GENERALLY

ACCEPTED
ACCOUNTING Foundation Course
PRINCIPLES AND
ACCOUNTING
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
 GAAP is an acronym for Generally Accepted Accounting
Principles
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 31 st
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
CONCEPT VIOLATED?
Kathy Jones owns a coffee shop. Her personal expenses are included
in the accounting records.
Entity
ABC Company owns land. The purchase price is $50,000. A recent
appraisal indicates the land is worth $200,000.
ABC shows the land in its financial statements at $200,000.
Historical cost
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