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Accounting standard 2

Accounting standard

Accounting standard 2 valuation of inventories OBJECTIVE OF AS 2: objective of this standard is to formulate the method of computation of cost of inventories/stock, determine value of closing stock /inventory at which, the inventory is to be shown in balance sheet till it is not sold and recognized as revenue. definition Inventories consists of the following: 1. Held for sale in ordinary course of business 2.In process of production of such sale. In form of materials or supplies to be consumed in production process or in rendering services (stores, spares ,rawmaterial)Inventories do not incl machinery. applicability AS 2 is not applicable in following cases: Work In Progress arising under construction Work In Progress arising in ordinary course of business Producers inventories like agricultural and forest products, livestock, mineral oils,ores and gases. Measurement of inventories Inventories should be valued at lower of cost and net realisable value. Major points for valuation of inventories: 1.Determination of cost of inventories 2. Determination of net realisable value of inventories 3.Comparison between cost and net realisable value. Accounting Standards Accounting standards-intro Accounting Standards are written documents, policy, documents issued by expert accounting body or by government or other regulatories body covering aspects of recognition,measurement,treatment ,presentation and disclosure of accounting policies. Objectives of accounting standards Objective of Accounting standards is to standardize the diverse accounting policies and practices with view to eliminate to the extent possible the noncomparibility of financial statements and add the reliability of financial statements. The ICAI recognizing the needs to harmonize the diverse accounting policies and practices, constituted an Accounting Standard Board(ASB) on 21st April,1977. Compliance with the accounting standards

1.The Accounting Standards will be mandatory from the respective date mentioned in AS. The mandatory status of Accounting standard implies that while discharging their attest functions it will be duty of members of institute to examine whether AS is complied within presentation of FS covered by their audit. 2.FS cannot be described as complying with the AS unless they comply with all requirements of each applicable standards. Advantages and disadvantages of as ADVANTAGES: 1.It facilitates comparison of FS of different companies situated at different places. 2.Standards reduce or eliminate altogether confusing variation in accounting treatment used to prepare FS. DIS ADVANTAGES of setting AS: 1.Trend towards rigidity and away from flexibility in applying AS 2.Differences in AS are bound because of diff. in legal system from one country to another. 3.AS cannot override the law. Procedure for issuing accounting standards by icai Broadly following procedure is adopted for formulating the AS: Accounting Standard Board(ASB) shall determine broad areas in which Accounting standards need to be formulated and priority in regards to selection thereof. In preparation of AS ,ASB will be assisted by study groups constituted to consider specific subjects. ASB will hold dialogues with representatives of govt., PSUs ,Industry and other org for ascertaining their views. An exposure draft of proposed standards will be prepared and issued for the comments of members by the institute. The draft of proposed standard will include following basic points:---A statement of concepts and fundamental accounting principles relating to standard. Definitions of the terms used in standard. Presentation and disclosure requirements in complying with the standards Class of enterprises to which std. will apply. Date from which standard will be effective. After this the draft of proposed standard will be finalized by ASB and submitted to council of institute. The council of institute will consider final draft of proposed standard and if found necessary modify the same in consultation with ASB. Scope of as 1.AS by their very nature cannot and do not override the local regulations which govern the preparation and presentation of FS. 2.In formulation of AS ,emphasis would be on laying down accounting principles and not detailed rules for application thereof.

The standards formulated by ASB include paragraphs in bold italic type, which have equal authority. Paragraphs in bold italic indicates the main principles. AS are intended to apply only to items which are material. Date from which its applicable will be specified by ICAI. Applicability of as For purpose of applicability of AS entities are classified into three categories: Level-I enterprise Level- II enterprise Level- III enterprise Level-I enterprise: Enterprises which fall in any one or more of following categories are classified as level-I enterprise: Enterprises whose equity or debt sec are listed whether in India or outside India.

Enterprises carrying on insurance business Financial Institutions Banks incl Cooperative banks All commercial, industrial and business reporting enterprises, whose turnover for immediately preceeding accounting period on basis of audited Financial statements exceeds Rs.50 crores. All commercial, industrial and business reporting enterprises, having borrowings incl public deposits in excess of Rs.10 crores at any time during accounting period. Level II enterprise: All commercial, industrial and business reporting enterprises, whose turnover for immediately preceeding accounting period on basis of audited Financial statements exceeds Rs.40 lakhs but does not exceed Rs.50 crores. All commercial, industrial and business reporting enterprises, having borrowings incl public deposits in excess of Rs.1 crore but not in excess of Rs.10 crores at any time during accounting period.

Level III enterprise: Enterprises which are not covered under Level I and Level II are considered as level III enterprises. Appicability of AS to Level I:All 29 AS are fully applicable . Applicability of AS to Level II and III: 1.AS fully applicable 2.AS applicable but relaxation from certain disclosure requirements 3.AS not applicable

1.AS fully applicable: As 1,2,4,5,6,7,8,9,10,11,12,13,14,15,16,22,16,28. 2.AS applicable but relaxation from certain disclosure requirements: AS 19,20,29 3.AS not applicable: AS3,17,18,24,21,23,25 and 27 are not applicable because of existing regulation in India. Accounting standard Accounting Standard 1 AS 1-disclosure of accounting policies What are Accounting policies: Accounting policies refer to specific accounting principles and method of applying those principles adopted by enterprise in preparation and presentation of FS. At time of preparation of FS(Balance sheet ,p&La/c)there are many areas which have more than one method of accounting treatment such as:

1.Methods of depreciation: SLM WDV 2.Valuation of Inventories: FIFO LIFO Weighted Average 3.Valuation of Investments 4.Tratement of Retirement benefits 5.Valuation of fixed assets 6. Treatment of contingent liabilities

Selection of Accounting Policies Basic objective of selection of accounting policies is that the financial statement should be prepared on the basis of such accounting policies, which exhibit true & fair view of state of affairs of balance sheet & profit & loss account. Major points, which are considered for the purpose of selection and application of accounting policies, are: Prudence Substance over form Materiality

Eg. Of accounting policies:

1. Depreciation: Depreciation on Fixed assets has been provided for on SLM at rates prescribed under schedule xiv to cos act,1956 as amended. 2. Inventories: Inventories are valued at lower of cost and net realizable value. Finished goods ang raw materials are valued at cost or realisable value whichever is lower.For raw materials cost is determined on FIFO method. Need for disclosure of accounting policies 1.For proper and better understanding of Financial statements, it is required that all significant accounting policies followed in preparation of FS should be disclosed.Because assets and liabs in bal sheet and p& l a/c are significantly affected by accounting policies followed. 2.All policies should be disclosed at one place because it would be helpful for a reader of FS. 3. Examples of matters in respect of which disclosure of accounting policies adopted will be required. 4.Any change in an accounting policy which has a material effect should be disclosed. The amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted. Fundamental accounting assumptions It is generally assumed that FS are prepared on basis of fundamental accounting assumptions :are: 1.Going concern concept 2.Consistency Concept 3.Accrual

Accounting standard Accounting standard 2 Accounting standard 2 valuation of inventories OBJECTIVE OF AS 2: objective of this standard is to formulate the method of computation of cost of inventories/stock, determine value of closing stock /inventory at which, the inventory is to be shown in balance sheet till it is not sold and recognized as revenue. definition Inventories consists of the following: 1. Held for sale in ordinary course of business 2.In process of production of such sale.

In form of materials or supplies to be consumed in production process or in rendering services (stores, spares ,rawmaterial)Inventories do not incl machinery. applicability AS 2 is not applicable in following cases: Work In Progress arising under construction Work In Progress arising in ordinary course of business Producers inventories like agricultural and forest products, livestock, mineral oils,ores and gases. Measurement of inventories Inventories should be valued at lower of cost and net realisable value. Major points for valuation of inventories: 1.Determination of cost of inventories 2. Determination of net realisable value of inventories 3.Comparison between cost and net realisable value.

Accounting Standards

Accounting standards-intro Accounting Standards are written documents, policy, documents issued by expert accounting body or by government or other regulatories body covering aspects of recognition,measurement,treatment ,presentation and disclosure of accounting policies. Objectives of accounting standards Objective of Accounting standards is to standardize the diverse accounting policies and practices with view to eliminate to the extent possible the noncomparibility of financial statements and add the reliability of financial statements. The ICAI recognizing the needs to harmonize the diverse accounting policies and practices, constituted an Accounting Standard Board(ASB) on 21 st April,1977. Compliance with the accounting standards 1.The Accounting Standards will be mandatory from the respective date mentioned in AS. The mandatory status of Accounting standard implies that while discharging their attest functions it will be duty of members of institute to examine whether AS is complied within presentation of FS covered by their audit. 2.FS cannot be described as complying with the AS unless they comply with all requirements of each applicable standards. Advantages and disadvantages of as ADVANTAGES: 1.It facilitates comparison of FS of different companies situated at different places. 2.Standards reduce or eliminate altogether confusing variation in accounting treatment used to prepare FS. DIS ADVANTAGES of setting AS:

1.Trend towards rigidity and away from flexibility in applying AS 2.Differences in AS are bound because of diff. in legal system from one country to another. 3.AS cannot override the law. Procedure for issuing accounting standards by icai Broadly following procedure is adopted for formulating the AS: Accounting Standard Board(ASB) shall determine broad areas in which Accounting standards need to be formulated and priority in regards to selection thereof. In preparation of AS ,ASB will be assisted by study groups constituted to consider specific subjects. ASB will hold dialogues with representatives of govt., PSUs ,Industry and other org for ascertaining their views. An exposure draft of proposed standards will be prepared and issued for the comments of members by the institute. The draft of proposed standard will include following basic points:---A statement of concepts and fundamental accounting principles relating to standard. Definitions of the terms used in standard. Presentation and disclosure requirements in complying with the standards Class of enterprises to which std. will apply. Date from which standard will be effective. After this the draft of proposed standard will be finalized by ASB and submitted to council of institute. The council of institute will consider final draft of proposed standard and if found necessary modify the same in consultation with ASB. Scope of as 1.AS by their very nature cannot and do not override the local regulations which govern the preparation and presentation of FS. 2.In formulation of AS ,emphasis would be on laying down accounting principles and not detailed rules for application thereof. The standards formulated by ASB include paragraphs in bold italic type, which have equal authority. Paragraphs in bold italic indicates the main principles. AS are intended to apply only to items which are material. Date from which its applicable will be specified by ICAI. Applicability of as For purpose of applicability of AS entities are classified into three categories: Level-I enterprise Level- II enterprise Level- III enterprise Level-I enterprise: Enterprises which fall in any one or more of following categories are classified as level-I enterprise: Enterprises whose equity or debt sec are listed whether in India or outside India.

Enterprises carrying on insurance business Financial Institutions Banks incl Cooperative banks All commercial, industrial and business reporting enterprises, whose turnover for immediately preceeding accounting period on basis of audited Financial statements exceeds Rs.50 crores. All commercial, industrial and business reporting enterprises, having borrowings incl public deposits in excess of Rs.10 crores at any time during accounting period. Level II enterprise: All commercial, industrial and business reporting enterprises, whose turnover for immediately preceeding accounting period on basis of audited Financial statements exceeds Rs.40 lakhs but does not exceed Rs.50 crores. All commercial, industrial and business reporting enterprises, having borrowings incl public deposits in excess of Rs.1 crore but not in excess of Rs.10 crores at any time during accounting period.

Level III enterprise: Enterprises which are not covered under Level I and Level II are considered as level III enterprises. Appicability of AS to Level I:All 29 AS are fully applicable . Applicability of AS to Level II and III: 1.AS fully applicable 2.AS applicable but relaxation from certain disclosure requirements 3.AS not applicable

1.AS fully applicable: As 1,2,4,5,6,7,8,9,10,11,12,13,14,15,16,22,16,28. 2.AS applicable but relaxation from certain disclosure requirements: AS 19,20,29 3.AS not applicable: AS3,17,18,24,21,23,25 and 27 are not applicable because of existing regulation in India.

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Accounting Concepts and Principles -

Prepared By: Prof: Mital Thakkar Introduction Actually there are a number of accounting concepts and principles based on which we prepare our accounts These generally accepted accounting principles lay down accepted assumptions and guidelines and are commonly referred to as accounting concepts Users of Financial Statements Investors Need information about the profitability, dividend yield and price earnings ratio in aorder to assess the quality and the price of shares of a company Lenders Need information about the profitability and solvency of the business in order to determine the risk and interest rate of loans Management Need information for planning, policy making and evaluation Suppliers and trade creditors Need information about the liquidity of business in order to access the ability to repay the amounts owed to them Government Need information about various businesses for statistics and formulation of economic plan Customers Interested in long-tem stability of the business and continuance of the supply of particular products Employees Interested in the stability of the business to provide employment, fringe benefits and promotion opportunities Public Need information about the trends and recent development Limitations of conventional financial statements Companies may use different methods of valuation, cost calculation and recognizing profit The balance sheet does not reflect the true worth of the company Financial statements can only show partial information about the financial position of an enterprise, instead of the whole picture Accounting Concepts Accounting Concepts Business entity Money Measurement/stable monetary unit Going Concern Historical Cost Prudence/conservatism Materiality

Objectivity Consistency Accruals/matching Realization Uniformity Disclosure Relevance

Business Entity Business Entity Meaning The business and its owner(s) are two separate existence entity Any private and personal incomes and expenses of the owner(s) should not be treated as the incomes and expenses of the business Examples Insurance premiums for the owners house should be excluded from the expense of the business The owners property should not be included in the premises account of the business Any payments for the owners personal expenses by the business will be treated as drawings and reduced the owners capital contribution in the business Money Measurement Money Measurement Meaning All transactions of the business are recorded in terms of money It provides a common unit of measurement Examples Market conditions, technological changes and the efficiency of management would not be disclosed in the accounts Going Concern Going Concern Meaning The business will continue in operational existence for the foreseeable future Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so Example Possible losses form the closure of business will not be anticipated in the accounts Prepayments, depreciation provisions may be carried forward in the expectation of proper matching against the revenues of future periods Fixed assets are recorded at historical cost Historical Cost Historical Cost Meaning

Assets should be shown on the balance sheet at the cost of purchase instead of current value Example The cost of fixed assets is recorded at the date of acquisition cost. The acquisition cost includes all expenditure made to prepare the asset for its intended use. It included the invoice price of the assets, freight charges, insurance or installation costs Prudence/Conservatism Prudence/Conservatism Meaning Revenues and profits are not anticipated. Only realized profits with reasonable certainty are recognized in the profit and loss account However, provision is made for all known expenses and losses whether the amount is known for certain or just an estimation This treatment minimizes the reported profits and the valuation of assets Example Stock valuation sticks to rule of the lower of cost and net realizable value The provision for doubtful debts should be made Fixed assets must be depreciated over their useful economic lives Materiality Materiality Meaning Immaterial amounts may be aggregated with the amounts of a similar nature or function and need not be presented separately Materiality depends on the size and nature of the item Example Small payments such as postage, stationery and cleaning expenses should not be disclosed separately. They should be grouped together as sundry expenses The cost of small-valued assets such as pencil sharpeners and paper clips should be written off to the profit and loss account as revenue expenditures, although they can last for more than one accounting period Objectivity Objectivity Meaning The accounting information should be free from bias and capable of independent verification The information should be based upon verifiable evidence such as invoices or contracts Example The recognition of revenue should be based on verifiable evidence such as the delivery of goods or the issue of invoices Consistency Consistency Meaning Companies should choose the most suitable accounting methods and treatments, and consistently apply them in every period

Changes are permitted only when the new method is considered better and can reflect the true and fair view of the financial position of the company The change and its effect on profits should be disclosed in the financial statements Examples If a company adopts straight line method and should not be changed to adopt reducing balance method in other period If a company adopts weight-average method as stock valuation and should not be changed to other method e.g. first-in-first-out method Accruals/Matching Accruals/Matching Meaning Revenues are recognized when they are earned, but not when cash is received Expenses are recognized as they are incurred, but not when cash is paid The net income for the period is determined by subtracting expenses incurred from revenues earned Example Expenses incurred but not yet paid in current period should be treated as accrual/accrued expenses under current liabilities Expenses incurred in the following period but paid for in advance should be treated as prepayment expenses under current asset Depreciation should be charged as part of the cost of a fixed asset consumed during the period of use Problems in the recognition of expenses Normally, expenses represents resources consumed during the current period. Some costs may benefit several accounting periods, for example, development expenditures, depreciation on fixed assets. Recognition criteria for expenses Association between cause and effect Expenses are recognized on the basis of a direct association between the expenses incurred on the basis of a direct association between the expenses incurred and revenues earned For example, the sales commissions should be accounted for in the period when the products are sold, not when they are paid Systematic allocation of costs When the cost benefit several accounting periods, they should be recognized on the basis of a systematic and rational allocation method For example, a provision for depreciation should be made over the estimated useful life of a fixed asset Immediate recognition If the expenses are expected to have no certain future benefit or are even without future benefit, they should be written off in the current accounting period, for example, stock losses, advertising expenses and research costs Realization Realization

Meaning Revenues should be recognized when the major economic activities have been completed Sales are recognized when the goods are sold and delivered to customers or services are rendered Recognition of revenue The realization concept develops rules for the recognition of revenue The concept provides that revenues are recognized when it is earned, and not when money is received A receipt in advance for the supply of goods should be treated as prepaid income under current liabilities Since revenue is a principal component in the measurement of profit, the timing of its recognition has a direct effect on the profit Recognition criteria for revenues The uncertain profits should not be estimated, whereas reported profits must be verifiable Revenue is recognized when The major earning process has substantially been completed Further cost for the completion of the earning process are very slight or can be accurately ascertained, and The buyer has admitted his liability to pay for the goods or services provided and the ultimate collection is relatively certain Example Goods sent to our customers on sale or return basis This means the customer do not pay for the goods until they confirm to buy. If they do not buy, those goods will return to us Goods on the sale or return basis will not be treated as normal sales and should be included in the closing stock unless the sales have been confirmed by customers Problems in the recognition of revenue Normally, revenue is recognized when there is a sale The point of sales in the earning process is selected as the most appropriated time to record revenues However, if revenue is earned in a long and continuous process, it is difficult to determine the portion of revenue which is earned at each stage Therefore, revenue is permitted to be recorded other than at the point of sales Exceptions to rule of sales recognition Long-term contracts Owning to the long duration of long-term contracts, part of the total profit estimated to have been arisen from the accounting period should be included in the profit and loss account Hire Purchase Sale

Hire purchase sales have long collection period. Revenue should be recognized when cash received rather than when the sale (transfer of ownership) is made The interest charged on a hire purchase sale constitutes the profit of transaction Receipts from subscriptions o A publisher receives subscriptions before it sends newspapers or magazines to its customers o It is proper to defer revenue recognition until the service is rendered. o However, part of subscription income can be recognized as it is received in order to match against the advertising expenses incurred Disclosure Disclosure Meaning Financial statements should be prepared to reflect a true and fair view of the financial position and performance of the enterprise All material and relevant information must be disclosed in the financial statements Uniformity Uniformity Meaning Different companies within the same industry should adopt the same accounting methods and treatments for like transactions The practice enables inter-company comparisons of their financial positions Relevance Relevance Meaning Financial statements should be prepared to meet the objectives of the users Relevant information which can satisfy the needs of most users is selected and recorded in the financial statement

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