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 Principles of Accounting

Dual Aspect Cost Principle

Accounting information is
based on actual cost.

Accrual

Now Future
Going-Concern Principle
Reflects assumption that the
business will continue operating
instead of being closed or sold.
 Concepts in Accounting

Revenue Recognition Principle

1. Recognize revenue when it is
Money Measurement concept earned.
Express transactions and events in 2. Proceeds need not be in cash.
monetary, or money, units.

Matching Concept
Business Entity Principle
A business is accounted for
separately from other business
entities, including its owner.
Accounting Conventions
•Disclosure
•Materiality
•Consistency
•Conservatism
• Financial statements are bound by laws and
accounting standards
• However finance is too complicated to have
a set of water-tight rules
• The Cadbury report intends to extend best-
of-practice, for example recommending that
directors report on the effectiveness of the
company's internal controls i.e. taking the
responsibility actively and personally
• spouses are sometimes put on the books
as employees though they may never
have worked for the company.
• Enron’s senior executives defrauded
investors by deliberately concealing
negative information about its finances.
The insider trading allegations centered
upon the sale by senior Enron executives
of company stock and their exercise of
Enron stock options before the stock price
plunged.
• To avoid reporting its mounting losses and to
give the appearance of rapid earnings growth,
Enron undertook creative accounting
• In Enron’s case, assets that were losing money
were sold to partnerships. Enron listed the sales
of these assets as earnings. However, to be
legitimate, accounting rules require that an SPE
be legally isolated from the company that
created it. In Enron’s case this was not true. The
SPEs relied upon Enron managers for
leadership and Enron stock for capital. When
outside auditors told Enron to treat some of the
4,000 SPEs it had created as part of Enron, the
company had to take the $1-billion charge
against earnings.
• The external auditing firm, Arthur Andersen,
failed to act in part because it made more money
providing consulting services for Enron than it
did providing auditing services. When
challenged by the federal government in court,
Andersen claimed it was not responsible
because it could only work with the numbers
provided by the company. However, a jury found
the firm guilty of obstructing justice in June 2002
for destroying documents in anticipation of an
SEC investigation. Andersen was one of the
earliest casualties of the Enron scandal, as it lost
its major accounts and ceased to be one of the
world’s five largest accounting firms
8-2

Corporate Financial Statements

 Only proper books of accounts can

provide a true and fair view of the
financial state of affairs of a company.
 Two essential conditions of proper

books of accounts:
 Double entry principle is followed.
 Accrual basis is followed.

Corporate Financial Statements- Part I

8-3

Corporate Financial Statements

 Section 210 of the Companies Act, 1956 provides
that at the annual general meeting, the Board of
Directors of a company shall lay before the
shareholders:
 A balance sheet as at the end of the accounting period;
 A profit and loss account for the period
 It may be noted that as per Accounting Standard 3,
a cash flow statement for the period is also an
integral part of corporate financial statements since
April 2001(for all listed companies, and other
companies having annual turnover exceeding Rs.
50 crore).

Corporate Financial Statements- Part I

8-5

Corporate Financial Statements

 What are the corporate financial statements?
 Balance Sheet
 Shows the financial position (position of assets,

liabilities and equity) as on the reporting date.

 Profit & Loss Account
 Shows the financial results (profit or loss) for an

accounting period.
 Cash Flow Statement
 Shows the net increase /decrease in cash and cash

equivalents during the accounting period.

Corporate Financial Statements- Part I

8-6

Corporate Financial Statements

 Balance sheet and profit and loss account are
prepared as per Schedule VI of the Companies
Act, 1956. The Schedule VI has four parts:
 Part I: Provides detailed balance sheet format.
 Part II: Lays down disclosure requirements in profit and
loss account.
 Part III: Provides interpretations of certain terms used in
Parts I and II.
 Part IV: Provides format for balance sheet abstract and a
company’s general business profile.
 Thus, corporate financial statements generally
consist of balance sheet, profit and loss account,
notes to accounts and schedules attached thereto.
Corporate Financial Statements- Part I
8-8
Corporate Financial Statements:
Basis of preparation
 Financial statements are prepared following two
basic conventions:
 Historical cost
 Accrual basis.
 Adherence to accrual basis involves use of
estimates and judgments which may differ from
actual.
 It is imperative on the preparers of financial
statements to be cautious while using estimates
and judgments.

Corporate Financial Statements- Part I

8-10

Basis of preparation
 Infosys
 The accompanying financial statements are prepared in
accordance with Indian Generally Accepted Accounting
Principles ("GAAP") under the historical cost convention on the
accruals basis. GAAP comprises mandatory accounting
standards issued by the Institute of Chartered Accountants of
India ("ICAI"), the provisions of the Companies Act, I956, and
guidelines issued by the Securities and Exchange Board of India.
These accounting policies have been consistently applied,
except where a newly issued accounting standard is initially
adopted by the company.
 The preparation of the financial statements in conformity with
GAAP requires Infosys' management ("Management") to make
estimates and assumptions that affect the reported balances of
assets and liabilities and disclosures relating to contingent assets
and liabilities as at the date of the financial statements and
reported amounts of income and expenses during the period.

Corporate Financial Statements- Part I

8-14

Schedules
 This section of financial statements shows details
of various financial items by way of separate
schedules.
 Balance sheet and profit and loss account
disclose financial elements under broad headings.
 Schedules capture the details of broad financial
elements. For example, a balance sheet shows
aggregate value of gross block, depreciation and
net block. The Schedule of Fixed Assets would
show details of major items of fixed assets, their
original cost, accumulated depreciation etc.

Corporate Financial Statements- Part I

8-18

Fixed Assets
 There are four items related to fixed assets that are
reported in balance sheet:
 Gross block
 Accumulated depreciation
 Net block
 Capital work in progress
 Gross block denotes original cost of assets.
 Net block represents depreciated value of fixed assets.
 Capital work in progress denotes assets under
construction.
 Once construction of an asset is over and the asset is
ready for commercial use, the costs incurred till date will
get transferred from capital work in progress to gross
block.
 Depreciation can only be charged once the asset is being
used.
Corporate Financial Statements- Part I
 Assets
• Current Assets: Assets with the intention of
converting them into cash within one year
Cash and Bank Balances, debtors, Prepaid
expenses, Closing Inventories, Bills Receivables
• Liquid Assets : Immediately converted into cash
.Sock of Inventory and Prepaid expenses are
excluded from current assets to calculate liquid
assets.
Immediately converted into cash
• Intangible Assets: Goodwill, Patent, Trademarks
 Liabilities
• Current Liabilities: Become due in one
year.
• Bank Overdrafts, Bills Payable,
Outstanding Expenses, short Term loan,
Advances received, Creditors
• Long Term Liabilities: More than one year.
• Loans from Bank, Debenture Issued
8-20

Current Assets, Loans and Advances

 Current assets are short-term assets which are

ideally realisable within twelve months from the
date of the balance sheet.
 Loans are essentially long term loans given to
other corporate and/or to employees. Loans carry
interest.
 Advances are short-term facilities and hence
normally do not carry interest.

Corporate Financial Statements- Part I