CHAPTER 3: THEORY BASE OF ACCOUNTING ( ACCOUNTING PRINCIPLES, ACCOUNTING STANDARDS, IFRS, GST)

CHAPTER 3 

THEORY BASE OF ACCOUNTING,ACCOUNTING STANDARDS, IFRS AND GST

LEARNING OUTCOMES:

INTRODUCTION
ACCOUNTING PRINCIPLES
ACCOUNTING STANDARDS
INTERNATIONAL FINANCIAL REPORTING STANDARDS(IFRS)
GOODS AND SERVICES TAX (GST)

INTRODUCTION  (CLICK FOR  THE AUDIO)

8. FULL DISCLOSURE PRINCIPLE : (HEAR ABOUT THE PRINCIPLE)

According to this principle, the financial statement should completely disclose all the significant information relating to the economic affairs of an enterprise. 

• The disclosure can be done either in the financial statements or in the footnotes like in case of contingent liabilities.

• Full Disclosure is not only a legal requirement, but it also makes the accounting system fair and transparent. 

• As per the Companies Act, every company is required to disclose essential information in the financial statements.

• Incomplete information hampers the basic purpose of financial statements. So, all the material and relevant facts should be disclosed in the financial statements.

• Full Disclosure ensures that financial statements presented true and fair view of the profitability and financial position of the business to its various users.



9. CONSERVATISM/ PRUDENCE PRINCIPLE : (HEAR THE AUDIO)


According to this principle, all prospective losses should be recorded in the books of accounts, but all anticipated profit should be ignored. 

• Due to this principle, provision is made for all known liabilities and losses, even though their amount cannot be determined with certainty. 

• For example, provision for doubtful debts is made in anticipation of actual bad debts. Similarly, closing stock is valued at lower of cost or net realizable value. 

• This principle aims to ensure that the financial statements present a true and fair view of the state of affairs of the business and does not exhibit a better picture then what actually is.

Drawbacks of Conservatism Principle

i. It may lead to creation of Secret Reserves: Creation of too much provisions, like creating excess provision for bad doubtful debts for charging excessive depreciation may lead to creation of secret reserves.

ii. It may lead to overstatement of liabilities: Conservatism provides for all the anticipated expenses and losses, but does not record anticipated revenues. So, it may result in over statement of liabilities. So, this principle should be carefully applied so that the results depicted by financial statements are not distorted.



10. MATERIALITY PRINCIPLE : (HEAR THE AUDIO)


According to this principle, all relatively relevant items, the knowledge of which might influence the decision of the users of the financial statements, should be disclosed in the financial statements. 

* As per this Materiality, only those items should be disclosed that have significant effect or are relevant to the user. So, this principle contradictory to the Full Disclosure principle. 

• An item which is significant for one enterprise maybe insignificant for another enterprise. For example tools costing 5000 is material for small car workshop but for a large enterprise, like Tata motors, it may be insignificant.

• So, whether an item is material or not will depend on its nature and/ or amount.



11. OBJECTIVITY PRINCIPLE : (KNOW ABOUT THE PRINCIPLE)

According to this concept, all transactions to be recorded in an objective manner and they should be free from personal bias. 

• It implies that all accounting transactions should be supported by documentary evidence or vouchers. 

• These supporting documents include cash memo, invoices, bills, etc.

• For example, cash purchase of goods should be supported by a Cash Memo and credit purchase by an invoice.


TASK

ACCOUNTING PRINCIPLES AND CONCEPTS (WATCH THE VIDEO FOR CLARITY)



ACCOUNTING STANDARDS (CLICK TO HEAR THE AUDIO)

Accounting Standards  are written policy documents issued by expert accounting body or by government or other regulatory body covering the aspect of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements.



INTERNATIONAL FINANCIAL REPORTING STANDARDS: IFRS (CLICK ON THE LINK)


INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS ) are considered a 'Principles - Based' set of standards . IFRS state how the particular type of transactions and other events should be reported in the Financial Statements.

ASSUMPTIONS ON IFRS:

The underlying assumptions in IFRS are

 Going Concern Assumption: According to this assumption, it is assumed that the business shall continue for an indefinite period of time. 

Accrual Assumption: According to this assumption, revenue and expenses are recorded in the period in which they become due.

Measuring Unit Assumption: The measuring unit is the current purchasing power, that is assets are shown at their current or fair value and not at the historical cost. Constant purchasing power assumption: According to this assumption, value of the capital should be adjusted to inflation in the economy at the end of the financial year. 



DIFFERENCE BETWEEN IFRS AND INDIAN GAAP OR ACCOUNTING STANDARDS:

1. IFRS are based on Principles, while Indian GAAP or Accounting STANDARDS are based on Rules. 

2. IFRS are based on Fair Value Concept, while Indian GAAP or Accounting Standards are based on Historical Cost Concept.



GOODS AND SERVICES TAX : GST  (CLICK THE LINK)

 Is a single tax on the supply of goods and services, right from the manufacturer to the consumer. This is a value added tax levied on manufacture, sale and consumption of goods and services.


TYPES OF TAXES UNDER GST: 


1.Central Goods and Services Tax (CGST): It is the GST levied on the 'Intra - State' supply of goods or services by the Centre.

2.State Goods and Services Tax (SGST) : It is the GST levied on the 'Inter-State' supply of goods or services by the State.

3. Integrated Goods and Services Tax (IGST): It is the GST levied on the 'Inter-State' supply of goods or services and is collected by the Centre. IGST is equivalent to the sum total of CGST and SGST.

IGST is designed to ensure smooth and continuous flow of input tax credit from one state to another. Every state has to deal only with the Central Government to settle the tax amount and not with each other state, does making the process easier.

IMPORTANT CONCLUDING NOTE (HEAR THE AUDIO)

IMPORTANT CONCLUDING NOTE:

THIS BRINGS US TO THE END OF THE THIRD CHAPTER TODAY. WE WILL START WITH THE SHORT AND  SIMPLE CHAPTER - 4 TOMORROW  (BASES OF ACCOUNTING)  AND HOLD A CLASS ASSESSMENT TEST ON THE FOLLOWING DAY. 

SYLLABUS:  CHAPTER 3(ACCOUNTING ASSUMPTIONS, ACCOUNTING PRINCIPLES ONLY) AND CHAPTER 4

(BASES OF ACCOUNTING: CASH AND ACCRUAL BASIS OF ACCOUNTING)