I. The Nature of Financial Accounting Principles
Accounting is often called the "Language of Business." To ensure this language is universal,
accountants follow Generally Accepted Accounting Principles (GAAP). These are split
into Concepts (assumptions) and Conventions (customs).
1. Basic Accounting Concepts
These are the fundamental ideas under which accounting operates.
● Business Entity Concept: The business is treated as a unit separate from its
owners. Personal transactions of owners are not recorded in business books.
● Money Measurement Concept: Only transactions that can be expressed in
monetary terms are recorded. (e.g., "Employee morale" is not recorded, but "Salaries
paid" is).
● Going Concern Concept: It is assumed the business will continue to operate for the
foreseeable future and has no intention of liquidating.
● Accounting Period Concept: The life of a business is divided into intervals (usually
12 months) to measure profit or loss.
● Dual Aspect Concept: Every transaction affects at least two accounts. This is the
basis of the equation:
$$\text{Assets} = \text{Liabilities} + \text{Capital}$$
● Revenue Recognition (Realization): Revenue is recorded only when it is legally
earned, not necessarily when cash is received.
2. Accounting Conventions
These are customs or practices adopted by the profession to make financial statements
more useful.
● Convention of Consistency: Accounting policies should remain unchanged from
one period to another to allow for comparison.
● Convention of Full Disclosure: All material and relevant facts must be fully
disclosed in the financial statements.
● Convention of Conservatism (Prudence): "Anticipate no profit, but provide for all
possible losses." This is why inventory is valued at cost or market price, whichever is
lower.
● Convention of Materiality: Only items that significantly impact the decision-making
of a user need to be strictly reported; trivial amounts can be merged.
II. Financial Accounting Standards
Accounting Standards (AS) are written policy documents covering the aspects of recognition,
measurement, treatment, presentation, and disclosure of accounting transactions.
1. Concept and Benefits
● Concept: Standards eliminate non-comparability of financial statements and provide
a set of standard accounting policies.
● Benefits:
, ○ Comparability: Allows users to compare financial results of different
companies.
○ Transparency: Reduces the scope for creative accounting or fraud.
○ Reliability: Provides a "true and fair view" of the financial position.
2. Procedure for Issuing AS in India
The Institute of Chartered Accountants of India (ICAI) established the Accounting
Standards Board (ASB) in 1977 to formulate these standards.
1. Identification of Area: ASB identifies areas where standards are needed.
2. Constitution of Study Group: To draft the standard.
3. Preparation of Exposure Draft: The draft is circulated to members, industry bodies,
and regulators (like SEBI/RBI).
4. Comments/Refinement: Feedback is analyzed and the draft is modified.
5. Finalization: The ASB submits the final draft to the Council of the ICAI.
6. Issuance: The ICAI issues the standard for use. (Note: For companies, the
Government of India notifies these under the Companies Act).
III. Salient Features of AS-1 (ICAI)
AS-1: Disclosure of Accounting Policies deals with the disclosure of significant
accounting policies followed in preparing financial statements.
● Fundamental Assumptions: It recognizes three fundamental assumptions: Going
Concern, Consistency, and Accrual. If these are followed, no specific disclosure is
needed. If they are not followed, it must be disclosed.
● Selection Criteria: In choosing accounting policies, management should consider
Prudence, Substance over Form, and Materiality.
● Mandatory Disclosure: All significant accounting policies (like methods of
depreciation or valuation of inventory) must be disclosed in one place, usually as
"Notes to Accounts."
● Change in Policy: Any change in accounting policy that has a material effect must
be disclosed along with the monetary impact.
IV. International Financial Reporting Standards (IFRS)
IFRS are issued by the International Accounting Standards Board (IASB) to create a
global common language for business affairs.
1. The Need for IFRS
● Global Investment: Investors need to compare a company in India with a company
in Germany using the same "yardstick."
● Lower Cost of Capital: Companies can raise funds from international markets more
easily if their accounts are understood globally.
● Cross-border Listings: Simplifies the process for companies to list on foreign stock
exchanges (like the NYSE or LSE).
, 2. Procedure for Issuing IFRS
1. Setting the Agenda: Identifying issues based on stakeholder feedback.
2. Planning the Project: Forming a working group.
3. Discussion Paper: Often published for public comment (optional but common).
4. Exposure Draft: A mandatory step where the proposed standard is published for
worldwide review.
5. Analysis of Comments: Reviewing feedback from global stakeholders.
6. Publication: The final IFRS is issued.
This section of financial accounting covers the Accounting Cycle—the step-by-step
process of transforming raw business transactions into organized financial information.
1. Recording Transactions: The Journal
The Journal is the "Book of Original Entry." Every transaction is first recorded here in
chronological order using the Double Entry System.
● Process: Analyzing the transaction, identifying the two accounts involved (Debit and
Credit), and writing a brief explanation called a Narration.
● The Golden Rules of Accounting:
○ Real Accounts: Debit what comes in, Credit what goes out.
○ Personal Accounts: Debit the receiver, Credit the giver.
○ Nominal Accounts: Debit all expenses/losses, Credit all incomes/gains.
2. Subdivision of Journal (Subsidiary Books)
In large businesses, recording every transaction in one journal is impractical. The journal is
subdivided into specialized books:
Book Transactions Recorded
Cash Book All cash and bank receipts and payments.
Purchase Book Credit purchases of goods only.
Accounting is often called the "Language of Business." To ensure this language is universal,
accountants follow Generally Accepted Accounting Principles (GAAP). These are split
into Concepts (assumptions) and Conventions (customs).
1. Basic Accounting Concepts
These are the fundamental ideas under which accounting operates.
● Business Entity Concept: The business is treated as a unit separate from its
owners. Personal transactions of owners are not recorded in business books.
● Money Measurement Concept: Only transactions that can be expressed in
monetary terms are recorded. (e.g., "Employee morale" is not recorded, but "Salaries
paid" is).
● Going Concern Concept: It is assumed the business will continue to operate for the
foreseeable future and has no intention of liquidating.
● Accounting Period Concept: The life of a business is divided into intervals (usually
12 months) to measure profit or loss.
● Dual Aspect Concept: Every transaction affects at least two accounts. This is the
basis of the equation:
$$\text{Assets} = \text{Liabilities} + \text{Capital}$$
● Revenue Recognition (Realization): Revenue is recorded only when it is legally
earned, not necessarily when cash is received.
2. Accounting Conventions
These are customs or practices adopted by the profession to make financial statements
more useful.
● Convention of Consistency: Accounting policies should remain unchanged from
one period to another to allow for comparison.
● Convention of Full Disclosure: All material and relevant facts must be fully
disclosed in the financial statements.
● Convention of Conservatism (Prudence): "Anticipate no profit, but provide for all
possible losses." This is why inventory is valued at cost or market price, whichever is
lower.
● Convention of Materiality: Only items that significantly impact the decision-making
of a user need to be strictly reported; trivial amounts can be merged.
II. Financial Accounting Standards
Accounting Standards (AS) are written policy documents covering the aspects of recognition,
measurement, treatment, presentation, and disclosure of accounting transactions.
1. Concept and Benefits
● Concept: Standards eliminate non-comparability of financial statements and provide
a set of standard accounting policies.
● Benefits:
, ○ Comparability: Allows users to compare financial results of different
companies.
○ Transparency: Reduces the scope for creative accounting or fraud.
○ Reliability: Provides a "true and fair view" of the financial position.
2. Procedure for Issuing AS in India
The Institute of Chartered Accountants of India (ICAI) established the Accounting
Standards Board (ASB) in 1977 to formulate these standards.
1. Identification of Area: ASB identifies areas where standards are needed.
2. Constitution of Study Group: To draft the standard.
3. Preparation of Exposure Draft: The draft is circulated to members, industry bodies,
and regulators (like SEBI/RBI).
4. Comments/Refinement: Feedback is analyzed and the draft is modified.
5. Finalization: The ASB submits the final draft to the Council of the ICAI.
6. Issuance: The ICAI issues the standard for use. (Note: For companies, the
Government of India notifies these under the Companies Act).
III. Salient Features of AS-1 (ICAI)
AS-1: Disclosure of Accounting Policies deals with the disclosure of significant
accounting policies followed in preparing financial statements.
● Fundamental Assumptions: It recognizes three fundamental assumptions: Going
Concern, Consistency, and Accrual. If these are followed, no specific disclosure is
needed. If they are not followed, it must be disclosed.
● Selection Criteria: In choosing accounting policies, management should consider
Prudence, Substance over Form, and Materiality.
● Mandatory Disclosure: All significant accounting policies (like methods of
depreciation or valuation of inventory) must be disclosed in one place, usually as
"Notes to Accounts."
● Change in Policy: Any change in accounting policy that has a material effect must
be disclosed along with the monetary impact.
IV. International Financial Reporting Standards (IFRS)
IFRS are issued by the International Accounting Standards Board (IASB) to create a
global common language for business affairs.
1. The Need for IFRS
● Global Investment: Investors need to compare a company in India with a company
in Germany using the same "yardstick."
● Lower Cost of Capital: Companies can raise funds from international markets more
easily if their accounts are understood globally.
● Cross-border Listings: Simplifies the process for companies to list on foreign stock
exchanges (like the NYSE or LSE).
, 2. Procedure for Issuing IFRS
1. Setting the Agenda: Identifying issues based on stakeholder feedback.
2. Planning the Project: Forming a working group.
3. Discussion Paper: Often published for public comment (optional but common).
4. Exposure Draft: A mandatory step where the proposed standard is published for
worldwide review.
5. Analysis of Comments: Reviewing feedback from global stakeholders.
6. Publication: The final IFRS is issued.
This section of financial accounting covers the Accounting Cycle—the step-by-step
process of transforming raw business transactions into organized financial information.
1. Recording Transactions: The Journal
The Journal is the "Book of Original Entry." Every transaction is first recorded here in
chronological order using the Double Entry System.
● Process: Analyzing the transaction, identifying the two accounts involved (Debit and
Credit), and writing a brief explanation called a Narration.
● The Golden Rules of Accounting:
○ Real Accounts: Debit what comes in, Credit what goes out.
○ Personal Accounts: Debit the receiver, Credit the giver.
○ Nominal Accounts: Debit all expenses/losses, Credit all incomes/gains.
2. Subdivision of Journal (Subsidiary Books)
In large businesses, recording every transaction in one journal is impractical. The journal is
subdivided into specialized books:
Book Transactions Recorded
Cash Book All cash and bank receipts and payments.
Purchase Book Credit purchases of goods only.
