ACCOUNTANCY
Unit – 2
Theory Base of Accounting
Q1. What is Generally
Accepted Accounting Principle (GAAP)?
Ans: Accounting is the language of business. To make the language
convey, the same meaning to all people, accountants all over the world have
developed certain rules, regulations, procedures and conventions which
represent a consensus view by the profession of good accounting practices and
procedures are generally referred to as Generally Accepted Accounting
Principle.
Q2.
What are the features of Accounting Principles?
Ans: Following are the features of
Accounting Principles:
a. Man made: Accounting principles are
manmade. They are not tested in a laboratory; therefore, they do not have
authoritativeness, as universal principles like other natural sciences viz.,
Physics, chemistry, botany etc.
b. Objectivity: It means accounting
principles must be based on facts and free from personal bias or judgement of
the individual who prepares the statements.
c. Relevance: Accounting principles
must be relevant and useful to the person who is using financial statements.
d. Feasibility: The accounting
principles should be practicable or feasible. In case principle is sound
theoretically but its application is difficult, then the principle does not
have much value.
Q3. Write short notes on:
1. Accounting Principle
The term principle refers to fundamental believe or a general truth
which once established does not change. The accounting principles are usually
the concept of conventions which have been adopted as a general guide by the
accounting profession. Some accountants prefer to use the term standard instead
of using the word principle. Accounting principle can be classified into two
categories:
a. Accounting concept.
b. Accounting convention.
Accounting concept: Accounting concept may be considered as postulates i.e., basic
assumption or condition upon which the science of accounting is based. Any
abstract ideas surviving a systematized function are regarded as concept.
Accounting convention: The term convention denotes circumstances or traditions which guide
the accountants while preparing the accounting statement. It refers to a
statements or a rule of practice which, by common consent, express or implied
is employed in the solution of a given class of problem or guide behavior of a
certain kind of situation.
Accounting concept
a. Business entity concept:
This concept implies that a business unit is separate and distinct from
the person who supplies capital to it. Irrespective of the form of organization
a business unit has got its own individuality as distinguished from the person
who own or control it.
b. Money measurement concept: Money is the only practical unit
of measurement that can be employed to achieve homogeneity of financial data,
so accounting records only those transactions which can be expressed in terms
of money.
c. Going concern: It is assumed that a business unit has a
reasonable expectation of continuing business at a profit for an indefinite
period of time. A business unit is deemed to be a going concern not a gone
concern.
d. Cost concept: The cost principle provides a relatively
objective foundation for accounting. Cost principle in accounting states that
all accounting entries shall be made at cost as and when the transactions take
place. Cost is the amount of money paid or payable for goods and assets
acquired or services received.
e. Dual aspect concept: Dual aspect is another important
concept applied in recording and presenting accounting information. According
to this concept every business transaction has a double effect i.e., it has two
sides debit and credit.
f. Accounting period concept: Accounting period refers to the
period of time at the end of which books of accounts of business entity are to
be closed and financial statements are to be prepared.
g. Matching concept: This concept is based on the accounting
period concept. The determination of profit of a particular accounting period
is essentially a process of matching the revenue recognized during the period
and the cost to be allocated to that period to obtain the revenue.
h. Realization concept: According to this concept revenue is
considered as being earned on the date at which it is realized i.e., on the
date when the property in goods passes to the buyer and he becomes legally
liable to pay.
i. Accrual concept: The essence of the accrual concept is that
revenue is recognized when it is realized i.e., when sale is complete or
services are given and it is immaterial whether cash is received or not.
j. Objective evidence concept: The objectivity principle states
that accounting should be definite, verifiable, reliable and free from manipulation
and personal bias of the persons engaged in the process of recording and
presenting accounting data.
Accounting conventions
a. Convention of consistency: The principle
of consistency requires that the accounting policies which are followed from period
to period should not be changed.
b. Convention of full disclosure: Accounting information are
required for decision making purpose by various users. Therefore to be useful
as the basis of decision making process, there should be full disclosure in the
financial statements of all significant information.
c. Convention of conservatism (prudence): The term conservatism
implies that all probable or anticipated losses should be provided for and all
anticipated or unrealized gains should be ignored and the profit should not be
overstated.
d. Convention of materiality: The term materiality refers to
the relative importance of an item. What is material for one firm may be
immaterial for another firm. Materiality depends on the amount involved in the
transactions.
Q4.
What is Accounting Standard?
Ans: Accounting standards are authoritative
standards for financial reporting and are the primary source of generally
accepted accounting principles (GAAP). Accounting standards specify how
transactions and other events are to be recognized, measured, presented, and
disclosed in financial statements. The objective of such standards is to
provide financial information to investors, lenders, creditors, contributors
and others that is useful in making decisions about providing resources to the
entity. Accounting standard is a selected set of accounting policies or broad
guidelines issued by an accounting body, regarding the principles and methods
to be chosen out of several alternatives that are followed for the preparation
of financial statements.
Q5.
What are the needs for Accounting Standard/ objectives of Accounting Standard/
Purposes of Accounting Standard?
Ans: Following are the needs for Accounting
Standard/ objectives of Accounting Standard/ Purposes of Accounting Standard:
a. Uniform presentation of accounts:
The users of financial statements require the accounting information which is
comparable. The presence of wide variety of concepts, conventions and
principles created confusion among them, rather than providing a solid and
logical treatment of the transactions. The necessity to present uniform
accounting information resulted in the emergence of accounting standards.
b. Avoidance of manipulation: Misusing
the vagueness of accounting concepts, conventions and principles generates
scandals resulting into failure of the business. Accounting Standards are
needed to avoid such manipulation of accounting results.
c. Globalised business: Globalization
of business has resulted in the emergence of multinational corporations in
different countries with different principles, customs and currency. The global
business needs standardization of accounting system for its smooth and fair
flow.
d. Disclosure beyond law: There are
certain areas of accounting where law does not require important information to
be disclosed. Accounting standard may call for disclosure of such information
beyond that required by law.
e. Simplify the accounting information:
Accounting standards prevent the users from reaching any misleading conclusions
and make the financial data simpler for everyone. For example, AS-3(Revised)
clearly classifies the flows of cash in terms of ‘operating activities’,
‘investing activities’ and ‘financing activities’.
Q6. Write short notes on:
ACCOUNTING STANDARD BOARD (ASB):
Ans: It was constituted by the ICAI on
April 21, 1977 to formulate accounting standards. While formulating accounting
standards, the ASB takes into consideration the applicable laws, customs and
business environment prevailing in the country. The ASB also gives due
consideration to IASs/IFRSs is issued by the International Accounting Standard
Board (IASB) and tries to integrate them, to the extent possible, in the light
of conditions prevailing in India.
Q7. What are the
distinction between Accounting Standard and Accounting Principles?
Ans: Following are the distinction between Accounting Standard and
Accounting Principles:
Q8.
What are the Advantages or Benefits of Accounting Standards?
Ans: Following are the Advantages or
Benefits of Accounting Standards:
a. Accounting Standards sets the tone of accounting: Accounting
as a language of business communicates the financial results and health of an
enterprise to various interested parties by means of periodical financial
statements.
b. Standardization of different accounting treatments: Standards
reduce to a reasonable extent or eliminate altogether confusing variations in
the accounting treatments used to prepare financial statements.
c. Improve the credibility and reliability of financial statements:
Financial Statements of business enterprises are used by a diverse group of
users for making sound economic decisions. It is necessary, therefore, that the
financial statements present a fair picture of the position and progress of the
enterprise.
d. Fulfill requirements for additional disclosures: There are
certain areas where important information are not statutorily required to be
disclosed. Standards may call for disclosure beyond that required by law.
Q9. What are the
limitations of Accounting Standards?
Ans: Following are the limitations of Accounting Standards:
a. Difficulties in making choice between different treatments: Alternative
solutions to certain accounting problems may each have arguments to recommend
them. Therefore, the choice between different alternative accounting treatments
may become difficult.
b. Lack of flexibility: There may be a
trend towards rigidity and away from flexibility in applying the accounting
standards.
c. Restricted scope: Accounting standards cannot override the
statute. The standards are required to be framed within the ambit of prevailing
statutes.
d. Involves Cost: The Company needs to comply with accounting
standards which requires a financial investment that includes employee labor
costs, system upgrades and employee training.
Q10. Write short notes on
International Financial Reporting Standards (IFRS)
Ans: International Financial Reporting Standards constitute a
globally recognized set of standards for the preparation of financial
statements by business entities used in multiple countries. The IASB, or
International Accounting Standards Board, work to develop these standards,
creating a consistent approach to financial reporting globally. The IASB works
with investors, auditors and regulators in different countries to determine the
needs of each user and incorporate those needs in the standards.
Q11. What are the need and
Importance of IFRS?
Ans: International Financial Reporting Standards (IFRS) convergence,
in recent years, has gained momentum all over the world. As the capital markets
become increasingly global in nature, more and more investors see the need for
a common set of accounting standards. It will lower the cost of raising funds,
reduce accountants’ fees and enable faster access to all major capital markets.
It will facilitate companies to set targets and milestones based on global
business environment rather than an inward perspective. This will eliminate the
need for multiple reports and significant adjustment for preparing consolidated
financial statements or filling financial statements in different stock
exchanges.
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