ACCOUNTING FOR MANAGEMENl'

1.2 "'" _
~~..----... ~,-:., 1.1 MEANING, o E; llffliON AND SCOPE OF ,FINAN~ IAL ACCO~~t'!'!~!_
"' · · " ......, ti /fl lal ace· ountlng Explain the scope of flnanclal accounting.
Q1. Define accoun ng nanc ·
Answer:
Accountlng/Flnanclal Accounting .
. .1 . d. 1 . i'th the preparation of financial statements such as profit and loss account (P & Lale) and
Fmanc1a accountmg ea s w . . · • · d h h
. ·.... t1·ng the accounting information of the business to its en users sue as s areholders
balance sheet. I t heIps 1q commun1- . . fi · ·· f th b · ,
employees etc. The mam . ob'~ec t'1ve of financial accounting 1s to analyse •pro t ord 1oss f b pos1t1on
· o e · us1Dess.
· In order
. h these ob'~ec tt' ves, 1·t 1·s very
to accomp I1s . essential
. to maintain a systematic• recor o . usmess transactions ID accounting
books. . .
· According to the American Institute of Certified Public Accountant (AICPA)'. 1941, "accountmg_ 1s an~ of recording,
classifying and summarizing in significant manner.~d in terms ofmoneytransact1ons and events which ar~ ID part, at least
of a financial character and interpreting .the results thereof'• ,
Scope/Functions of Financial Accounting .· · · · · . ·
Acc.ounting deals with recording, classifying, summarising, ~alysing and interpreting the financial transactions and
communicating the end results to the interested parties.
The functions of accounting are as follows, .
(i) Recording
Recording is a primary function of accounting. It mainly deals with recording all the financial tr:111sactio~ ofbusiness
in a sequential order. All financial transactions are recorded in a boo~ called as 'Journal'_. Journal 1s further divided into
many subsidiary books and the number of subsidiary books to be maintained depends upon nature and size of the business.
(ii) Classifying
q~':si~cation deals with the organized analysis of recorded data, with an intention to group all the related entries at
one place. Ledger account is the book where in all the similar entries are recorded. Ledger contains different accounts on
different pages and accordingly related entries are recorded under one particular account. It' helps in identifying the total
expenditure incurred in one specific account. . .
(iii) Summarising
Summarising includes presenting,the _cl~sified data in an acceptable and practical manner whicµ is·usefu\ to both
the internal and the external users of accounting statements. The process of summarising involves preparing trial balance,
income statement and the balance sheet. ·
(iv) Associated with Financial ·Transactions
In accounting, only those transactions are recorded which are financial in nature and are in terms of money. Transactions .
which are not expressed in terms of money and are non-financial in nature are not recorded in the books of account.
(v) Anal~sing and Interpreting
Analysing and interpreting is the last function of accounting. The financial data which was recorded earlier is now
being .analysed and interpreted so that it can be effectively used by the end users in making various decisions-related to the
~~ial condition and profitability of the business. The
data is also useful in preparing the future plms and designing the
.. pohc1es for accomplishing those plans. . ·
(vi) . Communicating •

. Wh~n a~counting information is thoroughly analysed and interpreted, it must be communicated .in an effec~ve
manner to ~e ~ght person. !he accounting information can be communicated by preparing and distributing the accounting.
re~orts which 1Dcludes the mcome statement and the balance sheet along with some additional information in the form ?f
ra~ws, graphs, funds flow statement, etc. An accountant must effectively utilise his innovative and imaginative abilities lll
this process. , ·
 Explain the significance of accounting Q3. Wllal . . the . . . . . . . anddludvantageaof ·
Information In business decision.
accounting? Who.,..~...,. of accounting
,...._ : <M,,,_JJ, IP<-.> [JIUILIFd.-11, Ql~J ~1
Significance of Accounting In Modem Organization Alla1N1' I
Accounting is a theory or system which tecords and AdvantagN of Aocountlng
assess the business transactions and ~taim them in the The foUowina point, a the advantages ofaccounting,
accounting books of a f.rm. Accounting records must be. 1.
Accountina maintain., an organil.ed documentation
maintained in chronological order and must be summariJ:ed of Imp number of monetary transactions that take
· a.standardized. format. so that financial nnc,;.:.... n..--=-~
m plaee in the business oipniwion.
can be evaluated through sales, purchases and overhead.
2. A ~ facilitates in determining the net profit or
. lnspite of the economic recession and decline in the lolls by maint;tinina record of all UIC tramactio,ns
job market, the importance of accounting bas not declined relatir.g to eipensea. loS$CS, incomes and. gains.
and is greatly percepbl>le ever before as accounting is very 3. Accountiog_also helps the film in finding out the actual
useful in almost all the areas of the ~nomy.
criteria, besides ascertaining the net prafu or net loss.
Accounting is important in modern organization in 4. Accounting records' are useful in c ~ out the
the following ways, comparison of the results Qfbusiness every year and
" .
I. The lqtowled~e of accounting ;s important as it · · carries out analysis of the de.velopm.ent of business
is applica~le for any job opPQrtunities. In a firm, for a particular period of time.
from secretary to executive everyone makes use of 5. Accounting records help in determining the exact
the accounting information in order to analyze the and authentic financial positio~ of the business
financial position of the firm. · organization.
2. In present scenario, business world is going on 6. Accounting records facilitate in identifying and
exploring and practising new financial laws. It is quite recognizing the frauds which occurred in the business
necessary for every worker of all businesses to hold organization.
atleast basic knowledge of accounting. 7. a
Accounting records helps business firm to monitor
3. . Accounting is useful in ascertaining the present and . its operations. Therefore, accounting records are ·
future economic stability of the org~on. . considered as. "the ~yes and ears of a business". ;
4.
Disadvantages of Accounting
Companies who applies/makes use of the effective
· accotmting practices enjoys competitive advantage Accounting has the following limitations,
over their competitors and also makes good decisions. 1. · Sometimes a business·may incur great expenditure
Financial managers depends upon their accountants which may not be beneficial in present but may
for gathering inforpiation ~hich is essentiaVrequired generate benefits in future~Financial accounting fails
for identifying the_profitability and financial status of to provide such information. •.
the firm. 2. Financial accounting does not explain the importance
of ac~ounting figures. It just show the records and
6. Accounting involves cash flow statement which is an interpret results. . ·
effective tool i.e., useful in monitoring and analyzing
the factors which effects the cash flows of the firm. 3. As financial accowiting records all transactions on
historical basis, it presents a post-mo~em record of
7. Accounting is also useful in making effective transactions. But now-a-days management is using
decisions relating to cash utilization, efficient business estimates arid ptojections for making decisions
· operation~/activities allocation of funds, financing of instead ofhistoricalfacts.
investment etc. 4. Financial accounting takes ,into consideration on1y
8. Accounting is not only useful to business firms but the monetary transactions which can be expressed in
also to the common people their in day-to-day life terms of money and ignores the qualitative elements.
for evaluating the interest rates and to make effective 5. A company comprises of different executives and
investments. they are classified under three levels of management.
H~ce, it is clear from the above points that accounting Top, middle and lower management. Each level of
.is imPQqant not Qnly for the busiDess people but also for the management requires different of infonnation
. hous~h9Jds. ·Evcnth<;>ugh accounting skills may not be that but Financial Accounting docs not possess a built-in
importa.Q.t in present scenario but it would be of utmost system which can provide inf~tion to all the levels
importance in the future. . of management.
514 PUBLISHERS AND DISTRIBUTOR~ PVT I Tn
 INTRODUCTION ,
(d) · Coat <;oncept
, I'

Wtaat do you mean by accounting? Exp1111\ ttt

The cost concept is similar to • .' '
Q4. This concept implies-that, going concern concept.
concepts and conventions on which accolll\tl"'
Is ba' sed • ' (Modt/Poptr-1, Q2(•) IAprlJ.Js n2 Q Only the actual price of tlie asset is . · .
' , le: (Q))
books of accoqnts and, . being recorded in
OR
This &Ctual Cost is considered as .• .
Briefly explaln ariy six accounting concePta. calculations of asset Thi's • a basis for further
. · concept ex 1a·
uset 1s recorded at its cost at the f P ms th~t an
but as the tinie passes on its value .une of purchase
Answer 1 Moy/June-11 Q·" · to depreciation charged on ·t Th gets reduced due
, "'(Q)
presentation offinancial sta~ e preparatio,n and·
Accouotlng and impartial with the help 0 f ents becomes flawless
. concept.
According to the American Insti~te of Certifi (e) Dual Aspect Concept
.. . . td
• Public Accountant (AICPA), 1941., . ac~o~t~g 1s an act of
recording, classifying and summ~g m s~gnificant manner . The dual aspect concept is a . · .
and in •terms of money transactions and events which ar· •. ccounting, it implies that every busi:esnm!!:.. of
two-10Id s .. _uon has
in part, at least of a financial character and interpretingth: . . effiect 1.e.,
b •
· dual effect. The doubl
.
ffi
eeectofth1s
c;oncept cap e expressed ID form of an a,.,.,,. · . .
.
results thereof'. as,· -vun1mg equ&tion
Accounting Concepts . Capital+ Liabilities == Assets
· Accounting is based on few concepts which follows or
assumptions or rules for recor~ing the transactions. Some
impol'tal\t accounting concepts are as follows, ,. Capital =Assets . :. Liabilities
. ," This e<tuation can also be written as
(a) Separate.Entity Concept - ,
Equities == Assets
In accounting, proprietor treats its business as
a separate e~tity so that h~s business transacti~ns d~es Henc~, ~counting equa~on explains the re~ationship
not gets mixed up wi~ his personal life. If business and· between equ1ti~s and assets. It unplies that every debit has
a, credit. which is equal to the sum.. of the debit.
personal activi~es ar: mixed up the? it ~ould be. diffic~lt . I. ,

to derive/draw meanmgful accountmg mforma-t1qn. Tlie (f) Accounting Period Concept

separate entity concept _is applicable to all forms of business
organizations for •the accounting purpose. Usually, thi~ :his ~oncept explains that even though the life
concept seems.to be unreasonable but it is very useful in of ~~mess 1s very long but proprietor must calculate its
position re~~ly after certain period of time usually after
drawing out the accounting infonnation.
one year, this 1s known as accounting period. A,t the end of
(b) Going Concern Concept ,. _eve~ accounting period,_·accountant i~ supposed to prepare
• • • I the ~come statement whi~h displays the profit or loss earned
In this concept, the proprietor assumes that bus~nes.5 ' dunng the accounting period and the balance sheet which
will continµe for 8t longer period of time in future. There.~ shows the financial condition of the business till the last
no intention of winding up the business in the near fu~~- day of the.accounting period. During \be prepai:ation of the 11
In this conc~pt accountant values the assets by calculatmg statement, the capital and revenue expenditures must be
depreciatio11 on the b~is of expected ltfe instead of taken carefully. ·
,market values and he does not take into account the fore ... (g) . Periodic Matching of Costs and Revenue
sale value of ~ sets. Concept ·
(c) Money Measurement Concept The matching :concept is based on the accounting
. concept imp
Th1s . that only monetary tran5actioOS
. 11es period concept. According to this concept, a business in
. of
order to achieve its prime objective of profit maximization
are into consideration at the time of preparatio~cier
shou~d alw~ys maintain a match bet.ween the costs and
accounting recprds. Books of account does not co!15 of r.evenue wit&in the accounting period. The term 'matching'
any transaction which cannot be expressed in tertn~t la ' refers to the adequate association of related revenues and
money even though.it may be useful for busmes . sbutt"'.·
expenditures.
not recorded i~ the books of account.
'.LTD. _ _ ___;__ _ _ _ _____ ~----------514
1.8 ACCOUNTINQ FQR MANAGEl'Jlt-
- .
Step-7: Adjusted Trtal Balanee '
The next step in accounting cycle after adjUstin
accrued and deferre~ accounts is t~ prepare new ~al the bian
which is similar to unadjusted trial.balance Wtth the
diffei"e~ce tliat the adjusting entries.are included in the oni~
trial balanc~. · ne,,v
· (, ----• AccounfnaC),:le
or . Step-8: Flnanclal Statements
Accounfna Process
In order to analyze the financial position of
• · statemen~ are prepared which
company, financial . inc!Ude
the
• I.
(a) ·income Statement
The income statement is prepared with the help
revenues and incomes earned by the company an~
losses and expen~es incurred by the company.
Figul'8: Accounting CyclalPracea
(b) Balance Sheet ·
Steps of Accounting Cycle
Balance sheet is prepared with the h~lp of assets,
Following are the steps involved in accounting cycle,' . liabilities and equity accounts.
Step-1: Identifying the Transaction ·
(c) Statement of Retaimtd E~ming
The first step in accounting cycle is.to ~dentify the ·
transaction and ascertain its source document like purchase It is prepared by using·net income •and dividend
order or sales invoice i.e., from w~ere the transaction h~ information.
been recorded.. (d) Cash Flow Statement · ·
Step-2: Ari~lyzing the Transaction
Either direct or ~direct method is used to extract cash
. In~ step transactions which are expr:essed, in terms flow suitement from other financial statements ofthe
ofmoney i.e., monetary transactions and the accounts which companY..
are affected by these transaction are identifie:d and analysed. Step~9: Closijng the Entries .
Step-3: Journalizing
. . After the preparation of financ.ial stat~ments, the
After analyzing the transaction, they are-recorded in .
balan~es of temporary accounts are transferred to owner's
journal in the form of entries. These entries are based on · .equity.
principle of double entry system .of a~ounting iq which
every transaction has a two fold effect i.e., dual effect. Step-1 O: Preparation of New Trial Balance
.S•p-t: Ledger Posting · After closing the entries a newlrial balance is prepared
When all the transactions are journalised, they must be in order to verify whether the balance debit equal to the
posted into ledger account. Ledger is a book wherein similar credit balance or not.
transactions are being recorded in one particular account. ·Q9. What are the dlffereni types of accounts? State
Step-5: Trial Balance the principles of recording transactions.

posting the entries into ledger, the entries must Answer t (Model Paper-II, Q2(a), Feb.-13, Q2(o))
be posted in the trial balance in order to.evaluate whether the Types of Accounts
balance of credit and debit side are equal to each other. All . At the time of journalizing the transactio~ on: the
the ledger accounts.which have debit balance are recorded basis of double entry system, transactions are being cl~ified
in the left column and ledger accounts with credit balance into three accounts as follows.
are posted on the right column of the trial balance. · · ACCO\Dlts

Step-6: Adjusting &ntrles

Personal Real
The accrued, deferred and estimated amounts Nominal
Natural Tangible Expemes and fDssCS
are recorded with the help of adjustment entries. These
Artificial Intangible Incomes and gad
adjustment entries ~re journalized and recorded into
. respective ledger·ac~ount. Representative

514 PURt u:u.11:::DQ All•'"' ....... _____ - - - - - - Figure: Cl111ification of Accounts

 (h) Realisation Concept
According to this concept revenue is generated only
through sales. The point of time when the property in goods
is passed on to buyer and when he is legally entitled/liable
to pay, it is considered as sales. The realisation concept is
not applicable for hire-purc~ase and contracts accounts.
Accounting C~nventions
Accounting conventions involves those rituals and .
practices which helps the accountant in the preparation of
accounting statements.
Some of the important accounting c~mventions are,
(a) Convention of Conservatism
According to this convention, ac~ountant must adopt
the policy of playing safe and follow the rule "anticipate
no profit but provide for all possible-losses". This implies
that accountant must make a provision for all possible or
expected losses but unearned or unrealized profit must riot
be included. _When convention of conservatism is used
inventory is valued at lower price, either at cost or market
price and provision is made for bad or doubtful debts. The
main objective of this convention is to misrepreseqt the true
financial position of the company in order to show lower net
income and understated assets and liabilities;
(b) Convention of Full Disclosure •
According to this convention, financial statements
must provide the complete and true inf<;>~ation about
the company. Financial statements· must be prepared in
accordance to the laws so that it can be effectively used by
proprietors, present and potential creditors anpinvestors. · ·
The convention of full disclosure add notes to the accounting
statements.
(c) Convention of Consistency
According to this convention, a company must
follpw same accounting practices and methods from one
period·to another. Any changing the accounting practices
would result in several problems in calculating the true
financial position of the company. If suppose for calculating
depreciation a company follows a straight line method in one
ii year and diminishing reducing balance method in another
year, it becomes difficult to -evaluate and compare the true
financial position ofthe company. Ifany advanced technique
is introduced, it must be mentioned clearly in the financial
statements.
(d) Convention of Materiality
According to this convention, the ? . ,._. . :.t
must give importance to m~terial details and rr,, .,. avoid
unnecessary/unimportant details.- Kohler defined '"materiality
means the characteristic attaching to a statement, fact or item
whereby its. disclosure or method of giving it expression
would be likely to influence the judgement of a reasonable
persori". · ·
 r
- - INTRODU~TI~~
Personal Accounts . · _ . .
1.9
.
~c;i:5onal accounts includes all these transactions which ~e related to person with whom the b~iness carries out its
tf8058CbOOS. Persona! ~ounts are furth~ categorized into three different accounts as follows,
(a) Natural Personal Accounts · ·
These ~e the accounts ofhull!an beings who are God'~ creation i.e.~they are natural and not arti~cial accolJl)ts.
ExampIe: Mahesh s accounts, Suman 's account etc.
i .. ,, ' ' •
· ·' .
' ' 't ' . . . .
(b) Artlflclal Personal Accounts _- ·' · ·
These. are the .'accohnts of corporate ·bodies ot'fostitutiori's' which I considered ·as ·a person in business. are
of
' I

Example: The account of a cl1,1b, the account·bf an insUl'ance,co~pany, th~ account government~ etc.
(c) Representative Personal Account$ · ·
Usually these a_c~unts are prepared when certain amount is due to a person or group of persons.
Example: Outstanding salaries account is openeci wh~ §)aries. are due to employee~. These accounts represents
the individual or the group of indiyiduals. · . .
The journalizing rule/principle personal a~counts ,is ."Debit the receiver, credit the giver''.
2. Real Accounts '· · ' · ·
Real accounts are those accounts which involves transactions relating tQ the propimies and assets which the bus~ess
bolds. Real accounts are bf two m,es. They are, ·
(a) Tangible Real Account ·
All the accounts .which are rel~ted to assets.that can be ·measured, thatchei yiewed felt, etc.,
tangible real accounts. · ·
are c~'tegorized as
I • • • •• • • ' ' , • . • I

Example: Cash stock account, building account, furniture acc~imt, etc. Bank account is not c~nsidered as a tangible
real ~ccount because it is treated as an artificial person a.id is thus regarded as a personal account.
(b) . Intangible Real Accounts .. . ..
Intangible real accounts involves the:: accounts ·of those assets which can be measured in terms of money but are
abstract in nature Le .., they cannot, be touched. :I --; ''• . '
Example: Patent's account, Goodwill i;tccount, etc,._
. . '
The journalizing rule for real accounts js "D~bit-what com¢s in, ·credit - what g<>es out".
. . 1 . . • .., • . < .- • • _:. • • • .,. • •

Example: When furniture is b¢ing purchased for cash thensfumiture,lilust be debited.and cash must be credited i.e.,
furniture account...dr. To cash account... cr. as fumi~e comes in and cash goes out.
3. Nominal Acc~unts .. ),

Nominal accounts coQsists of the accounts related to expenses, losses, incomes !Uld gaiQS. Nominal accounts are
imaginary in nature i.e., they·are prepared to describe the nature of transactions and to keep record of ail expenses incurred
by the business. .· ' • . . · · · . ·
Example: Salarie_s, rent, commission, etc. ' '
do
These accounts not exist ht reality. For instance salary_al~. rent ale, commi~sion a/c,;etc., are all nominal accounts
which shows the way h~w the cash is being spent. ·' ·
. . '

. The journalizing rule for nominal account is "Debit -All expenses and losses, Credit - All gains and incomes".
I .
Principles
. of Recording Transactions · · · ·' · · · ·'

There ~e some.b~ic principles to be followed in order to enter the daily transactions in journal as foilows,
Step1 . . .
Ascertain the two accounts involved in the business transactions. ·
' ' I••

~2 .
Ascertain ~e nature of accounts involved.
Step3

Apply the golden rule 'of acco1:1Dts f~r "Debit" and "Credit'' and find out which is to be debited and which is to be
credited. ·
 Q12.: whit
.
is aledger? Wrlt~-the procedurefor postingiilillJbalaiicing the leds,er accounts.
. f .
· ·
·· · · · · · · .,'!'. - ~ ~- : .,_ . "' . Mode/Pa
rper-n, 0(6J
,Y •
Answer : , , .• ··· ··. ·...
Ledger •
. . .. •
. _:~-. -: .; . .
'
,.
• •• i> ••
J
. Ledger is a accounting book where the j~urnalized transactiou.~m;~.bein~ classified. It consider set of accounts and,
includes all types of business ac~ounts i.e., personal, nominal or real. '·-
.A comp~y can maintain l~dger in.two forms i.e., Bound ~edger and Loose-leaf Ledger. The process oftransferring
the debit and credit items from the journal to the ledger in their respective accounts is known as posting. . ·.
Po_stlng in Ledge~ Account :
. .
The·book keeper posts the transactions from Jo~al to the Ledger by using any of the following methods,
(i) Book keeper can se~ect entries ofany specific side either debit or credit first_and then post all the transactions ofthat
side,~ the ledger accounts~ For instance, if the credit side is selected, then all the entries of the credit side must be
- ,

· ·posted into the 'ledger fir~: .. .

t. · , I • , •• • , ( ' . .

. . .
' • ; ~1 • •
(ii) · Book kee~r can post entries .on the basis of specific account ,and can complete all the debits and credits of that
specific ·account and then move onto the other account. . .
(iii) Boo~ keeper can post entne~~,n :accounts in a sequence· ·of jo~ar bntries. This method is effective as entries are
po_sted as and-when they are recorded in the journal.
. . s,ini~lar to_L~dg~ Fo~io (l·.F) in journal, a column.(?f folio is ·prepared in ledger ,also for recording the page number
~Journal from which the posting i~ b~ing done which is callea Jf~([ouinal Folio). The proforma o_f l~ge~ account is as
0
follows, . . _ . . . . . , ,._, ._ , . . . . . .. "., .• ..., :.. .. - . .
·_.-,utP~~~•,~eRs ANo:01s:rR1euT0Rs P:VT. ,a:., a~
: ·:~~
 ACCOUN I llll\;11 • - • • •••~•·u•'l\31:1\11~
1.30 . . -- ~l
Need 6. Useful to G_ ovemmen~~: .
J
fi ancial statements which ~e prepared .
. Accounting standards codify acceptable accounting The n . dards can be easily comb· b~
practices. They act as the basic source ofGenerally Accepted following accounting sffitan. ls and others. llled ¾d
used by government o c1a .
Accounting Principles (GAAP) and are thus in the first
position i the hierarchy of GI\AP. Besides this other sources Appllc•blllty .
of GAAP are ~hnical pronouncements provided by se~~ Great efforts bav~ been ma~e by two accounting
professional bodies, regulating the accounting and auditing bodies napiely, . .
profession, that requires the accounting principles and (a) International Accounting Standar~s Board
methods. (~SB) .
Different countries have different accounting standard (b) Institute of Chartered Accountants of Ind'
setting bodies. In USA, it is called as SFAS (Statements.of (ICAI). .. I~

Financial Accounting Stan~) which are give(l by the (a) lntematlonal Accounting Standards Board
Financial Accounting Standards Board (FASB). In India, the . (IASB) . . ·
accounting standards are given by the Institute of Chartered IASB was initially known as IASC (Internationa1
Accountants of India (ICAI). The Intemation~Accounting Accounting Standards Committ~e) in the year 1973. In
Standards Committee (IASC) was formed in 1973 in order
the year 2001, after its .restructunng IA~C was changed to
to frame the International Accounting Standards (IAS). The
IASB This organization aimed at frammg and spreading
accounting standards which are given by FASB is called as
the ~dards among the general public whic.h were USed in
IFRS (lnte~onal Financial Reporting Standards).
preparing_financial statements.'
lmportance/S_lgnlficance/Ratlonale
lASB also aims at promoting ~e accounting standards·
The following are the benefits of.accounting standards, all over the world. Nearly 140 countries are its members,
1. Uniformity Till date, IASC bas issued 41 standards, out of which 11
standards.have been withdrawn and 30 standards haye been
Accounting standards maintain uniformity i,n the . in practise. IASB has also issued 7 standards to date.
preparation and reporting offinancial•statements, so that the
misleading deviations or changes in·accounting treatment ' The ~tandards issued by IASB wee initially .Called
can be avoided while developing finan:cial statements.· as International Accounting Standards (IASs) and now
. '
currently are knowri as International Financial Reporting'
2. Comparability Standards (IF_RSs).
As the acco~ting principles are uniform or consistent IASB . does not hold any power to mandate the
the accowiting standards can be used-for -comp~g the compliance of its standards by ·its member countries but
. financial 'statements of various organizations or various simultaneously plays an important role in effecting the
accounting periods of the same organization. ' : ¥counting standards formulation on par with its country's
3. ReHability ! s&dards. ·
Th~ firmness or steadi11ess of economic system (b) Institute of Chartered Accountants of India ·
relies on the·trust. and (ICAI)
- . . confidence
. ·which
' the users have on
.

the .fairness of financial statements. Accounting standards According to the revised preface of the para 2.3 with
helps in developing such·type of confidence l?y producing a regards to the statements of accounting standards illustrates·
standard framework within which the financial statements the role of ICAI in harmonizing the accounting standards.
can be prepared. The para reads as under,
4. Useful to Investors "The ICAI, being a member of International
Federation of Accountants (IFAC), is supposed, inter alia
Accounting standards help the iftvestors in analyzing to develop the International Accounting Standards Boards
the growth of different companies depending on the financial (IASB) pronouncements in the nation with an aim to
statements so tl!at the best alternative is selected for taking facilitate global harmonization of the accounting standanb·
s
inve trnent decision. Thus, during the formulation of accounting standards,
5. Useful to Auditors ASB would greatly take into consideration IAS 's issued
Accounting standards must be tollowed while by the International Accounting Standards Committee. or
preparing financial ·statements as it helps the auditors International Financial Reporting Standards (IFRs) which
to matiage their clients. If clients are not following the are issued by IASB, any one of these and would attemP:i:
accounting stanQaJ"ds, then the auditor must specify this point integrate them fully, in the light of the circumstances
in the report for avoiding different penal provisions under practices existing in India".
the 9>~panies Act, 1956. ICAI till date has issued 3l accounting standards-
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 - INTRODUCTION 1 '!. ' I ......... .

~ r i t e about the' ra{lonale of

Q tandarda In lndla and alao dla accounting (ii)
b d d ting
Net rcaliable \'alue is obtained Y e uc
the0f
1
accounting atandarda. cuaa any four estimated selling price in the normal c~u1;se d
OR business from·the estimated cost of complet n an
the estimated cost needed for making the sale.
0I1cun the ratlonallty of accounu , • . h ed d used
In lndlan buslneu environment ng atand•rd• Inventory includes the goods pure •as an
M,,,..u, Qf(II) for resale or the land and other property used for resale, It
OR · ork · oaress
also includes finished goods produced or w m pr ,,.
exp_ laln any four Indian Accounting Stand rd 1 be1'ng produ-""... by the firm and the materials, maintenan_ce,
used· In presenting accounting Informati c,n. • supplies, consumables and loose fools waiti_ng fo~ use m the
-- 1 · Feb./M•rclt-12, Qf(•J production process. According to Accountmg Standard-IO
,tatlonallty of Accounting Standard In lndlan (AS-10), inventories do not inclqde the machinery sp~es
suslness·Envlronment that can be used only with an item of fixed asset and which_
1be following points show the need for accounting has irregtilar use.
standards as foll~ws, · Accounting Standarci-3 (AS-3)
(a) It emphasizes on Generally Accepted Accounti . The main aim of accounting standard-3' is to help the
Prineiples (GAAP) for preparing Financial Statem r;: users of financial statements by providing them· the basis
(b) It foe~ upon ~~onizing and standardising div~ for analysing the c·apability of the firm to produce cash and
accountmg po11c1es. . · cash equival~ts and the requirement ofthe firm to use th~
(c) It provides the accounting information to various cash flows. This information helps the users Qf finanetal
holding di~rent financial positions, performan:e:r stat~me~ts to analyse ~e liquidity and solven~ ·)L ,,he firm.
the company and so on. · The· use of accounting standard-3 bat, become a
(d) It ~tes and develops interest in the principles and compulsory method of cash· 'analysis for the following
theones related to accounting disciplines. companies:
(e) Itprovidescertainrules,regulationsandguidelinesto (i) Listed companies or the companies which are in
the public accountants for carrying out the operations course of issuµig debt or equity securitie~ that will
in an effective manner. be listed on a.recognized stock exchange in India.
(f) · It provides useful data to the· government ftir the Example: BSE or NSE. · ·
conducting of taxation, regulation of enterprise_s, (ii) · Commercial, industrial and business reporting finps
planning and regulation of economy as well. · whose turnover for the accounting period_is more than
Indian Accounting Standards SO·crores, . ·
Some of the accounting standards in India are as ' Cash flow statement deals.with the transfer of cash
follows, . . . , , under the following divisions. . .1.
Revised_ Accounting Standard-2 - Valuation · ~f'. , Cash flows from operating activities
lnventones 1. · Cash flows from investing activities and
The revised accounting standard-2 for valuation . Cash flows from financing activities.
of inventories .was initiated in June 1981. But, its Revised Accounting Standard•& - Depreciation
implementation started on or after I st April, 1999. The Accounting '
essential requirements of AS-2 for valuation of inventories · The re:vised accounting on depreciation accounting
is as follows, · was introduced by the Institute of Chartered Accountants of
Objective India in September 1994. The regulations or salient features
The main aim behind introducing Accounting of AS-6 are as follows, ·
Standard-2 for valuation of inventories was ·to ascertain 1. Accounting standard-6 is not applied to the assets
the stock vahie of inventories which need to be carried to like, .
financial statements till the goods are sold and profits are (i) Forests, plantations and similar regenerative
identified. . natural resources -
Definitions (ii) Wasting assets such as expenditure on
Accounting Standard-2 defined,
(i) Inventories as the assets,
exploration
-
natural gas . ·
.
for extracting minerals, oils and

(a) Held for sale in the normal course of business'. (iii) Expenditure.on research and development
(iv) Goodwill
(b) In the process of production for sale and
(c) In the form or"materials or supplies to be used (v) Livestock
in production or in rendering the services. . . (vi). Land till it has a limited useful life for the firm.
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