Accounting in Logistics and Supply Chain Sector-V1Final

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(1)(c). UP E. S, No t for pro. Re. on /Sa. cti. du. le. UNIT 20: Case Study.

(2) le. Accounting in Logistics and Supply Chain Sector. on /Sa. Course Design Advisory Council Chairman. cti. Dr Parag Diwan Members. Dr Satya Sheet VP – Academic Affairs. Prof I M Mishra Dean – IIT Roorkee. Dr Ashish Bhardwaj CIO. du. Dr Anirban Sengupta Dean. Mr M K Goel Management Consultant. pro. Dr Shrihari Dean. SLM Development Team Wg Cdr P K Gupta. Re. Dr Joji Rao Dr Neeraj Anand. for. Dr K K Pandey. Print Production. Mr A N Sinha Sr Manager – Printing. No t. Mr Kapil Mehra Manager – Material. Author. S,. N Balwani. UP E. All rights reserved. No parts of this work may be reproduced in any form, by mimeograph or any other means, without permission in writing from Hydrocarbon Education Research & Society.. Course Code: MBAF-911D. (c). Course Name: Accounting in Logistics and Supply Chain Sector Version: January 2013 © MPower Applied Learning Enterprise.

(3) on /Sa. le. UNIT 20: Case Study. Contents Block-I. Fundamentals of Accounting................................ ................................ ........................ 3. Unit 2. Generally Accepted Accounting Principles (GAAP)................................ ................... 17. Unit 3. Accounting Principles and Standards ................................ ................................ ........ 29. Unit 4. Accounting Equation ................................ ................................ ................................ .. 41. Unit 5. Case Studies................................ ................................ ................................ ................ 49. pro. du. cti. Unit 1. Block-II. Accounts ................................ ................................ ................................ ...................... 55. Unit 7. Journal ................................ ................................ ................................ ........................ 67. Unit 8. Ledger ................................ ................................ ................................ ......................... 79. Unit 9. Subsidiary Books ................................ ................................ ................................ ........ 93. Unit 10. Case Studies................................ ................................ ................................ .............. 113. for. Re. Unit 6. Block-III. Trial Balance................................ ................................ ................................ ............. 119. Unit 12. Preparation of Trading, Profit & Loss Account and Balance Sheet ........................ 127. Unit 13. Depreciation Accounting................................ ................................ ........................... 141. Unit 14. Cash Flow Statements................................ ................................ .............................. 153. Unit 15. Case Studies................................ ................................ ................................ .............. 163. UP E. S,. No t. Unit 11. Block-IV. Financial Aspects of Supply Chain Management ................................ .................... 169. Unit 17. Inventory Management’s Techniques and Control................................ .................. 181. Unit 18. Cost Accounting ................................ ................................ ................................ ........ 193. Unit 19. EVA and Budgets................................ ................................ ................................ ...... 207. Unit 20. Case Studies................................ ................................ ................................ .............. 217. (c). Unit 16.

(4) le. Accounting in Logistics and Supply Chain Sector. on /Sa. Block-V. Corporate Financial Reporting................................ ................................ ................. 223. Unit 22. International Financial Reporting Standards ................................ ......................... 233. Unit 23. International Accounting Standards-I ................................ ................................ ..... 241. Unit 24. International Accounting Standards-II................................ ................................ .... 251. Unit 25. Case Study ................................ ................................ ................................ ................ 263. cti. Unit 21. (c). UP E. S,. No t. for. Re. pro. du. Glossary................................ ................................ ................................ ................................ .......... 265.

(5) on /Sa. Notes. le. UNIT 1: Fundamentals of Accounting. ___________________ ___________________. ___________________ ___________________. cti. ___________________ ___________________. Re. pro. du. ___________________. (c). UP E. S,. No t. for. BLOCK-I. ___________________ ___________________ ___________________.

(6) Accounting in Logistics and Supply Chain Sector. le. Detailed Contents. . Classification of Accounting Principles. . Basic Assumptions. . Basic Accounting Principles. . Accounting Process. . Uses, Advantages or Role of Accounting. . Limitations of Accounting. . Introduction. . Meaning of Accounting Equation. . Calculation/Computation of Accounting Equation. . Effect of Transactions on Accounting Equation. pro. ___________________ UNIT 2: GENERALLY ACCEPTED ACCOUNTING ___________________ PRINCIPLES (GAAP) Introduction ___________________. Introduction. UP E. S,. No t. for. Re. UNIT 5: CASE STUDIES. (c). AND. UNIT 4: ACCOUNTING EQUATION. ___________________ Branches of Accounting. . PRINCIPLES. . du. . UNIT 3: ACCOUNTING STANDARDS. cti. UNIT 1: FUNDAMENTALS OF ACCOUNTING ___________________  Introduction ___________________  Characteristics of Accounting ___________________  Stages of Accounting ___________________  Objectives of Accounting ___________________  Accounting Information ___________________  Functions of Accounting. on /Sa. Notes.

(7) on /Sa. Notes. le. UNIT 1: Fundamentals of Accounting. ___________________. Fundamentals of Accounting. ___________________. ___________________. Objectives. ___________________. After completion of this unit, the students will be aware of the following topics:. cti. ___________________ ___________________. . Characteristics of Accounting. . Stages of Accounting. . Objectives of Accounting. . Accounting Information. . Characteristics of Accounting Information. . Functions of Accounting. . Branches of Accounting. pro. du. ___________________. Re. Introduction. No t. for. Accounting is used as an information system by its users. The users are of two types i.e., Internal and External. Accounting is generally termed as the language of business. It records all the transactions which can be expressed either in money or money’s worth and have taken place during a particular period. It is also termed as a science as the Transactions are recorded (which are of economic nature) in a systematic manner and also an art of analysing and interpreting the same i.e., the business transactions. Accounting is defined by different authors and institutions. Some of the most important definitions are as given below:. —Robert N. Anthony. UP E. S,. “Accounting system is a means of collecting, summarizing, analyzing and reporting in monitory terms, information about the business.”. “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of information.”. (c). —The American Accounting Association (AAA), 1966. “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and. ___________________ ___________________ ___________________.

(8) characteristics of accounting. ___________________. events which are, in part, at least, of a financial character, and interpreting the results there of.”. on /Sa. Notes Activity ___________________ Write an article on the. le. Accounting in Logistics and Supply Chain Sector. —American Institute of Certified Public Accountants, 1941. Characteristics of Accounting. ___________________. The following are the characteristics of accounting:. ___________________. Recording of transactions of financial nature: Transactions or events which are of economic/financial nature are only recorded in accounting. Events/transactions which cannot be measured in terms of money, are not at all recorded in accounting. For example, efficiency or honesty of the employees cannot be recorded because it cannot be measured in terms of money though it affects the total profits of business. Similar is the case of a quarrel between the factory workers and the factory production Manager which affects the production, but it is not recorded in the books as it can neither be measured in terms of money nor has any exchange or economic value.. cti. ___________________. ___________________ ___________________. du. ___________________ ___________________. Re. pro. ___________________. (c). UP E. S,. No t. for. Recording in definite (certain) units: Only such events are recorded which are measured in terms of money, no other unit is used to record such transactions, for example, if the publisher sells 10 books (copies) of Accounting to a bookseller and 20 copies of Business Studies to another bookseller, then the publisher is required to record these transactions only in terms of money. That in the first case 10 No. of copies is to be multiplied by the price per copy and if any discount (trade) is to be given, is deducted. The recording is done for the net amount in the books of the business and not in terms of 10 or 20 or so on the number of books only. It is an art of classifying the data: Accounting is also an art of classifying the data systematically. After all the transactions are recorded properly, all such data are also classified under appropriate heads, so that as and when data is analysed or interpreted, correct results can be drawn if data of similar nature is available at a particular place. This also saves the time and avoids unnecessary wastage of money. It is a science: Accounting is a science because every business transaction is recorded in a systematic manner. This is done first in the Journal which is the primary book of Accounting/Business. This may further be sub-divided into various types of subsidiary books such as cashbook for recording cash transactions only.

(9) W ___________________ ___________________. ___________________ ___________________ ___________________. pro. du. cti. Accounting can be used for analyzing and interpreting business transactions: As we know that the purpose of accounting is not only recording of transactions but also of analyzing and interpreting data for taking certain important future decisions. This is also known as future forecasting. Thus, we see that definition of accounting is changing rapidly because of increase in its functions. i.e., from recording of transactions to interpreting of economic events.. Notes Activity. on /Sa. whereas sales day book for recording credit sales of goods. Purchases book for recording credit purchases of goods and returns books for recording purchase returns and sales returns and other subsidiary books such as Bills Receivable book, Bills Payable book, etc.. le. UNIT 1: Fundamentals of Accounting. Stages of Accounting. Re. After knowing the characteristics of Accounting, one can list the different stages of Accounting which are as follows: Financial Transactions,. . Recording of Transactions,. . Classifying in different groups of transactions based as per the nature of transactions,. . Summarizing of transactions, and. . Analyzing and interpreting the same.. No t. for. . Table 1.1: Distinction between Book-keeping and Accounting Basis of Difference. Book-keeping Accounting. Accounting. The objective of bookkeeping is to record the transactions of economic nature.. Whereas the objective of accounting is not only the recording of transactions but also analyzing and interpreting the data.. It is an art.. It is a science.. Scope. The scope of bookkeeping is very limited.. The scope of accounting is very wide.. Functions. Most of the functions of book-keeping are now-a-days performed by machines.. Functions of accounting involve expert human beings in the art of analysis and interpretation.. Objective. 2. Nature (Art or science). 3. (c). 4. UP E. 1. S,. S. No.. Contd.... ___________________ ___________________ ___________________ ___________________ ___________________.

(10) Accounting Process. Book-keeping is just one part of accounting process.. Accounting involves the entire process of accounting that is why it is said that accounting begins where book-keeping ends.. 6. Rules to be followed. Rules of accounting are followed for recording.. Along with rules, assumptions and conventions are also there to follow.. 7. Net Results Profit or loss. Net results of the business cannot be known from bookkeeping.. Whereas accounting is used to find out net results of the business.. 8. Time. Transactions immediately recorded.. Transactions are generally recorded after a gap of time or at the end of a financial year.. ___________________ ___________________ ___________________ ___________________ ___________________. are. du. ___________________. on /Sa. 5. cti. Notes Activity ___________________ Make a report on the objectives of accounting. ___________________. le. Accounting in Logistics and Supply Chain Sector. Check Your Progress. ___________________. pro. State whether True or False: 1.. Accounting is the language of business.. 2.. Transactions or events which are of economic/financial nature are only recorded in accounting.. Re. ___________________. Objectives of Accounting. for. The basic objective of Accounting is to provide necessary information to the persons interested in the business. As we know that persons interested in the business are of two types: (a) Internal users and (b) External users.. (c). UP E. S,. No t. (a) Internal users: These are the persons who manage the business, i.e., management at all the levels–top, middle and lower level. (b) External users: External users are all persons other than internal users such as Investors, creditors, Government. The necessary information is supplied to the external users through the following financial statements: . Profit & Loss Account/Statement and. . Balance Sheet.. Whereas the internal users can obtain necessary information other than the above statements from the records of the business. Thus, the primary objectives of accounting are as given below: 1.. Maintenance of records of business.. 2.. Calculation of profit or loss of the business..

(11) 3.. Presentation of the financial position of the business.. 4.. To provide and make available the necessary and financial information to the users.. on /Sa. Notes. le. UNIT 1: Fundamentals of Accounting. ___________________ ___________________. The above objectives can be explained in detail:. ___________________. Maintenance of records of business: The Primary objective of accounting is to maintain proper records of business, i.e., every transaction which is of financial nature must be recorded fully otherwise it is very difficult to remember all the transactions because human memory is very short. Moreover, correct and fair results of the business transactions cannot be ascertained (calculated). So it is very much essential to keep proper and complete records of all business transactions so that records can be used as and when required/desired by the persons interested in the business.. ___________________ ___________________. pro. du. cti. 1.. Calculation of Profit or Loss: As we know that one of the most important objectives of business is to earn profit, and the main objective of accounting is to maintain proper records of all financial transactions in to order to calculate profit or loss of the business. This can be done with the help of a financial statement known as the Profit & Loss statement. This statement is prepared for a particular period which can tell us about the profit or loss of the business. If there is a profit, the management can take important decisions relating to selling price, output, etc. If two years results are known, then a comparison can also be made. Similarly, if there is a loss, then management can decide to discontinue the production of such items. Thus, we see that it is a very important objective of accounting, i.e., to provide information relating to profit or loss of business. This statement is very useful to all the persons interested, i.e., from management to creditors, investors, government and society at large including employees of the business. Thus, profit or loss statement is a measurement of performance of the business.. 3.. Presentation of financial position of the business: The financial position of the business is presented through another financial statement known as the Balance Sheet or Position Statement. This is a statement of assets and liabilities of the business. It tells about the owned capital as well as borrowed capital (liabilities) along with different assets such as fixed. (c). UP E. S,. No t. for. Re. 2.. ___________________ ___________________ ___________________ ___________________ ___________________.

(12) le. Accounting in Logistics and Supply Chain Sector. assets and current and other assets. If total liabilities are deducted from the total assets, then balance depicts the owners’ capital (owned funds). As we know that the objective of accounting is not only recording of financial events, make available information relating to profit or loss of the business but also provide full information regarding financial position of the business. This is done through a financial statement. The balance sheet is a mirror showing the financial solvency or insolvency of the business. If assets are more than its liabilities, it is a solvent otherwise in case of reverse, it is an insolvent business.. on /Sa. Notes Activity ___________________ Present a draft on accounting information. ___________________ ___________________ ___________________. ___________________ ___________________ ___________________. 4.. ___________________. To provide and make available the necessary and financial information to the users: The major objective of accounting is to provide and make available the necessary and financial information to the users or the persons interested so that, necessary and financial decisions and actions can be initiated by the management/persons interested such as owners, shareholders, debenture holders, creditors, investors, government and others such as research scholars, etc.. Re. pro. ___________________. du. cti. ___________________. for. Thus, we see that the accounting can play a very important role in depicting the financial results (profit/loss) of the business as well as the financial position (solvency or insolvency) of the business.. No t. Accounting Information. (c). UP E. S,. As per Accounting Principles Board (APB), Accounting is defined as follows: “Accounting is a service activity. Its function is to provide qualitative information, primarily financial in nature about economic activities that is intended to be useful in making economic decisions.” Thus, it is clear from the above definition, that accounting information is an important function of accounting. Accounting information must also be of quality so that important financial decisions can be taken by the users of accounting. Accounting information is supplied through financial statements. Financial statements are Profit & Loss account being income statement and balance sheet being position statement..

(13) 1.. Information about profit or loss of the business.. 2.. Information about financial position of the business.. Notes. on /Sa. The information which is provided by these statements is as follows:. le. UNIT 1: Fundamentals of Accounting. ___________________ ___________________. ___________________. Information about Profit or Loss of the Business. ___________________ ___________________. du. cti. The Profit & Loss account which is also known as income statement provides accounting information about profit earned or loss suffered (incurred) during an accounting period. This statement provides gross profit through trading account and net profit through Profit & Loss account. Gross profit = Sales – Cost of Sales. Whether cost of sales is reasonable or not?. 2.. Whether it can be reduced or not?. 3.. Whether selling price can be increased or not?. Re. 1.. pro. This information is very useful as it helps in deciding the following questions:. for. The Accounting information, thus available through trading account helps us to resolve the above questions.. No t. Net profit is the profit earned after allowing all the expenses relating to factory administration, financial, selling and distribution. Thus, income statement makes available information about net profit earned or net loss suffered. This also helps in answering the following questions. 1.. Whether expenses are reasonable or not?. 2.. Whether expenses can be reduced or not?. S,. Net profit is used as a basis for taxation purposes.. UP E. Information about Financial Position of Business. (c). The balance sheet also known as position statement tells about financial health of the business. This statement tells about the assets owned by the business including cash and bank balances. These assets are total of liabilities owned by the business which may be taken from the proprietor of the business or borrowed from outsiders. The position statement helps in determining the following questions:. ___________________ ___________________ ___________________ ___________________ ___________________.

(14) 1.. Whether funds invested are safe and sound, means provides reasonable return of income along with safety of funds?. 2.. Whether return of income is adequate or not?. 3.. It helps the investors, the creditors to arrive at a correct decision regarding investment, lending of funds, etc.. 4.. It helps in restoring confidence among the employees about their provident fund being properly deposited with the cost as per requirements.. on /Sa. Notes. le. Accounting in Logistics and Supply Chain Sector. ___________________ ___________________ ___________________ ___________________. cti. ___________________ ___________________ ___________________. du. Characteristics of Accounting Information. ___________________. Accounting information consists of the following characteristics:. ___________________. 1.. Reliability: Whatever accounting information is supplied must be reliable, means it must be free from all sorts of biases. Otherwise the basic purpose of using accounting information is defeated. Accounting information is reliable if following rules are observed:. Re. pro. ___________________. for. (a) Principle of prudence is followed: It means the principle of prudence, i.e., conservatism is followed and all losses are taken into account while all prospective gains are left out. In other words, accounting information tells about the facts and does not give any wrong information about the business.. No t. (b) Neutral Accounting information is free from all sorts of biases because if information supplied is biased, it would give misleading results.. (c). UP E. S,. (c) Complete: Whatever accounting information is supplied, must be complete in all respects. Otherwise incomplete information may give us misleading results.. 2.. Relevance: The accounting information should also disclose other information which may be useful to the users of information. This is in addition to the information which is required by statutes under different Acts/Laws.. 3.. Understandability: The accounting information provided, must be in a form which is understandable to the users of information. However, the information which can be useful must also be given. Whatever is the requirement of disclosure of information, must be followed strictly..

(15) Comparability: The users should be able to compare the accounting information as inter firm or intra firm comparison. It is therefore necessary to use standardized accounting policies consistently.. Notes. on /Sa. 4.. le. UNIT 1: Fundamentals of Accounting. ___________________ ___________________. Various Users of Accounting Information. ___________________. Following are the users of accounting information: The owners: Whosoever’s money is provided to the business, such persons are known as owners of the business. Such persons may be either the proprietor, the partners or the shareholders. They are very much interested in knowing about the profit or loss of the business and also the financial health and wealth of the business.. ___________________. du. cti. 1.. ___________________. Investors: Everyone who is either willing to invest in a business as a partner or as a shareholder is always interested to know about the safety of funds as well as adequate return on investments.. 3.. Creditors are interested to be satisfied about the credit worthiness of the business before supplying goods or services. Accounting information available through financial statements thus proves useful and helpful.. 4.. Government is interested in having certain other financial information on the basis of which economic and taxation policies are decided.. 5.. Employees: Accounting information is useful to the employees by telling them about their contribution which is regularly deposited with the Government by their employers.. 6.. Society: Accounting information is useful to the society. It depicts general financial state of affairs in the society, i.e., standard of living, per capita income, national income, etc.. S,. No t. for. Re. pro. 2.. UP E. Check Your Progress. Fill in the blanks: 1.. ................... is the profit earned after allowing all the expenses relating to factory administration, financial, selling and distribution.. (c). 2.. The ........................ also known as position statement tells about financial health of the business.. ___________________ ___________________ ___________________ ___________________ ___________________.

(16) le. Accounting in Logistics and Supply Chain Sector. on /Sa. Functions of Accounting Notes Activity ___________________ Prepare an assignment on the functions and branches of ___________________ accounting.. The main function of accounting is to record the business transactions scientifically and systematically. Apart from this, there are other functions of accounting which are as follows:. ___________________. It depicts the true and fair picture of the financial position of the company.. 2.. It helps in ascertaining profit or loss of the business which is the only primary aim of the business.. 3.. It helps in future decision-making by different persons interested in such accounting information.. ___________________. 4.. It depicts the earning capacity of the business.. ___________________. 5.. It satisfies all Government rules and regulations connected with Accounting information such as all the companies are required to prepare their statements as per requirements of the Indian companies Act, 1956, amended up to date.. ___________________. Re. ___________________. du. ___________________. pro. ___________________. cti. 1. ___________________. Branches of Accounting. for. As we know that the objectives of accounting are recording of business transactions and also make necessary information available to the persons interested. The accounting is broadly classified into three main branches, in order to achieve the above objectives. The branches are:. No t. (a) Financial Accounting (b) Cost Accounting. (c). UP E. S,. (c). Management Accounting. (a) Financial Accounting: It is mainly concerned with the ascertainment of profit or loss made during a particular period and also presents the financial position of the business. (b) Cost Accounting: As the name suggests, this type of accounting is mainly related with the ascertainment of the cost of a product, so that the management can exercise its control in order to minimize the costs and maximize the profits. (c) Management Accounting: This type of accounting is a tool in the hands of management for various functions; (i) to control costs (ii) to take important future decisions (forecasting)..

(17) Notes. on /Sa. Thus, we see that there are different branches of accounting, each branch is assigned a different job.. le. UNIT 1: Fundamentals of Accounting. ___________________. Check Your Progress. ___________________. Fill in the blanks:. ................... accounting is a tool in the hands of management for various functions; (i) to control costs (ii) to take important future decisions (forecasting).. ___________________ ___________________. cti. 2.. ................... is mainly concerned with the ascertainment of profit or loss made during a particular period and also presents the financial position of the business.. du. 1.. ___________________. pro. Summary. for. Re. Accounting is generally termed as the language of business. It records all the transactions which can be expressed either in money or money’s worth and have taken place during a particular period. It is also termed as a science as the Transactions are recorded (which are of economic nature) in a systematic manner and also an art of analysing and interpreting the same i.e., the business transactions.. Lesson End Activity. No t. Collect more information on accounting and present it in the form of a chart.. Keywords. S,. Accounting: It is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of information.. UP E. Cost Accounting: As the name suggests, this type of accounting is mainly related with the ascertainment of the cost of a product. External Users: All persons other than internal users such as Investors, creditors, Government.. (c). Financial Accounting: It is mainly concerned with the ascertainment of profit or loss made during a particular period and also presents the financial position of the business.. ___________________ ___________________ ___________________ ___________________ ___________________.

(18) le. Accounting in Logistics and Supply Chain Sector. on /Sa. Internal Users: These are the persons who manage the business, i.e., management at all the levels–top, middle and lower level.. Notes ___________________. Management Accounting: This type of accounting is a tool in the hands of management for various functions; (i) to control costs (ii) to take important future decisions (forecasting).. ___________________ ___________________ ___________________. Questions for Discussion. ___________________. 1.. Describe the characteristics of accounting.. ___________________. 2.. Explain the stages of accounting.. ___________________. 3.. Discuss the objectives of accounting.. ___________________. 4.. What do you understand by accounting information?. 5.. Explain the characteristics of accounting information.. 6.. Describe the functions of accounting.. du. pro. ___________________. cti. ___________________. Books. Re. Further Readings. for. Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., Homewood, Illinois, Richard D. Irwin, 1995. Bhattacharya S. K. and Dearden J. Accounting for Management– Text and Cases, New Delhi, Vikas, 1996.. No t. Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.. (c). UP E. S,. Hingorani, N.L. and Ramanathan, A. R., Management Accounting, 5th ed. New Delhi, Sultan Chand, 1992. Jawahar Lal, Cost Accounting, Vikas Publishing House, New Delhi. Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, New Delhi. K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi. R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi. M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi..

(19) Web Readings Notes. on /Sa. www.accountingcoach.com/online-accounting-course/60Xpg01.html. le. UNIT 1: Fundamentals of Accounting. ___________________. www.accsoft.ch/download/accountingconcepts.pdf www.investopedia.com/university/accounting/. ___________________. www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf. ___________________ ___________________. cti. ___________________ ___________________. (c). UP E. S,. No t. for. Re. pro. du. ___________________ ___________________ ___________________ ___________________.

(20) le. Accounting in Logistics and Supply Chain Sector. on /Sa. Notes ___________________ ___________________ ___________________ ___________________. cti. ___________________ ___________________ ___________________. du. ___________________ ___________________. (c). UP E. S,. No t. for. Re. pro. ___________________.

(21) on /Sa. Notes Activity. le. UNIT 2: Generally Accepted Accounting Principles (GAAP). ___________________ Write an article on the classification of accounting ___________________ principles.. Generally Accepted Accounting Principles (GAAP). ___________________ ___________________. Objectives After completion of this unit, the students will be aware of the following topics: Classification of Accounting Principles. . Basic Assumptions. . Basic Accounting Principles. pro. Introduction. UP E. S,. No t. for. Re. Accounting is a medium of recording the transactions made in the business that is why; accounting is termed as the language of the business. All the persons interested in the business, such as the owners/shareholders, the creditors, the government and the others, get the necessary business information through accounting because it is properly recorded, analyzed and summarized to the extent that it can be understood by all. This is possible when all the financial statements are prepared in accordance with generally accepted accounting principles. If such uniform principles are not adhered /followed, there would be a lot of difficulties and confusion which makes comparison impossible, unreliable or dependence is also reduced because, its acceptability is unsuitable for different business houses, etc. The accountants, therefore, have suggested the common concepts and conventions of accounting in order to overcome the above mentioned difficulties and problems enumerated earlier. Such accounting concepts and conventions are known as basic accounting concepts and conventions as they have been commonly accepted by the professional accounting world for preparing financial statements and reports for external use based on experience and practice.. Classification of Accounting Principles All the accounting concepts and conventions are broadly classified into three broad categories, such as:. (c). ___________________ ___________________. du. . cti. ___________________. ___________________ ___________________ ___________________.

(22) 1.. Basic assumptions are like pillars on which the structure of accounting is based. 2.. Basic Principles and. 3.. Modifying Principles.. on /Sa. Notes. le. Accounting in Logistics and Supply Chain Sector. ___________________ ___________________ ___________________. In this unit, we will study the basic assumptions and the basic principles. We will study the modifying principles in the next unit.. ___________________. ___________________. Basic Assumptions. ___________________. cti. ___________________. ___________________. Assumptions provide a base for accounting process without which no enterprise can prepare its financial statements. The following are the basic assumptions:. ___________________. (a) Accounting entity/Business entity. pro. du. ___________________. (b) Monetary unit/Money measurement concept (c) Going concern. Re. (d) Periodicity.. Accounting Entity. (c). UP E. S,. No t. for. It is also termed as Economic entity assumption which means that economic unit/event can be known with a specific unit. For this purpose business is considered as a distinct and separate entity than its owners. Recording of every transaction is done whether it is related to the owner/s or not. The business controls each and every activity this is possible because of its separate entity hence, it is also accountable. For example, when a business is started by the owners, then cash/goods come in the business which results in an increase in the capital of business and on the other hand, it reduces private capital of the owners. Nowadays the concept of business entity is becoming more and more popular because of further division of accounting in different departments, so that the responsibility of each department can be ascertained easily. This is done in responsibility accounting. According to this accounting entity, a distinction should be made between (1) Private/personal and (2) those of another business entity. If it is not done, results would not be accurate. It would be rather confusing, uncertain, ambiguous, though it is one of the most useful assumptions. Business and the owner/s whether sole proprietor or partner/s are one in the eyes of law, but.

(23) Monetary Unit/Money Measurement Concept. Notes. on /Sa. they are considered as separate entities from practical accounting point of view. But in case of companies, the law recognizes legal and separate entity from its owners, i.e., the shareholders.. le. UNIT 2: Generally Accepted Accounting Principles (GAAP). ___________________ ___________________ ___________________ ___________________ ___________________. No t. for. Re. pro. du. cti. Only such transactions are recorded in accounting that are of monetary value or that can be measured in terms of money. The transactions/events which cannot be measured in terms of money are not at all recorded in accounting. For example, if there is dispute between a manager and a worker which affects/does not affect the business, it cannot be recorded unless and until it is measured in terms of money. Likewise the health of the proprietor, sale policy of the business, entrance of other competitors in the business are such events which cannot be recorded in accounting howsoever important it may be, because these cannot be measured in terms of money. This is a peculiar feature of the Money measurement concept but this can also be termed as limitation of this concept which has attracted the attention of all the accountants in the world. All the transactions which are recorded if measured in money, at a present level, any increase/decrease after recording is left out. To make accounting records relevant, simple, understandable and of the same class or groups, they are brought to a common unit of measurement i.e., Money. It makes possible the preparation of financial statements. Had there been no monetary unit assumption, it would have been difficult to record business transactions; hence monetary unit concept is introduced. Though it is assumed that the monetary unit is a stable unit in value but in practice, this assumption is not correct as the money value changes over a period of time.. S,. Limitations of Money Measurement. UP E. There are certain limitations of this concept because of which the scope of accounting is limited the limitations are as follows:. (c). (i) Records only such events/transactions which can be expressed in terms of money but as we know that there are certain events which affect the business but cannot be measured such as wealth of the proprietor etc. such events are responsible for the success of the business but unable to record in the books of accounts, the direct result is that whatever information is gathered not correct and fair view of the either operational or position of the business is not there.. ___________________ ___________________ ___________________ ___________________ ___________________.

(24) le. Accounting in Logistics and Supply Chain Sector. ___________________. on /Sa. (ii) There is no consideration for purchasing power of money which is fluctuating. Again the result is that it is not a true and fair view of the business.. Notes. ___________________. Going Concern Concept. ___________________. It is assumed that every business would continue for a long period or have an indefinite life unless it is likely to be sold or wound up in the near future. This is also known as the concept of continuity. Keeping this in view, recording of transactions in accounting and division of expenses is done. In other words, it is seen whether benefit from expenses is immediate or long-term. If it is immediate, then it is to be treated as revenue or if it is long-term, it is to be treated as capital, depending upon the nature of expenses. This concept of going concern is considered better as compared to short-term or temporary business. In other words, a businessman charges depreciation on the historical (probable) costs as well as expected life and not on the market value. This is also a sound and fundamental basic principle of financial statement. This concept helps the investors in providing necessary capital to the business because of the assurance regarding the continuation of the business for a long time. If this type of commitment is absent, then it would be very difficult to procure funds for the business.. ___________________. cti. ___________________ ___________________ ___________________. du. ___________________ ___________________. for. Re. pro. ___________________. Accounting Period Concept. (c). UP E. S,. No t. This is also known as time period assumption, and the economic life is divided into different periods for preparing financial statements. As per going concern concept the financial statements must be prepared only when either it is sold or liquidated. But practically it is very difficult to wait for such a long period, hence it is agreed that economic life of a business must be reported over a reasonable time period which is normally taken as one year, either calendar year, financial year and or other year such as Deepawali, Dussehra or Samvat year, etc. Though, sometimes, it may be less than 12 months also i.e. monthly, quarterly or half yearly, etc.; but such periods are termed as interim periods and reports for such periods are called interim reports. Such reports are generally less reliable than annual reports. So it is very much desired to have relevant information, so that quick decisions can be taken. Thus, we see that the idea of accounting period is quite helpful and useful to all classes of users – management, creditors, investors and others..

(25) Check Your Progress. Notes Activity. ................... means that economic unit/event can be known with a specific unit.. 2.. ................... is also known as time period assumption, and the economic life is divided into different periods for preparing financial statements.. ___________________ Make a report on the basic accounting principles. ___________________ ___________________ ___________________ ___________________. cti. 1.. on /Sa. Fill in the blanks:. le. UNIT 2: Generally Accepted Accounting Principles (GAAP). ___________________. Basic Accounting Principles. du. ___________________. 2.. Revenue/Realization principle. 3.. Matching principle. 4.. Full disclosure principle. 5.. Dual aspect principle and. 6.. Objectivity principle.. Re. Cost principle. for. 1.. pro. The Accountants have agreed on some principles which tell how the transactions should be recorded and reported in the books of the business. Important basic accounting principles are as given below:. The above principles can be explained in detail one by one. The Cost Principle: Every transaction should be recorded at its actual (historical) cost or cost of its acquisition and not its market price. For example, if a Machine is purchased for 1 lac and its market price is 2.50 lacs, then recording of this transaction is done at 1 lac being its actual cost/or cost of its acquisition. Sometimes market price may be less than even then recording would be at its actual cost because of the cost principle, which is the basis of charging depreciation in future. If there is any residual value of asset and the asset is sold, then such amount is deductible from such value. If the asset is having no residual value, such assets are not shown in the Balance sheet though the existence of assets is very important to the business. Thus, we see that the Balance sheets which are based on cost concept/principle give us very wrong/ incorrect results for those investors who are interested to know the real values of the assets. This principle of cost is applicable. (c). UP E. S,. No t. 1.. ___________________ ___________________ ___________________.

(26) le. Accounting in Logistics and Supply Chain Sector. in case of fixed assets as well as the current assets. In the words of Hendriksen, “Expenses are using or consuming goods and services in the process of obtaining revenues.” Thus, it is the amount that is spent with a view to produce or procures goods or services to obtain revenue from the sale of such goods or services. In spite of so many criticisms of this, the cost principle is definite and reliable. So, it has an edge over other principles. It also provides an objective and comparable data in the financial statements.. ___________________ ___________________ ___________________ ___________________ ___________________ ___________________. 2.. ___________________. Revenue Principle (Realization Principle): Only such transactions are recorded in accounting which have actually taken place not the ones which would take place in future. This is based on revenue realization principle. For example, if goods are sold or purchased by a trader, transaction is recorded but if there is a contract or an agreement has taken place, it would not be recorded unless and until the contract is executed/complete/obligations/duties are performed as per contract. However, there are certain exceptions to the sales basis for revenue realization. In case of construction projects, revenue is generally realized before the contract is complete. Similarly in other cases, such as in case of sale by Instalment method revenue is realized later though sale has taken place earlier. Revenue is realized when cash is received. Sometimes there may be defaults in payment of some instalments. Apart from these exceptions, revenue is generally realized at the time of sale when actually the title of ownership passes from the seller to the buyer. This assumption is especially important because it recognizes the assets, liabilities, incomes and expenses as and when the transactions relating to these take place. We can find out from the books of account how much is due to creditors (liabilities) and how much the firm owns (assets). Apart from this, one can also know about the profit earned or loss suffered.. du. ___________________. cti. on /Sa. Notes. ___________________. (c). UP E. S,. No t. for. Re. pro. ___________________. 3.. Matching Principle: As we all know that the business is a going concern, so it is even more necessary to know its operational results for a particular/fixed period. This period may be of six months or one year. Profit or loss during this period indicates the financial operational results of the business, so it is necessary to put all financial records of the expenses, revenues or incomes relating to a particular period, so that matching between revenues and expenses can be.

(27) facilitated. This matching is termed as matching principle of accounting. The equation can be written as:. on /Sa. Notes. le. UNIT 2: Generally Accepted Accounting Principles (GAAP). ___________________. Profit = Revenues – Expenses. ___________________ ___________________ ___________________ ___________________. pro. du. cti. This principle of Matching is very much important for ascertainment of correct amount of profit (income) which is a measurement of performance. All expenses which can generate revenues in the current accounting period are taken as expenses. The matching of expenses with revenue is based on accrual system of accounting. In accrual system, revenue is recognized when sale is complete or services are rendered rather than when cash is received. Similar rule is applicable in the case of expenses, i.e., expenses are recognized, when assets and services are put to generate revenues and not when cash is paid. The matching principle makes the following points clear:. Re. (a) When an item of expense is spent against revenue it will be entered in the following period, result would be to show it in the Balance sheet and in the following period, to be treated as an expense.. for. (b) When an item of revenue is recorded in the Profit & Loss account, all the expenses incurred whether paid for cash on not should be recorded as the expenses.. Full Disclosure Principle: The objective of accounting is to provide true and accurate information. This may be because of law or social customs. All facts of assets must be disclosed along with their valuations. Principle of disclosure means to supply all information relating to economic activity of the business completely to the owners, creditors and Investors which can protect their interests. Disclosure does not mean. (c). 4.. UP E. S,. No t. (c) If any amount of revenue is received but either goods are to be supplied in future or services are rendered in future, the amount is not recognized as revenue in the current year, the result is to be shown as liability in the balance sheet but if any loss is there for which no revenue is earned it is to be charged from the current Profit & Loss account, for example in fire insurance premium. If goods are lost, whatever is recovered from insurance company is deducted from the cost of goods lost and the balance of loss is charged from Profit & Loss account.. ___________________ ___________________ ___________________ ___________________ ___________________.

(28) le. Accounting in Logistics and Supply Chain Sector. only that information which is required up to the stage when the Balance Sheet is prepared but after the preparation of Balance Sheet also. For example, bad debts, destruction of any machinery/building because of natural calamity, loan taken within a week or so, after the Balance Sheet is prepared, method of providing depreciation and Valuation of stock. All such events affect the investor’s decisions. So such events must be given compulsorily. The purpose of this principle is to convey all material and relevant facts relating to the operational result and the financial positions to the parties using the financial statements.. on /Sa. Notes ___________________ ___________________ ___________________ ___________________. cti. ___________________ ___________________ ___________________. du. ___________________ ___________________ ___________________. Dual Aspect Principle: Every transaction of a business is recorded at two places. That is why it is termed as Double entry system of accounting. Every debit has a credit. For example, when a business is started by a proprietor for cash, then whatever comes in the business is debited and whosever gives loan as giver is credited. Thus the following entry in the Journal is passed:. for. Re. 5.. pro. Financial Statement must be duly supported by footnotes. A good accounting principle requires that all significant and important information must be disclosed, apart from legal requirements.. Cash a/c. Dr.. Or. No t. Goods a/c. Dr.. To Proprietor's a/c. Or. To Capital a/c. (c). UP E. S,. Cash or Goods brought in as capital by the proprietor or partners.. As we know that only such events are recorded in financial accounting which are related to economic activities or can be expressed in money. These events may be either purchase or sale of goods on cash or on credit, receipts or payments, etc. Every transaction is recorded at two places that are why double entry system is in vogue. In America, this system is used in the form of equation. In the above example the owners can bring cash or goods or both as capital. The Following would be the equations: Capital = Cash/Stock/Cash + Stock.

(29) If any loan is taken then. on /Sa. Notes. Capital + Loan = Cash + Stock. ___________________. OR. ___________________. Total Liabilities = Total Assets. ___________________ ___________________. OR. In other words, we can say that. ___________________. cti. Internal + External Liabilities = Fixed Assets + Current Assets. du. pro. Thus, we see that the Principle of Dual aspect would provide us all the rules required for recording all the transactions of a business.. for. Re. Principle of Objectivity: All transactions which are recorded must be duly supported, by documents as far as possible. Then only the auditor would be able to verify the accounts: if it is not, transactions must have substantial evidence which is free from personal bias and is based on rational approach. As we know that the cash is definite and verifiable while value is not. The principles of Objectivity require that accounting data should be verifiable and free from bias.. No t. Check Your Progress Fill in the blanks:. ................... principle of Matching is very much important for ascertainment of correct amount of profit (income) which is a measurement of performance.. 2.. ................... is based on revenue realization principle.. 3.. Principle of ................... means to supply all information relating to economic activity of the business completely to the owners, creditors and Investors which can protect their interests.. UP E. S,. 1.. Summary. (c). ___________________ ___________________. Equity or owner’s equity = All Assets – Loans or liabilities of outsiders. 6.. le. UNIT 2: Generally Accepted Accounting Principles (GAAP). All the persons interested in the business, such as the owners/shareholders, the creditors, the government and the others,. ___________________ ___________________ ___________________.

(30) le. Accounting in Logistics and Supply Chain Sector. get the necessary business information through accounting because it is properly recorded, analysed and summarized to the extent that it can be understood by all. This is possible when all the financial statements are prepared in accordance with generally accepted accounting principles. If such uniform principles are not adhered /followed, there would be a lot of difficulties and confusion which makes comparison impossible, unreliable or dependence is also reduced because, its acceptability is unsuitable for different business houses, etc.. ___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________. cti. on /Sa. Notes. Lesson End Activity. du. ___________________. Gather information about the GAAP. Present the information collected in the form of a collage.. ___________________. pro. ___________________. Keywords. Re. Accounting Entity: It is also termed as Economic entity assumption which means that economic unit/event can be known with a specific unit.. for. Accounting Period Concept: This is also known as time period assumption, and the economic life is divided into different periods for preparing financial statements.. No t. Going Concern Concept: It is assumed that every business would continue for a long period or have an indefinite life unless it is likely to be sold or wound up in the near future. This is also known as the concept of continuity.. (c). UP E. S,. Monetary Unit Concept: Only such transactions are recorded in accounting that are of monetary value or that can be measured in terms of money. The Cost Principle: Every transaction should be recorded at its actual (historical) cost or cost of its acquisition and not its market price.. Questions for Discussion 1.. Describe the classification of accounting principles.. 2.. Explain the basic assumptions of GAAP.. 3.. Discuss the basic accounting principles..

(31) Further Readings Books. on /Sa. Notes. le. UNIT 2: Generally Accepted Accounting Principles (GAAP). ___________________. Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., Homewood, Illinois, Richard D. Irwin, 1995. Bhattacharya S. K. and Dearden J. Accounting for Management– Text and Cases, New Delhi, Vikas, 1996.. ___________________ ___________________ ___________________. cti. Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.. ___________________. ___________________ ___________________. Jawahar Lal, Cost Accounting, Vikas Publishing House, New Delhi.. ___________________. pro. du. Hingorani, N.L. and Ramanathan, A. R., Management Accounting, 5th ed. New Delhi, Sultan Chand, 1992.. Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, New Delhi.. Re. K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi. R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi.. for. M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.. Web Readings. No t. www.accountingcoach.com/online-accounting-course/60Xpg01.html www.accsoft.ch/download/accountingconcepts.pdf www.investopedia.com/university/accounting/. (c). UP E. S,. www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf. ___________________. ___________________.

(32) le. Accounting in Logistics and Supply Chain Sector. on /Sa. Notes ___________________ ___________________ ___________________ ___________________. cti. ___________________ ___________________ ___________________. du. ___________________ ___________________. (c). UP E. S,. No t. for. Re. pro. ___________________.

(33) on /Sa. Notes Activity. le. UNIT 3: Accounting Principles and Standards. ___________________ Write an article on the modifying accounting ___________________ principles.. Accounting Principles and Standards. ___________________ ___________________. Objectives After completion of this unit, the students will be aware of the following topics:. cti. ___________________. . Accounting Standards in India. . Accounting Process. . Uses, Advantages or Role of Accounting. . Limitations of Accounting. pro. Modifying Accounting Principles. du. ___________________. . Re. Introduction. for. Basic accounting assumptions and principles provide different rules for preparing certain financial statements which can provide useful information to different interested persons.. No t. In the previous unit, we studied the basic assumptions and the basic accounting principles of accounting. In this unit, we will study the modifying accounting principles.. Modifying Accounting Principles. UP E. S,. The information is useful if it is relevant and reliable. Information is relevant if it can provide a basis for future forecasting and is free from bias and errors. In order to prepare correct financial statements, it is necessary, to modify certain assumptions and principles. Cost benefits relationship, materiality, consistency, conservatism. Timeliness and industry practice, etc., have to be taken into account for making the information more useful. The following are the important modifying principles; Consistency: One thing must be kept in view, while recording in the books of account i.e., whatever principle or method is adopted in a year, must be adopted for the subsequent years then only comparison of results is possible. For example, if stock is valued using LIFO (Last In First Out) or FIFO (First. (c). 1.. ___________________. ___________________ ___________________ ___________________.

(34) le. Accounting in Logistics and Supply Chain Sector. In First Out) or any other method, the same method must be followed in subsequent years likewise is in case of depreciation and if there is any change in the method of charging depreciation it must be reported. Because of this, convention of consistency occupies an important place in the field of accounting. Consistent use of accounting principle and conventions is necessary in achieving comparability. Though the principle of consistency requires that a particular method used, generally should not be changed unless otherwise required and the user is informed accordingly. The Generally Accepted Accounting Principles (GAAP) allow more than one method of explaining similar operational results but in such situations, financial statements are not comparable. This is why the principle of consistency requires that the basis should remain consistent with the previous accounting year. One can conclude from the above that the principle of consistency does not allow a firm to change its method under any situation. It allows the firm to change its method if it is more useful or can supply better information or results. This change must be reported/disclosed in the financial statements by way of a foot note with a view to inform the users about the lack of consistency.. on /Sa. Notes ___________________ ___________________ ___________________ ___________________. cti. ___________________ ___________________ ___________________. du. ___________________ ___________________. Conservatism [Prudence]: All financial statements are prepared and presented as per law or conservatism and not for a specific purpose. That is why it is termed as convention of conservatism. This is a good and the safest policy. Accordingly all possible losses are taken into account and all (probable) (unrealized) profits/gains are left out. Likewise stock can be valued either at cost or market price whichever is lower. Similarly, provision for doubtful debts or provision for depreciation can also be arranged as per the conservatism. It can be a useful tool in such situations but if it is not used properly, it may lead to unpleasant and unforeseen results. For example, if a machine is purchased and the cost of machine is charged as an expense, then profit as well as assets would be underestimated.. (c). UP E. S,. No t. 2.. for. Re. pro. ___________________. Nowadays conservatism has been replaced by prudence which means the principle of conservatism is applied by the accountants only in case of doubts or uncertainties with prudence. The theme of the principle of conservatism is under-.

(35) on /Sa. Notes. ___________________ ___________________ ___________________ ___________________ ___________________. Cost Benefit Principle: This principle says that the cost of applying an accounting principle should not exceed its benefit. It does not mean that to save cost, no information or very little information should be given to the users. Certain minimum levels of relevance and reliability must be reached for information to be useful.. UP E. S,. 4.. No t. for. Re. pro. du. cti. 3.. statement of profit or assets rather than over-statement of profit or assets. Principle of Materiality: The American Accounting Association defines the term materiality as, “an item should be regarded as material if there is reason to believe that knowledge of it would influence the decision of informed investor”. In other words, materiality means only that information should be used which influences the decision of the investors, creditors, shareholders, etc. Though there may be so much financial information, but only relevant must be taken into account. This is very subjective. Likewise the problem may be in case of allocation of costs/other expenses. Moreover information material for one concern may not be material for others so, an alert is required and care has to be exercised while selecting or rejecting information. As per principle of disclosure, all relevant and necessary information (facts) must be disclosed whereas the Principle of Materiality is an exception or modifying principle. It is because of this, that the events or items not relevant or having an insignificant effect, need not be given. The concept of Materiality is relative. It is different for different enterprises. For example, the cost of a component is very significant to a small company whereas it is insignificant for a big company. Similarly nature of transaction also affects the decision of the user of information. Thus, it is clear from the above that the principle of materiality is very much useful in the day-to-day working of an organization.. le. UNIT 3: Accounting Principles and Standards. For example, it is required under the Companies Act, 1956 that information regarding managerial remuneration satisfying the overall ceiling of 11% of Net Profits should be given. This increases the cost of providing information. Timeliness: Information given must be relevant and reliable. In order to be relevant the information must also be timely. If information is not available or is provided after a long gap, it is. (c). 5.. ___________________ ___________________ ___________________ ___________________ ___________________.

(36) le. Accounting in Logistics and Supply Chain Sector. accounting standards of India. ___________________ ___________________. on /Sa. of no use. It is therefore desired that information must be available for decision-making before it becomes redundant. Old and late information hampers the ability of users on application of different accounting principles.. Notes Activity ___________________ Present a report on the. 6.. Substance over form: Means accounting treatment and its presentation in financial statement should be as per substance of the Transaction and not by its legal form alone. For example, in case of a lease the lessor is funding the transactions, hence he recognized the assets so financed as his assets whereas the lessee recognized lease payments as hire charges paid. In the First case, it is the legal form whereas in the second case, it is the substance of the transaction.. 7.. Variations in Accounting Practices: It means different accounting practices, which are equally acceptable. As such there is no single accounting practice which is applicable in all cases. For example valuation of inventories, method of charging depreciation, treatment of contingent liabilities etc. In the above such cases, the Management is required to use considerable judgment to select an appropriate/just practice.. 8.. Industry Practice: Sometimes different industries use different accounting principles and approaches to produce realistic financial reporting. For example, it is a practice to show investment at cost or market price whichever is lower. Similarly, agricultural produce is shown at market price because of certain practical difficulties. Thus, it is very much clear from the above that Industry practice also plays a very important role while applying certain accounting principles.. ___________________. ___________________ ___________________ ___________________ ___________________. No t. for. Re. pro. ___________________. du. cti. ___________________. Check Your Progress. (c). UP E. S,. Fill in the blanks:. 1.. ................... is defined as an item should be regarded as material if there is reason to believe that knowledge of it would influence the decision of informed investor. 2.. ................... principle says that the cost of applying an accounting principle should not exceed its benefit.. Accounting Standards in India India’s accounting standards are explained in the following subsections:.

(37) Meaning of Accounting Standards. on /Sa. Notes. ___________________ ___________________ ___________________ ___________________ ___________________. du. cti. It is a set of certain generally accepted rules, principles, concepts and conventions issued by the Institute of Chartered Accountants of India in consultation with other International Accounting Bodies. The purpose of making uniform rules and principles is to make the preparation and presentation of financial statement easy, relevant, reliable, understandable and finally comparable. In other words, Accounting standards are the basis of accounting policies and practices to facilitate the recording of transactions and events in such a way which can change them into financial statements, to be used by the persons interested in getting the correct and reliable information with a view to take future decisions.. le. UNIT 3: Accounting Principles and Standards. pro. Need for Accounting Standards. No t. for. Re. Different business enterprises were having different modes of recording the transactions and events and lack of uniform set of rules created a lot of problems, such as comparison was not truly possible but difficult also this was because of the nature of business, diversified and complex economic situations. This also made accounting information incomparable and less meaningful. Therefore a need was felt to have certain minimum standards which can are universally applicable, so that the financial statements thus made, can be more reliable, comparable, relevant and understandable. Keeping this in view, International Accounting Standard Committee (IASC) was set up in 1973. The objectives of this Committee were:. S,. (i) To formulate and publish in the public interest, accounting standards to be observed in the presentation of financial statements and also its world-wide acceptance, and. UP E. (ii) To work for improvement and harmonization of regulation of accounting standards and procedure relating to the presentation of financial transactions.. Nature. (c). The Institute of Chartered Accountants of India had set up Accounting Standards Board on 22nd April, 1977 to formulate accounting standards on a number of accounting issues, taking into account the accounting standards developed by the International Accounting Standard Committee, prevailing laws in. ___________________ ___________________ ___________________ ___________________ ___________________.

(38) le. Accounting in Logistics and Supply Chain Sector. ___________________ ___________________ ___________________ ___________________. on /Sa. India, business customs usages and conventions, etc. The Accounting Standards made were not mandatory in the beginning but after the amendment in the Sec 211(3C) of Companies Act, 1956 Accounting Standards out of 28 have been made mandatory. The Auditor is required to give in his report to the shareholders that accounts are prepared (drawn) in accordance with the provisions relating to Accounting Standards in India.. Notes. ___________________. Accounting Process. ___________________. The basic accounting process is shown in the Figure 3.1.. ___________________. The first thing that the accounting system takes on is the financial transactions. A transaction is defined as an external event or internal event which gives rise to a change affecting the operations or finances of an organisation. Now there should be evidence that a transaction has taken place. This evidence comes from the documents that are used to support a transaction, like invoices, receipts, cheques, bank statements, etc. For recording a transaction, it must be analysed to determine its effects on the two (or more) accounts and the reason why it affects those accounts. As the original document cannot be used to write these details, a standard document known as a voucher is used to accompany the original document.. du. cti. ___________________. ___________________. (c). UP E. S,. No t. for. Re. pro. ___________________. Figure 3.1: Basic Accounting Process.

(39) ___________________ ___________________ ___________________ ___________________ ___________________. cti. Once the vouchers are made for the day, they are entered into an intermediate book known as Journal. Vouchers are normally recorded in the order in which they occur. Journal entries contain all relevant information pertaining to a transaction.. Notes. on /Sa. Voucher is therefore the basic document of an accounting transaction. Every voucher mentions the two (or more) accounts that are being affected, the amount with which each account is affected and the reason for the transaction (known as narration). Each voucher is numbered and dated, so as to make referencing easier.. le. UNIT 3: Accounting Principles and Standards. No t. for. Re. pro. du. This data from the journal has to be rearranged to assist in analysis. For this the data is transferred to Accounts in the General Ledger (the process is known as posting). In accounting the term account is used to denote any item for which the transactions affect the amount of that item. A general ledger is a group of accounts, both permanent and temporary. In a manual system a loosely bound book with the title general ledger could be used where at least one side of a page is maintained for every account. More pages are added as required if the number of transactions in that particular account is high. In computers, the records are kept in the databases and there is no limitation either on the number of accounts or on the number of entries (accept the limitation of storage space on the computer). Hence is it much easier for the bigger companies to keep a computerised track of their accounts than keeping a manual system. There are five basic types of accounts: assets, liabilities, owner’s equity, revenue and expenses.. (c). UP E. S,. Accounts can be represented as T-accounts, a sample of which is shown in figure below:. Figure 3.2: T-account Example. ___________________ ___________________ ___________________ ___________________ ___________________.

(40) ___________________. A T-account is balanced only periodically (note that the rupee sign is not shown in the T-account, as it is the normal book keeping procedure). In the T-account in Figure 3.2 above, the left-hand side is called the debit side and the right-hand side is called the credit side. Therefore, to debit means to make an entry on the left-hand side of the account and to credit means to make an entry in the right-hand side of an account.. on /Sa. Notes Activity ___________________ Construct a summarized report on the uses, ___________________ advantages, or role of accounting. ___________________. le. Accounting in Logistics and Supply Chain Sector. ___________________. Fill in the blanks: 1.. ................... is a set of certain generally accepted rules, principles, concepts and conventions issued by the Institute of Chartered Accountants of India in consultation with other International Accounting Bodies.. 2.. ................... is defined as an external event or internal event which gives rise to a change affecting the operations or finances of an organisation.. ___________________. Re. ___________________. du. ___________________. pro. ___________________. cti. Check Your Progress. ___________________. Uses, Advantages or Role of Accounting Useful in depicting financial results: Accounting is very useful in depicting the financial results, i.e., profit or loss of the business. If information relating to profit or loss of a business is available, necessary decisions/future planning can take place either correcting the situation or improving the performance.. No t. 1.. for. The important uses/advantages of accounting are as given below:. Useful in showing financial positions of the business: The main function/objective of accounting is to show the financial position of the business, so that necessary steps can be taken for arranging additional funds, if any required. This also helps in depicting solvency of the business.. 3.. Replacement of memory: It is very difficult to remember all the events for a business man. That is why such events if are of financial/monetary nature are recorded, which is one of the foremost objectives of accounting. This recording is a replacement of memory. One is not required to remember, but is required to contact the accountant for necessary information regarding any of the transactions.. (c). UP E. S,. 2..

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