INTRODUCION CA MUNISH KUMAR

I strongly believes that 'Everybody is gifted with same brain, the difference in our
performances is only due to lack of concentration'. Thus, My prime effort is directed
towards increasing each student's concentration level which drives them to aim higher
and score better.
Chapter 1: INTRODUCTION
1) Accounting is often called language of business and ends with communication among users of the
financial information.
2) Book-keeping is regarded as a narrow term and hence a part of accounting.
3) Branches of accountingFinancial accounting; management accounting; cost accounting; tax
accounting; social accounting and human resource accounting and national accounting.
4) Accounting conceptsare the necessary assumptions, conditions or postulates upon which the
accounting is based and is universal
5) Accounting conventionsare the customs or traditions guiding the preparation of accounts.
6) Main Qualitative characteristics of corporate accounting disclosure – relevance and reliability
7) Procedure of accounting can be basically divided into two parts:
a. Generating financial information and
b. Using the financial information.
8)
S. No. Book-keeping Accounting
1. It is a process concerned with recording of It is a process concerned with summarizing
transactions. of the recorded transactions.
2. It constitutes as a base for accounting. It is considered us a language of the
business
3. Financial statements do not from part of this Financial statements are prepared in this
process. process on the basis of book-keeping
records.
4. Managerial decisions cannot be taken with Management takes decisions on the basis of
the help of these records. these records.
5. There is no sub-field of book-keeping. It has several sub-fields like financial
accounting, management accounting etc.
6. Financial position of the business cannot be Financial position of the business is
ascertained through book-keeping records. ascertained on the basis of the accounting
reports.

USERS INFORMATION REQUIRED

INTERNAL USERS
1. Management In order to decide future course of action, management needs information
about-
 Short solvency of the firm,
 Long-term solvency of the firm,
 Activity position of the firm (viz., effective utilization of its
resources),
 Profitability in relation to turnover,
 Profitability in relation to investments
EXTERNAL USERS
2. Short Term Creditors They need formation to determine-
 Whether the amount owing to them will be paid when due,
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 Whether they should extend, maintain or restrict credit to an
individual enterprise
3. Long Term Creditors Long-term creditors need information to determine-
 Whether their principle and the interest thereon will be paid when
due, and
 Whether they should extend, maintain or restrict the credit to an
enterprise.
4. Present Investors Present investors need information-
 To judge prospects for their investment, and
 To determine whether they should, buy, hold or sell the shares
5. Potential Investors Potential investors need information-
 To judge prospects enterprise, and
 To determine whether they should buy the shares
6. Employee Groups Employee groups need information to form judgment about
 Stability, continuity and growth of the enterprise,
 The ability of a firm to pay wages and other benefit and
enhancement
7. General Public The general public needs information to evaluate the effectiveness of the
economic entity from which is buys goods services.
8. Tax Authorities Tax authorities need information to assess the tax liabilities of an
enterprise

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INTRODUCION CA MUNISH KUMAR

ACCOUNTING PRINCIPLES
(GAAP)

CONCEPTS CONVENTIONS
These are the assumption on the These are derived by usage and
basis of which Financial Statements pactice. Accounting conventions need
are prepared concepts are the ""idea" not have universal application
or "Thought
"Thought", which has
universal application

1. Conservatism or prudence
2. Full disclosure
3. Consistency
1. Separate entity or Business
Entity 4. Materiality
2. Going concern or Continuity
3. Accounting period or Periodicity
4. Accrual
5. Realization or Revenue
Recongnition
6. Money measurement
7. Cost
8. Matching
9. Objective or Objective Evidence
10. Dual aspect

A. ACCOUNTING ENTITY (OR BUSINESS ENTITY PRINCIPLE)

(1) Meaning: According
ording to this principle, a business is treated as separate entity that is distinct from its
owner(s) hence a distinction should be made between (i) personal transactions and business
transactions, For example, in case of a proprietary concern, though the legal entity of the business
and its proprietor is the same, for the purpose of accounting, they are to be treated as separate from
each other.
(2) Due to this profits are shown on liabilities side of Balance Sheet Effect: if this assumption is not
followed, true financial position and true financial performance of a business entity cannot be
ascertained. For example, if the household expenses (Rs 10, 10,000)
000) of a proprietor are shown as
business expenses, the profits of a business will be understated to the extent of Rs 10,000.
B. MONEY MEASUREMENT PRINCIPLE
(1) What is recorded: According to this principle, only those transactions which are capable of being
expressed
ressed in terms of money are included in the accounting records.
C. ACCOUNTING PERIOD PRINCIPLE (PERIODICITY PRINCIPLE)

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Meaning: It is also known as periodicity principle or time period principle. According to this principle, the
economic life of an enterprise is artificially split into periodic intervals which are known as accounting
periods, at the end of which an income statement and position statement are prepared to show the
performance and financial position.
Reporting Period: It may be noted that the custom of using twelve month period is applied only for
external reporting. For internal reporting, accounts can be prepared even for shorter periods say monthly,
quarterly or half yearly.
Accounting Period vs Financial Year vs Calendar Year
D. GOING CONCERN PRINCIPLE
Meaning: It is also known as continuity assumption. According to this assumption, the enterprise is
normally viewed as a going concern that is, continuing in operation for the foreseeable future. It is assumed
that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the
scale of its operations.

Implications:Its is because of the going concern assumptions:

(i) That the assets are classified as current assets and fixed assets.
(ii) The liabilities are classified as short-term liabilities and long-term liabilities.
E. ACCRUAL CONCEPT [REVENUE RECOGNITION PRINCIPLE]
Meaning: According to Accrual principle, all revenues and costs are recognized as they are earned or
incurred (and not as money is received or paid).

F. CONSISTENCY PRINCIPLE
Meaning: According to this principle, whatever accounting practices (whether logical or not) are selected
for given category of transactions, they should be followed on a horizontal basis from one accounting period
to another to achieve compatibility.

Examples: If the inventory is valued on LIFO basis, this basis should be followed year after year and if a
particular asset is depreciated according to WDV method, this method should be followed year after year.

G. PRUDENCE PRINCIPLE (CONSERVATISM PRINCIPLE)

Meaning: According to this principle, the principle of ‘anticipate no profit but provide for all probable
losses’ should be applied. In other words, the principle of conservatism requires that in the situation of
uncertainty and doubt. The business transactions should be recorded in such a manner that the profits the
business transactions should be recorded in such a manner that profits and assets are not overstated and the
losses and liabilities are not understated.

Examples: the valuation of stock-in-trade at a lower of cost or net realizable value and making the
provisions for doubtful debts and discount on debtors are the applications of this principle.

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 Conflicts with consistency: When the stock is valued at cost in one accounting period and at a lower of
cost or net realizable value in another accounting period, this conflicts with the principle of full
discloser.
 Conflicts with Full Disclosure: When excessive provisions for doubtful debts and depreciation are
charged, it leads to the creation of secret reserves, and thus, this principle conflicts with the principle of
full discloser.

H. FULL DISCLOSURE PRINCIPLE

According to this principle, the financial statements should act as means of conveying and not concealing.
The financial statements must disclose all the relevant and reliable information which the y purport to
represent, so that the information may be useful for the users.

The disclosure should be full, fair and adequate so that the users of the financial statements can make
correct assessment about the financial performance and position of the enterprise.

I. MATERIALITY PRINCIPLE
 This principle is basically an exception to the full disclosure principle.
 The full disclosure principle requires that all facts necessary to ensure that the financial statements are
not misleading, must be disclosed, whereas the materiality principle requires that the items or events
having an insignificant economic effect or not being relevant to the user’s need not be disclosed.
 The materiality depends not only upon the amount of item but also upon the size of business, level and
nature of information, level of the person/department who makes the judgment about materiality.
J. HISTORICAL COST PRINCIPLE
According to this principle, an asset is ordinarily recorded in the accounting records at the price paid to
acquire it at the time of its acquisition and the cost becomes the basis for the accounts during the period of
acquisition and subsequent accounting periods.
Accordingly, if nothing is paid to acquire an asset; the same will not be usually recorded as an asset, e.g. a
favorable location and increasing reputation of the concern will remain unrecorded though these are valuable
assets.
This does not mean that the asset will always be shown at cost. The cost of an asset is systematically
reduced from year to year by charging depreciation and the asset is shown in the balance sheet at book
value, (i.e. cost less depreciation). It may be noted that the purpose of depreciation is to allocate the cost of
an asset over its useful life and not to adjust its cost so as to bring it close to the market value.
 According to this principle, the expenses incurred in an accounting period should be matched with the
revenues recognized in that period. That is, if revenue is recognized on all goods sold during a period,
cost of those goods sold should also be charged to that period.
 Matching does not mean that expenses must be identifiable with revenues. Expenses charged to a period
may or may not be related to the revenue recognized in that period, for example, cost of goods sold and
commission to salesman are directly related to sales whereas rent, interest, depreciation accruing with
the passage of time and stock lost by fire are not directly related to sales revenue, yet they are charged to
the accounting period to which they relate. Thus, appropriate costs have to be matched against the
appropriate revenues for the accounting period.

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Two fold aspect of a transaction is called dual aspect or duality of a transaction. As the name implies, the
entry made for each transaction composed of two parts-one for debit and another for credit. The double entry
system may be compared with Newton’s law of motion, viz, to every action there is always an equal and
contrary reaction. Every debit has equal amount of credit. So the total of all debits must be equal to the total
of all credits.
Example Mr. X sold goods for cash Rs 1,000 to Mr. Y. in this case the dual aspects of this transaction
for Mr. X and Mr. Y are as follows:
Dual Aspects for Mr. X Dual Aspects for Mr. Y
1. Receipt of cash Rs 1,000 1. Payment of cash Rs 1,000
2. Foregoing of goods of Rs. 1,000 2. Receipt of goods of Rs 1,000

Dual Aspects for Mr. X Dual Aspects for Mr. Y

1. Acquisition of right to recover Rs 1,000 1. Assumption of obligation to pay Rs 1,000
2. Foregoing of goods of Rs. 1,000 2. Receipt of goods of Rs 1,000

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