under the GST regime, & at the principal place of business, jie, the primary place where the business neg PI Pl re takes place. edit « Ifmore than one place of businessis mentioned in the registration certificate, On records and accounts related to each place of business should be kept at the nese respective workplaces. ein « Ifabusiness owner chooses to maintain the records/accounts in electronic i by fonmat, they should make sure they ave a proper back-¥P of the records/ ited accounts. Also, they should be feasible to produce the records/accounts S Of | when demanded. » When the turnover ofa business exceeds the: prescribed financial limit, the business is liable for an audit. Q. 9. What are the records to be maintain under GST? ‘Ans, Records to be maintained under the GST regime: Every business owner sof | resistered under GST must maintain the following records « tity. «production or manufacture of goods -Detailsofall the goods manufactured ners or produced by the taxpayer. ee «Details of purchases - Details of all the inward supplies purchased by the taxpayer, including the name and address of the supplier. nor + Details of sales - Details of all the outward supplies sold by the taxpayer, ate including the name and address of the buyer ; «Stock of goods - The current amount of goods available in the taxpayer's ae inventory. the « Input Tax Credit availed - The value of Input Tax Credit availed during the purchase of raw materials or other capital goods. ode + Output tax payable - The output tax payable on the sale of finished goods or services. sy a +. Output tax paid - The GST paid either by availing of input tax credit or in ers cash. for + Any other records if required - Any additional record required by the edit Government for a particular business type such as: je" « Goods or services imported or exported during a 12% period, + Inward and outward supplies that attract the payment of tax on reverse charge, along with relevant documents such as invoices, bills of supply, delivery challans, credit notes, debit notes, receipt vouchers, payment of vouchers, refund vouchers and e-way bills.Com. ( counting fear (Sem. I Financial Acc 1g) 1 Year (Sem. 1) ag AMAR tained under GST accounting’ Ss tap 8 7 bene : Every b . | 2.10. What are the accounts tobe mir the GST regime ny isingg 7 UN ‘Ans, Accounts to be maintaif i ee owner could maintain the following accom chased and sold. Inpu i dl spect to the goods purchast” . ae ‘ aaa ia all the related details like opening balance, Outp: This account shoul i aif, goods lost/stolen/destroyeq) _Flectroni cived and SUBPILEH, BOF raw materials, finished | pdgers. Once ds rect sods Pa i vcived and paid, along with adjustments ifany + The! 2 Aceon cane eich contains details ofax payable tax collected oe * Account of ax amounts ey credit claimed (along with tax invoice as ae a ai Gln and delivery callan (ssued or eceiveg ||" ing a particular tax period). : i a Se cconapptonsin | taxable goods/services, have been received. ook os « Recipient details containing the name and address of the buyer towhom |. The goods/services were supplied. : aa «Address of the warehouse/garage or any other premises where the goods eas are stored. This ificludes goods stored during transit, along with the details of the stock stored at that instance. : * Monthly production accounts, where the quantitative details of the following are furnished: * raw materials used for manufacture * goods manufactured * waste and by-products produced in the process * Accounts containing the quantitative details of goods used in the provision of services, details of input services utilised and the services supplied Note : In addition to this, the Commissioner of GST has the authority to apprise business owners to maintain additional accounts/documents for a specific reason or to maintain the accounts in a prescribed manner, Input and Output in GST : The biggest change GST brings to the table is the concept of Input Tax Credit. The tax you pay on purchasing your inputs (goods or services used for furthering your business) can.be used to offset the tax you will Pay on your outputs (finished products or services). Another change is GST’s dual- component structure, The tax for intrastate transactions is divided into CGST (Central GST) that must be paid to the Center and SGST (State GST) that must be paid to the State. If it's an interstate transaction, a single integrated tax called IGST (Integrated GST) has te be paid to the Center. Because of these regulations, the following accounts must be maintained by a registered business owner: * Input CGST A/c * Output CGST A/cance, >yed/ shed, y. acted ce as ‘ived hom hom vods tails the y to or a the 5 OF vill ral- ust an «Input St « Output SGST A/c « Input IGST A/c = Output IGST A/e Electronic cash ledger : GST also introduces a concept called the electronic Hedgers. Once you register for GST in the Government portal, you will get access to Grypes of electronic ledgers : os The E-cash ledger serves as an e-wallet and can be used by the taxpayer to make any payments, such as tax, interest, and penalties. If the taxpayer does not have enough money in this ledger for a particular payment, they can simply’ recharge it online. + The E-credit ledger will contain the input tax credit fetched from the taxpayer’s monthly returns, The credit will be of three types : CGST, SGST and IGST. This amount can only be used to pay tax and cannot be used for any other purpose. « ‘The E-liability ledger will contain the taxpayer's total tax liability for a particular month. By default, this will be shown on the taxpayer's GST dashboard. oe