CHAPTER3

Theory Base of Accounting, Accounting

Standards and Indian Accounting
Standards (Ind-AS)
LEARNING OBJECTIVES
This chapter would enable students to understand:
O Meaning and Nature of Accounting Principles
O Features of Accounting Principles
O Necessity of Accounting Principles
O Fundamental Accounting Assumptions or Concepts:
Going Concern Consistency > Accrual

DAccounting Principles:
Accounting Entity Money Measurement Accounting Period
Full Disclosure Materiality Prudence or Conservatism
Cost or Historical Cost > Matching Dual Aspect or Duality
Following Accounting Principles are not prescribed in syllabus but have been discussed:
> Revenue Recognition (Realisation) Verifiable Objective
O Accounting Standards
DMeaning of Accounting Standards
ONature of Accounting Standards
O Concept of Accounting Standards
J Objectives, Utility and Limitations of Accounting Standards
International Financial Reporting Standards (IFRS) and Indian AccountingStandards (Ind-AS)
Accounting principles, concepts and conventions commonly known as Generally
Accepted Accounting Principles or GAAPs are the basic rules that define the
parameters and constraints within which accounting operates. These principles are
the theory base of accounting, on the basis of which financial statements are prepared.
Inother words, they are the guidelines for preparing the financial statements.
The Institute of Chartered Accountants of India (1CAI) has issued Accounting Standards
to standardise the accounting practices adopted to prepare financial statements.
Initially the accounting standards were recommendatory but were gradually made
mandatory. Presently, the accounting standards issued by ICAI are applicable on
non-corporate enterprises (firm). The accounting standards notified under the Companies
Act, 2013 are applicable and mandatory on companies.
 3.2 Double Entry Book

"principles
MEANINGAND NATURE OF ACCOUNTING PRINCIPLEe
of Accounting are the general law or rule adopted or proposerd
Gction, a settled ground or basis of conduct or practice.
Ke ping-CBs
aLS a
-American Institute of Certified Public gude
Accounting
of
varioUs
(stock) is
are the rules adopted by accountants universally
Principles Thev are the norms or rules which are followedwhile
accounting transactions. in
items of asseis, liabilities, expenses, incomes, etc. For exampla
valued at lower of its cost or net realisable value. Fixed
AcassetscoaucrenOcortaunndttiinng
depreciated over their expected useful life(Accounting Principles are should
fundamental propositions generally accepted by accountants as a set. the
Principles based on which transactions are recorded and Financial of basic or
Inventory
prepared. These principles are classified into two categories:
LAccountingConcepts
Conceptsare the
Accounts ing
Statement are
Accounting basic assumptions or fundamental
{3
which accounting operates\
They are generally accepted accounting rules based
transactions are recorded and financial on
proposiitions wiwhithcinh
follow the accounting concepts because it statements are prepared. It is
(

Se
enables the users of financial
understand them better and in the same manner.
2. Accounting Conventions
istatements
mportant to
to
Accounting Conventions are the outcome of
followed by the enterprises over a accounting practices or principles being
period of time,
with time to bring Conventions may
about improvement in the quality of accounting undergo a change
information.
FEATURES OF ACCOUNTING PRINCIPLES
1. Accounting
Principles are Man-Made
Accounting Principles are man-made and,
suggestions tobased on practical experiences. therefore, they are the best possible
enterprises ensure uniformity and They are
recommended for use by all
2Accounting
Accounting
understandability.
Principles are Flexible
but change Principles are
with time. not rigid but flexible. Accounting
3.Accounting Principles are not permane
Principles
Accounting Principles are
are the Generally Accepted
accepted. The bases and
it general i.e.,
meets three criteria, guidelines for accounting and are generally
acceptance of an Accounting
i) Relevance Principle usually depends on how
Accounting Principles are relevant if
users of accounting information. they result in
(i) Objective
Accounting Principles are
information that is useful to the

the persons preparing the objective if they are not

(iii) Feasible accounting information. influenced by the personal bias of
Accounting Principles :are
feasible if they can be
applied without undue and cost.
complexity
Theory Base of Accounting, Accounting Standards and Ind-AS 3.3

NECESSITY OF ACCOUNTING PRINCIPLES

Accounting information is better understood ifit is prepared following the set of
Accounting Principles uniformly. It means the same Accounting Principles are followed
by all entities in preparing their final accounts. Accounting information is meaningful
anduseful for users of accounting information if the accounting records and financial
statements are prepared following generally accepted accounting principles.
FUNDAMENTAL ACCOUNTING ASSUMPTIONS ORCONCEPTS
Fundamental Accounting Assumptions or Concepts are the assumptions which are
presumed to have been followed in preparing the annual accounta The entities which
do not follow any of the fundamental accounting assumptions are required to disclose
which of these assumptions have not been followed and the reasons for not following
them. The Fundamental Accounting Assumptions recognised by AS-1, Disclosure of
Açcounting Policies are:
(1.Going Concern Assumption
Business will continue for a foreseeable future at the same level of operations.
Going Concern Assumption prescribes that transactions should be recorded and reported
on the basis that business shall continue for a foreseeable period and there is no intention
to close the business or scale down itsoperations significantly)
It is because of this concept that a distinction is made between capital expenditure,
i.e., expenditure that will give benefit for a long period and revenue expenditure, i.e..
one whose benefit will be consumed or exhausted within the accounting period.
(On the basis of this concept, fixed assets are recorded at their original cost and they
are depreciated in asystematic manner over their expected useful life.
10,000) has an
For example, a machine purchased for 1,10,000 (residual value years to
expected useful life of 10 years. 1,00,000 is written off in the next 10 reported
and
determine profit/loss for each year. Thus, 1,10,000 will be recorded
(shown in the Balance Sheet) at? 1,10,000 as an asset.
of purchase itself.
The total cost of the machine is not treated as an expense in the year
(2Consistency Assumption
to
Accounting practices and principles once applied shall be applied year after year
meet the qualitative characteristic.
selected and adopted,
According tothe Consistency Assumption, accounting practices once
in better understanding of
should be applied consistently year after year. The concept helpsprevious years,Consistency
accounting information and makes it comparable with that of equally acceptable and
concept is important because alternative accounting practices are
results that are comparable.
it eliminates personal bias and helps in showing
Down Value Method and
(For example, two methods of charging depreciation, Writtenassumption, method once
Straight Line Method, are equally acceptable.) Under the financial
chosen and applied should be applied consistently year after year tomake the
statements comparable. )
The accounting practice may be changed if the law or Accounting Standard requires it
or the change will result in more meaningful presentation.
 Double Entry Book

Ke pingC85E
34

3. Accrual Assumption
areentered into whether amount is
Transactions
or no.

Accord1ng
are recorded when thev

Assumption, atransaction is recorded

in the
takes oi hooks
exchOnged
plact, accounTh
to the Accrual. when the settlement
atrevenue
the ime
is recogniscd it isinto
entered and not
when it is when realised, i.e., when sale is complete 0r serViCes ar
rendered it is immaterial whether cash is received or not. Similarly./ expenses are
recognised as expenses in the accounting period in which the revenue related to it iy

recognised. whether paid in cash or not.

because it recognises assets, Iiabilities
The concept
and expensesis particularly important
as and when transactions relating to it are entered into. Under this
concept. profit is regarded as earned at the time the goods or services are sod or incomes
rendered to a customer, i.e., the legal title is passed to the customer, who. in turn, has
an obligation to pay for them. Similarly, expense is regarded as incurred when the
goods or services are purchased or availed and an obligation to payfor them is assumed.
Concept.
Let us take examples to understand the Accrual
M/s. RSM & Co. purchases computers on 1st January, 2022 amounting to 5,00,000 to
the enterprise and haci
be paid on 15th April, 2022. Since the asset has been acquired by must
the process incurred a liability tothe extent of that amount on lst January, 2022, it
record the transaction in its books of account on lst January, 2022. The transaction
on recording shall reflect that the enterprise owns assets (computers) worth? 5,00,000
and also owes an equal amount of money to the supplier.
Similarly. if M/s. RSM & Co. makes a sale of goods to M/s. VS & Co. on 27th February,
2022 for 15,000on credit of two months, the sale must be recorded on 27th February,
2022 although the amount will be received on 27th April, 2022. The transaction is recorded
because the revenue has been earned, although the amount has not been received.
M/s. VS& Co. should alsorecord the purchase in its books of account on 27th February,
2022 because goods have been purchased although the amount has not been paid.
ACCOUNTING PRINCIPLES(OTHERS)
A Accounting Entity or Business Entity Principle
Entries are recorded in the books of aecount from the point of view of business.
Aceording to the Business Entity Principle, business is considered to be separate iro
itsowners. Business transactions are recorded in the books of account from the business
point of view and not from that of the owners. Owners being regarded as separatefrom
business are considered as creditors of the business tothe extent of their capital. Their
account with the business is credited with the capital introduced and profit earned
during the year, ete., and debited by the drawings mado
For example, Amrit started business and introduced 1,00,000 by cheque. Sincethe
firm has received the amount, it will debit Bank Account and credit Amit's Capital
Account. Thus, a transactionis recoded in the books of the firm from firm's pointof view.

Business entity principle is applicable to all entities, be it a or

not.
business enterprise
 Theorv Base of Accounting, Accounting
Standards and Ind-AS 3.5

Money Measurement Principle

Transactions and events that can be measured in money terms are
According to the Money recorded.
measured in money terms Measurement Principle, transactions and events that can be
are recorded in the hooks of account of the
differently, money is the commondenominator in recordingand reporting enterpriseJStating
This principle suffers from two major limitations: transactions.
(a) Transactions and events that cannot be measured in money
in the b0oks of account, howsoever important they may be to
terms are not recorded
the enterprise. For
example, human resources with the enterprise are iimportant to the enterprise
but are not reflected in the financialstatements because they cannot be measured
and expressed in money terms.
(6) The value of money is considered to have static value as the transactions are
recorded at the value on the transaction date and continue to be shown at the
recorded value. In reality, due to inflation, goods that can be purchased for
1,000 today may be purchased for (say) 1,200 later.
Accounting Period Principle
Life of the business is broken into smaller periods of 12 months known as accounting
periods.
CAccording to the Accounting Period Principle, life of an enterprise is broken into
smaller periods so that its performance is measured at regular intervals) The accounts
of an enterprise are maintained following the Going Concern Concept, meaning the
enterprise shall continue its activities for a foreseeable future. Users of Financial
Statements, especially the management and banks, require information from the
accounts at regular intervals so that decisions can be taken at the appropriate time.
Management requires information at regular intervals to assess the performance,
funds requirement (short-term as well as long-term), banks require accounting
its
information periodically because they have invested money and have to ensure
enterprise.
safety and returns. Similarly, Government has to assess tax dues from the
periods (usually
In view of the above, the life of the enterprise is broken into smaller
Period'.
one year) which is termed as the Accounting
which Income Statement
An accounting period is the interval of time at the end of case of companies) and
(Profit & Loss Account or Statement of Profit & Loss, in the
resources of the business.
Balance Sheet are prepared to know the results and
AFullDisclosure Principle
those items which are
Disclosures should be made of items required under law and
material.
should be complete and
According to the Principle of Full Disclosure, "There information
understandable reporting on the financial statements of allsignificant
legal requirements, good
relating to the economic affairs of the entity.") Apart frominformation to be disclosed.
accounting practice requires all material and significantunderstanding. For example,
Disclosure of material information will result in better
be disclosed.
the reasons for low turnover should
 36
Double Entry Book
ws. Materiality Principle
An item or decision of the
Keeping- CBSE
is material ift will influence the
disclosurerefers to relative importance user
toMaternality
of an item or an
the Principle
f thereAmerican Associationan item should be regardedevent. as Accordi
is a reasonAccounting influence the
to believe that knowledge of it would
materi
informed
andior investor)
amount.
Thus, whether an item is material or not will depend on
It1, thus, means that it is a matter of exercising judgmentits
an
which item is material and which is not. And only those items should b to nature
decision of
that have effect or are relevant tothe user. An item may be be decid
one significant
enterprise but may not be material for another. For example,
mat diesriclaosle fo
repairs
of saY
of building.
10,00,000 but
amount spent on
say R 2,50,000, is material for an enterprise having a
production plant, even turnoverturnover
it is
not material for an enterprise having a
R15.00,00,000. On the other hand, closure of a of say
because
6.
of
an environmental problem is
Prudence or Conservatism Principle
material. temporarily,
say
Provide for
and profits. alhanticipated expenses and lossesbut do not account anticipated
Prudence or Conservatism Principle is many a time incomes
"Do not anticipate aprofit, but provide for all described using the phrase
ütakes into possible losses." Stating differentle
consideration all prospective losses but not the
appication of this concept ensures that the financial prospective profits.'The
picture than what it actually is. For example, statements do not paint a better
or net realisable value closing stock
(market value) or making the provision for is valued at lower of cost
discount on debtors in anticipation of bad debts and doubtful debts and
Prudence Conservatism Principle
or discount.
should be accounted. Thus, as a resultprescribes that anticipated expenses and losses
as it mnay be used to
create liabilities may be overstated. It has a
Secret
debts, depreciation, etc.), and thus Reserve (e.g., by creating excess drawback
yiew of state of affairs of the financial statements may not provision
depict a
for
true
doubtrul
and far
The Concept of business.
Conservatism needs to be
results reported are not distorted. applied with caution and care so that the
7. Cost Concept or
Historical Cost
Transactions are recorded at the pricePrinciple
paid.
According to the Cost Concept, an asset
paid to acquire it and the cost is the is recorded in the books of the price
Asset is recorded at cOst at the basis for all account ofatthe
charging depreciation. The market time of its
purchase subsequent
but is accounting asset.
reduced by
time but for accounting purposes value of an asset
book value (i.e., cOst at which it was continues to be shown inchange
it maysystematically
with the passage of
account at its
For example, an asset is purchasedpurchased
the books of
for ? minusdepreciation up-to-date).
final accounts, even if its 5,00,000 provided
and if at the time of preparing
the
shall continue to be shown market
at iits value is say, 4,00,000 or 7,00,000, yet the asset
COst concept brings objectivity in the purchase price of
5,00,000.
statements. They are not influenced by preparation and financial
of
the personal bias presentation
orjudgments.
 3.7
Theory Base of Accounting, Accounting Standards and Ind AS
RMatching Concept or Matching Principle
Expenses incurred to earn the revenue should be recognised as expense in the year
revenue is recognised.
An important objective of business is to determine profit periodically. It is necessary
to match 'revenues' of the period with the 'expenses' of that period to determine
correct profit (or loss) for the accounting period. Profit earned by the business during
a period can be correctly measured only when the revenue earned during the period 1s
matched with the expenditure incurred to earn that revenue. It is not relevant when
the payment was made or received. Therefore, as per this concept, adjustments are
made for all outstanding expenses and prepaid expenses.
In brief, according to this concept,(the expenses for an accounting period are matched
against related revenues, rather than cash received and cash paid.This concept should
be followed while preparing financial statements to have a true and fair view of the
profitability and financial position of a business firm.
9. Dual Aspect or Duality Principle
Every transaction entered into has two aspects debit' and 'credit'of equal amount.
According to the Dual Aspect Concept, every transaction entered into by an enterprise
debit
stated, for every
has two aspects, a debit and a credit of equal amount. Simply
also true vice versa. For
there is a credit of equal amount in one or more accounts. It is
are two aspects
example, Rahul starts a business with a capital of 1,00,000. There
asset of 1.00,000 (cash) while
to the transaction. On one hand, the business has an
1,00,000 (capital of Rahul).
on the other hand, it has a liability towards Rahul of
Thus, we can say
Capital (Equities) Cash (Asset)
1,00,000=1,0,000
bank; its assets will increase
Suppose further, the enterprise borrows amount fromn a borrowing is payable
amount equal to
but this will mean that out of the total assets,
to the outsiders. Thus, we can say
Owner's Equity or Capital + Claims of Outsiders = Assets
Or

Assets = Owner's Equity + Claims of Outsiders

other words, accounting equation
This fundamental equation will alwaysremain good. In equal credit and vice versa.
demonstrates the fact that for every debit there is an
based on this concept.
The system of Double Entry Book Keeping is
10. Revenue Recognition Concept
established.
Revenue is recognised when the right to receive is
considered to have
According to the Revenue Recognition Concept, revenue is
the obligation to
been realised when a transaction has been entered into and
receive the amount is established. It is to be noted that recognising revenue
example to
and receipt of an amount are two separate aspects. Let us take an
 Double Entry
Book
Ke ethpiengCBt
3.8

2022 and receive

understand it. An enterprise sells goods in February,
recognised in
am
in April, 2022. Revenue of this sales should be
when the goods are sold because the legal obligation to
receive Februtheary, 2022,i
established (upon sales) in February, 2022. Let us take
an enterprise has received an advance in February,
another examnl
2022 for the sales to amountSup ,
having be
May, 2022. revenue shall be recognised in May, 2022, upon sales
because the legal obligation to receive the amount is established in May, 2022, been made:mad
l Verifable Objective Concept
Transaction is recorded on the basis of evidence.
The Verifiable Objective Concept holds that accounting should be free
from persona
bias. Measurements that are based on verifiable evidences are regarded as
It means all accounting transactions should be evidenced and supported byobjbusiectniesve
documents. These supporting documents are cash memo, invoices, sales bills. et
ACCOUNTING STANDARDS

The rise in diversity, complexity and globalisation of business made the study
accounting information important and essential. But the diverse accounting policies beine
followed and the accounting treatment of transactions and events made the accounting
information less meaningful and also incomparable. A need was, thus, felt that certain
minimum standards should be universally applicable, so that the accounting statements
have the qualitative characteristics of reliability, relevance,
understandability and
comparability. Therefore, an International Accounting Standards Committee (IASC)
(now renamed as International Financial Reporting Board) was
set up in the year
1973. The objectives of this committee are:
1. to formulate and publish in public interest,
the presentation of Financial
Accounting Standards to be observed
Statements and also their worldwide acceptance; a
2. to work for the
improvement and harmonisation of regulation of Accounb
Standards and procedures relating to the presentation of
financial transactions.
The Institute of Chartered Accountants of India (ICAI) and the Institute of Cost and
Works Accountants of India (now Institute of Cost Accounting of India) are members
of this committee.
ICAI had set up the Accounting Standards Board (ASB) in April 1977 toidentify
areas of accounting where alternative and diverse practices were followed. ASB,
with a purpose to bring uniformity in practices, was to develop draft Accounting
Standards keeping in view the business environment and legal provisions ofthe
country and after discussions with various stakeholders (Government, Industry
Federations, etc.).
Theory Base of Accounting, Accounting Standards and Ind-AS 3.9

ASB submits the draft Accounting Standards to the Council, the Institute of Chartered
Accountants of India which issues it for the comments of the government, industry
and professionals, ete. The Council of ICAI gives due consideration to the comments
received by amending the draft Accounting Standards, if necessary, hefore notitying
it. In the case of Companies, Accounting Standards are recommended to National
Financial Reporting Authority (NFRA) an authority under the Companies Act, 2013,
which notifies the standards to be applicable to companies.
It should be noted that in the case of companies, accounting standards notified under
the Companies Act, 2013 are followed.

Scan QR Code for the List of Standards notified under the

Companies Act, 2013
MEANINGOF ACCOUNTING STANDARDS
Accounting Standards are a set of guidelines, i.e., Generally Accepted Accounting
Principles, that are followed for preparation and presentation of Financial Statements.
They are accounting rules and procedures relating to measurement, recognition,
treatment. presentation and disclosure of accounting transactions in the financial
statements issued by the Council of the Institute of Chartered Accountantsof India.

NATURE OF ACCOUNTING STANDARDS

Following points highlight the nature of Accounting Standards:
1. Accounting Standards are guidelines providing the framework so that credible
Financial Statements are prepared.
2. The objective of setting Accounting Standards is to bring uniformity in accounting
practices and to ensure transparency, consistency and comparability.
3. Accounting Standards are prepared keeping in view the business environment
and laws of the country. It, therefore, naturally means that the guidelines change
with change in business environment and laws. It is because of this that Accounting
Standards are being revised from time to time. It may be noted that whenever a
conflict arises between law and Accounting Standards, law will prevail.
4. Accounting Standards are mandatory in nature.
5. Accounting Standards have also been made flexible in the sense that where
alternative accounting practices are acceptable, an enterprise may adopt any of
the practices with a suitable disclosure. For example, an enterprise may charge
depreciation on the Written Down Value Method or Straight Line Method.
CONCEPT OF ACCOUNTING STANDARDS
Accounting Standards prescribe the accounting rules and procedures for recognition,
measurement, treatment, presentation and disclosure of accounting transactions in
financial statements. They are prescribed to be followed in preparing and presenting
the financial statements, so that the financial statements are based on common rules
and principles for better understanding by the users.
 Double Entry Book

24 OBJECTIVESOF
ACCOUNTING
STANDARDS Keeping-CBSE
aim
Objectives of Accounting Standards are:
and practices withthe to
1. Minimise the diverse accounting
them to the extent possible.
of
policies

financial statements.
elimninat.
2. Promote better understanding
Accounting Policies adopted and applied.
4.
3. Fac1litating meaningful comparison of financial statements of two or more entities
Understand significant
statements.
5. Enhancing reliability of financial
STANDARDS
UTILITY OF ACCOUNTING
Accounting Standards serve the following purposes:
basis of which financial
1. Accounting Standards, provide the norms on the statements
should be prepared.
and
2. Accounting Standards ensure uniformity in the preparation
financial statements by removing the effect of diverse accounting presentation
practices. The
(x
application of Accounting Standards make financial statements more meaningf
St and comparable.
3. Accounting Standards create confidence among the users of accounting information
Accounting information based on Accounting Standards is considered reliable hy
usersof such information.
4. Accounting Standards help auditors in auditing the accounts. They help accountants
to follow uniform practices and policies.

LIMITATIONS OF ACCOUNTING STANDARDS

1. Accounting Standards are man made. Hence, it does not pass the
test always. verification
2. Accounting Standards are based on business environment and laws of
Hence, they change often to meet the the country.
changes.
NOTE
Accounting Standards (AS) are applicable on companies on which Ind-AS is not
adopted voluntarily by the companies. applicable or are T
Problem. While preparing the accounts of company,
(i) Production Manager is interested in following issues are faced:inthe
accounts. recording good industrial relations
(ii)
Long-term success of the
companyis doubtful due to market competition.
(iii) Although sales have not yet
have placed large orders fromtaken place, few reliable of the compan'
(iv) One of the shareholders of the which customers
huge profit is expected.
another company. company has invested his in shares o
savings
Theory Base of Accounting, Accounting Standards and Ind-AS 3.11

(v) At the end of the accounting period, factory rent of the company /s outstanding
for ? 10,000.
(v) At present, market price of the fixed assets of the company is very
high as
compared to the book value and directors are interested to show the fixed assets
in accounts at their current market price.
(vin) During the year, the company purchased pencils of 50. These had all been
issued from stock and were still in use at the end of the year.
(viüi) Directors are interested to adopt Written Down Value (WDV) Method of charging
depreciation in place of Straight Line Method (SLM) in the current accounting
period to show higher profit.
(ix) Adebtor who owes an amount to the company is likely to be declared insolvent.
You are required to (a) state which accounting concept youwould follow in dealing with
each of the above problems and (b) explain briefly what each concept means.
Ans.
(i) Money Measurement Concept
Transactions and events that can be measured in money or in money terms are recorded
in the books of account. Since, good industrial relations cannot be measured in money
terms, they willnot be reflected in the accounts.
(ii) Going Concern Concept
The business will continue for an indefinite period and there is no intention to close
the business or downsize its operations significantly. The doubt of success does not
lead to the inference that business will not continue for indefinite period and also the
intention that the business will be downsized significantly.
(iüi) Realisation Concept
Revenue is recognised when sale has been made or service has been rendered.
Therefore, the revenue will be recognised when sale has been affected and not when
the order is placed.
(iv) Business Entity Concept
Business is treated as a separate and distinct entity from its owners. The investment
in another company's shares is by a shareholder who is distinct from the business.
(v) Accrual Concept
This concept recognises revenues and expenses as they are earned or incurred
respectively ignoring the date of receipt or payment. Since, the factory rent of the
company is outstanding, it will be recorded in the books of account.
(vi) Historical Cost Concept
According to the Historical Cost Concept, the asset must be shown at its cost price.
which is the cost of acquisition less depreciation. As a good accounting practice, they
should be continued to be shown at cost.
(vii) Materiality Concept
An item is recorded in the books of account on the basis of materiality. Purchased
stationery (Pencil) is in use but, the amount and nature is not material. Therefore, it is
debited toStationery Account.
312 DoubleEntry Book

r ) Consistency
Keeping- CBSEX
Al
accounting Assumption or Concept
methods should be applied in
a similar
principles
perind to the next so that and financial statements can be
way from one
one
it should be disclosed
data
period with that ofalong
reported in
with period.
another Method
its impact
may be changed
on profit or loss.
hy the
compare
companyd for
but
(ix) Con servatism
The concept is oftenConvention or Concept
stated as, "Anticipate no profit, but provide for all possible

debtolors.sses"
Thus. provision for doubtful debts should be made against the amount of

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

Introduction
Globalisation integrates the national economies into the international
through trade, foreign direct investments, capital flow, etc. In this age of
and technology. enterprises are on businesses worldwide. We also
economy
globalisati
that accounting is the languagecarrying understand
of business. Thus, business enterprises around the
worid should not be speaking different languages while sharing financial
Therefore, there is a need of single set of accounting standards that can information
accounting practice worldwide. It is difficult to understand and compare unify the
financial information without a common set of accounting and worldwide
financial reporting
standards. The use of a single set of highquality accounting standards
investment and other economic decisions across borders, increase would facilitate
and reduce the cost of capital. Thus, market efficienc.
International Accounting
developed, which are being withdrawn or superseded by Standards (IAS) were
Reporting Standards (IFRS). International Financial
The International Accounting Standards Committee (LASC) established in 1973
replaced by International Accounting Standards Board
was
now issues International Financial (LASB) in the year 2001 which
the accounting standards issued byReporting Standards (IFRS). IASB initially adopted
The objective behind setting up the IASC to be replaced by IFRS upon their issuance.
IASC and later IASB was to develop
standards that would be acceptable worldwide to produce and presentaccounting
informnation based on similar accounting standards. Thus, it is the financial
financial reporting internationally. process to improve
Objectives of IASB
The objectives of IASB are:
(i) To develop, in the public interest, a single set of
enforceable globalaccounting high-quality, understandable, and
and comparable information in standards that require high-quality, transparent,
to help financial statemnents and other reporting
participants the
in financial
of the information to makevarious capital markets of the world and other us
:n r promote the use and
economic decisions:
rigorous application of those standards:
Theory Base of Accounting, AccountingStandards and Ind-AS 3.13

(i) In fulfilling the objectives ass0ciated with (i) and (in), to take account of, as
appropriate, the special needs of small and medium-sized entities and emerging
economies; and
(iv) To bnng about convergence of national accounting standards and International
Financial Reporting Standards to high-quality solutions.
Meaning
IFRS are a set of accounting standards developed by the International Accounting
Standards Board (LASB), the international aCcounting standard-setting body. The
standards issued by IASB are based on sound and clearly stated principles. Therefore,
IFRS are referred to as principles-based accounting standards. This contrasts with
set of standards, like Indian Accounting Standards, which contain significantly more
application guidance. These standards are often referred to as rule-based accounting
standards.

Accounting Standards Issued by the lASC and Standing Interpretation Committee (SIC)
LASChad issued 4l accounting standards,known as the International Accounting
Standards (LAS), and a Framework for the Preparation and Presentation of Financial
Statements, out of which 12 IASs have been superseded and a large number of them
have been revised. Standing Interpretation Committee (SIC) was the interpretive
body of the IASC. The interpretation of LAS issued by the SIC are described as
SIC-1, SIC-2, etc.
JASB has adopted alloutstanding LAS and SIC issued by the IASC as its own standards.
Those LAS and SIC continue to be in force to the extent they are not amended or
withdrawn by the LASB. New standards issued by the IASB are known as IFRS.
New interpretations issued by the International Financial Reporting Interpretations
Committee (IFRIC) are known as IFRIC Interpretations. When referring collectively
to IFRS, that term includes IAS, SIC, IFRS, and IFRIC Interpretations.
IFRS Based Financial Statements
The financial statements produced under IFRS are:
1. Statement of Financial Position
2. Statement of Comprehensive Income
3. Statement of Changes in Equity.
4. Statement of Cash Flow.
5. Notes and Significant Accounting Policies.
India and IFRS
India had two options, i.e., either to adopt IFRS as they are or converge the Indian
Accounting Standards in line with the IFRS. It decided to converge its existing accounting
standards with IFRS. The converged accounting standards titled Ind-AS have been
issued and notified.
 Double Entry Book
Keeping CBSE
STANDARDS(IND-AS)
14
ACCOUNTING
INDIAN
own
prepare its accounting
Introduction
adopting IFRS,
decided to
to be
converged
said Accounting¡
Ind-AS can beIndian
standards
of
Standards standarIFRS
to (Ind-As
instend of
India, IFRS. Thus, known as and are applicable
Pquivalent to standardsare 2013
These
accOunting
Ind-ASare
notified under
the
Companies Act,
Exchangein India; and
companie
on the Stock crores or more;
) Listed 250 venture companies.
Heving networth of associate and joint
(ü)
Their holding.
subsidiary,
companies may adopt Ind-AS voluntarily.
(ii) companies, other
above financial statements of a
Besides the isto prepare
behindissuing Ind-AS accounting principles and practices and
on company
Theobjective
the lines of
internationally accepted
country's business environment
and laws.
A Standards (As
complying
with the Accounting Standards(Ind-AS) andIAccounting
Diference between Indian Accounting Standards are as follows:
principal differences between Ind-AS and
The
Ind-AS are Principle based while Accounting Standards are Rule boess
1. accordine
Balance Sheet is prepared by a company (on which lnd-AS is not applicable)
to Scheduile III of the Companies Act, 2013. It means, a Balance Sheet item should
depicted under the prescribed head. In contrast to this, Ind-AS do not prescribe any
form for the Balance Sheet. They prescribe that items may be shown in the Balance
Sheet in accordance with the principle associated with them. For example, Redeemable
Preference Shares are shown under the main head Share Capital" under Schedule ll
of the Companies Act, 2013. But, it is shown as
of dividend and als0 must be loan because it carries a fixed rate
redeemed in accordance with the
later than 25 years from the date of issue. terms of issue but i
of ioan, it should be Ind-AS reguire that since it is in the nature
depicted under the main head
1
2. Ind-AS
on involves Fair Value Concept while "Loans".
Historical
Unlike
Cost Concept Standards are based
Accounting
Account in g Standards,
Company may be shown at theInd-AS prescribes that ofthe
fnancial fair value as at the the assets and liabilities But
f
when fair instruments
value is (Securities, etc.) should be date of the Balance Sheet. effect
asBet but it is adopted for fixed
assets, valued at fair value. Thus, intofthe
is valued
debited or as on that date and
will have obecredited to Profit &
loss
the depreci ationin opening
difference
is not
charged onthe cost
valuation
valued or
Meaning of ind-AS discounted everyAccount. It and closing liabiliy
Ind-AS are aset of year to bemeans every asset and also

conuerge with shown in Balance

the Sheet.

In
toLnd-beAS are basedte uccount in g
onrnational inancial
sta ndards notified 013thal
sound and clearly Reporting under the Companies Act,
principle-based
that are
icableingonuccount
rule-basedapplaccount ing ests andaron stated
stacompani
ndards. dwhich prinSt
gipandards
s. "This contersastands withth(IFRS).
l Ind-AS
sait

are

Ind-AS are erefore;

Standard
Accounting
whicha t
not applicable,
 3.15
Theory Base of Accounting, Accounting Standards and Ind-AS

Underlying Assumptions in Ind-AS

The underlying assumptions in Ind-AS (Ind-AS 101) are:
. Going Concern Assumption
It is assumed that the life of the business is infinite. i.e.. the entity will continue its
operations for an indefinite period.
2. Accrual Assumption
The transactions are recorded inthe books of account on accrual basis, i.e., as and when
they occur and not when the settlement of transactions takes place.
Ind-AS Based Financial Statements
The financial statements prepared under Ind-AS are:
1. Statement of Financial Position
The elements or contents of the statement are:
(i) Asset
Assets are the resources controlled by the enterprise as a result of past events and
operations from which the future economic benefits shall flow to the enterprise.
(ü) Liability
Liabilities are the obligations of the enterprise from the past events and operations,
which shall result in outflow of resources, i.e., assets.
2. Statement of Changes in Equity
Equity is the residual interest in the assets of the enterprise after deducting liabilities.
It is the real value of shareholders' equity.
3. Statement of Comprehensive Income
A Statement of Comprehensive Income includes two separate
statements, i.e. Income
Statement and a Statement of Comprehensive Income are prepared. The
of Comprehensive Income reconciles the income or loss as per Income
Statement
total comprehensive income. The elements or contents of the
Statement with
statement are:
(i) Revenue
It increases the economic benefit during the
accounting period as a result of business
operations or increase in value of assets or decrease in liabilities. It
in the value of shareholders' equity.
results in increase
(ü) Expense
It is a decrease in economic benefits in the
form of outflows during the accounting
as a result of business
operations or decrease in value of assets or increase in
period
It results in decrease in the value of liabilities.
4.
shareholders' equity.
Statement of Cash Flow.
5. Notes and Significant
Accounting Policies.
 Double. Entry Book

B.76

value its
financial assets
KeepingCBs T

Valuation Principles

Ind AS
prescribes that everv company shall
assetscan be
valued at
historical cost or at Fair
to be consistently
(secuVariltuiee.s R
Fair Value
whereas
whichever ofthe two
other shall

that would be
have
methods is adopted, received when an asset is
market
folaolowed:
d or
means the price pai
FAIT Vaue
measurementliability orderly transaction bettween
at
in an differently, it is a price which a buyer would be willing t
date. Stating participants
to transfer a
would be willing to accept.
However, fortheand
asset a sellerof Ind-ASin many cases, fair value is estimated, (excepti
purposes
pay for an
Valuation Rules are notified.
financial securities) for which
the case of quoted
Applicability of Ind-AS
Ind-ASappies to following companies:
Stock Exchange, in India: and
(a) Companies that are listed on
more.
(b) Companies having net worth of 250 crores or
Other companies may follow Ind-AS voluntarily.
Ind-AS will also apply on the Holding, Subsidiary, Associate and Joint-ventul
Companies on which Ind-AS applies or is voluntarily adopted.
ind-AS Under the Companies Act, 2013
So far the number of Ind-AS issued and notified
40, list of which is given under the Companies Act, 2013 are
hereunder.

Scan QR Code for the List of Indian

ACcounting Standards

Higher Order Thinking Skills QUESTIONS

Q. 1.
Rahul, the propretor of M/s.(HOTS) Questions
residene. The R.K. && Co.
The Aocwuntantpayment was made by purchased an i aths
chequeair-conditioner
installedit
debited the issuing a and &Ca
View that it should
Ans. The be Drawi n gs from
debited to the FixedAccount withIn the the account of M/s. R.K.
whereas Rahul is of t
Accountant is correct
Assets. youramount
Beparate and
the distinct from because
the according the to view, who 18 Correct and why
o2. Whichresidence the proprietor, owners. Business Concept business.
of
Since,
i.e., for his the Entity beeninstalledal
Ans.
should beaccount
debited
Accounting Entity orDrawings
air-c0nditioner
ing toPrinciple requires that personal use, it is has bythe owner.
drawings
Business Account? personal expenses of proprietor or
partners

Entity Principle.