Generally Accepted

Accounting Principles and

Accounting Standards
GAAP
 GAAP
 Good accounting practices evolved by the
profession over a period of time
 Most of these practices have been adopted
explicitly in the Accounting Standards
 Accounting Standards
 Mandatory accounting/ disclosure principles
prescribed by an authority
 In India Accounting Standards are
prescribed by the Institute of Chartered
Accountants of India
Accounting Period Concept
 Income is measured for a specified
interval of time – accounting period
 A period of 12 months
 Financial Year
 Calendar Year
 Diwali Year
 Makes comparison easier
 Takes seasonal fluctuations in consideration
Example
 X Limited reported profit of Rs.14
crores whereas P Limited net profit of
Rs.20 Crores. Which company has
performed better?
 X Limited prepares its accounts for 7
months whereas P Limited prepares its
accounts for 13 months.
Money Measurement Concept
 Only those transactions that can be
expressed in terms of money are the
subject matter of accounting
 Money is the common unit of measurement
 Each accounting transaction must be
converted into the `reporting currency’ of
the entity
Examples
 There is a lockout in the factory of Y limited
for 2 months. How do you record this in
accounts?

 Z Limited has 2 plants, 7 cars, 8

computers, 11 tables and 6 chairs as its
assets. What are the total assets?

 Q Limited has sales of Rs.1.20 Crores in

domestic market and $10 million of
exports. What is the total income of Q
Limited?
The Entity Concept
 Business is a separate accounting entity
for which accounts are kept
 Business and the businessman are separate
entities
 Transactions recording depends upon the
`accounting entity’ chosen.
Examples
 Shyam bought goods for `10 lakhs and sold
for ` 10.50 lakhs. What is the profit?
 Out of the good bought he consumed goods
worth ` 1 lakhs for personal purposes?

 A Limited is a captive BPO of B Limited, a

UK entity. The costs incurred by A during
2017 are ` 20 crores and the revenue is NIL
as all the services were provided to B
Limited which owns A Limited. What is the
profit of A Limited?
Accrual Concept
 Cash basis of accounting vs. Accrual
basis of accounting
 Timing when income or expenses should
be recorded
 Income and expenses are recorded
when `accrued’ and not when received
or paid
 Income recorded when earned
 Expenses recorded when incurred
Examples
 D Limited sold goods on 28 February 2018
for ` 10 lakhs and allowed 3 months credit
to its customer. The amount was collected
on 28 May 2018. Should the sale be
recorded in the year 2017-18 or 2018-19?

 E Limited has the practice of paying

monthly salary on the 7th of next month.
Salary for the month of March 2018 was
paid on 7th April 2018. Should it recognized
as the expense of 2017-18 or 2018-19?
The Matching Concept
 Expenses should be matched against the
revenue generated to ascertain profit
 Profit = Sales/ Income minus Cost of Goods
Sold
 Cost of Goods sold = Opening Stock +
Purchases + Expenses incurred – Closing
Stock
Examples
 Total purchase for the year 2017-18 are `
120 lakhs whereas the sales are ` 175
Lakhs. What is the profit?
 What is the profit if goods worth ` 20 lakhs are
still unsold?
 What is the profit if goods worth ` 35 lakhs
bought during 2016-17 were unsold during that
year?

 A lap top was bought for ` 1lakh on 1st April

2017 with an estimated useful life of 3
years. Should the cost be charged to the
P&L account of 2017-18?
Operating vs. Capital Expenditure
 Revenue Expenses /Operating Expenses
(OPEX)
 OPEX for day to day operations
 OPEX is charged to P&L account when
incurred
 Capital Expenditure (CAPEX)
 CAPEX for long term benefits
 CAPEX is appropriated over the useful life
of the asset by way of depreciation
The Going Concern Concept
 The business will continue to operate
indefinitely
 Unless there are reasons to believe
otherwise
 The business neither has the intention nor
the necessity to discontinue operations
Historical Cost Concept
 Assets are recorded in the accounts at
its historical cost
 Subsequent changes in the value are
normally not recorded in the accounts
 Cost is however systematically
apportioned over the useful life of the
asset
Examples
 A Limited bought a piece of land for ` 120 lakhs
during 2007-08. The current market price for
the same is ` 1,000 lakhs. At what value should
it appear in the Balance Sheet?

 R Limited, a pharmaceutical company, bought

10,000 shares of S Limited as a strategic
investment @ ` 250 per share. The current
market price of S limited is ` 150 per share? At
what value this investment should appear in
the books of R Limited?
The Conservatism Concept
 Anticipate no profit but anticipate all
losses
 Recognise gains only when they are reasonably
certain
 Recognise losses even if they are reasonably
probable
 It is prudent to `understate profits’ rather
than `overstate’
Examples
 Pee Ltd. bought 1,000 shares of RIL @ ` 1,000 per
share on 1 October 2017 for trading. The market price
per share on 31st March 2018 is ` 800. At what value
the short term investment appear in the Balance
Sheet of Pee Ltd? How do we treat ` 200 fall in value
per share?
 What would be your answer if the market price per
share on 31st March 2018 is ` 1,200?

 MD Limited sells goods on credit basis. On 31st March

2018, it has a total outstanding of ` 1200 lakhs from
its customers. The past experience says that about
5% of the customers invariably default. How do we
account for this anticipated loss?
The Materiality Concept
 Insignificant details should be avoided
but all important information must be
disclosed
 Any information that may influence the
decision of the user of the financial
statement
 The level of details to be maintained
Examples
 S Limited bought a calculator for Rs.200. It
has an estimated useful life of 5 years.
 Is it a CAPEX or OPEX?
 Should it be depreciated over its useful life?

 In the Profit and Loss A/c of Tee Ltd. about

60% of the expenses have been clubbed
under the heading `Miscellaneous Expenses’
where as Cee Limited has reported all heads
of expenses separately including about 100
different types of expenses which together
constitute only 10% of the total expenses in
rupee terms. What are your views?
The Consistency Concept
 Accounting methods once chosen must
be applied consistently period after
period unless there is strong reasons to
change
 Makes inter-period comparison possible
 If there is a change the same must be
disclosed separately
 The impact of the change in accounting
policy must be quantified and reported
separately
Example
 Dee Limited wants to change its
accounting policy in respect of
depreciation method.
 Is it allowed to do it?
 What is the impact of change in
accounting policy?
 What disclosure would you suggest?
Substance over form
 The accounting treatment and
presentation in financial statements
of transactions and events should be
governed by their substance and not
merely by the legal form
Example
 X Limited sold some investments to Y
Limited for ` 100 lakhs with an
agreement to repurchase them after
one month at ` 101 lakhs.
 How should this transaction be recorded
in the books of X Limited?
 How to treat the gain of ` 1 lakh?
Dual Aspect Concept
 Each accounting transaction effects at-
least two accounts in such a way that
 Assets = Liabilities + Owner’s Equity
 This system of accounting is called
double-entry book-keeping system
Ind AS - 8
 accounting policies are specific principles, bases,
conventions, rules and practices applied by an
entity in preparing and presenting financial
statements.
 Any transaction or event or condition that is
specifically covered by an Ind AS, accounting policy
shall be determined by applying the relevant Ind
AS.
 If there is no specific Ind AS covering a particular
transaction or event or condition, the management
shall use its judgement in developing an accounting
policy. users.
Ind AS - 8
 Selection of accounting policy shall be governed by
principles of relevance and reliability. The information
must be relevant to the economic decision making needs
of the users
 The accounting policies are considered to be
reliable, if the financial statements:
 represent faithfully the financial position, financial
performance and cash flows of the entity;
 reflect the economic substance of transactions, other
events and conditions, and not merely the legal form;
 are neutral, i.e. free from bias;
 are prudent;
 are complete in all material respects.
Ind AS – 8
 An entity shall select and apply its accounting
policies consistently for similar transactions, other
events and conditions, unless an Ind AS specifically
requires or permits categorisation of items for
which different policies may be appropriate.
 Accounting policies once chosen shall be applied
consistently period after period.
 An entity may change its accounting policy only if the
change is required by an Ind AS; or the change results in
the financial statements providing reliable and more
relevant information about the effects of transactions,
other events or conditions on the entity’s financial position,
financial performance or cash flows.
Ind AS - 8
 In case of a change in accounting policy, the
entity shall disclose the nature of change in
accounting policy and the reasons how the new
accounting policy provide reliable and more
relevant information.
 The impact of the change in accounting policy
for the current period and each prior period
presented shall also be quantified and
presented.
Accounting Standards
 Accounting Standard Board (ASB) of
ICAI is responsible for preparation of
accounting standards
 So far 32 accounting standards have
been issued
 Initially AS are recommendatory in
nature
Globalization of accounting
standards
 Ministry of Corporate Affairs (MCA)
decided to converge Indian AS with
International Financial Reporting
Standards (IFRS)
 Convergence involved modifying Indian
AS with IFRS rather than adopting the
later
 MCA has issued a new series of
accounting standards (Ind AS)
Globalization of accounting
standards
 Ind AS are substantially in line with IFRS
 The implementation of Ind AS has
commenced in a phased manner from 1st
April 2016