MBA EFB SEMESTER 1

UNIT 1
FINANCIAL ACCOUNTING
By
PRANJILI CHAUHAN
 FINANCIAL ACCOUNTING

Financial accounting is a specific branch of accounting

involving a process of recording, summarizing, and
reporting the myriad of transactions resulting from
business operations over a period of time. These
transactions are summarized in the preparation of
financial statements, including the balance sheet,
income statement and cash flow statement, that record
the company's operating performance over a specified
period.
MEANING OF FINANCIAL ACCOUNTING AS
PER INDIAN NEEDS
• Financial accounting is a particular type of accounting that includes a method
of documenting, summarising, and reporting the transactions arising from
business operations for a period of time. Such transactions are outlined in the
preparation of accounts, including the balance sheet, income statement, and
cash flow statement, which document the financial results of the company
over a particular period of time.
• In India, companies must report the transactions that occur during the fiscal
period or a financial year between 1 April to 31 March.
• Financial accounting reflects the accounting on "accrual basis" over the
accounting on "cash basis". Non-profit firms, companies, and small
businesses use accountants in financial matters.
 NATURE OF FINANCIAL ACCOUNTING

• Dealing with financial transactions:

Accounting as a process deals only with those transactions which are measurable in
terms of money. Anything which cannot be expressed in monetary terms does not
form part of financial accounting however significant it is.

• Recording of information:
Accounting is an art of recording financial transactions of a business concern. There is
a limitation for human memory. It is not possible to remember all transactions of the
business. Therefore, the information is recorded in a set of books called Journal and
other subsidiary books and it is useful for management in its decision making process.
 NATURE OF FINANCIAL ACCOUNTING

• Classification of Data:
The recorded data is arranged in a manner so as to group the transactions of similar nature at
one place so that full information of these items may be collected under different heads. This
is done in the book called ‘Ledger’. For example, we may have accounts called ‘Salaries’,
‘Rent’, ‘Interest’, Advertisement’, etc. To verify the arithmetical accuracy of such accounts,
trial balance is prepared.

• Making Summaries:
The classified information of the trial balance is used to prepare profit and loss account and
balance sheet in a manner useful to the users of accounting information. The final accounts
are prepared to find out operational efficiency and financial strength of the business.
 NATURE OF FINANCIAL ACCOUNTING

• Analyzing:
It is the process of establishing the relationship between the items of the
profit and loss account and the balance sheet. The purpose is to identify the
financial strength and weakness of the business. It also provides a basis for
interpretation.

• Interpreting the financial information:

It is concerned with explaining the meaning and significance of the relationship
established by the analysis. It should be useful to the users, so as to enable
them to take correct decisions.
 NATURE OF FINANCIAL ACCOUNTING

• Communicating the results:

The profitability and financial position of the business as interpreted above are
communicated to the interested parties at regular intervals so as to assist
them to make their own conclusions.
 SCOPE OF FINANCIAL ACCOUNTING

• Accounting facilitates the systematic management of the records of the

transaction and other financial data.
• It gives an idea about the chances of profitability or failure or losses.
• The process assists the management by helping them to make the best
decisions. besides that, accounting ascertains the financial position of an
organization.
• It also helps in the evaluation of the employee and their working efficiency, in
addition, communicating and spreading the accounting information to the user.
• Accounting contributes the biggest to any organization by preventing fraud
and prevents profit risks.
 OBJECTIVES OF FINANCIAL ACCOUNTING

1.Compliance with Statutory Requirements

One of the objectives is to ensure compliance with local
laws related to taxation, the Companies Act and other
statutory requirements relevant to the country where
the business undertakes. It ensures that the business
affairs adhere to such laws and relevant provisions
comply while business is conducted.
 OBJECTIVES OF FINANCIAL ACOUNTING

2. Safeguarding of Interest of Various

Stakeholders
It provides suitable and relevant information related to business operations to
stakeholders such as Shareholders, Prospective Investors, Financers, customers,
and creditors. They are not just appropriate for those who have existing business
relationships but also for those who are interested in having future collaboration with
the business by providing them with meaningful information about the business. In
addition, further financial accounting standards ensure control over
accounting policies of businesses to protect the interest of investors
OBJECTIVES OF FINANCIAL ACCOUNTING

3.Helps in the Measurement of Profit and

Loss of Business
It measures the business’s profitability for a
particular period and discloses the net profit or
loss of the business as a whole. It also exhibits
the Assets and Liabilities of the business.
 OBJECTIVES OF FINANCIAL ACCOUNTING

4.Presentation of Historical Records

Unlike other accounting, it focuses on the presentation
of historical records and not on forecasting the future.
Therefore, the primary rationale for preparing
Financial Accounts is ascertaining profit earned or loss
incurred by the business in the period concerned.
 OBJECTIVES OF FINANCIAL ACCOUNTING

5. Focus on External Transaction of Business

It focuses on a transaction that the business enters into
with external parties, such as customers, suppliers, etc.
The accounts are prepared to quantify the business,
costs incurred as expenses, and resultant profit or loss
earned based on these transactions.
 OBJECTIVES OF FINANCIAL ACCOUNTING

6.Periodic Reporting and Wide Availability

Financial Accounting is undertaken with a pre-specified periodic
reporting period, usually quarterly, half-yearly, and annually. It
enables easy comparison and keeps the information relevant and
informative for various stakeholders. Further Financial Accounts
are available publicly and are accessible to everyone who wants
to know about the business and its performance.
 OBJECTIVES OF FINANCIAL ACCOUNTING

7.Basis for Other Accounting

The other types of accounting, namely cost accounting
or management accounting, provides their base data
from financial accounting. It acts as a source for
different types of accounting undertaken by the
business. It deals with business transactions broadly,
which acts as a base for Cost Accounting to further
identify costs with products and services.
 OBJECTIVES OF FINANCIAL ACCOUNTING

8.Meeting the Objective of Various Stakeholders

Another essential objective is meeting the needs of various
stakeholders, which are associated with the business. Different
stakeholders have different purposes, such as lenders to the
business intend to assess the capability of the business to pay
interest and principal, which is lent to the business or prospective
lenders, so they are more interested in the
solvency of the business and focus on that aspect.
 OBJECTIVES OF FINANCIAL ACCOUNTING

9.Only Financial Transactions

Financial Accounting records only those transactions
which can be denominated in monetary terms or those
which include financial aspects as such non-financial
transactions are outside its purview. Accordingly, it
serves the objective of only Financial Transactions.
 OBJECTIVES OF FINANCIAL ACCOUNTING

10. Reliability and Relevance

• An important objective is to prepare reliable financial
statements, and decisions can be based on them. For
this purpose, such Accounting should represent a
faithful representation of transactions and events
undertaken by the business, represented in their actual
substance and economic reality perspective.
 OBJECTIVES OF FINANCIAL ACCOUNTING

11.Easy to Understand
Among all the objectives discussed above, it is the primary
objective that Financial Accounts are prepared so that they are
easily understandable by intended users.
However, while meeting this objective in mind, it must be equally
essential to ensure that no material information is omitted
because it will be complex and cumbersome to understand for
various users. In short, efforts must be made to prepare Financial
Accounts in an easy way to know wherever possible.
 BASES OF FINANCIAL ACCOUNTING

• Accrual basis (Mercantile)

It takes into consideration only the expenses, before the actual transaction takes
place.

• Cash Basis
It takes into consideration only the cash, once the actual transaction takes place
spontaneously.

• Hybrid (Accrual and Cash Basis)

Attributes of accrual and cash basis.
 BRANCHES OF ACCOUNTING

• Financial accounting
• Cost accounting
• Management accounting
• Tax accounting
• Triple Bottom accounting (people, plant, profit)
ADVANTAGES OF FINANCIAL ACCOUNTING

1.Maintenance of business records

It records all the financial transaction pertaining to the
respective year systematically in the books of accounts.
It is not possible for management to remember each
and every transaction for a long time due to their size
and complexities.
ADVANTAGES OF FINANCIAL ACCOUNTING

2.Preparation of financial statements

Financial statements like Trading and profit and loss
account, Balance Sheet can be prepared easily if there is
a proper recording of transactions. Proper recording of
all the financial transactions is very important for the
preparation of financial statements of the entity.
ADVANTAGES OF FINANCIAL ACCOUNTING

3.Comparison of results
It facilitates the comparison of the financial results of
one year with another year easily. Also, the
management can analyze the systematic recording of all
the financial transactions according to the policies of the
entity.
ADVANTAGES OF FINANCIAL ACCOUNTING

4.Decision making
Decision making becomes easier for
management if there is a proper recording of
financial transactions. Accounting information
enables management to plan its future activities,
make budgets and coordination of various
activities in various department
ADVANTAGES OF FINANCIAL ACCOUNTING

5.Evidence in legal matters

The proper and systematic records
of the financial transactions act as
evidence in the court of law.
ADVANTAGES OF FINANCIAL ACCOUNTING

6.Provides information to related parties

It makes the financial information of the
organization available to stakeholders like
owners, creditors, employees, customers,
government etc. easily.
ADVANTAGES OF FINANCIAL ACCOUNTING

7.Helps in taxation matters

Various tax authorities like income-tax,
indirect taxes depends on the accounts
maintained by the management for
settlement of taxation matters.
ADVANTAGES OF FINANCIAL ACCOUNTING

8.Valuation of business
For proper valuation of an entity’s business
accounting information can be utilized. Thus, it
helps in measuring the value of the entity by
using the accounting information in the case of
sale of the entity
ADVANTAGES OF FINANCIAL ACCOUNTING

9.Replacement of memory
Proper recording of accounting transactions
replaces the need to remember
transactions
 DISADVANTAGES OF FINANCIAL
ACCOUNTING

1.Expresses Accounting information in

terms of money
Non-financial transactions cannot be given effect to in
books of accounts. Only transactions of financial nature
are measurable by the accountant. In fact, financial
transactions are expressed in terms of money.
 DISADVANTAGES OF FINANCIAL
ACCOUNTING

2.Accounting information is based on

estimates
There are some accounting data which are based on
estimates. Thus, inaccuracy in estimates is possible.
 DISADVANTAGES OF FINANCIAL
ACCOUNTING

3.Accounting information may be biased

Accountants personal influence affects the accounting information
of the entity. Different methods of inventory valuation,
depreciation methods, treatment of revenue and capital expenses
etc can be adopted by the accountant for measurement of
income of the entity.
 DISADVANTAGES OF FINANCIAL
ACCOUNTING

4.Recording of Fixed assets at the original cost

There can be a difference between the original cost and
current replacement cost of a fixed asset due to efflux of
time, change in technology etc. Thus, the balance sheet may
not show the true financial status of an entity.
 DISADVANTAGES OF FINANCIAL
ACCOUNTING

5.Manipulation of Accounts
The accountant or management can
manipulate or misrepresent the profits of an
entity.
 DISADVANTAGES OF FINANCIAL
ACCOUNTING

6.Money as a measurement unit changes in value

Stability in the value of money is not possible.
Accounting information will not show the true financial
position if changes in the price level are not considered.
 GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
• GAAP (generally accepted accounting principles) is a
collection of commonly followed accounting rules and
standards for financial reporting. The acronym is
pronounced gap.
• GAAP specifications include definitions of concepts and
principles, as well as industry-specific rules. The purpose
of GAAP is to ensure that financial reporting is
transparent and consistent from one public organization
to another, and from one accounting period to another.
 BENEFITS OF GAAP

• Helps You Plan Ahead

• Maintains Consistency
• Reduces Risks and Frauds
• Identifies Scope for Improvement & Competitive Analysis
• Gives You Detailed Information on Business Spending
• Helps in Earning the Trust of Shareholders
 1.HELPS YOU PLAN AHEAD

• Being a business owner, you may have understood the

importance of planning. Apart from having a future
business plan ready in your hands, you need to
implement those pre-planned actions at the right time to
make the most out of them. GAAP provides you with an
accurate picture of your business transactions and
revenue so that you can determine and predict regular
cash flow trends. As you will have a detailed record of
your financial statements, you are less likely to skip
essential things, such as sending regular invoices and
 2.MAINTAINS CONSISTENCY

• GAAP ensures that businesses follow the same accounting principles

for all reporting periods. This helps in promoting the usability and
consistency of all financial statements. For instance, changing your
inventory accounting method from first-in, first-out to last-in, first-
out can confuse the users of financial statements.
• It can also make a negative impact on internal investors and other
decision-makers. By observing the consistency principle and GAAP,
businesses can make it easier for stakeholders or other involved
parties to evaluate financial data efficiently – offering greater
assurance to stay connected.
 3.REDUCES RISKS AND FRAUDS

• GAAP helps companies lower the risk of data misrepresentation

and other business frauds. GAAP guidelines are what your
investors or stakeholders follow to hold you liable for reporting
business finances effectively. The process can also push you to
answer other questions, such as why your business is not
reaching the expected sales rate and more. GAAP provides you
with the details you require to diagnose gaps in collection
issues and earning capabilities. It also pinpoints mistakes that
you need to clean up to run your business efficiently.
 4.IDENTIFIES SCOPE FOR
IMPROVEMENT & COMPETITIVE
ANALYSIS
• GAAP enables you to compare your company’s overall performance
with other business rivals in the market and highlight areas where
you require to make necessary changes. You can also evaluate all
financial decisions’ advantages depending on other businesses in
the industry with the same business models. From here, you can
note down critical points which are offering benefits to your
competitors. Implement these steps into your business model to see
the growth. Overall, this feature allows you to draw realistic
conclusions about your company’s performance and improve it
positively if needed.
 5.GIVES YOU DETAILED INFORMATION
ON BUSINESS SPENDING
• Every business owner thinks he has an optimized track of all
spending related to his company and employees. But, there
are so many other things that go beyond your line of sight,
leading you to lose track of your money. GAAP offers you a
detailed view of the costs you have collected – the way your
investors or other people see them. This is a great way to
analyze how you are spending your funds, are you making
wise decisions, is there any scope of improvement, and so
on.
 6.HELPS IN EARNING THE TRUST OF
SHAREHOLDERS
• Using GAAP to present your business information helps you establish trust
among people interested in what you do. There are several possible methods to
manipulate a company’s financial data, and sometimes, a simple adjustment to
the method used to show the data can change the whole face of financial
statements.
• These little modifications to the method can cause readers to understand
financial statements differently compared to the non-altered way. GAAP
guidelines in the business model give assurance to stakeholders, investors, and
anyone else interested in your business.
• It shows that all your financial statements have been prepared considering the
standard guidelines – leading all interested parties to trust your company.
 1. LANGUAGE OF BUSINESS

• GAAP, together with its accounting

standards, is said to be the language of
business. This means that
GAAP accounting helps communicate a
company’s financial results to both
investors and other stakeholders.
 2. STANDARDIZE

• GAAP standardizes the entire process of making financial

statements. It establishes the assumptions, rules, and
regulations that companies must follow when preparing
financial statements. It also specifies when and how
companies must comply with the standards, ensuring
that all companies follow the same guidelines when
preparing and disclosing their financial statements.
 3. COMPARABILITY

• Since GAAP standardizes financial statements, it helps

compare one company with another. Or, a company can
compare its financial over time, which means that
management or other stakeholders can easily compare
their numbers with others in the industry. In addition,
comparing a company’s performance from one period to
another helps analyze progress if the company has made
any progress.
 4. COMPANY PERFORMANCE

• GAAP standards cover all types of situations and scenarios.

This ensures that an entity discloses its real and true
financial position regardless of the transactions it
undertakes. In addition, there is long-term consistency in
accounting standards. This helps to ensure that the financial
statements provide a realistic view of the company’s
performance over the years and that accounting policies are
not changed year-over-year to make them incomparable
with other motives.
 5. RELEVANCE

• A company records many transactions in a reporting

period, but not all transactions have an impact on the
financial health of the company. GAAP standards ensure
that a company records recognizable transactions and
useful details that users need to make better decisions.
So, we can say that GAAP helps reduce the information a
company must disclose without compromising the aspect
of accuracy and transparency.
 6. RELIABILITY

• Financial statements prepared in accordance with GAAP standards

are more reliable. This is because auditors can also audit these
financial statements. Moreover, it is very important for companies to
have the financial statements audited because lenders use audited
financial statements to decide whether or not to lend to a borrower.
• In addition, reliable statements help management to take superior
actions that are consistent with a company’s objectives. Because
GAAP contains so many controls and safeguards, it also reduces the
risk of incorrect financial reporting.
 7. KEEPS A CHECK ON MISLEADING OR
WRONG INFORMATION

• Without these standards, companies would

have a free hand in deciding what information
they do not want to disclose to investors, or
they would disclose the information as they
see fit. GAAP ensures that companies do not
mislead, conceal or share wrong financial
information.
 8. CHECK ON SPENDING

• All companies, including government

entities, must adhere to these standards.
This ensures that people can easily obtain
details of how government entities spend
their tax money.
 FOUR MAJOR RULES AND STANDARDS OF
GAAP

• Accrual accounting methods

• Depreciation and capital expenditures
• Reporting of historical costs
• Reporting of bad debts
 1. ACCRUAL ACCOUNTING METHODS

GAAP uses accrual accounting, which records

revenue when a service or good is sold but not
when payment is received; direct expenses for
goods sold are recorded when a sale is
transacted, and indirect expenses are recorded
when expenses are paid.
 2. DEPRECIATION AND CAPITAL
EXPENDITURES

Costs of major asset acquisitions are

accounted for over the entire life of the
asset. For example, an item with a 10-year
life is accounted for at 10% for 10 years.
 3. REPORTING OF HISTORICAL COSTS

Some assets -- such as property, equipment

and facilities -- are accounted for using
original purchase costs rather than current
market values.
 4. REPORTING OF BAD DEBTS

Companies with significant money owed by

customers, or accounts receivable, must
report the possibility that some or all of
that money may not be received and
becomes lost revenue.
PRINCIPLES OF GAAP
 1. REGULARITY

The business and accounting staff

apply GAAP rules as standard
practice.
 2. CONSISTENCY

Accounting staff apply the same

standards through each step of the
reporting process and from one reporting
cycle to the next, paying careful attention
to disclose any differences.
 3. SINCERITY

Accounting staff provide objective and

accurate information about business
finances.
 4. PERMANENCE

Accounting staff use consistent

procedures in financial reporting,
enabling business finances to be
compared from report to report.
 5. NONCOMPENSATION

Accountants provide complete

transparency of positive and negative
factors without any compensation. In
other words, they do not get paid based
on how good or bad the reporting turns
out.
 6. PRUDENCE

Financial data is based on

documented facts and is not
influenced by guesswork
 7. CONTINUITY

Financial data collection and asset

valuations should not disrupt normal
business operations.
 8. PERIODICITY

Financial data should be organized and

reported according to relevant
accounting periods. For example, revenue
or expenses should be reported within
the corresponding quarter or other
reporting period.
 9. MATERIALITY

Accountants must rely on material

facts and disclose all material
financial and accounting facts in
financial reports.
 10. GOOD FAITH

There is an expectation of honesty

and completeness in financial data
collection and reporting.
 ACCOUNTING STANDARDS

• Accounting standards are authoritative standards for

financial reporting and are the primary source of
generally accepted accounting principles (GAAP).
• Accounting standards specify how transactions and other
events are to be recognized, measured, presented and
disclosed in financial statements. Their objective is to
provide financial information to investors, lenders,
creditors, contributors, and others that is useful in
making decisions about providing resources to the
entity.
OBJECTIVES OF ACCOUNTING STANDARDS

Accounting standards have the essence of

coordinating, directing, authorizing. It is a
solution provider which is generally evaluated as
the language for enterprises and linked with the
financial position of companies. The set of the
guideline is achieved by forming the standards of
rules and regulation. Let us explore the
objectives required to regulate the
financial statements and positions of companies.
OBJECTIVES OF ACCOUNTING STANDARDS

• Financial statements have to follow up in accordance with

accounting standards for the user can dependence. So the prime
focus is to refine the reliability of financial statements and in case
the confirmation to the standards are not fulfilled, serious issues
plus consequences a company can face.
• Ensuring the standards will permit for external and internal firm
comparisons and that will upgrade and advance the firm financial
position in the market. Comparing your company standard position
with another is also the motive of accounting standards.
• Outlooking the comparison criteria the accounting standards deliver
accounting policies that comprise of disclosure need and evaluation
methods of variant financial statements and transactions.
 CHARACTERISTICS OF ACCOUNTING
STANDARDS

On the basis of the meaning of accounting

standard, we can state that the document
is a director, authoritarian, solution
provider, and coordinator in the arena of
the accounting procedure.
 CHARACTERISTICS OF ACCOUNTING
STANDARDS

1. As a director
The accounting standard directs the accounting and
bookkeeping records, practice, procedure, and policies. It
is a guideline for accountants.

2. As an authoritarian
It can reject the outcomes of accounting practice and
procedure and policies so that if the financial reports of
conflicts it can be contrasted.
 CHARACTERISTICS OF ACCOUNTING
STANDARDS

3. A Solution Provider
As it’s is a set of guidelines it can deliver solutions to the accountants for
accounting procedure. It is a source of information for the financial operators
on the base of which financial reports are formulated.

4. A coordinator
In standard accounting, there is coordination and consistency which enhance
the accounting and bookkeeping services of the company. All set of guidelines
are fair and strict. Further, That’s the key to eliminate the varying effect of
policies in accounting standards. Even the finest part is it provides solutions
to conflicting issues which resolved through the guidelines and act as
coordinator to provide a solution to the accountant.
 MERITS OF ACCOUNTING STANDARDS

• The accounting standards render perfect accounting regulation, policies,

and rules in a registered written format and all the policies need to be
follow up. So if an auditor evaluates that the policies have been
systematically followed he states that financial statements are fair and
factual.
• The Accounting standard is body support for the financial position of a
company and is compulsory to follow up. Further, these accounting
fundamentals and techniques help in identifying the manipulative financial
data by any entity or the companies. These standard sets eliminate the
activity of frauds.
• In the arena of accounting standards, all the companies whether its national
or international form up the same set of standard guidelines their financial
accounts. But t​he financial positions are comparable. The financial
DEMERITS OF ACCOUNTING STANDARDS

• Accounting Standards cannot overrule the laws the standards have

restricted scope. In addition, Financial Statements have to be
shaped while keeping laws in mind which limits the best policies for
the enterprises. Laws are mandatory to follow and no company
would ever let it reputation down, so you have to follow them in any
situation.
• The accounting standards will never provide guidelines to choose
what is best for the companies and business. You need to allocate
the best policies and choose the alternative policies which are a
very complex decision for the company and its management.
 ACCOUNTING THEORY

• Accounting theory is the set of assumptions, frameworks and

methodologies used in the study and application of financial
reporting and principles.
• The study of accounting theory involves a review of both the
historical foundations of accounting practises, as well as the way in
which accounting practices are changed and added to the regulatory
framework that governs financial statements and financial
reporting.
• The Financial Accounting Standards Board issues GAAP, which aim to
improve comparability and consistency in accounting information.
• Accounting Theory is a continuously evolving subject, and it must
 ACCOUNTING CONCEPT

Accounting concepts are ideas, assumptions and

conditions based on which a business entity records its
financial transactions and organises its bookkeeping. It
helps a business interpret and integrate a financial
transaction into the accounting process. It is important for
a business owners and accountants to understand basic
concepts to bring about consistency and uniformity in
their accounting process. In this article, we examine
accounting concepts and discuss the difference between
concepts and conventions, along with the meaning of a
 ACCOUNTING CONCEPTS
1. Business entity concept
2. Going concern concept
3. Money measurement concept
4. Accounting period concept
5. Accrual concept
6. Revenue realisation concept
7. Full disclosure concept
8. Dual aspect concept
9. Materiality concept
10. Verifiable objective evidence concept
11. Historical cost concept
 1. BUSINESS ENTITY CONCEPT

The business entity, economic entity or separate entity

concept assumes that a business is independent of its
owner. A business may not record its owner's personal
expenses, income, liabilities and assets. It aids in tracking
a business's expenses, incomes and tax deductions
without any ambiguity. In addition, it safeguards a
business owner's personal finances and helps build their
creditworthiness. It reflects cash flow and financial
position more accurately. This clear distinction helps
stakeholders and creditors take appropriate business
 2. GOING CONCERN CONCEPT

Going concern concept prescribes that accountants prepare financial statements on the
assumption that a business may continue its operations for the foreseeable future.
Under this concept, the definition of a foreseeable future is a period of 12 months from
the end date of the reporting period. If a business owner or the management is
invested in scaling down business operations to zero, they cannot apply the going
concern concept for accounting. Accountants may no longer apply the going concern
concept if a company is:

• unable to pay dividends

• unable to raise credit from banks and financial services

• facing losses and negative operating cash flow

• facing an adverse financial position

• unable to pay back crucial debts

• facing an unfavourable legal or regulatory action against it

 3. MONEY MEASUREMENT CONCEPT

This is an accounting concept based on assumption, and it

stipulates that companies record only those transactions
that they can quantify and measure in terms of money. If
they cannot assign a monetary value to a transaction,
they do not record it in their annual financial statement.
Though these transactions affect a company's financial
performance, they may not find a place in financial
statements, as monetising them can be challenging. Some
examples of non-monetary value include employee
competence, product quality, employee efficiency, market
 4. ACCOUNTING PERIOD CONCEPT

The accounting period concept prescribes a timeframe

within which a business records and reports its financial
performance for the purview of internal and external
stakeholders. An accounting period of a company may
coincide with the fiscal year. A company can determine a
timeframe for internal reporting, like three or six months,
or prepare monthly financial reports to analyse their cash
flow positions. The management can determine a
convenient accounting period for internal reporting, but
the reporting for investor, government and tax purposes is
 5. ACCRUAL CONCEPT

Accrual is a fundamental concept that guides how a

business can record cash or credit transactions. Under
this concept, a business records a financial transaction in
the period it occurs. It does not consider whether the
business pays or receives cash at the time of the
transaction, or if it pays cash after a certain period. For
example, a company records a credit purchase at the time
of purchase rather than when it pays back the seller. This
helps record and report income, expenses, liabilities and
receivables accurately. All modern accounting systems
 6. REVENUE REALISATION CONCEPT

Under the revenue realisation or revenue

recognition concept, a seller records potential
revenue from a transaction, regardless of whether
they have or have not received proceeds. The
ownership of a product transfers from a buyer to
a seller during a sale. A seller recognises the
transaction by creating a receivable against the
buyer's name in their ledger. An accountant
creates another entry when they receive the due
 7. FULL DISCLOSURE CONCEPT

The full disclosure concept requires a business

entity to furnish necessary information for the
benefit of those who read financial statements
and reports for investment, taxation or audit
purposes. This concept aims to provide important
financial information to investors, creditors,
shareholders, clients, and other stakeholders.
Disclosure policies cover revenue recognition,
depreciation, inventory, taxes, earnings, stock
 8. DUAL ASPECT CONCEPT

Dual aspect concept states that every transaction

affects two accounts of a business. A business
then records both aspects to enable accurate
accounting. Every financial transaction has a
credit or debit or a giver or receiver aspect. If an
accounting process does not represent both, it
may lead to faults in the final accounting record.
The dual aspect concept is the foundation of the
double-entry system of bookkeeping, which is
 9. MATERIALITY CONCEPT

The materiality concept prescribes guidelines to identify if

a piece of financial information is material and whether it
can influence the person reading a company's financial
statements. Based on this concept, an accountant or a
business may remove negligible transactions that may not
have a bearing on final accounts. This concept is open to
subjective interpretation and the basis for using the
materiality concept varies with the size of a company.
While a large company may round off figures in the final
accounts to crores, a small firm may round off their
 10. VERIFIABLE OBJECTIVE EVIDENCE
CONCEPT

Under this concept, a business can record only

those transactions that they can furnish
documentary proof for. Without proper and valid
documentary evidence, a transaction can be
biased or undependable, and it can increase the
scope of financial irregularities. For example, a
retail employee may present a bill for purchases
and sales, and corroborate it with sale and
purchase invoices.
 11. HISTORICAL COST CONCEPT

The historical cost concept states that a

business may record assets and liabilities
at their historical cost rather than their
current market or sale value. It helps to
maintain consistent, reliable and verifiable
financial information. Including the current
value of an entity can result in financial
irregularities.
 ACCOUNTING COVENTIONS

• Accounting conventions are guidelines used to help

companies determine how to record certain business
transactions that have not yet been fully addressed by
accounting standards. These procedures and principles
are not legally binding but are generally accepted by
accounting bodies.
• Basically, they are designed to promote consistency and
help accountants overcome practical problems that can
arise when preparing financial statements.
 KEY HIGHLIGHTS OF ACCOUNTING
CONVENTIONS
• Accounting conventions are guidelines used to help companies
determine how to record business transactions not yet fully covered
by accounting standards.
• They are generally accepted by accounting bodies but are not
legally binding.
• If an oversight organization sets forth a guideline that addresses
the same topic as the accounting convention, the accounting
convention is no longer applicable.
• There are four widely recognized accounting conventions:
conservatism, consistency, full disclosure, and materiality.
 KEY HIGHLIGHTS OF ACCOUNTING
CONVENTIONS
• The scope and detail of accounting standards continue to widen, meaning that
there are now fewer accounting conventions that can be used.
• Accounting conventions are not set in stone, either. Instead, they can evolve over
time to reflect new ideas and opinions on the best way to record transactions.
• Accounting conventions are important because they ensure that multiple
different companies record transactions in the same way.
• Providing a standardized methodology makes it easier for investors to compare
the financial results of different firms, such as competing ones operating in the
same sector.
IMPORTANCE OF ACCOUNTING
CONVENTIONS
 IMPORTANCE OF ACCOUNTING
CONVENTIONS
• Monetary Impact : Accounting considers only items and
events with monetary value. Items such as Market leadership,
management efficiency, skills are not considered in accounting
as it does not directly reflect the financial impact on business.
• Different Entity : Accounting convention ensures that owners’
private transactions should not interfere with business
transactions. Since businesses and owners are treated as two
separate legal entities by law, this should be followed in
business.
 IMPORTANCE OF ACCOUNTING
CONVENTIONS
• Understanding : There should be clarity of information in
financial statements so that investors or analysts who read
them must understand such data.
• Reliable : They ensure reliable information is segregated and
reported in financial statements.
• Neutral : They state that the accountant should make financial
statements with no stake in a company or a biased opinion.
 IMPORTANCE OF ACCOUNTING
CONVENTIONS
• Realization : Convention concentrates on the completed
transaction. Transfer of ownership or sale of an asset or product
should not be considered at the point of contract but when the
entire process completes.
• Comparison : Many Investors and analysts compare the
company’s financial statements with their peers to analyze
performance over a period. They make sure any information
reported is in a way that will make it easy for investors.
TYPES OF ACCOUNTING CONVENTIONS
 TYPES OF ACCOUNTING CONVENTIONS

#1 – Conservatism
The accountant has to follow the conservatism principle of “playing safe”
while preparing financial statements, considering all possible loss scenarios
while recording transactions. There are specific points used for criticizing such
a principle. Two values occurred while logging assets, i.e., Market value and
Book Value. A lower value is generally considered since these conventions
consider the worst-case scenario. In some instances, it’s observed that private
reserves are being created by showing excess provision for bad debt and
doubtful debts, depreciation, etc. And this affects the principle of ‘true and
fair status of financial conditions.’
 TYPES OF ACCOUNTING CONVENTIONS

#2 – Consistency
Once a particular method is selected by the business while reporting, it should
be followed consistently in the ensuing years. This principle is helpful for
investors and analysts to read, understand, and compare the company’s
financial statements. If the company wants to change the method, it should do
so only with good reasons to make specific changes. Certain points criticize
this principle, like considering certain items on a cost basis while others at
market value void the principle of consistency in accounting. Still,
accounting convention considers consistency in reporting methods over the
years and not consistency with line items in comparison.
 TYPES OF ACCOUNTING CONVENTIONS

#3 – Full Disclosure
Relevant and important information regarding the company’s
financial status must be revealed in financial statements even
after applying the accounting convention. E.g.
Contingent Liabilities, and Law Suits against a business should
be reported in adjoined notes in the company’s financial
statements.
 TYPES OF ACCOUNTING CONVENTIONS

#4 – Materiality
Materiality Concept includes the impact of an event or item and its
relevance in financial statements. It means materiality allows an accountant to
ignore certain principles when items are not material. The accountant must
report all such events and items that might influence the decision of investors
or analysts. However, the information should be worthy of investigation and
should have a higher value than the cost of preparation of statements. E.g.,
Low-cost assets like stationery and cleaning supplies are charged under
expense account instead of regular depreciating assets. Such issues have
very little importance.
 ADVANTAGES OF ACCOUNTING
CONVENTIONS
• Credibility: Financial Statements prepared according to accounting
standards and conventions are much more reliable and accurate. It increases
the confidence of investors. The following specific methods disclose relevant
information.

• Planning and Decision: It provides enough information regarding

financial data.

• Easy to Compare: Accounting conventions ensure that multiple

companies report the transaction in the same manner as described. Thus
making it easy for investors, creditors, and analysts to compare the
performance of peer groups of companies.
 ADVANTAGES OF ACCOUNTING
CONVENTIONS
• Efficiency: Accounting standards and conventions provide efficiency in the reporting
process, making it easier for an accountant. Even users of such financial statements
benefitted as such standards are applicable and followed by all companies.

• Management Decisions: They help management make important decisions

that affect business. E.g., the Prudence concept makes sure revenues are recorded
when realized, but liabilities and expenses are recorded as soon as they occurred.

• Reduce Fraud: It is guidelines for certain business transactions, which are fully
explained by accounting standards. Although not legally binding, accounting
conventions make sure that financial statements provide relevant information in a
particular manner.
 ADVANTAGES OF ACCOUNTING
CONVENTIONS

• Reduce Wastage and Save Time: Accounting conventions

like materiality makes sure that financial statements record all items and
events worth value. This convention helps the accountant to ignore certain
principles and concentrate on relevant items

• Reduce Fraud: It is guidelines for certain business transactions,

which are fully explained by accounting standards. Although not legally
binding, accounting conventions make sure that financial statements provide
relevant information in a particular manner.
 DIS-ADVANTAGES OF ACCOUNTING
CONVENTIONS
• Uncertainty: Many accounting conventions don’t wholly explain concepts
or transactions recorded in financial statements. They are thus making it
easy for management to manipulate specific figures through the accountant,
e.g., Provisions for bad debt and depreciation.

• Lacks Consistency in Different Line Items: Assets and income

are recorded at cost and when a transaction completes, while liability and
expenses are recorded as soon as it occurs. They operate with worst-case
scenarios, which might not reflect actual information about the company.
 DIS-ADVANTAGES OF ACCOUNTING
CONVENTIONS
• Manipulation: Although they are designed to avoid manipulation, many
times, these conventions help the management of the business to
manipulate specific financial data through the reporting process, which
shows a different picture of a company’s financial status.

• Estimates: Certain accounting estimate might not show a clear picture

of the financial data of the company.
 FEATURES OF ACCOUNTING
CONVENTIONS
• Accounting conventions are designed to resolve the issue of certain transactions
through guidelines that are not adequately addressed by accounting standards.
• These conventions help many companies efficiently report their financial data. At
the same time, it makes certain financial statements have all relevant information
for the benefit of investors.
• Though this convention helps management to manipulate specific figures in
financial statements, it also helps in the smoothening reporting process of a
company.
• It makes sure relevant information is disclosed in financial data or adjoined
notes. For an investor, it is essential to go through all the information before
making any decision.
 INDIAN ACCOUNTING STANDARDS

• Indian Accounting Standards Aka Ind As. were developed to harmonize

standards related to international accounting and reporting. Accounting
standards standardize the whole accounting procedure of the economy.
• All companies after adopting these accounting standards follow the same
manner of recording transactions. It is an attempt to help everyone in the
business sector to easily understand the whole accounting system.
• Moreover, considering how companies are prone to frauds and so is the
government, the presence of certain norms & principles, accounting
standards, scam-proves a company.
 WHAT ARE INDIAN ACCOUNTING
STANDARDS
• Indian accounting standards are nothing but guidelines to be followed in the
accounting system. It means rules & regulations that are to be followed while
recording accounting & financial transactions. It governs the manner in
which financial statements are prepared & presented in a company.
• In India, Institute of Chartered Accountants formulate & issue accounting
standards. These standards are followed by accountants of all the companies
registered in India. As we have mentioned before, these accounting
standards help in preparation and presentation of financial statements.
 CORE OBJECTIVES OF INDIAN
ACCOUNTING STANDARDS
• The main objective of Indian accounting standards is to bring in more transparency of annual
financial statements in company accounts.
• Ensure companies in India adopt these standards to implement internationally recognized best
practices.
• One systematic, single accounting system common for all the companies. Cutting out confusions
and frauds.
• The Indian accounting standards are so simplified that they can be understood worldwide,
globally.
• There are several global requirements and the Indian accounting standards are designed to
match the global requirements.
• To increase the reliability of the financial statements.
 BENEFITS OF INDIAN ACCOUNTING
STANDARDS
• Provides Reliability to Financial Statements

The financial statements are a significant measure of gaining data with respect to
organizations.
Financial backers and various partners rely upon these assertions for getting data. These
individuals take significant choices based on this information as it were.
It is in this way vital that these financial statements are valid and reasonable.
Bookkeeping principles completely oversee these financial reports.
It is guaranteed by accounting principles that these assertions are genuine and reliable.
 BENEFITS OF INDIAN ACCOUNTING
STANDARDS
• Uniformity in Accounting System
Accounting standards are the one that aids in acquiring the consistency of entire
accounting. It is one significant benefit of accounting guidelines. Accounting
guidelines set similar standards and guidelines for the treatment of accounting
exchanges.
It implies that all organizations record the exchanges in a similar way. For instance,
Accounting Standard administers the entire deterioration of accounting. All
organizations will be following AS-6 for issues worried about devaluation. This way it
acquires consistency throughout the entire accounting system in the country, as well
as globally.
 BENEFITS OF INDIAN ACCOUNTING
STANDARDS
• Report of Management Performance
The accounting standards make it simple in deciding responsibility of the
executives. It makes it simple to gauge the exhibition of supervisory crew and
give any ideas.
It helps in breaking down administration capacity in keeping up with
dissolvability of the firm, expanding the organization's benefit and different
other significant jobs.
It guides the administration to take on specific accounting standards and its
strategy. Same arrangement ought to be followed continually to keep away
from any disarray
 BENEFITS OF INDIAN ACCOUNTING
STANDARDS
• Accounting Easy & Simple
Working in the general Indian accounting system, data is a
significant benefit of accounting norms. It gives standard
guidelines to each and every accounting exchange. It eliminates
all intricacy in the accounting system.
Standard and uniform cycle is followed. It helps the clients in
simple agreement and dodges any deludes from it.
 BENEFITS OF INDIAN ACCOUNTING
STANDARDS
• Say Goodbye to Fraudulation
Accounting standards assume a proficient part in forestalling
fakes in the accounting system. Fakes and any accounting
information control may unfavorably influence the association.
Accounting norms set up various accounting rules and standards.
These accounting standards administer the entire accounting
system. These standards are not discretionary to be followed yet
are obligatory to be followed.
 BENEFITS OF INDIAN ACCOUNTING
STANDARDS
• Provides Assistance to Auditors
The Indian accounting standards help the auditors in playing out their
obligations, in their audits. It improves on their assignment and makes it
simple for them to play out their jobs. Accounting Standards have set up
various guidelines, rules and guidelines to be trailed by organizations in their
accounting system.
These standards and guidelines are obligatory to be trailed by each
organization. It oversees the entire way of planning and introducing monetary
guidelines
 BENEFITS OF INDIAN ACCOUNTING
STANDARDS
• Easy Comparability
Accounting standards have improved the correlation of various financial
reports. Budget reports of two organizations can be effectively thought about.
In the event that two organizations are following a distinctive accounting
framework and configuration, examination between them turns out to be very
troublesome.
LIST OF INDIAN ACCOUNTING
STANDARDS
IFRS- INTERNATIONAL FINANCIAL REPORTING
STANDARDS
• IFRS International Financial Reporting Standards (IFRS) are a set of
accounting rules for the financial statements of public companies that are
intended to make them consistent, transparent, and easily comparable
around the world.
IFRS currently has complete profiles for 167 jurisdictions, including those in
the European Union. The United States uses a different system, the
generally accepted accounting principles (GAAP).
• The IFRS is issued by the International Accounting Standards Board (IASB).
• The IFRS system is sometimes confused with
International Accounting Standards (IAS), which are the older standards that
IFRS replaced in 2001.
 HIGHLIGHTS OF IFRS

• IFRS specify in detail how companies must maintain their records and report their
expenses and income. They were established to create a common accounting language
that could be understood globally by investors, auditors, government regulators, and
other interested parties.
• The standards are designed to bring consistency to accounting language, practices, and
statements, and to help businesses and investors make educated financial analyses and
decisions.
• They were developed by the International Accounting Standards Board, which is part of
the not-for-profit, London-based IFRS Foundation. The Foundation says it sets the
standards to “bring transparency, accountability, and efficiency to financial markets
around the world.“.
 STANDARD IFRS REQUIREMENTS

IFRS covers a wide range of accounting activities. There are certain aspects of business practice for
which IFRS set mandatory rules.
• Statement of Financial Position: This is the balance sheet. IFRS influences the ways in
which the components of a balance sheet are reported.
• Statement of Comprehensive Income: This can take the form of one statement or be
separated into a profit and loss statement and a statement of other income, including property
and equipment.
• Statement of Changes in Equity: Also known as a statement of retained earnings, this
documents the company's change in earnings or profit for the given financial period.
• Statement of Cash Flows: This report summarizes the company's financial transactions in the
given period, separating cash flow into operations, investing, and financing.
 PRINCIPLES OF IFRS

• Clarity
The accounting principles which are adopted by the companies need to be
clear and accordingly adoption of the accounting standards.
• Relevance
To provide useful information to the decision maker , it is ensured that
information provided in the material appropriate and relevant for decision
making.
• Comparability
Comparability arises from the consistency, proper and full disclosure ,
compliance with the accounting standards and law of land
 PRINCIPLES OF IFRS

• Consistency
• Full disclosure
• Fairness
• Base Year Consideration
• Measurable