ACCOUNTING

CONCEPTS
Dr.Srikanth Potharla
M.Com.,M.Phil.,FCMA.,UGC-NET.,Ph.D.

Assistant Professor,
ICFAI Business School(IBS)
Hyderabad

Deeksharamb- Accounting- Dr. Srikanth Potharla

 • In the lively city of Tradeville, the bakery known as "The Crust &
Crumble" flourished. Its owner, Baker Ben, was admired for his
delectable pastries and his careful bookkeeping. Each day, he
diligently recorded every monetary detail - the expense of the flour,
the revenue from the bread sold.
• Nevertheless, Ben often found himself deep in thought,
Beneath the contemplating the invisible aspects of his business. The high spirits
of his team, the respect his brand had earned, the steadfast loyalty
Numbers: The of his customers, the unparalleled quality of his pastries - these
Invisible Layers of significant factors never found a place in his accounting ledger. Ben
knew that his bakery's story wasn't fully encapsulated by the
'Crust & Crumble's' numbers, the unseen elements played a critical role too, even
Success" though they remained unrecorded.
• Question 1: What are the daily tasks of Baker Ben in his bakery,
"The Crust & Crumble"?
• Question 2: What are the unseen, unrecorded aspects of Baker
Ben's business that he often contemplates?
• Question 3: Does Baker Ben believe that the success of "Crust &
Crumble" is entirely determined by its financial transactions?
Deeksharamb- Accounting- Dr. Srikanth Potharla
 What is money measurement
concept
• The money measurement concept is a fundamental
principle in accounting, stipulating that only
transactions and events quantifiable in monetary terms
are recorded.
• This principle provides a uniform scale of measurement,
enabling the comparison and analysis of diverse
business elements.
• However, it overlooks qualitative factors, such as
management competence or market reputation, which
can significantly influence a business's performance.
• Also, it assumes currency stability, not accounting for
inflation or deflation impacts.
• Despite these limitations, the money measurement
concept remains vital in accounting, offering objective,
verifiable records that facilitate informed decision-
Deeksharamb- Accounting- Dr. Srikanth Potharla
making by various stakeholders.
 Qualitative aspects having a significant impact on the business
Management Quality: Brand Reputation: The Employee Morale: The
Customer Satisfaction: Company Culture: The
The competence, perception and overall satisfaction,
How satisfied customers shared values, beliefs,
experience, and recognition of a motivation, and
are with a company's and behaviors within the
leadership style of the company's brand in the enthusiasm of the
products or services. organization.
management team. market. workforce.

Operational Efficiency: Customer Loyalty: The

Innovation Capability: Supplier Relationships:
Business Ethics: The How efficiently a degree to which
The ability of a company The quality and stability
ethical standards and company uses its customers continue to
to innovate and adapt to of relationships with
practices of the company. resources to produce its purchase from the
market changes. suppliers.
goods or services. company.

Environmental Impact: Corporate Social

Intellectual Property: The Regulatory Compliance: Quality of Products or
The company's Responsibility: The
value of patents, How well the company Services: The perceived
environmental company's efforts in
trademarks, copyrights, adheres to laws and value and quality of
sustainability practices social welfare and
and trade secrets. regulations. products or services.
and their impact. community involvement.

Organizational Structure:
Market Leadership: The Strategic Alliances: Risk Management: The Workforce Skills: The
The efficiency and
company's position in Partnerships or alliances ability of the company to skills, experience, and
effectiveness of the
comparison to that could benefit the identify, assess, and capabilities of the
company's organizational
competitors. company. manage risks. workforce.
hierarchy.
Deeksharamb- Accounting- Dr. Srikanth Potharla
 "Stitch's Threads: Weaving the Finances of 'The Artful Thread'"

• In a bustling town, a hardworking tailor named Stitch operated a well-

known shop called "The Artful Thread." Stitch was a stickler for details
and made it a point to keep his personal money matters separate from
his shop's finances. He meticulously noted down all the things related to
his shop, like the value of sewing machines, scissors, threads, and the
amount he owed for a business loan he took to expand his workspace.
• These business-related finances were never intermingled with his
personal ones. His own assets, such as his house, his bicycle, and the
money he owed for his personal car loan, were kept strictly separate.
Similarly, his personal expenses, like grocery bills, his children's tuition
fees, or the cost of a family vacation, were not mixed with the shop's
expenses.
• He also diligently maintained a clear distinction between the money he
made from his business and his personal income. The income from
selling beautifully tailored dresses, repairing old clothes, and the cost
incurred for buying new fabric rolls, paying electricity bills of the shop, or
wages of his assistant, were recorded separately from his own money.
• However, there were times when the lines blurred. For instance, when
he used his personal car for fabric delivery or when he used the shop's
telephone for personal calls. In such instances, Stitch found it challenging
Questions relating to the story

• Question 1: How does Stitch manage his

personal and business finances?
• Question 2: What dilemmas does Stitch
face in maintaining his business
finances?
• Question 3: Why is it important for Stitch
to maintain separation between his
personal and business finances?

Deeksharamb- Accounting- Dr. Srikanth Potharla

 The business entity concept is a fundamental principle in
accounting that treats a business as separate and distinct
from its owners or operators.
Business entity

This means that the business's financial activities are

recorded separately from the personal financial activities of
its owners.
concept

It helps in providing clear, accurate financial information

about the business for decision-making, taxation, and
liability purposes. This concept is crucial regardless of a
business's legal structure, be it a sole proprietorship,
partnership, or corporation.
Deeksharamb- Accounting- Dr. Srikanth Potharla
 In the lively town of Profitville, two businesses painted a fascinating picture of the marketplace. One was
"Seasonal Skies," a pop-up shop that sold vibrant kites during the annual kite festival. The other, "Fancy
Forever," was a permanent shop known for its eclectic array of fancy items.

"Sprinters Seasonal Skies came to life each year a month before the kite festival. Its sole purpose was to provide the
most colorful and sturdy kites for the townsfolk to enjoy during the festive season. Once the festival ended,

and the shop would disappear, only to return the following year. The business existed to make the most of the
kite-selling season, and its planning was focused only on this temporary timeframe.

Marathoners: On the other hand, Fancy Forever was a fixture in Profitville's market. Selling an assortment of fancy items, it
catered to the townsfolk's needs all year round. The shop aimed to grow and expand over time, with its
future planning extending years into the future. Its objectives were long-term, focusing on establishing a

A Tale of Two strong customer base, maintaining consistent inventory, and ultimately, ensuring the shop's sustainability.

Businesses in Even though both businesses were part of Profitville's vibrant market, the underlying assumption of their
operations differed. Seasonal Skies was akin to a sprinter, focusing on a short, intense race. In contrast,
Fancy Forever was more like a marathon runner, prepared for a long, enduring journey.

Profitville" This difference was clear in how each business planned its operations and accounted for its finances.
Seasonal Skies never planned beyond the festival season, while Fancy Forever always prepared for the
continuous journey ahead, assuming it would always be operational. This subtle, yet significant difference,
mirrored the essence of the 'going concern concept' in accounting - a concept that presumes that a business
will continue to operate indefinitely, just like Fancy Forever planned to do.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 Question 1: What are the primary aims of
"Seasonal Skies" and "Fancy Forever"?

Question 2: How does the planning timeframe

Questions of the two businesses differ?

on the Question 3: How does the story illustrate the

story 'going concern concept' in accounting?

Question 4: How do the businesses "Seasonal

Skies" and "Fancy Forever" symbolize a sprinter
and a marathon runner respectively?
Deeksharamb- Accounting- Dr. Srikanth Potharla
What is going concern concept ?

Deeksharamb- Accounting- Dr. Srikanth Potharla

 • In the bustling city of Valueville, a real estate mogul named Raj stood out for his
prudent practices. Raj owned "Foundation Realty," a firm that dealt with various
properties, from residential apartments to commercial buildings.
• One sunny day, Raj sealed a deal for a grand mansion at a cost of Rs. 2 million. The
mansion was located in an upscale neighborhood, and similar properties were
selling at a whopping Rs. 2.5 million. But Raj, in his wisdom, recorded the mansion
"Foundation in his financial books at the purchase cost of Rs. 2 million, not at the prevailing
market value.

Realty: Raj's • Raj's colleagues often questioned his approach, arguing that the mansion could
fetch a higher value. However, Raj was steadfast. He believed that market value
Steadfast was like shifting sands, subjective, and often influenced by numerous
unpredictable factors. The price he paid, on the other hand, was objective and
verifiable, backed by the clear evidence of the transaction receipt.
Approach in the • In Raj's mind, recording the transaction at cost ensured stability and accuracy in his
Fluctuating Real financial records. He knew that the market value could fluctuate, and relying on it
could create a distorted picture of his business's financial health. By adhering to
the cost concept in accounting, Raj managed to maintain an unambiguous and
Estate Market" verifiable record of his business transactions, making "Foundation Realty" a trusted
name in Valueville's real estate market.
• Over time, the wisdom in Raj's approach became evident. When a property bubble
burst in Valueville, many real estate firms found their books in disarray due to the
steep drop in market values. However, "Foundation Realty" stood firm, its accounts
unscathed, all thanks to Raj's diligent application of the cost concept.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 Questions relating to the Story
• Question 1: How does Raj record the purchase of
the mansion in his financial books?
• Question 2: What is Raj's rationale behind recording
transactions at purchase cost rather than market
value?
• Question 3: How did Raj's approach benefit
"Foundation Realty" during the property bubble
burst?
• Question 4: How does Raj's approach to recording
transactions align with the cost concept in
accounting?

Deeksharamb- Accounting- Dr. Srikanth Potharla

What is cost concept?
The Cost Concept, also known as the Historical Cost Concept, is a
fundamental accounting principle that asserts that assets and services
should be recorded at their original purchase cost.

This cost includes not just the purchase price, but also any other
expenses necessary to get the asset ready for use.

This principle is based on objectivity and verifiability, as the purchase

cost is a factual, verifiable number, unlike subjective market valuations
that can fluctuate over time.

Deeksharamb- Accounting- Dr. Srikanth Potharla

"Twice as Nice: A Tale of Twin Entrepreneurs
Mastering the Balance in Accounting"
• In the bustling town of Commerceville, twin sisters Abby and Bella ran a popular bakery called "Twice as Nice". Abby was the baker,
creating delectable pastries, while Bella managed the books, ensuring all transactions were accurately recorded.
• For the first few years, Bella followed a single-entry system, recording only one aspect of each transaction. However, this created
confusion and imbalance in the bakery's accounts. Without a comprehensive view of the transactions, they had difficulty
understanding their financial position and making informed business decisions.
• One day, their old friend Carlos, a seasoned accountant, visited the bakery. Seeing Bella's dilemma, he introduced them to the dual
aspect concept of accounting. He explained that every business transaction had two aspects – a debit and a credit, and for the
accounting equation to remain balanced, both aspects must be recorded.
• The concept seemed intuitive to Bella. If Abby bought flour for $100, the bakery's inventory of flour increased (an asset), but at the
same time, the bakery's cash decreased by $100 (a decrease in another asset). Both aspects needed to be captured to understand
the complete picture.
• The sisters decided to implement the dual aspect concept in their accounting practices. Bella started recording both aspects of
each transaction. Soon, the bakery's books reflected a clear, balanced picture of their financial position. The change enabled them
to make better decisions, ultimately contributing to the growing success of "Twice as Nice".
• Through their experience, Abby and Bella learned the importance of the dual aspect concept in accounting - a valuable lesson that
helped their bakery thrive in the bustling town of Commerceville.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 Questions on the story

Question 1: What Question 3: How did the

Question 2: Who
accounting system did implementation of the
introduced the dual aspect
Bella initially use to record dual aspect concept
concept to Bella, and what
transactions, and what improve the bakery's
is it?
problems did it create? accounting?

Question 4: Give an
example of a transaction
and its dual aspects from
the story.

Deeksharamb- Accounting- Dr. Srikanth Potharla

Examples of transactions along with their Dual
Aspects:

Purchase of Receipt of Cash from

Sale of Goods for Purchase of Payment of Rent in
Equipment with a Customer for a
Cash: Inventory on Credit: Cash:
Cash: Previous Credit Sale:

Increase in
Increase in Cash Increase in Decrease in Cash Increase in Cash
Equipment
(Asset) Inventory (Asset) (Asset) (Asset)
(Asset)

Decrease in
Increase in Decrease in Rent
Decrease in Cash Decrease in Accounts
Accounts Payable Expense
(Asset) Inventory (Asset) Receivable
(Liability) (Expense)
(Asset)

Deeksharamb- Accounting- Dr. Srikanth Potharla

Examples of transactions along with their Dual Aspects:

Payment of Investment of Cash Payment of a

Borrowing Money Depreciation of a
Salaries to into the Business Dividend to
from a Bank: Machine:
Employees: by the Owner: Shareholders:

Decrease in
Decrease in Cash Increase in Cash Increase in Cash Decrease in Cash
Machine Value
(Asset) (Asset) (Asset) (Asset)
(Asset)

Increase in
Increase in Increase in Decrease in
Increase in Bank Depreciation
Salaries Expense Owner's Equity Retained Earnings
Loan (Liability) Expense
(Expense) (Equity) (Equity)
(Expense)

Deeksharamb- Accounting- Dr. Srikanth Potharla

What is Dual Aspect Concept

The Dual Aspect Concept, fundamental in

accounting, asserts that every financial
transaction affects at least two accounts,
Debits increase assets or reduce liabilities, This ensures a balanced financial
maintaining the accounting equation
while credits decrease assets or increase representation, enhancing accuracy and
"Assets = Liabilities + Equity". This
liabilities. facilitating financial analysis.
concept forms the basis for the double-
entry bookkeeping system, where each
transaction has a debit and a credit.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 • In the bustling town of Marketville, there was a thriving bookstore named
"Page Turner's," managed by a passionate bibliophile, Maya. Her bookstore
had an extensive collection and loyal customer base, but she struggled with

"Page finances. Maya used to review her bookstore's performance only when she
felt the need, resulting in sporadic and unstructured financial assessments.
• One day, Maya's friend Isha, an experienced accountant, visited "Page
Turner's Turner's." Noticing Maya's irregular accounting habits, Isha introduced her
to the Accounting Period Concept. She explained that accounting should not
Annual Tale: be haphazard but divided into specific intervals, typically twelve months, to
provide a regular, structured, and detailed overview of the business's
performance.
Maya's • Intrigued, Maya decided to give it a shot. She began preparing annual
accounts, recording income and expenses, assets and liabilities, and equity
Journey to for the twelve-month period. This approach not only gave her a
comprehensive view of the bookstore's performance but also allowed her to
Financial compare it with previous years and plan for the future.
• As she continued this practice, Maya realized the importance of the
Clarity" Accounting Period Concept. It not only aided in understanding "Page
Turner's" financial health but also facilitated better decision-making,
contributing to the bookstore's growing success. The story of Maya and her
bookstore in Marketville became a testament to the importance of
structured financial assessment and the Accounting Period Concept.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 • Question 1: What was Maya's initial
approach to reviewing her bookstore's
financial performance?
• Question 2: Who introduced Maya to the
Accounting Period Concept, and what does it
Questions entail?
for the story • Question 3: What changes did Maya make in
her accounting practices after learning about
the Accounting Period Concept?
• Question 4: How did the implementation of
the Accounting Period Concept benefit "Page
Turner's"?

Deeksharamb- Accounting- Dr. Srikanth Potharla

 • The Periodicity Concept, also known as the
Accounting Period Concept, is a fundamental
accounting principle that dictates that an entity's life
What is can be divided into time periods.
• These periods, usually a year, are used to prepare
periodicity financial reports.
concept? • This concept allows for a consistent, comparative
analysis of a business's financial health over time.
• It aids in timely decision-making, providing regular
updates on profitability, liquidity, and overall
performance, thereby facilitating effective business
management.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 "Prudent Pathways: Vijay's Journey with Financial Conservatism"
• In the charming town of Bookkeepville, lived a diligent entrepreneur named Vijay. Vijay owned "ElectroHub," an
electronics store known for its high-quality products and Vijay's cautious approach to financial management.
• Vijay was an adherent of the Conservatism concept in accounting. When he anticipated a potential decrease in the
price of an older model TV due to the arrival of a newer model, he promptly recognized the expected loss in his
books. This proactive approach to potential losses, even before they were incurred, reflected his conservative stance.
• Vijay's strategy served as a powerful risk buffer. By acknowledging potential losses promptly, he could fortify his
financial standing against future surprises. He was aware that his approach could paint a conservative financial
picture, possibly underestimating the store's true worth.
• One day, Meena, an experienced accountant and a friend, visited "ElectroHub". She observed Vijay's cautious
accounting and, while appreciating it, cautioned him about the potential for his approach to skew the perception of
his business's financial health.
• Vijay, however, valued the prudence that the Conservatism concept encouraged. Despite its potential limitations, he
saw the wisdom in preparing for potential losses, ensuring the stability of "ElectroHub" in the face of uncertainties.
From then on, he continued his conservative approach, further cementing "ElectroHub" as not just a successful
electronics store, but also a paragon of prudent financial management in Bookkeepville.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 • Question 1: What kind of accounting
concept did Vijay follow in his electronics
store, "ElectroHub"?
• Question 2: How did Vijay's adherence to
the Conservatism concept affect his financial
management?
Questions • Question 3: What caution did Meena offer
Vijay regarding his conservative approach to
accounting?
• Question 4: Despite its potential limitations,
why did Vijay continue to adhere to the
Conservatism concept?

Deeksharamb- Accounting- Dr. Srikanth Potharla

 Accounting areas where conservatism is followed
Inventory Valuation: Companies
often value inventory at the lower of Depreciation: Companies often
Bad Debt Provision: Companies make
cost or market value, in line with the choose methods that accelerate
provisions for bad debts in
conservatism principle. This means if depreciation, recognizing the cost of
anticipation of some customers not
the market value of the inventory an asset more quickly, thus
paying their dues, an application of
falls below its cost, the company will conservatively acknowledging the
the conservatism principle.
write down the value of the inventory asset's decreasing value over time.
to reflect the loss.

Income Recognition: Companies Lawsuit Reserves: If a company is

Warranty Reserves: When a company
typically do not recognize revenue involved in a lawsuit with a potential
sells products with warranties, it
until it is earned and reasonably financial payout, it may set aside
makes a reserve for future warranty
certain, which is a conservative reserves even before the lawsuit is
claims, based on estimates.
approach. settled.

Impairment of Assets: If the value of Conservative Estimates: Companies Research and Development Costs:
an asset declines significantly, often make conservative estimates Most companies expense R&D costs
companies recognize an impairment about future outcomes, such as the as incurred, rather than capitalizing
loss, reducing the asset's carrying useful life of an asset, salvage value, them, due to uncertainty about
value on the balance sheet. or future cash flows. future economic benefits.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 • In the vibrant city of Financeton, lived a spirited baker named Riya. Riya owned a quaint
bakery known as "Bread and Beyond," celebrated for its mouth-watering pastries and
Riya's unique financial acumen.
• Riya's bakery was always buzzing with customers. Her raspberry tarts and chocolate
croissants were the talk of the town. However, what set Riya apart was not just her
"Riya's baking skills but her keen understanding of the financial workings of her business. She
adhered to the Realization concept in accounting, recognizing revenue at the point of
sale, not when she received the cash.
Revenue • Riya had a faithful customer, Mrs. Kapoor, who adored her cinnamon rolls. She
purchased them every week, always settling her bill at the end of the month. Despite
Revelations: the deferred payments, Riya accounted for the sales when Mrs. Kapoor took her
favorite cinnamon rolls home, not when she received the payment.

A Tale of • Riya's approach offered her a lucid understanding of her bakery's performance. It
enabled her to maintain a steady picture of her revenue, unaffected by actual cash
inflows and outflows. Even when customers delayed their payments, Riya could

Realization in accurately gauge her bakery's profitability, aiding her in making informed business
decisions.
• One day, a business school professor, Mr. Verma, visiting "Bread and Beyond," learned
Accounting" about Riya's practices. Impressed, he invited Riya to share her hands-on experience
with the realization concept with his students. Consequently, Riya's story became an
invaluable lesson for aspiring entrepreneurs, demonstrating how the realization
concept aids businesses in accurately recognizing income and making well-informed
financial decisions.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 • Question 1: What unique financial strategy
did Riya, the owner of "Bread and Beyond,"
follow in her bakery business?
• Question 2: How did Riya's adherence to the
Realization concept affect her understanding
of her bakery's financial performance?
questions • Question 3: How did Riya handle Mrs.
Kapoor's deferred payments for her
cinnamon rolls?
• Question 4: What opportunity arose for Riya
as a result of her practical application of the
Realization concept in accounting?

Deeksharamb- Accounting- Dr. Srikanth Potharla

 • Sale of Goods: A clothing retailer recognizes revenue when
the customer purchases and takes delivery of the clothes, not
when the customer actually pays for them if payment is
deferred.

examples where • Service Provision: A consulting firm provides services over a

three-month period but doesn't get paid until the end of the
realization project. The firm recognizes revenue when the services are
provided, not when payment is received.

concept can be • Long-Term Contracts: A construction company involved in a

long-term project recognizes revenue progressively, as certain
milestones are achieved, even though full payment is only
applied received upon completion.
• Subscription Services: A magazine publisher recognizes
revenue from subscriptions over the duration of the
subscription period, as the magazines are delivered, not when
the subscriber pays upfront for the full subscription period.
• Rent Income: A landlord leasing out a property recognizes the
rental income monthly over the period of the lease
agreement, not when the tenant pays the rent in advance for
a year.

Deeksharamb- Accounting- Dr. Srikanth Potharla

"Veer's Venture: The Espresso Extravaganza
and the Art of Matching"
• In the bustling city of Financetown, there was a vibrant cafe called "The Espresso Express," run by a young
and energetic entrepreneur, Veer. Veer had a passion for coffee and a keen mind for business, making his
cafe a popular hangout spot for locals and tourists alike.
• Veer was meticulous with his finances. He adhered to the Matching concept in accounting, ensuring that all
his expenses were matched with the revenue they generated. This approach painted an accurate picture of
his cafe's profitability, helping him make informed business decisions.
• One month, Veer decided to introduce a new drink, the "Espresso Extravaganza." He invested in high-quality
beans and additional barista training. Despite the upfront costs, Veer recognized these expenses only when
the "Espresso Extravaganza" started selling and generating revenue.
• By matching the expenses of the new drink with its revenue, Veer could accurately assess its profitability.
While the drink was initially expensive to produce, the sales quickly picked up, and it became a hit. Veer's
financial reports reflected the accurate profit margin of the "Espresso Extravaganza," validating his decision
to introduce the new drink.
• Veer's approach was a lesson for other businesses in Financetown. It emphasized the importance of the
Matching concept in accounting - ensuring that expenses are accounted for in the same period as the
revenue they help generate, providing a true reflection of a business's profitability. The success of "The
Espresso Express" was not just a testament to Veer's culinary skills but also his financial acumen.
Deeksharamb- Accounting- Dr. Srikanth Potharla
Questions
Question 1: What is the Matching
concept in accounting, and why is it
important?

Question 2: How did Veer use the

Matching concept in accounting to assess
the profitability of the "Espresso
Extravaganza" drink?

Question 3: What was the significance of

Veer's adherence to the Matching
concept in accounting for "The Espresso
Express"?

Deeksharamb- Accounting- Dr. Srikanth Potharla

• Salary Expenses: A company matches the salaries of its Examples of five areas
employees with the revenue generated during the period in accounting where
in which they were employed. matching concept is
• Marketing Expenses: A business matches the costs of its used
marketing campaigns with the revenue generated from the
products or services being advertised.
• Depreciation Expenses: A company matches the
depreciation expenses of its fixed assets with the revenue
generated by those assets over their useful life.
• Rent Expenses: A business matches the rent expenses of
its leased properties with the revenue generated from the
operations conducted in those properties.
• Interest Expenses: A company matches the interest
expenses of its loans with the revenue generated by the
investments made using the borrowed funds.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 What is matching concept?
• Matching concept is an accounting principle that
requires businesses to match their expenses with
the revenue generated during the same period.
• This concept helps to provide an accurate picture of
a company's profitability.
• By recording the expenses incurred to generate the
revenue, companies can match the cost of goods
sold or services rendered with the revenue
generated from those sales or services.
• This approach ensures that expenses are accounted
for in the same period as the revenue they help
generate, providing a true reflection of a business's
profitability.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 The Importance of Consistency in Accounting: A Story of Stitch n' Style

• In the heart of Mumbai, there was a clothing manufacturing company called "Stitch n' Style." The company had been running successfully for over a
decade, consistently growing and expanding their operations.
• However, in a bid to modernize their accounting practices, the management decided to change their accounting principles and adopt a new method of
valuing inventory. The new method, they believed, would help improve the accuracy of their financial statements and provide a more comprehensive
picture of their financial performance.
• But the sudden change in accounting principles caused chaos in the company's financial statements. It became difficult to compare the financial results of
different years, making it impossible for investors to gauge the company's financial health. The management realized their mistake and sought the advice of
a financial consultant.
• The consultant explained the importance of Consistency in accounting. She emphasized that the company should stick to its established accounting
principles to ensure that the financial statements were consistent and comparable over time. She also explained that consistency was crucial in maintaining
the stability of the company's profitability and financial position.
• The management understood the importance of Consistency and decided to revert to their previous accounting principles. They worked tirelessly to revise
their financial statements and make them comparable over time.
• Soon, the company's financial reports became more reliable, and investors began to trust their financial position once again. The company regained
stability in its profitability and financial position, and the management realized the importance of Consistency in maintaining it.
• From that day on, the management made sure that the company followed the Consistency concept in accounting. They maintained the same accounting
principles year after year, ensuring that their financial statements were consistent and comparable over time. The company's financial statements became a
benchmark for other clothing manufacturers in the city.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 • What caused chaos in the financial
statements of Stitch n' Style?
• What concept did the financial
consultant emphasize to the
management of Stitch n' Style?
• Why is Consistency important in
Questions financial reporting?
• What was the impact of maintaining
Consistency on the financial position
of Stitch n' Style?

Deeksharamb- Accounting- Dr. Srikanth Potharla

 A few examples of line items in financial statements that could be affected by not
maintaining the Consistency concept:

Revenues and Expenses: Changes Inventory Valuation: Changes in Fixed Assets: Changes in
in accounting methods can cause inventory valuation methods can depreciation methods can cause
fluctuations in the recognition of lead to significant fluctuations in fluctuations in the value of fixed
revenue and expenses, making it the value of inventory on hand, assets on the balance sheet,
difficult to compare financial making it difficult to compare making it difficult to compare the
results year over year. financial results year over year. value of assets year over year.

Earnings Per Share: Changes in

Income Taxes: Changes in tax
accounting principles can cause
accounting methods can cause
fluctuations in earnings per share,
fluctuations in income tax
making it difficult for investors to
expense, making it difficult to
compare financial results and
compare financial results year
assess the company's financial
over year.
performance over time.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 "Balancing Act: A Tale of Materiality in the World
of Finance"
• Once upon a time in the bustling city of New York, there was a small, yet ambitious tech company called "InnoTech." The
company was run by Jane, a brilliant CEO, and Mike, a meticulous CFO. They were preparing for the company's first public
offering, a milestone that had been a dream since they started the company five years ago. As part of the process, Mike was
responsible for preparing the financial statements to be presented to potential investors. He was a firm believer in the
materiality concept of accounting.
• The materiality principle guided him on what to include and what not to include in the financial statements. One day, as Mike
was going through the financial records, he came across a significant transaction: a lawsuit settlement that had cost the
company a substantial sum. Mike knew that this was material information because it significantly affected the company's
financial position. He understood the importance of not ignoring such material information in the financial statements.
• However, Jane, the CEO, was concerned about the potential negative impression this might create among prospective investors.
She suggested that perhaps this information could be omitted, seeing it as an isolated incident that wouldn't affect the
company's future performance. Mike, however, knew that ignoring such material information could have serious implications.
• Omitting this information could mislead the investors, and if discovered later, it could damage the company's reputation and
cause a loss of trust among shareholders. Additionally, it could have legal implications, as the regulatory bodies mandate full
disclosure of such material information. So Mike explained these implications to Jane, who, although initially hesitant,
understood the gravity of the situation and agreed to include the lawsuit settlement details in the financial statements.

Deeksharamb- Accounting- Dr. Srikanth Potharla

"Balancing Act: A Tale of Materiality in the World of Finance"…................................
• On the other end of the spectrum, Mike also had to deal with the issue of immaterial information. The company had
made several minor purchases throughout the year. These were small costs like office supplies, minor repairs, and
other minor expenditures that didn't significantly impact the company's overall financial standing.
• Jane, wanting to show complete transparency, suggested including all these minor expenses in the financial statement.
But Mike understood that overloading the financial statements with such immaterial information could confuse and
overwhelm investors, obfuscating the truly important data.
• He explained to Jane that while transparency is crucial, it's equally important to present information in a manner that is
clear and meaningful. Including too many insignificant details could detract from the understanding of the financial
health of the company, and in fact, it might seem like they were trying to hide the significant numbers among less
relevant ones.
• In the end, they produced financial statements that were clear, honest, and adhered strictly to the concept of
materiality in accounting. The IPO was a success, investors appreciated the clarity and honesty in InnoTech's reporting,
and the company enjoyed a smooth transition into the public market. This story shows how the materiality concept in
accounting can greatly influence a company's financial reporting and investor relations.
• Ignoring material information can lead to mistrust and potential legal issues, while overloading the statements with
immaterial information can result in confusion and a lack of understanding of a company's true financial standing. It's
about striking the right balance, and that's what Mike did for InnoTech. suggest a creative title to the above story

Deeksharamb- Accounting- Dr. Srikanth Potharla

Questions
Question: What is the name of the
company in the story? Answer: The name
of the company in the story is "InnoTech."

Question: What was the material

information that Mike, the CFO, found in
the financial records?

Question: What could be the implications of

ignoring such material information in the
financial statements?

Question: Why did Jane, the CEO, initially

suggest including all minor expenses in the
financial statement?

Question: What could be the negative

consequences of overloading the financial
statements with immaterial information?

Deeksharamb- Accounting- Dr. Srikanth Potharla

What is materiality concept ?
Materiality in accounting refers to the
significance of financial information and its
potential influence on decision-making. If the
omission or misstatement of information
could affect the judgments of users, it's
considered material.
Materiality is subjective and depends on the
size and nature of the item or error in relation
to other factors, such as the size of the
company or the context of its financial
situation.
It guides what information is included in
financial statements.
Deeksharamb- Accounting- Dr. Srikanth Potharla
 Examples of accounting areas where materiality concept is applied
Asset Capitalization: Deciding
Revenue Recognition: Deciding when
Expense Recognition: Similar to whether to capitalize or expense a
and how much revenue to record can Inventory Valuation: Material
revenue, expenses that are material purchase can be influenced by
be influenced by the materiality discrepancies between the actual
to the financial statements should be materiality. If the purchase is
concept. If a sale is significant, it inventory and the recorded inventory
recognized when incurred, not significant (material), it may be
should be recorded when earned, not must be corrected.
necessarily when paid. capitalized and depreciated over its
necessarily when cash is received.
useful life.

Contingent Liabilities: If there's a

Impairment of Assets: If the fair
Estimates and Provisions: Materiality lawsuit or potential obligation that Related Party Transactions: Material
value of an asset falls significantly
is necessary when making estimates could have a significant financial transactions between the company
below its carrying value, it may be
for items like warranty provisions, impact, it should be disclosed in the and its related parties should be
necessary to recognize an
doubtful debts, and depreciation. notes to the financial statements, disclosed to avoid conflict of interest.
impairment loss.
even if it's uncertain.

Financial Statement Disclosures:

Materiality guides what information
Bad Debt Expense: Materiality needs to be disclosed in the
determines whether to write off a footnotes to the financial statements.
bad debt immediately or to set up an For example, if the company has a
allowance for doubtful accounts. significant contractual obligation or a
Deeksharamb- Accounting- Dr. Srikanth Potharla change in accounting policies, such
details should be disclosed.
"Woven Wisdom: The Accrual Tale of Shining
Silks"
• Once upon a time in the vibrant city of Mumbai, there was a successful textile business named
"Shining Silks" run by two ambitious friends: Arjun, the pragmatic CEO, and Ravi, the meticulous CFO.
They had established the company seven years ago, and now they were looking to expand their
business nationwide.
• Arjun, always the more adventurous one, was keen to push for rapid expansion, while Ravi was a firm
believer in cautious growth, making sure every financial decision was well thought out. Ravi's careful
approach was heavily guided by the accrual concept of accounting.
• One day, while going through the accounts, Ravi noticed that there was a large order for silks placed
by a high-profile fashion designer, Manish, which was due to be delivered in two months. The
payment for the order, however, was scheduled to be received only after delivery. Arjun, seeing this
significant sum, was eager to count it as revenue immediately and use it to fund their expansion
plans.
• Ravi, however, understood that according to the accrual concept, revenue should be recognized when
it is earned, not when it is received. He explained to Arjun that including this sum in their current
revenue would misrepresent their financial position, as the money was not yet earned and there was
always a risk with such transactions. Arjun, appreciating the wisdom in Ravi's words, agreed to wait
until the order was fulfilled to recognize the revenue.

Deeksharamb- Accounting- Dr. Srikanth Potharla

"Woven Wisdom: The Accrual Tale of Shining Silks"...........................
• Around the same time, Shining Silks received a hefty electricity bill for their factory, which was due
in a month. Arjun was inclined to not include it in their current expenses, as it was not yet paid. But
Ravi reminded him of the accrual concept again, explaining that expenses should be recognized
when they are incurred, not when they are paid. The electricity bill, thus, was an expense for the
current period and should be accounted for as such.
• As a result, Ravi helped maintain an accurate representation of Shining Silks' financial position,
ensuring that revenues and expenses were matched to the correct periods. This not only kept their
financial records accurate but also helped them make better decisions about their expansion plans.
They eventually did expand, but at a pace that their real revenues allowed, leading to sustainable
and steady growth of their business.
• In the end, Arjun realized the value of the accrual concept of accounting. By recognizing revenues
when earned and expenses when incurred, they could maintain a realistic view of their financial
position, helping them make informed and effective business decisions.
• This story shows how the accrual concept of accounting plays a crucial role in a company's financial
reporting and decision-making. It ensures that financial statements accurately reflect the company's
performance and financial position, enabling better planning and execution of business strategies.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 • Question: Who are the main characters in the story
and what are their roles in the company?
• Question: What is the accrual concept of accounting as
demonstrated in the story?
• Question: Why did Ravi not agree to recognize the
large order placed by the fashion designer as revenue
Questions immediately?
• Question: Why did Ravi insist on recording the
electricity bill that was due in a month as an expense
in the current period?
• Question: How did the application of the accrual
concept impact Shining Silks' business decisions and
growth?

Deeksharamb- Accounting- Dr. Srikanth Potharla

20 examples of areas in accounting where the accrual concept is applied.....................

Revenue Recognition: Revenue Prepaid Expenses: Costs paid in

Expense Recognition: Expenses Depreciation: The cost of a
should be recognized in the advance are initially recorded as
are recognized when they are fixed asset is spread over its
accounting period in which it is assets and then expensed in the
incurred, not when they are useful life, not all charged in the
earned, regardless of when period they are used or
paid. year it was purchased.
payment is received. consumed.

Unearned Revenue: Money Bad Debt Expense: The

Accrued Expenses: Costs like
received in advance for services Accrued Revenues: Income that estimated amount of
interest or wages that have
or goods to be provided in the has been earned but not yet uncollectible accounts
been incurred but not yet paid
future is recorded as a liability received is recognized in the receivable is recognized as an
are recognized in the period
and then recognized as revenue period it is earned. expense in the same period the
they are incurred.
when earned. related sales are made.

Inventory Costing: The cost of Deferred Tax Liabilities/Assets:

goods sold is recognized in the The expected future tax
period the related sales are consequences of transactions
made, not when payment is are recognized in the period the
made to suppliers. transactions occur.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 20 examples of areas in accounting where the accrual
concept is applied...................

Impairment Losses: Capital Leases: Leases that Warranty Obligations: The

Provisions: Liabilities of
Reductions in the carrying transfer substantially all the estimated cost of fulfilling
uncertain timing or amount
amount of assets are benefits and risks of ownership product warranties is
are recognized when an
recognized when there is a to the lessee are accounted for recognized as an expense in
obligation exists and can be
significant or prolonged as if the lessee acquired an the period the related sales
reliably estimated.
decline in their value. asset and incurred a liability. are made.

Employee Benefits: Costs of Construction Contracts: Research and Development Insurance Premiums: The cost
benefits like pensions and Revenue and costs associated Costs: R&D costs are generally of insurance coverage is
vacations are recognized in the with long-term construction expensed as incurred, not spread over the policy term,
periods the employees render contracts are recognized as when a resulting product regardless of when payment is
service. progress is made. generates sales. made.

Interest Payable/Receivable:
Long-Term Investments:
Interest expense or revenue is
Earnings on long-term
recognized over the term of
investments are recognized as
the related debt or
they are earned, not when
investment, not just when
Deeksharamb- Accounting- Dr. Srikanth Potharla received.
payment is made or received.
What is Accrual
Concept

The accrual concept, also known as accrual basis of

accounting, stipulates that revenues and expenses
should be recognized when they are incurred, not
when cash is exchanged.
This means companies record revenues when they
earn them and expenses when they owe them,
regardless of the timing of cash flows.
This concept provides a more accurate picture of a
company's financial health by matching revenues
with the expenses incurred to generate them.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 "Transparency Triumphs: TechSutra's Journey to Full
Disclosure"…....................
• Once upon a time in the bustling city of Bangalore, known as the Silicon
Valley of India, there was an innovative tech startup, "TechSutra". The
company was led by two childhood friends, Vinay, a visionary CEO, and
Suresh, a diligent CFO. They had built the company from the ground up,
turning it from a dream into a well-respected name in the Indian tech
industry.
• As the company grew, Vinay and Suresh decided it was time to take
TechSutra public. They hoped to raise capital to fuel further growth and
innovation. As part of preparing for the initial public offering (IPO), Suresh
had to ensure that the company's financial statements adhered to the
principles of accounting, one of which was the full disclosure principle.
• The full disclosure principle required that all information that could
influence the decisions of the users of the financial statements should be
disclosed. Suresh knew that this principle was crucial for maintaining
transparency and trust with potential investors.
• While Suresh was preparing the financial statements, he noticed an ongoing
legal dispute with a rival company over a patent issue. The dispute could
potentially cost TechSutra a significant amount if they lost. Vinay, concerned
about the potential negative impact this disclosure might have on their IPO,
Deeksharamb- Accounting- Dr. Srikanth Potharla suggested that they omit this information from the financial statements.
"Transparency Triumphs: TechSutra's Journey to
Full Disclosure"…....................
• However, Suresh knew that following the full disclosure principle was essential. He explained to Vinay that the
omission of this material information could mislead investors. If discovered later, it could damage TechSutra's
reputation, lead to a loss of trust among shareholders, and potentially result in legal repercussions.
• Meanwhile, Suresh also uncovered an underperforming segment within the company. Despite its innovative ideas,
the segment had been generating losses for the past couple of years. Vinay was initially hesitant to disclose this
information, fearing it would deter potential investors. However, Suresh insisted on the importance of full
disclosure, highlighting that it would show investors their commitment to transparency and ethical practices.
• After much deliberation, Vinay agreed to fully disclose all pertinent information in their financial statements. The
IPO went ahead as planned, with the financial statements providing a complete, accurate, and honest picture of
TechSutra's financial situation.
• Despite the disclosed legal dispute and the underperforming segment, the investors appreciated the transparency
of TechSutra. They believed in the potential of the company, trusting that the leadership was honest and dedicated
to ethical practices. As a result, TechSutra's IPO was a success.
• The story of TechSutra underlines the importance of the full disclosure principle in accounting. It not only fulfills a
legal requirement but also builds trust with stakeholders and paves the way for a company's success.

Deeksharamb- Accounting- Dr. Srikanth Potharla

 • Question: Who are the main characters in the story
and what are their roles in the company?
• Question: What is the full disclosure concept in
accounting as demonstrated in the story?
• Question: Why did Suresh insist on disclosing the
ongoing legal dispute and the underperforming
Question segment in the financial statements?
• Question: How did Vinay react to the suggestion of
full disclosure and what was the final decision?
• Question: What was the outcome of their IPO and
how did investors react to the company's full
disclosure?

Deeksharamb- Accounting- Dr. Srikanth Potharla

 The full disclosure concept in accounting
refers to the necessity for companies to
provide all necessary information in their
financial statements and accompanying notes.
What is full This information should be sufficient for users
to understand the company's financial
disclosure condition, performance, and changes in
financial position.
concept?
It includes not only the regular financial data
but also any significant events or transactions
that may affect the financial health or the
future performance of the company.
Deeksharamb- Accounting- Dr. Srikanth Potharla