Objective of Accounting:
1. To keep Systematic record.
2. Ascertain the financial position on a particular date.
3. Ascertain the true profit and loss of any company.
4. To communicate the information to the interested parties (owners, lenders,
investors etc.).
5. To help in Planning and controlling various business activities
Book-keeping is the art of recording business transactions in the book of original entry and
posting them into ledger. Whereas Accounting is the summarization, compilation of various
accounts and preparation of various financial statements.
Book-keeping is of mechanical and repetitive in nature, usually done by junior clerks.
Whereas accounting is of technical in nature, usually done by a person well aware of
accounting principles.
Book-keeping comes first and accounting comes next. Accountants work starts where Bookkeeping ends.
Book-keeping is the simplest phase of Accounting.
Cost Concept,
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Realization Concept,
Accrual Concept,
Verifiable Objective Evidence Concept,
The business entity concept According to this, the business is treated as a distinct entity from
its owners. This enables the business to segregate the transactions of the company from the
private transactions of the proprietor(s).
The going concern concept According to this concept, it is assumed that the business will
exist for a long time and transactions are recorded on this basis. This concept forms the basis for
the distinction between expenditure that will yield benefit over a long period of time and
expenditure whose benefit will be exhausted in the short-term.
Accounting standards:
Accounting Standards: Accounting Standards issued by ICAI: Sub Section (3A)
to section 211 of Companies Act, 1956 requires that every Profit/Loss Account and Balance
Sheet shall comply with the Accounting Standards. 'Accounting Standards' means the standard of
accounting recommended by the ICAI and prescribed by the Central Government in consultation
with the National Advisory Committee on Accounting Standards (NACAs) constituted under
section 210(1) of companies Act, 1956.
Disclosure of Accounting Policies: Accounting Policies refer to specific accounting principles
and the method of applying those principles adopted by the enterprises in preparation and
presentation of the financial statements.
Valuation of Inventories: The objective of this standard is to formulate the method of
computation of cost of inventories / stock, determine the value of closing stock / inventory at
which the inventory is to be shown in balance sheet till it is not sold and recognized as revenue.
Cash Flow Statements: Cash flow statement is additional information to user of financial
statement. This statement exhibits the flow of incoming and outgoing cash. This statement
assesses the ability of the enterprise to generate cash and to utilize the cash. This statement is one
of the tools for assessing the liquidity and solvency of the enterprise.
Contingencies and Events occurring after the balance sheet date: In preparing financial
statement of a particular enterprise, accounting is done by following accrual basis of accounting
and prudent accounting policies to calculate the profit or loss for the year and to recognize assets
and liabilities in balance sheet. While following the prudent accounting policies, the provision is
made for all known liabilities and losses even for those liabilities / events, which are probable.
Professional judgment is required to classify the like hood of the future events occurring and,
therefore, the question of contingencies and their accounting arises Objective of this standard is
the significance of financial instruments for the entitys financial position and
performance; and
the nature and extent of risks arising from financial instruments to which the entity is
exposed during the period and at the reporting date, and how the entity manages those
risks.
IFRS:
1. IFRS (International Financial Reporting Standards) is a set of accounting standards
developed by an independent, not-for-profit organization called the International Accounting
Standards Board (IASB).
2. The goal of IFRS is to provide a global framework for how public companies prepare and
disclose their financial statements.
3. IFRS provides general guidance for the preparation of financial statements rather than setting
rules for industry-specific reporting.
4. Currently, over 100 countries permit or require IFRS for public companies, with more
countries expected to transition to IFRS by 2015.
5. Having an international standard is especially important for large companies that have
subsidiaries in different countries.
6. Adopting a single set of world-wide standards will simplify accounting procedures by
allowing a company to use one reporting language throughout.
7. A single standard will also provide investors and auditors with a cohesive view of finances.
8. Proponents of IFRS as an international standard maintain that the cost of implementing IFRS
could be offset by the potential for compliance to improve credit ratings.
9. IFRS is sometimes confused with IAS (International Accounting Standards), which are older
standards that IFRS has replaced.
The following IFRS statements are currently issued:
IFRS 1 First time Adoption of International Financial Reporting Standards
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration for and Evaluation of Mineral Resources
IFRS 7 Financial Instruments: Disclosures
IFRS 8 Operating Segments
IFRS 9 Financial Instruments
IAS 1: Presentation of Financial Statements.
IAS 2: Inventories
IAS 7: Cash Flow Statements
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10: Events After the Balance Sheet Date
Assets
XXXXX
= Liabilities +
=
XX
Owners'
Equity
XXX
An
Owner:- Owner brings land, labour, capital & organizes all the factors of production.
So he is interested for the safety and effective utilization of his money.
Managers:- Managers look for a variety of information, including information relating
to their own incentive contracts. Managers also use financial statement information in
many of their financing, investment and operating decisions.
Creditors:- Many bank loans include bond covenants that can result in the bank
restructuring the existing loan agreement: again, the Enron case is directly relevant
here. One effect of incorporating such covenants into the loan agreement is to create a
demand by the bank for successive financial statements of the business.
Employees:- Employees are interested in financial statement information that helps to
inform them about the continued and profitable operation of their employer.
Particularly pertinent at the moment, following the Enron scandal of
November/December 2001, is the realization that employees look to financial
statements to monitor the viability of their pension plans.
Investors:- Shareholders, investors and security analysts have at least two focus points:
Investment focus with the emphasis on choosing a portfolio of securities that is
consistent with the preferences of the investor for risk, return, dividend yield, liquidity
and so on. Stewardship focus in which the concern of shareholders is with monitoring
the behaviour of management and attempting to affect its behaviour in a way deemed
appropriate.
Consumers:- Customers, and here we mean industrial and commercial customers
rather than domestic or high street customers, have an interest in monitoring the
financial health of an organization: a long time customer says it already has reduced its
orders sharply so that it doesn't depend on the company as the single source for any
products is the reaction that Foster records vis a vis a business in trouble and its
customers' reaction to that event.
Regulatory bodies (Government/Regulatory Agencies): Revenue raising: income tax, sales, tax, VAT
Government contracting: paying suppliers on a cost plus basis, monitoring
government suppliers and their potential for earning excess profitability
Rate determination: rates of return that a utility can earn
Regulatory intervention: whether a government back loan guarantee to a financial
distressed organization needs support