Principles of Accounting GAAP Notes BBA
Principles of Accounting GAAP Notes BBA :-
Q. 1. Briefly describe the accounting conventions in accounting principles.
Ans. Accounting Conventions: The term ‘conventions’ includes those customs or tradition which guide the accountant while preparing accounting statements. The important accounting conventions are given below :
Conservatism : Convention of conservatism is a policy of playing safe and it had its origin as a safeguard against possible losses in a world of uncertainty. It compels the businessman to wear a ‘risk-proof’ jacket for the working rule ‘ ‘anticipate no profit but provide for all possible lossess”, For example, suppose a closing stock is valued at cost price or market price whichever is lower. If the market price is higher than the cost, the higher amount is ignored in accounts and the closing stock will be valued at a cost which is lower than market price.
Full Disclosure : According to the convention of full disclosure, all the material information should be revealed, while preparing the final accounts. All information which is of material interest to proprietors, creditors, or investors should be disclosed ‘in accounting statement. Full disclosure involves proper classification, summarising and explanation of the numerous business transactions.
The disclosure convention is gaining momentum due to fact that business concerns are increasingly managed by the professional manager, who has the responsibility of making full disclosure to the person who have invested their money as capital in the company. The term ‘full disclosure’ does not mean providing any information required by anybody or revealing trade secrets and strategies.
Consistency : According to the convention of consistency, accounting should the same from one year to another. This is ‘because the evaluation of performance by the comparison of results of different accounting periods can be significant and useful only if consistent practices are followed in determining them. For example, there are various methods of depreciation and any method can be adopted by the firm.
Materiality : According to the convention of materiality, the accountant would attach only those
important material details and avoids those insignificant. Otherwise, accounting will be Over-burdened with minute details. An item which is material for one group may be immaterial for another. So it is the discretion of the accountant to consider which is material and which is immaterial for his business.
In practice, an item OR 1,000 may be material for a small firm, while for a large enterprise, even 10,000 may not be material. Pen sets and paper weights supplied to executives may ‘last for more than one years. Still the expenditure on such items may be recorded as expenses, instead of treating them as assets.
Q. 2. Write a short note on GAAP.
What have generally accepted accounting principles? Explain.
Ans : Generally Accepted Accounting Principles IGAAPI
Financial accounting follows a set of ground rules or accounting principles in presenting financial information. They are known as “Generally Accepted Accounting Principles (GAAPI) .” To be useful, financial accounting information should be collected, classified, summarised and reported objectively. Those who use such information and rely on such data have a right to be assured that the data are reliable and free from bias and inconsistencies whether deliberate or otherwise, for this reason, financial accounting depends on certain guidelines or standard that have proved useful over the years in accounting and reporting information.
According to the accounting principle time as to :
1. which economic resources and obligations should be recorded as assets and liabilities by financial accounting.
2. which changes in assets and liabilities should be recorded.
3. when these changes are to be recorded.
4. how the assets, the liabilities and the changes in them should be measured.
In India, organizations such as Accounting Standards Board IASBI, Institute of Chartered
Accountants of India [ICAI], Department of Company Affairs IDCAI, Government of India, Securities and Exchange Board of India ISEBII, Institute of Costs and Works Accountants of India [ ICWAI ],Institute of Company Secretaries of India [ ICSI ], stock exchanges and their literature are instrumental in the development of most accounting principles, In the US, Financial Accounting Standard Board IFASBI, American Institute of Certified Public Accountants (AICPAI, Securities and Exchange Commission ISECI, Internal Revenue Service ORSI and American Accounting Association IAAAI are instrumental in the formulation of accounting principles. Generally accepted accounting principles are primarily applicable to financial accounting. In management accounting, the main objective of using “Generally Accepted Accounting Principles IGAAPI is to help the management in making a decision and in operation effectively.
Therefore, in the area of management accounting, it is frequently useful to depart from accounting principles used in financial accounting, different accounting, principles may’ need to be used in accordance with income tax regulations for the determination of income (taxable income) which may differ income acceptable for financial accounting and business reporting purposes.
Q. 3. What is ‘accounting standard’? Discuss its benefits, functions and importance.
Ans. Accounting Standards : The term ‘accounting standards’ is defined as written statements issued from time to time by institution of the accounting profession in which there is its sufficient involvement and which are established expressly for this purpose, Such accounting institution or bodies are currently found in many countries of the world, e.g., Accounting Standards Board (India), Financial Accounting Standards Board IIJSI, Accounting Standards Committee (UK’ l, and so on. At the international level, International Accounting Standards Conunittee IIASCI, has been created “to formulate and publish, in the public interest, basic standards to be observed in the presentation of audited accounts and financial statements and to promote their worldwide acceptance and observance,” Accounting standards tangibly deal With financial measurements and disclosures used in producing a set of fairly presented financial statements. They also draw the boundaries within which acceptable conduct lies and in that they are similar in nature to laws.
Benefits of Accounting Standards
Accounting standards have involved curbing the abuse of flexibility in the adoption of accounting polices by business enterprises. These standards help accounting practitioners to apply those accounting practices regarded as the most suitable for the circumstances covered. Further, they help individual companies and their management to justify the adoption of certain practices when producing their financial statements,
1. To imporve the Credibility and Reliability of Financial Statements Financial statements of business enterprise are used by a diverse group of users for making a sound economic decision. The users are shareholders (existing and potential), trade creditors, customers, suppliers, employees, taxation authorities and other interested parties. It is necessary, therefore, that the financial statements, which the users use and rely upon, present a fair picture of the position and progress of enterprise. It is the function of accounting (and auditing) standards to create this general sense of confidence by providing a framework within which credible financial statement s can be produced. Accounting standards are required in order to meet the basic need of managers investors and creditors to compare results and financial conditions of different segment of firms, different periods of a firm. Different firms and different industries.
2. Benefits to Preparers and Auditors
Preparers and auditors, with the passage of time and changing the climate of opinion, have to work in an environment when they face the threat of stern sanctions and a bad name to their professions. There result partly from changed penalties and remedies available under the company law and partly the greater willingness of aggrieved parties to take their causes before the courts. The risk of these are considerable to auditors whether in terms of uncovered financial exposure to liability or adverse effects on professional reputation resulting from unfavourable publicity. Particularly dangerous are causes of undetected fraud and audited accounts, which are held to be ruisleading due to insufficient disclosure or use of inappropriate accounting principles.
3. Determining Managerial Accountability
Accounting standards facilitate in determining specific corporate accountability and regulation of the company. They help in assessing managerial skills in maintaining and improving the profitability of the company, depicting the progress of the company, its solvency and liquidity. These standards aim to ensure consistency and comparability in place of uniformity in financial reporting to permit better comparisons in profitability financial position, future prospects and other performance indicators associated with different business firms.
4. Functions of Accounting Standards Board
(a) The main function of ASB is to formulate accounting standards after considering the applicable laws, customs, usages and business environment so that such standards may be established by the council of institute in India.
(b) ICAI is one of the members of International Accounting Standard Committee (IASC) and has agreed to support the objective of it. While formulating the accounting standards, ASB will give due consideration to International Accounting Standards Committee issued by IASC and try to integrate them, to extent possible, in light of the conditions and practices prevailing in India,
(c) The accounting standards will be issued under the authority of the council of chartered Accountant of India. ASB has also been entrusted with the responsibility of propagating the accounting standards and persuading the concerned parties to adopt them in the preparation and presentation of financial statements.
Importance of Accounting Standards
1. They lay down uniform accounting policies, which are to be followed by all entities in respect of a particular subject or peculiar events transaction.
2. Financial statements of various entities become comparable because of uniform accounting standards followed in their presentation.
3. Reliability of the financial statements increase when they are prepared in compliance with the accounting standards as they are more accurate compared to custom-based practices.
4. They arc more rational and scientific as they are issued by the apex accountancy body rather than the custom-based accounting practices.
5. They keep abreast of the international accounting standards and hence, perceive to incorporate the latest trends and principles in the preparation of financial statements.
Accounting Standards in India
The council of the Institute of Chartered Accountants of India constituted the Accounting Standards Board IASBI in April 1977, Recognising the need to harmonise the diverse accounting policies and practices in India and keeping in view the international development in the field of accounting. The ASB is entrusted with the following functions :
1. To formulate accounting standards which may be establish by the council of ICAI. While formulating standards, the ASB is required to take into consideration the applicable laws, customs and usages and business environment; it is also required to give due consideration to I international Accounting Standard Committee issued by IASC and to integrate them, to extent possible, in light of conditions and practices prevailing in India.
2. To issue guidance notes on accounting standard and give clarification on issues arising there from.
3. To propagate the accounting standards and persuade the concerned parties to adopt them in preparation and presentation of financial statements.
Q. 4. Write an essay on accounting standards in India. (2018)
Ans. Indian accounting standards, (abbreviated as India AS) are a set of accounting standards notified by the Ministry of Corporate. Affairs which are converged with international financial reporting standards (IFRS). These accounting standards are formulated by Accounting Standards Board of Institute of Charted Accountants of India. Now India will have two sets of accounting standards viz existing accounting standards under Companies (Accounting Standard) Rules, 2006 and ‘IFRS converged Indian Accounting Standards. The Indian Accounting Standards (Ind AS) are named and numbered in the value way as the corresponding IFRS. NACAS recommended these standards to the Ministry ofCorporate Affairs. The Ministry of corporate Affairs has to spell out the accounting standards applicable to companies in India. As on date, the Ministry of Corporate Affairs notified 35 Indian Accounting Standards (Ind AS). But it has not notified the date of implementation of the same.
The objective of Indian Accounting Standard: The basic objective of accounting Standards is to remove variations in the treatment of several accounting aspects and to bring about standardization in the presentation. They are intended to harmonize the diverse accounting policies followed in the preparation and presentation of financial statements by different reporting enterprises so as to facilitate intra-firm and inter-firm comparison. Failure to follow accounting standards leads to engagements for audits of government grants. What leads to violation of rule 501 (ET section 501-01), unless the member discloses in his or her report the fact that such requirements were not followed and the reasons therefor.