Chapter 3: THEORY BASE OF ACCOUNTING, ACCOUNTING STANDARDS, IFRS AND GST

April 22, 2020

CHAPTER 3

THEORY BASE OF ACCOUNTING , ACCOUNTING STANDARD, IFRS AND GST

Learning objectives:

*Introduction

*Meaning and Nature of Accounting

Principles

*Generally Accepted Accounting Principles(GAAP)

*Fundamental Accounting Assumptions

*Accounting Principles

*Accounting Standards *International Financial Reporting Standards(IFRS)

*Goods and Services Tax (GST)

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INTRODUCTION

Introduction

As discussed before, accounting is concerned with identifying, recording, classifying and summarising of financial transactions and interpreting and communicating the results thereof. So, accounting aims at providing information about the financial performance of a firm to its various users such as owners, management, investors, creditors, and help them in taking important decisions.

• For making the accounting information meaningful to its users, it is very important that such information is reliable, relevant, comparable and understandable.

• This becomes possible only when information provided in by the financial statements is based on consistent Accounting policies, principles and practices.

• Such consistency is required throughout the process of accounting, which requires developing a proper Theory Base of Accounting.

• The Theory Base of Accounting consists of Fundamental Accounting Assumptions, Principles, Concepts and Guidelines, which have been developed over a period of time to bring uniformity and consistency to the process of accounting.

• Apart from these, The Institute of Chartered Accountants of India, (ICAI), which is the regulatory body for standardization of accounting policies in the country, has also issued 'Accounting Standards'.

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MEANING & NATURE OF ACCOUNTING PRINCIPLES

MEANING AND NATURE OF ACCOUNTING PRINCIPLES

The Accounting Principles have evolved over a long period of time on the basis of past experiences, usages or customs by individuals and professional bodies and regulations by government agencies and have general acceptability among most accounting professionals.

• Accounting Principles are man made.

• Accounting principles are not rigid. Accounting Principles act as a guide for accounting and are generally accepted.

These principles are classified into two categories:

1. Accounting Concepts: Accounting Concepts are necessary assumptions and ideas, which are fundamental to accounting practice.

2. Accounting Conventions: Accounting conventions are the customs or traditions guiding the preparation of accounts. They are adopted to make financial statements clear and meaningful.

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GAAP, FUNDAMENTALS OF ACCOUNTING ASSUMPTIONS : GOING CONCERN ASSUMPTION

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Are the principles, which serve as the rules for accounting for financial transactions and preparing financial statements.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS

The 3 Basic Accounting Assumptions are:

1. GOING CONCERN ASSUMPTION:

According to this assumption, it is assumed that business shall continue for an indefinite period of time and there is neither any intention nor any necessity to close down the business or scale down its operation significantly.

• Business transactions are recorded from this point of you.

• On the basis of this assumption, fixed assets are recorded at their cost and depreciation is charged on the basis of their expected lives rather than their market values.

• Going concern concept facilitates the distinction between Current and Non-current assets, Long term and Short term liabilities and Capital and Revenue Expenditure.

• It is also because of this assumption that outside parties enter into long term contracts with the enterprise, give loans and purchase debentures and share of the enterprise.

• This assumption is also known as 'Continuity Assumptions'.

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FUNDAMENTAL ACCOUNTING ASSUMPTIONS: CONSISTENCY ASSUMPTION, ACCRUAL ASSUMPTION

2. CONSISTENCY ASSUMPTION:

According to this assumption, accounting practices one selected and adopted, should be applied consistently year after year.

• This concept provides intra firm comparison and inter firm comparison.

• Consistency eliminates personal bias and helps in achieving results that are comparable.

• This concept becomes particularly more important when two or more methods or alternative accounting practices are available and each one is equally acceptable.

• But the concept does not mean that method or a practice once adopted cannot be changed.

• The method of practice may be changed if the law of accounting standards requires it or if the change will result in more meaningful presentation.

3. ACCRUAL ASSUMPTION:

According to the accrual assumption, revenue and expenses are recorded in the period in which they become due, rather than they are received or paid.

• According to this assumption, a transaction is recorded in the books when it is entered into and not when the settlement takes place. It means:

+ Revenue is recorded when sales are made or services are rendered, irrespective of the fact whether cash is received or not.

For example, if a firm has sold goods on 27 June, 2018 on two months credit, then the sale must be recorded on 27th June 2018, although the amount will be received in August.

+ Similarly, expenses are recorded in the period in which they have become due rather than in the period in which they are paid.

• This concept recognises the assets, liabilities, income and expenses as and when transactions relating to it are entered into.

• To arrive at the correct profit or loss during an accounting period, all expenses and incomes be recorded on accrual basis and not on cash basis.

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CONCLUDING NOTES