CA FOUNDATION – JAN 2025 EXAM

ACCOUNTING - NOTES
KS ACADEMY
UNIT - 1 MEANING AND SCOPE OF ACCOUNTING
 Definition of Accounting:
Accounting is the art of recording, classifying, and summarising in a significant manner and
in terms of money, transactions and events which are, in part at least, of a financial
character, interpreting and communicating the result thereof.
 Steps involved in generating the financial information:
 Recording: Recording is done in a book called “Journal”. This book may further be
divided into several subsidiary books according to the nature and size of the
business.
 Classifying: Classification is concerned with the systematic analysis of the
recorded data, with a view to group transactions or entries of one nature at one
place so as to put information in compact and usable form. The book containing
classified information is called “Ledger”.
 Summarising: It is concerned with the preparation and presentation of the
classified data in a manner useful to the internal as well as the external users of
financial statements. This process leads to the preparation of the financial
statements.
 Analysing: The term ‘Analysis’ means methodical classification of the data given
in the financial statements. It is concerned with the establishment of relationship
between the items of the Profit and Loss Account and Balance Sheet i.e. it
provides the basis for interpretation.
 Interpreting: It is concerned with explaining the meaning and significance of the
relationship as established by the analysis of accounting data. The recorded
financial data is interpreted in a manner that it will enable the end users to make a
meaningful judgement about the financial performance and position of the
enterprise.
 Communicating: It is concerned with the transmission of summarised, analysed and
interpreted information to the end-users to enable them to make rational decisions.
This is done through preparation of reports which will include the FS and additional
information in the form of ratios, graphs etc.

 Objectives of Accounting:
 Systematic recording of transactions: Basic objective of accounting is to
systematically record the financial aspects of business transactions, i.e.,
book-keeping. These recorded transactions are later on classified and
summarized.
 Ascertainment of the financial performance of the business: Results are
ascertained through preparation of Profit and Loss account which helps
users in taking rational decisions.
 Ascertainment of the financial position of the business: Financial position
is ascertained through preparation of Balance Sheet that presents assets
owned and liabilities owed as at a particular date.
 Providing information to the users for rational decision-making:
Accounting as a ‘language of business’ communicates the financial
results of an enterprise to various stakeholders by means of financial
statements. Accounting aims to meet the information needs of the
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decision-makers and helps them in rational decision-making.
 To know the solvency position: Balance Sheet gives information regarding
entity’s ability to meet its liabilities in short run (liquidity) and long run
(solvency).

 Functions of Accounting:
 Measurement: Accounting measures past performance of the
business entity and depicts its current financial position.
 Forecasting: Accounting helps in forecasting future performance and
financial position of the enterprise using past data and analysing trends.
 Decision-making: Accounting provides relevant information to the users
of accounts to aid rational decision-making.
 Comparison & Evaluation: Accounting assesses performance achieved in
relation to targets and discloses information regarding accounting
policies and contingent liabilities which play an important role in
predicting, comparing and evaluating the financial results.
 Control: Accounting also identifies weaknesses of the operational system
and provides feedbacks regarding effectiveness of measures adopted to
check such weaknesses.
 Government Regulation and Taxation: Accounting provides necessary
information to the government to exercise control on the entity as well
as in collection of tax revenues.

 Book-Keeping definition: Book-keeping is an activity concerned with the recording of financial

data relating to business operations in a significant and orderly manner.
 It covers procedural aspects of accounting work and embraces record keeping function.
 Objectives of book-keeping is to maintain a complete record of all the transactions and
ascertain the impact of all such transactions on the business as a whole.
Difference between Accounting and Book-keeping:

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Sub-fields of Accounting:
 Financial Accounting: It covers the preparation and interpretation of
financial statements and communication to the users of accounts. It is
historical in nature as it records transactions which had already been
occurred. The final step of financial accounting is to prepare FS.
 Management Accounting: The different ways of grouping information and
preparing reports as desired by managers for discharging their functions
are referred to as management accounting. A very important component of
the management accounting is cost accounting which deals with cost
ascertainment and cost control.
 Cost Accounting: It refers to the process of accounting for cost which begins
with the recording of income and expenditure or the bases on which they
are calculated and ends with the preparation of periodical statements and
reports for ascertaining and controlling costs.
 Social Responsibility Accounting: It is concerned with accounting for social
costs incurred by the enterprise and social benefits created.
 Human Resource Accounting: Human resource accounting is an attempt
to identify, quantify and report investments made in human resources
of an organisation that are not presently accounted for under
conventional accounting practice.

 Users of accounting information:

 Investors: Concerned with the risk and return of their investments. Use
financial statements to assess an enterprise’s profitability and stability.
Such information is also required to evaluation whether to continue or shut
down the business.
Employees: Interested in the stability and profitability of their employer.
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Seek information on the company's ability to provide fair remuneration,
retirement benefits, and job security.

 Lenders: Focus on the company’s ability to repay loans and

associated interest on time.
Analyze solvency and cash flow data to ensure timely repayments.

 Suppliers and Trade Creditors: Require information on the

company’s ability to meet its payment obligations.
Short-term creditors are particularly interested in liquidity and operational
efficiency.

 Customers: Customers are also concerned with the stability and

profitability of the enterprise because their functioning is more or less
dependent on the supply of goods or serviced by the business.

 Governments and Their Agencies: They regulate the functioning of

business enterprises for public good, allocate scarce resources among
competing enterprises, control prices, charge excise duties and taxes, and
so they have continued interest in the business enterprise.

 Public: The public at large is interested in the functioning of the enterprise

because it may make a substantial contribution to the local economy in
many ways including the number of people employed and their patronage
to local suppliers.

 Management: Management as whole is also interested in the

accounts for various managerial decisions. On the basis of the
accounts, management determines the effects of their various
decisions on the functioning of the organisation.

 Relationship of accounting with other disciplines:

 Accounting and Economics: There exists a wide gulf between economists’
and accountants’ concepts of income and capital. Accountants got the ideas
of value, income and capital maintenance from economists, but brushed
suitably to make them usable in practical circumstances. Accountants
developed the valuation, measurement and decision-making techniques
which may owe to the economic theorems for origin but these are moulded
in the work environment and suitably tempered with reference to
relevance, verifiability, freedom from bias, timeliness, comparability,
reliability and understandability.
At the macro-level, accounting provides the database over which the
economic decision models have been developed; micro-level data arranged
by the accounting system is summed up to get macro-level database.

 Accounting and Statistics: In accountancy, a number of financial and

other ratios are based on statistical methods, which help in averaging
them over a period of time. Several accounting and financial
calculations are based on statistical formulae.
Statistical methods are helpful in developing accounting data and in their
interpretation. For example, time series and cross-sectional comparison of
accounting data is based on statistical techniques.Therefore, the study and
application of statistical methods would add extra edge to the accounting

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data.

 Accounting and Mathematics: With the advent of the computer,

mathematics is becoming a vital part of accounting. Instead of writing
accounts in traditional fashion, the transactions and events can be
recorded in the matrix form and the rules of matrix algebra can be applied
for classifying and summarising data.
Now-a-days statistics and econometric models are largely used for
developing decision models for the users of accounts. Also, Operations
Research Techniques provide lot of decision models.

 Accounting and Law: Transactions and events are always guided by laws of
the land. Very often the accounting system to be followed has been
prescribed by the law.
Banking, insurance and electric supply undertakings may also have to
produce financial statements as prescribed by the respective legislations
controlling such entities.

 Accounting and Management: A large portion of accounting information is

prepared for management decision-making. Although management relies
on other data sources, accounting data are used as basic source
documents. In the management team, an accountant is in a better position
to understand and use such data.

 Limitations of Accounting:
 The factors which may be relevant in assessing the worth of the
enterprise don’t find place in the accounts as they cannot be
measured in terms of money.
 Balance Sheet shows the position of the business on the day of its
preparation and not on the future date while the users of the accounts are
interested in knowing the position of the business in the near future.
 Accounting ignores changes in some money factors like inflation etc.
 Certain accounting estimates depend on the sheer personal
judgement of the accountant, e.g., provision for doubtful debts,
method of depreciation adopted etc.
 Different accounting policies for the treatment of same item adds to the
probability of manipulations. Hence, efforts are being made to reduce
the accounting alternatives.

 Areas of service for an accountant:

 Maintenance of Books of Accounts: An accountant is able to maintain a
systematic record of financial transactions in order to establish the net
result of the transactions entered into during a period and to state the
financial position of the concern as at a particular date.
 Statutory Audit: Every limited company is required to appoint a chartered
accountant or a firm of chartered accountants as their auditor who are
statutorily required to report each year whether in their opinion the
balance sheet shows a true and fair view of the state of affairs on the
balance sheet date, and the profit and loss account shows a true and fair
view of the profit or loss for the year. Organisations other than companies
also may require their accounts to be audited.
 Internal audit: It is a management tool whereby an internal auditor
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thoroughly examines the accounting transactions and also the system,
according to which these have been recorded with a view to ensure the
management that the accounts are being properly maintained and the
system contains adequate safeguards to check any leakage of revenue or
misappropriation of property or assets and the operations have been
carried out in conformity with the plans of management.
 Taxation: An accountant can handle taxation matters of a business or a
person and he can represent that business or person before the tax
authorities and settle the tax liability under the statute prevailing. He can
also assist in avoiding or reducing tax burden by proper planning of tax
affairs.
 Management Accounting and Consultancy Services: Accountant provides
management consultancy services in the areas of management information
system, expenditure control and evaluation of appraisal techniques for
new investments and divestments, working capital management, corporate
planning etc.
 Financial Advice: An accountant who knows about finances, taxation and
family problems is well placed to give such advice. Some of the areas in
which an accountant can render financial advice are investments, insurance,
business expansion, investigations, pension schemes etc.
 Other services such as Secretarial Work, Share Registration Work,
Company Formation, Receiverships, Liquidations, etc, Arbitrations, Cost
audits etc.

 Various roles of a CA:

 CA in industry: A qualified accountant will be able to play an important role
in performing important functions of a business relating to accounting,
costing and budgetary control, estimating and treasury.
 CA in Public Sector Enterprises: It is the duty of the accountants to prepare
the accounts and reports of these public corporations in such a way that
they enable the general public to know how far the items appearing in the
various types of records and financial statements justify their existence.
 CA in framing fiscal policies: Accountants have a positive role to play in the
determination of proper fiscal policies and advancement of trade,
commerce and industry. They should develop new techniques and prepare
themselves for new fields of service towards their commitment to the
concept of the public goods and services.
 CA and economic growth: Accountants have to accept a positive role
and do their best to encourage efficiency in individual business units and
encourage those social objectives which form the main foundation of a
welfare state.

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UNIT – 2 ACCOUNTING CONCEPTS, PRINCIPLES AND CONVENTIONS
 Accounting concepts: Assumptions on the basis of which financial statements of a business
entity are prepared. Such concepts are assumed to provide a unifying structure and logic
to accounting process.
The word concept means idea or notion which has universal application.
 Accounting principles:
 Accounting principles are a body of doctrines commonly associated with the
theory and procedures of accounting serving as an explanation of current
practices and as a guide for selection of conventions or procedures where
alternatives exist.
 Accounting principles must satisfy the following conditions:
 They should be based on real assumptions
 They must be simple, understandable and explanatory
 They must be followed consistently.
 They should be able to reflect future predictions.
 They should be informational for the users.
 Accounting conventions:
 Accounting conventions emerge out of accounting practices, commonly known as
accounting principles, adopted by various organizations over a period of time. These
conventions are derived by usage and practice.

Note: In the study material, the terms ‘accounting concepts’, ‘accounting principles’ and
‘accounting conventions’ have been used interchangeably to mean those basic points of
agreement on which financial accounting theory and practice are founded.

 Overview of Concepts, Principles and conventions:

 Entity concept: Entity concept states that business enterprise is a separate identity apart
from its owner. Accountants should treat a business as distinct from its owner. All the
transactions should be recorded in the books of accounts from the business perspective.
It is due to the entity concept that capital investment made by the owner is treated as a
liability and withdrawal made by the owner is treated as an asset (drawings).

 Money measurement concept: As per this concept, only those transactions, which can be
measured in terms of money are recorded. Since money is the medium of exchange and the
standard of economic value, this concept requires that those transactions alone that are
capable of being measured in terms of money be only to be recorded in the books of
accounts. Transactions are recorded in the currency of the home country. Transactions that
cannot be expressed in terms of money should not be recorded in books of accounts.

 Periodicity concept (also called as concept of definite accounting period): As per going
concern concept an indefinite life of the entity is assumed. However, it is necessary to
measure the performance and financial position periodically and not at the end of entity’s
life. Usually this period is one calendar year.

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Thus, the periodicity concept facilitates:
 Comparing of financial statements of different periods
 Uniform and consistent accounting treatment for ascertaining the profit and
assets of the business
 Matching periodic revenues with expenses for getting correct results of
the business operations
 Accrual concept: As per this concept, transactions are recorded as and when they occur
and not at the time of receipt or payment of cash. Revenue is recorded once the benefit
is provided and right to receive payment is established but not at the time of receipt of
cash. Expenses are recorded at the time of receipt of benefit and not at the payment of
cash.

Timing of revenue and expense could be different from payment or receipt of cash:

When cash received before revenue is A liability is created in respect of

booked cash that has been received in advance

When cash received after revenue is An asset called Trade receivables is

booked created
When cash paid before expense is An asset is called prepaid expense is
booked created
When cash paid after expense is booked A liability called trade payables or
outstanding liability is created

 Matching concept: As per this concept, all the expenses matched with the revenue of that
period should only be considered. In other words, all the expenses that relate to revenue
recognised during a period should also be recognised.
It is this concept that leads to adjustment of certain items like prepaid and
outstanding expenses, unearned or accrued incomes.
It is not necessary that every expense identify every income. Some expenses are
directly related to the revenue and some are time bound.

For example: selling expenses are directly related to sales but rent, salaries etc are
recorded on accrual basis for a particular accounting period. In other words,
periodicity concept has also been followed while applying matching concept.

Profit = Periodic Revenue – Matched Expense

Thus, accrual, matching and periodicity concepts work together for income measurement
and recognition of assets and liabilities.

 Going concern concept: As per this concept, it is assumed that an enterprise has neither
the intention nor the need to liquidate or curtail materially the scale of its operations.
The valuation of assets of a business entity is dependent on this assumption.
Traditionally, accountants follow historical cost in majority of the cases.
If the going concern assumption is not valid, then the entity needs to adopt an
alternative assumption (usually liquidation basis of accounting is adopted) while
preparing the financial statements and communicate such fact to the users.

 Cost concept: By this concept, the value of an asset is to be determined on the basis of

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historical cost, in other words, acquisition cost. Although there are various measurement
bases, accountants traditionally prefer this concept in the interests of objectivity.

Cost concept has the following limitations:

 In an inflationary situation when prices of all commodities go up on an
average, acquisition cost loses its relevance.
 Historical cost-based accounts may lose comparability.
 Many assets do not have acquisition costs. Human assets of an enterprise
are an example. The cost concept fails to recognise such asset although it
is a very important asset of any organization.

 Realisation concept: It closely follows the cost concept. Any change in value of an asset is to
be recorded only when the business realises it.
However, accountants follow a more conservative path. That is to say, if accountants
anticipate decrease in value they count it, but if there is increase in value they ignore
it until it is realised.

 Dual aspect concept: As per this concept every transaction has two aspects “Debit and
Credit”. In other words, for every transaction total debit is equal to total credit. Accounting
equation is based on this concept.

Assets = Liabilities + Capital

 Conservatism: Conservatism states that the accountant should not anticipate any
future income however they should provide for all possible losses. Whenever there are
alternative methods, an accountant should choose that leads to lower value of an
asset or higher value of a liability.

The Realisation Concept also states that no change should be counted unless it has
materialised. The Conservatism Concept puts a further brake on it. It is not prudent to count
unrealised gain but it is desirable to guard against all possible losses.

 Consistency: In order to achieve comparability of the financial statements of an enterprise

through time, the accounting policies are followed consistently from one period to another;
a change in an accounting policy is made only in certain exceptional circumstances.
The concept of consistency is applied particularly when alternative methods of
accounting are equally acceptable (methods of depreciation, methods for valuation
of inventory etc.).
However the concept of consistency doesn’t imply on-flexibility as not to allow the
introduction of improved method of accounting.

An entity should change an accounting policy in the following circumstances only:

i) To comply with AS
ii) To comply with law
iii) If the new method reflects a true and fair picture in the FS.

 Materiality: According to materiality principle, all the items having significant economic
effect on the business of the enterprise should be disclosed in the financial statements and
any insignificant item which will only increase the work of the accountant

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but will not be relevant to the users’ need should not be disclosed in the financial statements.
The term materiality is the subjective term. It is on the judgement, common sense
and discretion of the accountant that which item is material and which is not.
The materiality depends not only upon the amount of the item but also upon the
size of the business, nature and level of information, level of the person making the
decision etc.

 Full disclosure principle: The financial statement must disclose all the reliable and relevant
information about the business enterprise to the management and also to their external
users for which they are meant, which in turn will help them to take a reasonable and
rational decision.
No material information should be omitted from disclosure and all the
transactions should be accounted in such a manner that the FS presents a true and
fair view.
 Fundamental accounting assumptions: There are 3 fundamental accounting
assumptions:
1. Going concern
2. Consistency
3. Accrual
If the above assumptions have been followed, then there is no disclose the fact that the
above assumptions have been complied with. However, if any of the above assumptions is
not followed, then such fact needs to be disclosed.

 Qualitative characteristics of FS:

1. Understandability:
 An essential quality of the information provided in financial statements is
that it must be readily understandable by users.
 For this purpose, it is assumed that users have a reasonable
knowledge of business, economic activities and accounting.
 Information on complex matters that affects users’ decision making
should not be excluded merely on the grounds of complexity.
2. Relevance:
 Information disclosed in FS should be relevant to the decision-making needs
of users.
 Information is relevant when it is material and influences the economic
decisions of the users.
 Information in FS should be presented in such a manner that it enhances
its predictive value thereby helping the users to predict the future
performance and financial position.
3. Reliability:
 Information presented in the FS must be reliable, i.e. it must be free from
material error and bias can be depended upon by users to represent
faithfully that which it either purports to represent or could reasonably
be expected to represent.
 For FS to be reliable, the following aspects needs to be ensured:
 Faithful representation: To be reliable, information must
represent faithfully the transactions and other events it either
purports to represent or could reasonably be expected to
represent.

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 Substance over form: Transactions and other events needs to
recorded in accordance with their substance and economic reality
and not merely their form.
 Neutrality: Information contained in FS must be free from bias.
Financial statements are not neutral if, by the selection or
presentation of information, they influence the making of a decision
or judgement in order to achieve a predetermined result or
outcome.
 Prudence
 Completeness: To be reliable, the information in financial
statements must be complete within the bounds of materiality and
cost. An omission can cause information to be false or misleading
and thus unreliable and deficient in terms of its relevance.
4. Comparability:
 Users must be able to compare the financial statements of an
enterprise through time in order to identify trends in its financial
position, performance and cash flows.
 Users must be able to undertake both intra-firm and inter-firm
comparison.
 Hence, the measurement and display of the financial effects of like
transactions and other events must be carried out in a consistent way
throughout an enterprise and over time for that enterprise and in a
consistent way or different enterprises.
 Compliance with Accounting Standards, including the disclosure of the
accounting policies used by the enterprise, helps to achieve comparability.
 However, the need to ensure comparability should not act as a impediment
to making changes in accounting policies when such change is necessary to
present more relevant and reliable information. It means this shouldn't stop
a company from changing its accounting methods if the new approach
provides better and more accurate information

UNIT – 3 CAPITAL AND REVENUE EXPENDITURES AND RECEIPTS

AS PER CLASSROOM MATERIAL

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UNIT – 4 CONTINGENT ASSETS AND CONTINGENT LIABILITES
 CONTINGENT ASSET:
1. Definition: Possible asset that arises from past events and whose existence will be
confirmed only after occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the enterprise.
Eg.: Legal case filed by an entity for compensation
2. Contingent asset is not recognised in books as per the prudence concept. Only
when realisation of income is virtually certain (100% certain that the amount
will be received), contingent asset can be recorded in books.
3. A contingent asset need not be disclosed in the FS.
4. It is usually disclosed in Board’s report / report of approving authority if the
inflow of benefits is probable (>50% probability of receipt).
 CONTINGENT LIABILITY:
1. Definition:
(i) a possible obligation (<=50% certainty of payment) that arises from past events
and the existence of which will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly within the control
of enterprise.
(ii) a present obligation (>50% certainty of payment) that arises from past
events but is not recognised because
(a) outflow of resources is not probable.
(b) reliable estimate of the obligation cannot be made. (very rare)
2. Contingent liability is not recognised but disclosed in the FS unless possibility of
outflow of resources is remote.
3. Contingent liabilities are continuously assessed and in the period in which it
becomes a present obligation or if outflow of resources becomes probable a
provision is recognised.
4. Eg.:
 Claims against the company not acknowledged as debts
 Guarantees given on behalf of third parties
 Liability in respect of bills discounted
 Statutory liabilities under dispute
 PROVISION:
1. Provision can either be created in respect of decline in asset value (provision for
depreciation, provision for doubtful debts etc.) or for providing for a known liability.
2. Definition: Present obligation which can be measured reliably using a
substantial degree of estimation.
3. A provision is recognised when:
 There is a present obligation arising out of past events
 Outflow of resources is probable
 Reliable estimate of the obligation can be made

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DISTINCTION BETWEEN PROVISION AND CONTINGENT LIABILITY

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UNIT – 5 ACCOUNTING POLICIES
 Definition: Accounting Policies refer to specific accounting principles and methods of
applying these principles adopted by the enterprise in the preparation and presentation of
financial statements.
Characteristics that should be considered while selection of accounting policies:
1. Prudence
2. Substance over form
3. Materiality

Examples of areas where selection of accounting policy is made:

 Selection of method of inventory valuation – FIFO, weighted average etc.
 Selection of method of investments valuation – FIFO, weighted average etc.

A change in accounting policy

It should be made in the following situations:
1. It is required by some statute or
2. For compliance with an accounting standard or
3. Change would result in better presentation of financial statements.

Disclosure requirement
 If an entity changes the accounting policy, it should be disclosed in the financial
statements along with quantification of the impact of such change.
 Change in accounting policy should be given retrospective impact whereas change in
accounting estimate should be given prospective impact.

Changes in Accounting Policy: Change in Inventory Valuation Method, Change in Investment

Valuation Method, Adoption of a New Accounting Standard from old etc

Changes in Accounting Estimates: Useful Life of an Asset, Residual Value of an Asset, Provision for
Doubtful Debts,Fair Value Estimates etc

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UNIT – 6 ACCOUNTING AS A MEASUREMENT DISCIPLINE – VALUATION
PRINCIPLES, ACCOUNTING ESTIMATES

 Definition of measurement: assignment of numbers to objects and events according to

rules specifying the property to be measured, the scale to be used and the dimension of
the unit.
 Basic elements of measurement:
1. Identification of events and objects to be measured
2. Selection of standards or scale to be used (money is the scale of
measurement in accounting)
3. Evaluation of dimension of measurement standards or scale (since money is used as
a scale of measurement, it is not stable and may not be comparable with figures of
other years)
 Valuation principles: There are four generally accepted measurement bases or valuation
principles:
1. Historical cost: It is acquisition price. According to this base, assets are
recorded at amount of cash or cash equivalents paid at the time of acquisition.
Liabilities are recorded either (i) at the amount of proceeds received in exchange for
the obligation or (ii) amount required to be paid to settle the liability.

2. Current cost: Assets are carried out at the amount of cash or cash equivalent that
would have to be paid if the same or an equivalent asset was acquired currently.
Liabilities are carried at the undiscounted amount of cash or cash equivalents that
would be required to settle the obligation currently.

For example assume X Ltd has borrowed a loan of INR 5 lakhs. If the loan is to be
prepaid it should be paid along with a prepayment penalty of 1%. In this case INR 5
lakhs is the historical cost and INR 5,05,000 is the current cost.

3. Realizable value: Assets are carried at the amount of cash or cash equivalents that
could currently be obtained by selling the assets in an orderly disposal. Haphazard
disposal may yield something less.
Liabilities are carried at their settlement values; i.e. the undiscounted amount of
cash or cash equivalents expressed to be paid to satisfy the liabilities in the normal
course of business.

4. Present value: As per present value, an asset is carried at the present

discounted value of the future net cash inflows that the item is expected to
generate in the normal course of business.
Liabilities are carried at the present discounted value of future net cash outflows
that are expected to be required to settle the liabilities in the normal course of
business.
P = A / (1+i)^n
P – Present Value
A – Future Value
i – Interest rate
n – number of years

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DIFFERENCE
VALUATION DESCRIPTION FOR ASSETS DESCRIPTION FOR LIABILITIES
PRINCIPLE
Historical Cost Recorded at the acquisition price Recorded either at the amount of proceeds
(amount of cash or cash equivalents received in exchange for the obligation or the
paid at the time of acquisition). amount required to settle it.
Current Cost Carried at the amount of cash or cash Carried at the undiscounted amount of cash
equivalents that would be required to or cash equivalents required to settle the
acquire the asset currently. obligation currently.
Realizable Carried at the amount of cash or cash Carried at the settlement values
Value equivalents that could currently be (undiscounted amount of cash or cash
obtained by selling the asset. equivalents expected to be paid).
Present Value Carried at the present discounted value Carried at the present discounted value of
of the future net cash inflows expected the future net cash outflows required to
to be generated. settle the liability.

 Accounting estimates:
1. With respect to transactions where estimates are involved, a reasonable
estimate needs to be made based on the existing situation and past
experiences.
Measurement of certain assets and liabilities is based on estimate based on management’s
judgement as they cannot be measured with precision.
Examples: Depreciation, amortisation, accruals and provision, useful life, residual
value etc.
2. An estimate may require revision if there is a change in circumstances based on
which estimate was made or as a result of new information or subsequent
developments.
3. Change in accounting estimate is the difference between (i) previous estimate and re-
estimate or (ii) estimate and actual results achieved.

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UNIT – 7 ACCOUNTING STANDARDS
 Introduction:
I. If the financial reporting process is not regulated, then there is a possibility that
FS can be misleading and provides a distorted picture of the business.
II. To ensure transparency and reliability, it is essential to standardize the
accounting principles and policies.
III. Accounting Standards (ASs) provide framework and standard accounting
policies for treatment of transactions and events so that the financial
statements of different enterprises become comparable.
IV. Definition of AS: They are written policy document issued by the expert
accounting body or by the government of other regulatory bodies covering
aspects of recognition, measurement, presentation and disclosure of accounting
transactions and events in the financial statements.
V. Accounting standards deal with:
I. Recognition of events and transactions in the financial statements
II. Measurement of these transactions and events
III. Presentation of these transactions and events in the financial statements
in a manner that is meaningful and understandable to the reader
IV. Disclosure requirements which should be there to enable the public at
large to get an insight into the financial statements.

 Objectives of AS: Accounting Standards standardise diverse accounting policies with a

view to:
 Eliminate the non-comparability of financial statements and thereby improving the
reliability of financial statements; and
 provide a set of standard accounting policies, valuation norms and disclosure requirements.

 Benefits of AS:
1. Facilitates standardisation of alternative accounting treatments thereby
eliminating confusing variations.
2. AS may call for additional disclosures beyond what is required by law.
3. Application of AS facilitates comparison of FS of companies. However, it
should be noted that owing to differences in institutions, traditions and legal
systems from one country to another there may be differences in AS adopted
in different countries.

 Limitations of AS:
VI. Difficulty in making a choice between different treatments: Alternative
solutions to certain accounting problems may each have arguments to
recommend them. Therefore, the choice between different alternative
accounting treatments may become difficult.
VII. Restricted scope: Accounting standards cannot override the statute. The
standards are required to be framed within the ambit of prevailing statutes.
 Process of formulation of AS in India: Initiated by ICAI's Accounting Standards Board
(ASB) in 1977. Composition of ASB includes representatives of industries, associations of
industries (namely, ASSOCHAM, CII, and FICCI), regulators, academicians, government
departments, etc.

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Process includes:
I. Identifying areas for standards.
II. Constitution of study groups by ASB to consider specific projects and to
prepare preliminary drafts of the proposed accounting standards.
III. Consideration of the preliminary draft prepared by the study group of ASB
and revision, if any, of the draft on the basis of deliberations.
IV. Circulation of draft to ICAI’s council members and outside bodies such as
MCA, SEBI, C&AG, CBDT etc. for comments.
V. Meeting with the representatives of the specified outside bodies to
ascertain their views on the draft of the proposed accounting standard.
VI. Finalisation of the exposure draft of the proposed accounting standard and
its issuance inviting public comments.
VII. Consideration of comments received and finalization of the standard.
VIII. Consideration of the final draft by the ICAI council and necessary
modifications in consultation with ASB are done.
IX. Issuance and notification of AS. For corporates, AS are issued by MCA
in consultation with NFRA.

List of Accounting Standards (not part of the syllabus – only for knowledge purposes)

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