1. Explain the meaning of accounting. What are its Objectives / functions of accounting? Also point out some advantages of accounting.
Ans : Accounting is an art of recording, summarizing, analyzing, classifying and interpreting business transactions of financial nature.
In other words ‘Accounting is the art of recording, classifying and summarizing is a significant manner and in terms of money , transactions and events which are in part at least of financial character and interpreting results thereof’ [AICPA]
Objectives / functions of accounting (you can also make characteristics from the below points)
i. Recording Financial Information: Accounting is an art of recording financial transactions of the business concern. This is the basic function of accounting.
ii. Classification of Data: Classification of data means that data of one nature is kept at one place. This is done in the book is termed as a ledger.
iii. Summarizing : Another important function of financial accounting is to make summaries of recorded and classified data.
iv. Dealing with Financial Transactions: Financial Accounting records only financial transactions and events capable of measuring in terms of money . transactions which are not financial nature are not recorded in the book of accounts.(you can ignore underlined)
v. Interpretations: The data are interpreted for various end users by means of ratios to judge the solvency, profitability and performance of the business organizations. These also help the managers to formulate plans, policies and budgets etc.
Limitations of accounting :
a. Since accounting is not an exact science ,it can be influenced by personal judgments. For example while charging depreciation , either Original Cost or Written down Method or some other method can be used.
b. Qualitative information like employees satisfactions , customer satisfaction are ignored. It can only record monetary transactions.
c. Accounting information provides only the incomplete records because actual profit or loss of a business can be known only when the business is closed down.
d. Transactions are recorded on the basis of historical cost. As cost of acquisition is generally taken and not the current value, hence true state of financial position cannot be determined.
The following are the advantages of accounting:
i. Complete and systematic record: Accounting helps to keep systematic records of all transactions and summaries of them.
ii. Ascertainment of profit or Loss : Accounting helps in ascertainment of Net Profit or Net Loss by preparing Profit or Loss account.
iii. Ascertainment of financial position: The financial position of a firm/business can be ascertained by preparing the Balance Sheet of the firm/business.
iv. Evidence for legal matters: Properly maintained accounts , supported by authentic documents(vouchers) are accepted by courts as a firm evidence.
v. Assessment of tax liability: Properly maintained record will be of great help to the firm for assessment of taxation.
2. What do you mean by Accounting Information and Accounting Information System?
Ans: Accounting information means the data provided in the financial statements and reports. Financial Statements, in ordinary sense, means a statement relating to financial matter. But in accounting and financial management, the term is specifically used to refer to the two statements which the accountant prepares at the end of a period of time for a business enterprise.
These two statements are a. Balance Sheet and b. Profit and Loss Account or Statement of P&L. They are the basic statements of any business enterprise. In case of a public limited company, these are also known as published accounts.
Accounting Information System (AIS): Accounting Information System means collection, processing and arrangement of accounting data in such a way which enables the users of such information to form rational and judicious decision in regard to concern course of action.
Since the financial statements are general purpose statements, so, accounting information should also be general purpose information and should be designed to serve the information needs of all types of interested parties. A formal ‘Accounting Information System' produces statements and reports which can be used to make business decisions by the managements and other interested parties.
3. Name the different parties interested in accounting information and explain why they want it? ( G.U. 1991 , 1994 , 1998 ) 8 Marks .
Ans : There are various parties interested in accounting information to make use of the same for their respective purposes. These parties are :
i. Owners: The parties, who contribute towards the capital of a business entity, bear the risk of the business. Therefore, they are interested to know the operating profit earned or loss sustained and financial position of an entity. Accounting information helps the owners to achieve their information for the purpose they need.
ii. Managers: Accounting information are useful to managers for the purpose of planning, decision making, controlling, motivating, directing and monitoring the working of a business entity.
iii. Creditors, Bankers, Lenders, etc: This group of users are interested in accounting information to ascertain the solvency position and the profit earning capacity of the business. Solvency position ensures them timely return of their money and the profit earning capacity ensures payment of interest.
iv. Employees: Employees are interested in financial accounting in order to assess the stability of their employment, to lodge their claim for hike in wage, share in profit, bonus etc.
v. Consumers: Consumers use accounting information to safeguard their interest in regard to quality of products, price level maintained, price charged and to uphold the consumer movement.
vi. Prospective Investors: Prospective investors are interested in accounting information to determine safety of their investment is the business. They are also interested to know earning capacity and dividend policy of the business.
vii. Government and regulating agency: Government and other regulating authority are interested in financial statements in order to assess, levy and collect sales tax, excise duty, custom duty, income tax wealth tax etc. They also require accounting information in order to regulate the activities of the enterprise where necessary and to determine economic policies.
viii. Trade association and chambers of Commerce: This group of users make use of accounting information to frame various types of industry demands to be placed before the concerned authority, and also to formulate business policy.
4. What are the Characteristics/ Qualitative Characteristics ( Attributes ) of Accounting Information?
Ans: Qualitative aspects of accounting information are more important than the availability of accounting information. If the information does not have the utility to the user, the mere availability does not serve the purpose. So, one of the objectives of the financial statements is to provide quality information regarding the financial position and operating performance.
The Accounting Standards Board of the ICAI has underlined four major qualitative characteristics of accounting information provided in the financial statements:
(i) Reliability: Accounting information must be reliable. Reliability implies that the information must be factual and verifiable. The Accounting information is said to have verifiability if such information can be verified from source document such as cash memos, purchase invoices, sales invoices , correspondence, agreements, property deed and other similar document.
(ii) Relevance : Accounting information depicted by financial statements must be relevant to the objectives of the enterprise. Unnecessary and irrelevant information should not be included in financial statements.
(iii) Understandability: Accounting information should be presented in such a simple and logical manner that they are understood easily by their users such as investors, lenders, employees, etc. A person who does not have any knowledge of accounting terminology should also be able to understand them without much difficulty.
(iv) Comparability : Comparability is a very useful quality of the accounting information. The financial statements should contain the figures of previous year along with the figures of current year. So, that the current performance can be compared with past performance.
Other qualitative characteristics are:
(v) Verifiability : The Accounting results may be corroborated by independent measures using the same measurement methods .
(vi) Neutrality: Accounting information should be neutral and for common purpose only, directed towards the common needs of users and should not aim to serve particular needs of specific users.
(vii) Timeliness : To avoid delay in economic decision making accounting information is supposed to be available in time to the users.
(viii) Completeness: All the information that “reasonably" fulfills the requirements of the other qualitative objectives should be reported.
(xi) Substance Over Form: If information is to represent faithfully the transactions and other events, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form.
(xii) Materiality (Economic Reality): The relevance of information is affected by its materiality. Information is material if its misstatement (i.e. omission or erroneous statement) could influence the economic decisions of users taken on the basis of the financial information.
5. Explain the different Bases of Accounting? What are the differences between Cash basis and Accrual Basis of Accounting?
Ans: One of the main objectives of accounting is to ascertain the profit or loss of a business enterprise at the end of an accounting period. There are three bases of ascertaining profit or loss, namely
a. Cash Basis b. Accrual Basis and c. Hybrid or Mixed basis.
(a) Cash Basis of Accounting: Under this basis, incomes are not recorded unless they are received in cash. Similarly, expenses are recorded only when they are paid in cash. In other words, credit transactions are not recorded at all and are ignored till cash is actually received or paid for them. Thus profit is merely the excess of actual cash receipts in respect of sale of goods and other incomes over actual payments in respect of purchase of goods, expenses on wages, salary, rent etc. Income or profit is calculated with the help of a Receipts and Payments Account. This basis is useful for professional people like lawyers, doctors, chartered accountants etc.
(b) Accrual Basis of Accounting : Under this basis, incomes are recorded when they are earned or accrued, irrespective of the fact whether cash is received or not, e.g. sales made on credit will be included in the total sales of the period. Similarly, expenses are recorded when they are incurred or become due and not when the cash is paid for them, e.g. , rent due to the landlord but not paid will be treated as expense for the period when it is due and not in the period when it is paid. Hence, in accrual basis, profit or loss of a particular period is the result of matching of the revenues earned and expenses incurred during the period. This makes it necessary to consider outstanding expenses, prepaid expenses, accrued incomes, incomes received in advance etc. for the preparation of financial statements.
(c) Hybrid or Mixed Basis of Accounting: This basis of accounting is the mixture of cash basis and accrual basis. Under hybrid basis of accounting, revenues and assets are recorded on cash basis whereas expenses and liabilities are recorded on accrual basis. Usually it is adopted by professional people like doctors, lawyers etc., they prepare Receipts and Expenditure Account to ascertain their net income during a period. (not in G.U. syllabus)
Distinction between Cash Basis of Accounting and Accrual Basis of Accounting:
Basis of Distinctions Cash Basis of Accounting Accrual Basis of Accounting
1. Recording of cash and credit transactions. This basis records only the cash transactions. This basis makes a complete record of all cash as well as credit transactions.
2. Recording of incomes. As per this basis, only those incomes are recorded which have been received in cash. As per this basis, all incomes are recorded whether cash is received for them or not.
3. Recording of expenses. As per this basis, only those expenses are recorded which have been paid in cash. As per this basis, all expenses are recorded whether cash is paid for them or not.
4. Outstanding expenses, prepaid expenses, accrued incomes and incomes received in advance This basis does not take into consideration outstanding expenses, prepaid expenses, accrued incomes and incomes received in advance. This basis takes into consideration all such items.
5. Distinction between capital and revenue items This basis does not make a distinction between capital and revenue items. This basis makes a distinction between capital and revenue items.
6. Legal position This basis is not recognized under the Companies Act,2013. This basis is recognised under the Companies Act,2013
7. Ascertainment of correct profit or loss This basis does not ascertain correct profit or loss because it does not make a complete record of all cash and credit transactions. This basis ascertains correct profit or loss because it makes a complete record of all cash and credit transactions.
8. Suitability This basis is suitable for professional people like doctors, lawyers etc. This basis is adopted by business enterprise with profit motive.
6. What are the different Branches of Accounting?
Ans: Accounting information means the data provided in the financial statements and reports. These are : Financial Accounting , Cost Accounting , Management Accounting Tax Accounting , Social Responsibility Accounting , etc. These branches of accounting are explained below:
(1) Financial Accounting: Financial Accounting is that branch of accounting which deals with the recording of business transactions in a systematic manner for the purpose of ascertaining the profit or loss of the business earned during an accounting period by preparing a Profit & Loss Account and to present the financial position of the business by preparing a Balance Sheet. This branch of accounting provides information required by the management and various other parties interested in the business.
(2) Cost Accounting: Cost accounting is used to ascertain the total cost and per unit cost of goods produced and services rendered by a business. It also estimates the cost in advance and helps the management in exercising strict control over cost.
(3) Management Accounting: Management accounting is used to present the accounting information in such a way as to assist the management in planning and controlling the operations of a business. The management accountant uses various techniques and concepts to make the accounting data more useful for managerial decision making. These techniques include ratio analysis, budgetary control, fund flow statement, cash flow statement, etc.
(4) Social Responsibility Accounting: Social responsibility accounting is that branch of accounting which is aimed at identifying, measuring and communicating the contribution of a business entity to the society. The contribution of a business to the society consist of providing employment to socially backward class , providing financial and manpower support for public programmes , environmental protection measures , customer satisfaction etc.
(5) Human Resource Accounting: Human resource accounting is the art of valuing, recording and presenting the worth of human resources in the books of accounts of an organization. Accordingly, human resources accounting is an information system which involves measuring the costs incurred by business to recruit select, train and develop personnel, evaluate their economic value, and report to management the changes occurring in this asset.
(6) Tax Accounting: The branch of accounting which is used for tax purposes is called Tax Accounting. Income tax and Sales tax are computed on the basis of this accounting.
7. Explain the term Accounting Principle.
Ans : The term ' Principle ' means rule or law or guideline or regulation which help to perform an act. Accounting principles are general decision rules derived from both objectives and theoretical concept of accounting. These are some guidelines for sound accounting Practices. These are manmade and are the result of evolutionary process in accounting.
In simple words ‘Accounting principles are general decisions and rules which govern the development of accounting techniques.’
8. What is GAAP ? Explain its Accounting implications? Or Give a brief account of the structure of Generally Accepted Accounting Principle ( GAAP ) Or Explain ' Generally Accepted Accounting Principles' Or What do you understand by GAAP? Discuss.
Ans : GAAP means Generally Accepted Accounting Principles. Generally accepted means generally approved by accounting Professions. It means principles which are generally regarded as permissible or legitimate by the accounting professions.
GAAP guide the accounting profession in the choice of accounting techniques and in the preparation of financial statements. These are manmade and have been developed gradually through the process of evolution over the years. These are not rigid and are subject to changes according to the changing economic circumstances. These principles are applied in recording business transactions, preparing accounts and presenting them before the users of accounting information.
9. Give a short explanation on the Characteristics of accounting principles.
Or
Explain the main features of Accounting Principles.
Ans : Following are the main characteristics / features of accounting principles :
a. Accounting principles are man made and have developed through the process of evolution over the years . Like natural sciences viz - Physics , Chemistry , etc , accounting principles cannot be proved / verified by observation . These principles are subject to changes according to the changing economic situations.
b. Accounting principles are the process of evolution and are developing fast . It means that they are not in a finished form.
c. Accounting principles must fulfill three criteria , relevance , objectivity and feasibility. The word relevance implies that principles should provide useful information to the users. Objectivity implies that accounting information is not influenced by the personal bias of those who furnish the information. Accounting information given in the financial statement should be free from the personal bias of the persons who have taken part in the preparation of such statements. The principle of feasibility is that it can be applied without undue complexity and cost.
d. Accounting principles are not rigid and are flexible in nature. They are subject to changes from industry to industry and accountant to accountant and place to place.
e. Accounting principles are developed for common usage to ensure uniformity and understandability.
10. What are the fundamental accounting assumptions? Discuss
Ans : - Assumptions are traditions and customs developed over a period of time and well accepted by the accounting profession. Fundamental accounting assumptions provide a foundation for recording the transactions and preparing the financial statements therefrom.
Following are the fundamental accounting assumptions :
(i) Accounting entity: Under this assumption a business unit is considered separate from its owners and only business transactions are recorded in books of accounts.
(a) Accrual : - Under this assumption , revenue is recognized when it realises . Date of receipt of cash is immaterial. Similarly, expenses are recognized when they are incurred to earn a revenue and the date of actual payment of expenses is immaterial.
(iii) Going concern: - Under this assumption , a business unit will continue to exist indefinitely . It means it will be continued for a long period and will not be dissolved immediately.
(iv) Money measurement : - Under this assumption , the transaction which can be expressed in terms of money will only be recorded in accounting .
(v) Accounting Period: - Under this assumption, financial statements are to be prepared periodically in order to provide accounting information to its users.
11. What are the fundamental accounting principles.
Ans : - Fundamental / Basic accounting principles are the general decision rules which govern the development of accounting techniques . These principles do not violate or conflict with the fundamental accounting assumptions. Following are the fundamental accounting principles:
(i) Dual aspect: Under this principle , every transactions is to be recorded in its two fold aspects the debit aspect and credit aspect i.e. A = E or Assets = Equities .
(ii) Revenue recognition : - Under this principle revenue is recognised when goods are sole and services are rendered . It is not necessary whether cash is received or not .
(iii) Cost : - This principle implies that a transaction is to be recorded at the price which is paid or be paid for the acquisition of an asset or a service .
(iv) Matching : - This principle implies that expenses incurred to earn a revenue are compared with that revenue in order to ascertain the net profit or net loss .
(v) Full disclosure : - This principle implies that transaction should be recorded in such a way that there must be a full disclosure of facts . There should not be any role for personal choice of an accountant.
(vi) Objectivity : - This principle states that accounting should be definite, verifiable , reliable and free from personal judgment of the accountant .
12. Explain modifying Accounting Principles.
Or ,
Explain any three modifying accounting principles .
Ans : - In the application of accounting principles and assumptions in certain situations some have been modified for preparation of financial statement . These constraints are referred to as modifying principles some of which are discussed below :
1. Materiality : - The term materiality refers to the relative importance of an item . This modifying principle states that only material information should be incorporated in the financial statement and non - material information should not be stated in those statements. An item of information should be judged as material, if the knowledge of that item has an influence on its users in their decision making process. For example - instead of writing pen, pencils , rubber , register etc. we may write stationery A/c.
2. Consistency : - The principle of consistency implies that a method decided once to treat a given event should be consistently followed from one period to another . It means that the same accounting procedure should be followed for similar items over the periods. For example -- If written down value method of depreciation is followed in a particular year the same method should be followed in subsequent years.
3. Conservation ( prudence ) : - This principle states that all unfavorable events should be recognized at the earliest and favorable events should be recorded only when they actually takes place under this principle expenditure are divided between capital and revenue on the basis of its service potential . If the benefit derived from an expenditure is consumed within an accounting period, it is considered revenue and if the benefit from an expenditure is derived for a longer period, it is treated as capital expenditure.
4. Cost concept : - Financial statements are prepared on historical cost basis . Historical cost implies that transactions should be recorded at cost price and not at any other price . Thus cost concept makes the financial statements objective , reliable and feasible .
5. Dual aspect concept : - It provides the accounting equation E = A. It means that the assets of a firm are equal to the claims of the creditors and owners . It also shows how each nominal account affects the owners equity .
6. Realisation concept : It provides guidelines for determining and measuring incomes and helps in the preparation of profit and loss account in order to ascertain the true profit or loss of a firm .
7. Periodicity concept : - It enables the accountant to prepare the financial statements periodically in order to ascertain the periodical profit or loss and the financial position at the end of a given period .
8. Matching and accrual concepts : - These concepts suggest that the expenses incurred to earn a revenue should be compared with that revenue . Thus, in the preparation of income statement, revenue earned during a given period whether received or not and expenses incurred to earn that revenue within that period whether paid or not are to be considered . Thus a true profit or loss for a period can be determined with the help of these concepts.
13. Explain the role of accounting concepts in the preparation of financial statements.
Or,
Briefly explain the accounting concepts which guide the accountants at the recording stage.
Ans : - Financial statements are required to show a true and fair view of the financial position of a concern on a particular date and a true and fair view of the financial profit or loss . In preparing and presenting these statements, the accounting principle offer guide lines to the accountants.
1. Entity concept: - This concept recognizes that a business unit is separate from its owner and restricts the recording of transactions to business transactions only. Private transactions are excluded from recording in business books. Thus, the financial statement reflects the financial position of the business alone.
2. Money measurement unit: This concept states that only those transactions which can be expressed in terms of money are only recorded. Thus financial statements contain the information in monetary terms and as a result the statement can convey information which is objective and understandable.
3. Going concern concept: - This concept assumes that a business unit will exist for an indefinite period of time . It means that it will not be dissolved immediately. Therefore, this help the accountants to divide the life span of the business, thus , all sources of losses and contingences are to be recognized and provided for immediately , but in case of a gain , it is to be recognized when it actually realizes . Examples of this principle are---
( i ) Valuation of inventory and investment at cost price or market price whichever is lower .
( ii ) Maintaining provision for bad and doubtful debts ,
( iii ) Not taking appreciated value of fixed assets .
4. Timeliness: - The principle of timeliness states that information should be disclosed timely . The companies Act , 1956 requires that the annual reports must be submitted to the register of companies and made available within a specified period of time after the closure of accounting year.
5. Cost benefit; - This modifying principle states that the cost of applying a particular principle should not exceed the benefits derived from it . This does not mean that effort should be taken to save cost by providing lesser information. But it indicates that heavy expenses should not be incurred in supplying information which is not relevant.
6. Periodicity Assumptions: According to this concept accounts should be prepared after every period and not at the end of the life of the entity. Usually, this period is one calendar year. In India we follow from 1st April of a year to 31st March of the immediately following year.
7. Dual Aspect Principle: Each transaction has two aspects. If a business has acquired an asset, it must have resulted in any one of the followings :
a ) Some other assets has been given up or
b ) Obligation to pay for it has arisen , or
c ) There has been a profit , which the business owes to the proprietors or
d ) The proprietor has contributed for the acquisition of the assets.
The reserve is also true. So the equation is
Assets = Liabilities + Capital
8. Accrual Principle: If an event has occurred, its consequences will follow. If a transaction is not settled in cash, nevertheless it is proper to record the event in the books. Thus expected future cash receipts and payments are considered in accounting. As for example unpaid salaries and wages, prepaid rent are taken into account.
9. Materiality Principle: According to this principle, items having an insignificant effect or being irrelevant to the user need not be disclosed . These important items are either left out or merged with other items , otherwise accounting statements will be unnecessary over burdened .
10. Full Disclosure Principle: This principle requires that all significant information relating to the economic affairs of the enterprise should be completely disclosed.
11. Consistency Principle: This convention states that accounting principles and methods should remain consistent from one year to another. This should not be changed from year to year, in order to enable the management to compare the profit and loss A/c and balance sheet of the different periods and draw important conclusions about the working of the enterprise.
12. Conservation Principle: According to this convention all anticipated losses should be recorded in the books of accounts , but all anticipated or unrealized gains should be ignored.
14. Short Notes : 5 Marks each
A. Assumptions: Assumption means taking certain things for granted. In accounting , certain assumptions are fundamental for the preparation and presentation of financial statement . The following five assumptions are considered as basic assumptions of accounting. These are
i. Accounting Entity / Separate Business Entity: In accounting business is treated as a unit separate and distinct from its owners, creditors, managers and others. In other words the owner of a business is always considered as distinct and separate from the business he owns. Business unit should have a completely separate set of books and we have to record business transactions from firms points of view and not from the point of view of the proprietor. The proprietor is treated as a creditor of the business to the extent of capital invested by him in the business. The capital is treated as a liability of the firm. Because it is assumed that the firm has borrowed funds from its own proprietors instead of borrowing it from outside parties. It is for this reason that we also allow interest on capital and treat is as an expenses of the business. Interest on capital reduces the profits of the firm and at the same time increases the capital of the proprietor. Similarly, the amount withdrawn by the proprietor from the business for his personal use is treated as his drawings. Likewise, goods used from the stock of the business for business purposes are treated as the expenditure of the business but similar goods used by the proprietor for his personal use are treated as his drawings.
ii. Accrual : Accrual is the accounting process where the effect of transactions and other events are recognized on mercantile basis . i.e., when they occur ( and not as cash or a cash equivalents is received or paid ) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate . Financial statements prepared on the accrual basis inform users not only of past events involving the payment and receipts of cash but also of obligations to pay cash in the future and of resources that represent cash to be received in the future.
Accrual means recognition of revenue and costs as they are earned or incurred and not as money is received or paid. The accrual concept relates to measurement of income, identifying assets and liabilities.
Example : Mr. Pankaj buys clothing Rs.20,000 paying cash Rs. 10,000 and sells at Rs.30,000 of which customers paid only Rs. 25,000
His revenue is Rs. 10,000 , not Rs. 25,000 cash received. Expenses is Rs.20,000 not Rs.10,000 cash paid. So the accrual assumption based profit is Rs.10,000 ( Revenue - Expenses)
iii. Going Concern: The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on the different basis and, if so, the basis used is disclosed.
The valuation of assets of a business entity is dependent on this assumption. Traditionally, accountants follow historical cost in majority of the cases. For example, if a machinery is purchased which would last, say, for the next 10 years, the cost of this machinery will be spread over the next 10 years for calculating the net profit or loss of each year. Because of the concept of going concern the full cost of the machine would not be treated as expenses in the year of its purchase itself. The marked value of the fixed assets is irrelevant and is not recorded in the balance sheet, as these assets are not going to be sold in the near future.
iv. Money Measurement: Only those transactions and events are recorded in accounting which is capable of being expressed in terms of money. An event, even though it may be very important for the business, will not be recorded in the books of the business. Unless it effect can be measured in terms of money with a fair degree of accuracy. For example, accounting does not record a quarrel between the production manager and sales manager, it does not report that a strike is beginning and it does not reveal that a competitor has placed a product in the market. These facts or happenings cannot be expressed in money term and these are not recorded in the books.
v. Accounting Period: As the business is intended to continue indefinitely for a long period, the true results of the business operations can be ascertained only when the business is completely wounded up. But ascertainment of profit after a very long period will be of little use to the proprietors, managers, investors and other because it will be too late to take corrective steps at that time. The users of the financial statements need to know the results of the business at frequent intervals. Thus, the entire life of the firm is divided into time intervals for the measurement of the profit of the business. Twelve month period is usually adopted for this purpose. According to the amended income tax law, a business has compulsorily to adopt financial year beginning on 1st April and ending on 31st March in the next calendar year, as its accounting period. Apart from this companies whose shares are listed on the stock exchange are required to publish quarterly results to depict the profitability and financial position at the end of the three months period.
B. Principles: Basic accounting principles are the general decision rules which govern the development of accounting techniques. These principles do not violate or conflict with the basic accounting assumptions. They work as a complementary to basic assumptions. Following are the basic accounting principles.
i. Dual Aspect Principle: Here, in this principle of ' Dual Aspect ' every business transaction is recorded as having a dual aspect. In other words, every transaction affects at least two accounts. If one account is debited, any other account must be credited. The system of recording transaction based on this principle is called 'Double Entry System'. It is because of this principle that the two sides of the Balance Sheet are always equal and the following accounting equations will always hold good at any point of time.
Assets = Liabilities + Capital Or Capital= Assets - Liabilities
Whenever a transaction is to be recorded, it has to be recorded in two or more accounts to balance the equation. If a transaction affects (increases or decreases) the one side of the equation , it will also affect (increase or decrease) the other side of the equation or increase one account and decrease another account on the same side of equation. Equation remains balanced whenever a transaction take place. For example , X commences business with Rs.5 lakhs in cash and takes a loan of Rs. 1 lakh from the bank and these 6 lakhs are used in buying some assets , say plant and machinery .
The equation will be as follows -
Assets = Liabilities + Capital
Rs.20 lakhs = Rs.5 lakhs + Rs.15 lakhs
ii. Revenue Recognition Principle: Revenue means the amount which is added to the capital as a result of business operations. Revenue is earned by sale of goods or by providing a service. Concept of revenue recognition determines the time or the particular period in which the revenue is realised. Revenue is deemed to realised when the title or the ownership of the goods has been transferred to the purchaser and when he has legally become liable to pay the amount. It should be remembered that revenue recognition is not related with the receipt of cash. For example, if a firm gets an order of goods on 1st January , supplies the goods on 20th January and receives the cash on 1st April , the revenue will be deemed to have been earned on 20th January , as the ownership of goods was transferred on that day.
Revenue in case of incomes such as rent , interest commission etc. is recognised on a time basis . For example , rent for the month of March 2006 , even if received in April 2006 will be treated as revenue of the financial year ending March 31 , 2006. Similarly if commission for April 2006 is received in Advance in March 2006 , it will be treated as a revenue of the financial year commencing April 2006 .
iii. Cost Principle: Cost means monetary price paid or to be paid for the acquisition of an asset or a service. Thus, historical cost principle implies that an asset is ordinarily recorded in accounting records at a price which is paid or to be paid to acquire it. As it refers to the past so it is also called historical cost. It is the basis for the valuation of an asset in the financial statement. Fair value is considered for the purpose of recording the value of an asset. For example, if a business entity purchases a building for Rs. 5,00,000 , it would be recorded in the books at this figure . Subsequent increase or decrease in the market value of the building would not be recorded in the books of accounts . If two years later the market value of the building shoots up to Rs. 10,00,000 , the increased value will not be ordinarily recorded in books of accounts.
iv. Matching Principle: Though the business is a continuous affair, its continuity is artificially split into several accounting years for determining the periodical results. Thus expenses of a particular period are compared with the revenues of that period to determine the net operational results of that accounting period. As for example; rent for twelve months whether paid or not is matched against the revenues earning during these twelve months.
In addition to these, legal position of transactions should be considered while recording such transactions e.g. Hire Purchase transactions.
v. Full Disclosure Principle: This principle requires that all significant information relating to the economic affairs of the enterprise should be completely disclosed. In other words, there should be a sufficient disclosure of information which is of material interest to the users of the financial statements such as proprietors, present and potential creditors, investors and others. The principles are so important that the Companies Act makes ample provisions for the disclosure of essential information in the financial statements of a company. The format and contents of a Balance Sheet and Profit and Loss Account are prescribed by Companies Act. Various items or facts which do not find place in accounting statements are shown in the Balance sheet by way of foot notes.
vi. Objectivity Principle: This principle requires that accounting transaction should be recorded in an objective manner, free from the personal bias of either management or the accountant who prepares the accounts It is possible only when each transaction is supported by verifiable documents and vouchers such as cash memos, invoices, sales bill, pay in slip, correspondence, agreement etc. For example, when the goods are purchased for cash, the transaction must be supported by cash receipt for money paid and if the goods are purchased on credit , e you the transaction must be supported by a copy of invoice or delivery challan . The cash receipt or invoice become the documentary evidence of the transaction and provide an objective basis for verifying the transaction. Objectivity is one of the reasons for adopting the ' Historical Cost ' as the basis of recording accounting transaction because cost actually paid for an asset ( i.e. , historical cost ) can be verified from the documents . On the contrary, if assets are recorded on their market value , the objectivity cannot be adhered to because the market value may differ from person to person and from place to place .
C. Modifying Principle: Generally, the financial statements are prepared keeping in view the basic principles and assumptions of accounting. However difficulties are faced in the application of accounting principles in certain situations which call for the modified application of the principles and assumptions of accounting. These constraints are referred to as Modifying Principles. These Modifying Principles are :
i. Materiality : According to this principle , items having an insignificant effect or being irrelevant to the user need not be disclosed . These unimportant items are either left out or merged with other items , otherwise accounting statements will be unnecessary overburdened . American Accounting Association ( AAA ) defines the term materiality as under " An item should be regarded as material if there is reason to believe that knowledge of it would influence decision of informed investor."
According to Kohler " Materiality is the characteristics attaching to a statement , fact , or item whereby its disclosure or the method of giving its expression would be likely to influence the judgment of a reasonable person."
It should be noted that what is material for one concern may be immaterial for another. For instance, the cost of small tools may be material for a small repair workshop, but the same figure may be immaterial for Tata Limited. Similarly, the nature of the transaction should also be taken into consideration. A difference of Rs. 500 in the valuation of stock may b y be regarded as immaterial but the difference of Rs.500 in cash could be termed material . Thus , the accountant shout judge the importance of each transaction to determine its materiality .
ii. Conservation: According to this principle, all anticipated losses should be recorded in the books of accounts, but all anticipated or unrealized gain should be ignored. In other words, conservatism is the policy of playing safe. Provisions is made for all known liabilities and losses even though the amount cannot be determined with certainty Likewise , when there are different alternatives for recording a transactions The one h one having least favourable immediate effect on profits or capital should be adopted . For example closing stock is valued at cost price or market price whichever is lesser.
iii. Cost Benefit: Cost Benefit principle implies that the cost of applying the principle should not exceed the benefit derived from the application of the principle. This does not mean that effort should be taken to save cost by providing lesser information. It stresses that undue heavy expenses must not be incurred in supplying information which are not relevant.
iv. Consistency: The principle of consistency requires that the accounting policies , which are followed from period to period should not be changed . These should not be changed from year to year , in order to enable the management to compare the profit & Loss Account and balance sheet of the different periods and draw important conclusions about the working of the enterprise . If a firm adopts different accounting principles in two accounting periods , the profits of current period will not be comparable with the profits of the preceding period . For example , a firm can choose any one of the methods of depreciation, from Straight line method , written down value method , Annuity Method etc. But it is expected that the method once chosen will be followed consistently year after year.
But the principle of consistency should not be taken to mean that it does not allow a firm to change the accounting methods according to the changed circumstances of the business.
v. Timeliness: Under this principle, accounting information should be furnished to different users in a timely manner. If information is not provided timely, it loses its ability to influence decisions and becomes irrelevant. It means that financial statements must be prepared periodically without waiting for the final dissolution of the firm. Such statement requires some estimates in certain situations and a rational approach should be adopted for making these estimates in order to arrive at fair income and position statement.
vi. Substance over legal form: According to this modifying principle, the transactions and events recorded in the books of accounts and prescribed in the financial statement, should be governed by the ' substance of such transactions, and not by the legality of such transactions . In certain cases, the transaction recorded may not represent the true legal position. Therefore, under ' substance over legal form ' principle , substance of the transactions gets preference over legal position . For example , under hire purchase system , the legal ownership of an assets lie with the hire vendor until the last installment is paid but the assets is recorded and shown in the Balance Sheet at . cost less depreciation as its own assets . Here the substance of the transaction prevails over its legal position.
vii. Industry Practice : Industry practice varies from Industry to Industry . For example , under Banking Companies Act , the reporting format of the Banks is quite different from other companies governed by the Companies Act 1956. Valuation of stock of gold is valued at market price and not at cost price .
15. What is IFRS (International Financial Reporting Standards )State the steps/process of issuing IFRS?
International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not - for - profit organization called the International Accounting Standards Board (IASB).
The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry - specific reporting.
Scope and process of issuing International Financial Reporting Standards (IFRS):
International Financial Reporting Standards (IFRSs ) are developed through an international consultation process , the “ due process ", which involves interested individuals and organisations from around the world. The due process comprises.
1. Setting the agenda: First of all the IASB sets an agenda adding potential items by reference to the needs of investors. For this the IASB considers :
(a) The relevance to users of the information and the reliability of information that could be provided,
(b) Whether any existing guidance is available,
(c) The possibility of increasing convergence,
(d) The quality of the standard to be developed,
(e) Resource constraints.
2. Consultation with IFRS Advisory Council: After setting the agenda, the IASB holds a meeting to consult with IFRS Advisory council to take decisions on the proposed agenda item and setting priorities.
3. Planning the project: When adding an item to its active agenda, the IASB also decides whether to conduct the project alone, or jointly with another standard setter.
After considering the nature of the issues and the level of interest among constituents , the IASB may establish a working group at this stage.
4. Developing and publishing the discussion paper: Although publications of discussion paper are not mandatory, the IASB normally publishes it. Before discussion paper is published, issues related to the discussion paper are discussed in IASB meetings and publication of such a paper requires a simple majority vote by the IASB.
5. Developing and publishing the exposure draft: Unlike a discussion paper, an exposure draft sets out a specific proposal in the form of a proposed standard (or amendment to an existing standard).
The development of an exposure draft begins with the IASB considering:
( a ) Issues on the basis of staff research and recommendations ;
( b ) Comments received on any discussion paper , and
( c ) Suggestions made by the IFRS Advisory council , working groups and accounting standard - setters , arising from public education sessions .
After resolving issues at its meetings, the IASB instructs the staff to draft the exposure draft.
When the draft has been completed, and the IASB has balloted on it, the IASB publishes it for public comment .
6. Developing and publishing the IFRS : After resolving issues arising from the exposure draft, the IASB holds another round of discussions to decide whether one more revised proposals on the exposure draft will be made or not. If the IASB in its meeting thinks that re- exposure draft is necessary a due process will be followed for re-drafting and publishing the IFRS.
7. Procedure after an IFRS is issued: After an IFRS is issued, the staff and the IASB members hold regular meetings with interested parties, including other standard - setting bodies, to help understand unanticipated issues related to the practical implementation and potential impact of its proposals.
Need of IFRS :
Business world has been witnessing growth in cross border trade from recent past. There has been rise of internationalization and globalization of business and increase in business competition. There emerge more multinational companies, mergers, joint ventures and business cooperation. As a result there is the need for easy capital flow across the border, true and fair audit of accounts and accountability of the Board of Directors reflected in the corporate governance report. All these have necessitated globally acceptable accounts of companies. Issue of International Financial Reporting Standards (IFRS) is the need of the hour to facilitate internationalization of business.
The specific needs for adopting IFRS are listed below.
i. Common Accounting language: Since the business is spread over the globe, so there is the need of common accounting language which is possible only through adoption of IFRS.
ii. Elimination of accounting differences: Heterogeneity in accounting procedure leads to misunderstanding and misconception so far as financial statements are concerned Financial statements prepared under a common procedure eliminates such heterogeneity.
iii. Global Stakeholders: The stakeholders of a company are spread over throughout the world due to Internationalization and globalization of business. They require financial statements prepared on the basis of a common set of accounting principles. So, there is the need for globally acceptable accounting standards.
iv. Stock Exchange listing requirement: Multinational companies are generally listed in stock exchanges of more than country. To facilitate such listing financial statements prepared on the basis of IFRS is required.
v. Free Capital Flow: International investors require globally acceptable financial statements to make decisions for investment in companies situated in various countries. So it is possible provided the financial statements are prepared following IFRS.
vi. Need for Comparison: By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier.
16. What is accounting standard? Explain the need / objectives / utility of Accounting standard.
Ans Accounting standards may be defined as written statements , issued from time to time by institutions of accounting professionals , specifying uniform rules or practices for drawing the financial statement.
Kohler defines accounting standards as " a mode of conduct imposed on accountants by custom , law or professional body . "
Accounting standards aims at bringing about uniformity, objectivity and reliability in accounting practices. So it's central idea is to harmonies the diverse accounting policies and practices followed by business enterprise.
Following are the needs / objectives of accounting standards :
(1) Uniformity in accounting practices : - Accounting principles provide alternative methods for treating certain event as a result of which the financial statements of different periods are not comparable . Therefore , accounting standards prescribe definite guidelines for bringing an uniform ity in accounting practices in order to make the financial statements uniform and reliable .
(2) Flexibility in accounting procedure : - Accounting principle are rigid , not flexible and do not respond in the changes in economic situation . Therefore , accounting standards have developed to meet the changing economic situation in the society . Thus , these are essential now - a - days because provides new accounting principles under new situation .
(3) Measurement of income and presentation of final accounts : - Accounting standards provide a definite guideline for measurement of incomes and valuation of assets of various nature different situations . Thus, operational results of the organisation can be properly evalued and financial position can be fairly ascertained .
(4) Facilitates to arrive at judicious decisions by users :- Introduction of accounting standards have made the financial statements neutral , consistent and factual . Hence , it helps the users to take judicious decisions on the matters relating to the organisation .
(5) Formulation of accounting Policies for world wide acceptance and observance : - In different countries , different accounting practices are prevailing . Accounting standards are aimed at harmonising them so that similar events may be uniformly treated at international level . Thus accounting standards are aiming to formulate accounting police to be applied at international level .
(6) Reduction of uncertainties : - Accounting standards are aimed at reduction of uncertainties prevailing in accounting practices such as life of an asset , depreciation , valuation of assets , recovery of book debts etc. Reduction of uncertainties enables the preparation of financial statements reliable and usable for their users.
17. Explain the procedure for Issuing an Accounting Standards in India?
Broadly , the following procedure is adopted for formulating Accounting Standards :
1. In the preparation of Accounting Standards , the ASB will be assisted by Study Groups constituted to consider specific subjects . In the formation of Study Groups , provision will be made for wide participation by the members of the Institute and others .
2. The draft of the proposed standard will normally include the following :
( a ) Objective of the Standard,
( b ) Scope of the Standard,
( c ) Definitions of the terms used in the Standard,
( d ) Recognition and measurement principles , wherever applicable,
( e ) Presentation and disclosure requirements .
3. The ASB will consider the preliminary draft prepared by the Study Group and if any revision of the draft is required on the basis of deliberations , the ASB will make the same or refer the same to the Study Group .
4. The ASB will circulate the draft of the Accounting Standard to the Council members of the ICAI and the following specified bodies for their comments :
( i ) Department of Company Affairs ( DCA )
( ii ) Controller and Auditor General of India ( C & AG )
( iii ) Central Board of Direct Taxes ( CBDT )
( iv ) The Institute of Cost and Works Accountants of India ( ICWAI )
( v ) The Institute of Company Secretaries of India ( ICSI )
( vi ) Associated Chambers of Commerce and Industry ( ASSOCHAM ) and Confederation of Indian Industry ( CII ) and Federation of Indian Chambers of Commerce and Industry ( FICCI )
( vii ) Reserve Bank of India ( RBI )
( viii ) Securities and Exchange Board of India ( SEB )
(i x ) Standing Conference of Public Enterprises ( SCOPE )
( x ) Indian Banks ' Association ( IBA )
( xi ) Any other body considered relevant by the ASB keeping in view the nature of the Accounting Standard
5. The ASB will hold a meeting with the representatives of specified bodies to ascertain their views on the draft of the proposed Accounting Standard. On the basis of comments received and discussion with the representatives of specified bodies , the ASB will finalise the Exposure Draft of the proposed Accounting Standard .
6. The Exposure Draft of the proposed Standard will be issued for comments by the members of the Institute and the public . The Exposure draft will specifically be sent to specified bodies ( as listed above ) . stock exchanges , and other interest groups , as appropriate.
7. After taking into consideration the comments received , the draft of the proposed Standard will be finalised by the ASB and submitted to the Council of the ICAI.
8. The Council of the ICAI will consider the final draft of the proposed Standard , and if found necessary , modify the same in consultation with the ASB . The Accounting Standard on the relevant subject will then be issued by the ICAI.
9. For a substantive revision of an Accounting Standard , the procedure followed for formulation of a new Accounting Standard , as detailed above , will be followed.
10. Subsequent to issuance of an Accounting Standard, some aspect ( s ) may require revision which are not substantive in nature. For this purpose, the ICAI may make limited revision to an Accounting Standard.
Thus , the accounting standards in India are formulated.
18. Explain the Salient features of Ind AS-1.
Ans : ( i ) Presentation of financial statement ( Ind AS - 1 ) : This standard prescribes the basis of presentation of general purpose financial statements to ensure comparability both with the entity's financial statement of previous periods and with the financial statements of other entities . It sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirement for their content.
Salient features of Ind AS - 1 :
( i ) True and fair view : Ind AS - I requires that financial statements true and fair view of the financial position , financial performance and cash flows of an entity .
( ii ) Accrual basis of accounting :
( a ) Financial statements ( except the statement of cash flows ) should be prepared under the accrual basis of accounting .
( b ) Assets , liabilities , equity , income and expenses are recognized only when they meet the defitions and recognition , criteria in the ICAI framework .
( iii ) Frequency of reporting :
a ) As per Ind AS - I a complete set of financial statements should be presented at least annually .
b ) When there is a change in the end of reporting period and presents for a period longer or shorter than 1 year .
( iv ) Going concern :
a ) An entity is going concern unless:
(1) Cease business trading .
(2) Intends to liquidate or no relastic alternative but to do so .
b ) Management shall make an assessment of an entity's ability to continue as a going concern .
19. Write a brief note on Indian accounting standard (Ind AS-2).
Ans : Inventories : ( Ind AS - 2 ) : A S-2 specifically deals with inventory and its valuation. While measuring inventories the objectives, scope and applicability must be kept in mind.
The objective of this standard is to prescribe the accounting treatment for inventories .
A primary issue in accounting for inventories is the amount of east to be recognized as an assets and carried forward until the related revenues are recognized.
This standards deals with the determination of cost and its subsequent recognition of as an expenses , including any write down to net reliable value .
Scope of Indian Accounting standard ( Ind AS - 2 ) :
This standard applies to all inventories , except :
( i ) Work in progress arising under contraction contracts , including directly related service contracts ( Ind AS - 11 , construction contracts )
( ii ) Financial instruments ( Ind AS - 39 Financial instruments : Recognition and measurement and Ind AS - 32 financial instruments : Presentation .
( iii ) Biological assets ( i.c. living animals or plants ) related to agricultural activity and agricultural produce at the point of harvest .
Inventories are assets :
( i ) Held for sale in the ordinary course of business .
( ii ) In the process of production for such sale or
( iii ) In the form of materials or supplies to be consumed in the production process .
20. Write a brief note an Indian accounting standard Ind AS 16 .
Ans : Property plant equipment ( Ind AS -16 ) : Ind AS - 16 prescribes the accounting treatment for property , plant and equipment . The principal issues covered the standards include :
( 1 ) Timing of recognizing an assets .
( ii ) Determining the carrying amounts of the assets .
( iii ) Depreciation to be recognized in the financial statements .
Applicability and scope :
Ind AS 16 property plant equipment is applicable to all property , plant and equipment unless and until any other accounting standards task for a different treatment .
Ind AS - 16 property plant equipment is not applicable in the following cases :
( i ) Property , plant and equipment which are classified as held for sale as per Ind AS 105 .
( ii ) The measurement and recognition of exploration and evaluation assets .
( iii ) Biological assets which are related to agricultural activities excepts bearer plant .
( iv ) Mineral rights and reserves like oil , natural gas and other such non - regenerative resources .
Recognition : The cost of any item of property plant equipment must be recognized as an assets only when
( i ) it is apparent that the future economic benefits related to such assets would follow the business .
( ii ) Cost of such assets could be reliably measured .
21. Write a brief note on Revenue recognition Ind AS - 9 .
Ans : Ind AS - 9 : Revenue recognition : Revenue means gross inflow of cash and receivables from sale of goods , rendering of services , interest , dividend and royalty etc.
This AS does not deal with revenue from the followings :
( i ) Construction of contracts ( AS - 7 )
( ii ) Government grants ( AS - 12 )
( iii ) Lease or Hire purchase ( AS - 19 )
( iv ) Foreign exchange ( AS - 11 )
( v ) Sale of fixed assets / investment ( AS - 10 / 13 )
Revenue is recognized if conditions relating to revenue are satisfied .
Revenue from sale of goods : Revenue is recognized when all the following conditions are fulfilled :
( i ) Seller has transferred the ownership of goods to buyer for a price .
( ii ) All significant risks and rewards of ownership have been transferred to buyer .
( iii ) Seller does not retain any effective control of ownership on the transferred goods .
Revenue from rendering services : Revenue is recognized when the following conditions are fulfilled :
( i ) Performance of service has been completed or partially completed .
( ii ) There is no uncertainty regarding consideration and collection .
Revenue from interest , dividend and royalty : Revenue is recognized when the following conditions are fulfilled :
( i ) Performance is completed and the time of receiving interest has passed.
( ii ) Right to receive dividend has been established .
( iii ) Condition of royalty have been satisfied .
( iv ) There is no uncertainty regarding considerations and collections .
If any uncertainty arises after revenue have been recognized necessary provision will be made.
EXRAS*** Authorities involved in Accounting Standards setting procedure in India. (8 to 10 marks)
In India there are three authorities that can set and issue Accounting Standards under their respective legislative powers. These authorities are ----
i. The Council of the Institute of Chartered Accountant of India (ICAI): It is established under the Chartered Accountants Act of 1949 passed by the Parliament. It is a full fledged member of International Federation of Accountant Committee (IFAC) and is an Associate Member of International Accounting Standard Committee (IASC). It actively promotes the International Accounting Standard's pronouncements in India in order to bring about harmonization of Indian Accounting Standards with International Accounting Standards (IAS).
ii. The Central Government under the Income Tax Act , 1961 : Under Section 145 (2) , the Central Government may notify from time to time Accounting Standards that are to be followed by any class of assessee or any class of income group.
iii. The Central Government under the Companies Act , 1956 : Under section 210 A ( 1 ) of the Companies Act , 1956 , the Central Government may constitute an Advisory Committee on Accounting Standards consisting 12 members . The committee is to advise on formulation and laying down of Accounting policies and Accounting standards for adoption by companies or a class of companies.
Though no accounting standard has been laid down till now under this Act , but is provided in Section 210 of the Act , that the standards of accounting specified by the ICAI shall be deemed to be the Accounting Standards prescribed by the Central Government under this section.
22. What are the features of First-time Adoption of India Accounting Standards?
1. The objective of Ind AS -101 is to ensure that the entity’s first Ind AS Financial Statements, and its interim financial reports for the period covered by those financial statements, contain high quality information that:
i. Is transparent for users and comparable over all periods presented,
ii. Provide a suitable starting point for accounting in accordance with the Indian Accounting Standards ( Ind- AS), and
iii. Can be generated at a cost that does not exceeds benefits.
2. SCOPE: The Indian Accounting Standard- 101 (first time adoption of Indian Accounting Standards) shall be applied by an entity in the following:
i. First Financial Statements after implementing Ind AS.
ii. Each Interim Financial Report in accordance with Ind-AS 34 Interim Financial Reporting for the part of the period covered by its first Ind-AS financial Statements.
3. The First Ind AS Balance Sheet : The first step in preparation of Ind AS financial statements is to prepare the first Ind AS Balance Sheet at the date of transition to Ind AS .
4. Accounting policies to be used : The Accounting policies used in first Ind AS financial statements and all comparative periods ( including opening Balance Sheet ) shall comply with each Ind AS effective at the end of its first Ind AS reporting period.
5. Adjustments to be made in Opening Balance Sheet : Ind AS 101 requires that the following adjustments shall be made in an entity's Opening Ind AS Balance Sheet :
a. Companies shall recognise all assets and liabilities whose recognition is required by Ind AS , and derecognise items as assets or liabilities if Ind AS do not permit such recognition ;
b. Companies shall reclassify items that is recognised in accordance with previous GAAP as one type of asset , liability or component of equity , but are a different type of asset , liability or component of equity in accordance with Ind AS.
c. Companies shall apply Ind AS in measuring all recognised assets
6. Exceptions in preparing opening Ind AS Balance Sheet: Ind AS 101 provides two types of exceptions. These are as follows :
i. Prohibition on retrospective application of some Ind AS : The standard prohibits retrospective application of certain requirements of other Ind AS .
ii. Exemptions from requirements of some Ind AS : The standard provides exemptions from complying with certain requirements of other Ind AS.
7. Presentation and disclosure :
i. Exemptions : Ind AS 101 does not provide exemptions from the presentation and disclosure requirements in other Ind AS .
ii. Components of First Ind AS financial Statements :
The first Ind AS financial Statements shall comprise of following minimum statements
a. Three Balance Sheets ( Current Year ( CY ) , Previous Year ( PY ) and Opening Ind AS Balance Sheet )
b. Two Statements of Profit and Loss ( CY and PY )
c. Two Statements of Cash Flows ( CY and PY )
d. Two Statements of Changes in Equity ( CY and PY )
e. Related notes including comparative information for all statements presented.
8. Reconciliation of financial statements: The entity should explain how the following reported items are affected due to adoption of IND AS,:
(a) Balance Sheet
(b) Financial performance
(c) Cash flow
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