Homework

• Problem 2.2 to 2.5

Accounting principles
Accounting has evolved over a period of many centuries, and during this period
many terminologies, rules and conventions have come to be accepted as useful.
• Accounting as set of rules ( Golden rules of accounting and the bag of pebbles)
• Accounting as a language
• Accounting equation
• The Principles of accounting :
 relevance - meaningful and useful to those using
objective - not subjective and influenced by personal bias
feasible - can be implemented without undue complexity
Accounting Standards
• The foundation of accounting consists of a set of Generally Accepted
Accounting Principles ( GAAP) established by the Financial Accounting
Standards Board (FASB). These are applicable in practice in the United States.
• In all other countries, the authority of accounting standards is based on the
laws of the land. However much similarity to the American GAAP is always
found. Eg in India we have the (Ind)AS (Accounting Standards).
• However an attempt has been made to codify a set of accounting principle
that would apply internationally and over 40 statements have been published
by the International Accounting Standards Board (IASB). These are termed as
International Financial Reporting Standards (IFRS). Now the FASB and the IASB
have initiated a joint program to converge GAAP and IFRS beginning 2014
Concept of going concern and gone
concern.

•  Liquidity vs solvency
• In the case of insolvency and distribution of assets , the shareholders
share what is left after all the liabilities are paid ( which may be
nothing)
• Cost is the monetary measurement of the amount of resources used
for some purpose. An expenditure is the decrease in an asset ( usually
cash ) or an increase in the liability (often accounts payable)
associated with an incurrence of a cost. If the cost benefits a future
period it is an asset ( prepaid expense ). If it relates to the current
period it is an expense that reduces the retained earnings of the
current period. An expense represents resources consumed by the
entity’s earning activity during the current period.
• Costs related to the activities of a period are expenses of the period.
• Costs that cannot be associated with revenues of future period are
expenses of the current period.eg :training costs; write off of obsolete
inventory
• Expenses of a certain accounting period, even though cannot be
traced to any specific transaction occurring in that period are period
costs, to be treated as expenses of that period. Eg : salary costs;
interest costs etc
Conservatism

• Prudent reporting and healthy skepticism

• Recognize revenue when they are certain
• Recognize expenses as soon as they are reasonably possible
• If a revenue of future period is received in the accounting period (current
period), it is recognized as an increase in cash (receipt basis of accounting) but
not recognized as revenue. It is an off setting (becoming zero in the future )
liability in the balance sheet and recorded as income received in advance.
• If an expense of future period is paid in the current period, under the same
analogy , it is reckoned as decrease in cash but recorded as an off setting asset
in the balance sheet and recorded as prepaid expenditure.
Realisation
• The realization concept states the amount recognized as revenue is
the amount that is reasonably certain to be recognized.
• Conservatism concept suggest when the revenue should be
recognized
• Interest on a non performing asset is recognized only when it is
received.
Matching

• The revenue and expense effects of a given event should be

recognized in the same accounting period.
• Eg : sales and discount on sales
• Egs : An item of inventory costing Rs. 1000 is received in March,
vendor paid in April and item shipped to a customer in May. In March
the inventory will go up by Rs. 1000. That is a cost (acquisition of the
goods). Since the vendor is not paid, it is accounted as Accounts
Payable. In April, there is a cash disbursement towards offsetting the
payable (decrease in cash ). In May there is a consumption of the
inventory (decrease in an asset)
Trial balance
• Trial balance is a summary of the transactions
• From here the items move to either the balance sheet ( asset or
liability/ equity) or income statement.
• Because of the dual concept every transaction has two parts- debit
and credit
• Any transaction either impacts an expense, income, asset, liability or
equity
When a salary is paid, the expense increases and cash decreases
• Salary is a charge on resources. It is an expense
• Cash is the resource which is used to pay the salary.
Class exercise No.2

• Understand the nature of transactions in Problem 2.6

• Self study – Problem 2.7

• Understand the nature of transactions in Problem 2.8

• Self study – 2.9, 2.10, 2.11

• Problem 2.12