Accounting for Managers

Dr.Arpana Basnet
 Syllabus
 Unit 1
 Financial Statements, meaning of financial accounting
 GAAP
 IFRS
 Indian Accounting Standards (AS1, AS2, AS7, AS16, AS18, AS33, AS101)
 Financial Statements- Introduction
 Recording & Classification of transactions- Journal, Ledger
 Final Accounts with adjustments
 Understanding of P&L A\c & Balance Sheet
 Interpretation of Corporate Financial Statements in Annual reports of selected companies
 Case Study on Financial Statements
Unit 2
 Valuation of Tangible Fixed Assets
 Cost of Acquisition, borrowing costs on fixed assets
 Depreciation (As per IndAs-16)
 Methods of Depreciation ( Straight line & Diminishing balance method)
 Changing the depreciation method
 Disposal of depreciable assets
 Numerical
Unit 3
 Inventory Valuation
 Meaning & nature of inventory
 Purpose & benefit of holding an inventory
 Methods of Inventory valuation (LIFO, LIFO, Weighted Average cost methods)
 Valuation o inventories as per Ind AS2
 Perpetual Inventory System
Unit 4
 Statement of changes in Financial Position
 Cash low statement (As per Ind AS-7)
 Preparation of Cash flow statement
 Interpretation of Cash flow statement
Unit 5
 Financial Statement Analysis
 Introduction of ratio Analysis
 Interpretation o ratios
 Liquidity, Profitability, Efficiency & Activity ratios
 Uses & significance of ratios
 Limitation of ratio analysis
 Common size statements
 Trend Analysis
 Du Pont Analysis
Unit 1
 Financial accounting refers to collecting, summarizing and presentation of the financial
information resulting from business transactions. It reports the operating profit and the
value of the business to the stakeholders. In other words, financial accounting is used for
reporting financial transactions to the stakeholders in a format that is acceptable and
adaptable by all businesses.
 Objectives of Financial Accounting
 Financial accounting needs to fulfil the following objectives:
 Providing accounting-related information to all the concerned parties: When we talk
about a large business or organisation, it is not just the owner who is concerned with the
financial position of their entity. There are several other concerned parties like
shareholders, investors, managers, tax officers, auditors, etc., who are concerned with
the company’s finances.
 To ascertain profitability: A business can either make a profit or a loss in its operations.
To measure which way the company is going, we need financial accounting.
 Keeping systematic records: For the smooth running of any company, it is essential to
maintain a systematic financial record and keep stakeholders abreast of the financial
situation all the time.
 Ascertaining the financial position: To know how much the business owes to other parties
 Nature of Accounting
 Identifying monetary transactions – First, the transaction has to take place and be
identified so that it can be accounted for. To identify financial transactions, store and
check the receipts and bills of every transaction is a must. Sometimes, the exchange of
money is not directly involved, but it still needs to be identified. This involves
depreciation in the value of goods over time, which forms an important aspect of
financial accounting.
 Measuring and recording transactions – The value of transactions has to be measured in
terms of money and those concerned with revenues and expenditures need to be
recorded. The recording is done in journals.
 Classifying payments – The huge data needs to be classified in a record known as a
ledger. For example, all salary-related expenses can be classified under one column.
Leasing related data can be classified in another column and so on.
 Summarisation – The larger the corporation, the more complicated the record. Hence,
the record needs to be summarised in a form where it can be easily comprehended.
 Analysing, interpretation, and communication: The summarised data needs to be
analysed well and interpreted so that it can be communicated to the concerned
stakeholders so that they have the full knowledge of the company’s financial position.
 Scope of Accounting
 Reporting to shareholders: Shareholders are entities who invest their money in the
business seeking profit from their investment. Since they have invested their own
money in the business, they need to be reported on the overall financial position of
the company involving the number of outstanding loans, assets, expenses, revenue
streams, and so on.
 Reporting to the Public: The companies listed on the stock exchange are the ones in
which the general public can also invest. Since the public also becomes an investor,
account statements have to be made public so that they are fully aware of their
investment choices.
 Reporting to Government: It is necessary for tax purposes. Governments need to be
aware of the financial position of the businesses which come under their jurisdiction.
 Reporting to employees: Employees are indirect stakeholders and they must know
about the company’s financials which helps them stay informed regarding their job
security.
 Items disclosed in financial statements
 Assets
 •
 Liabilities
 •
 Incomes / Gains
 •
 Expenses / Losses
 •
 Equity (Capital)
 •
 (Personal, Real and Nominal Accounts
Reporting financial information on following
 1.Sales
 2.Purchases
 3.Expenses
 4.Incomes
 5.Profits
 6.Losses
 7.Capital
 8.Liabilities
 9.Assets
 10.Reserves
 11.Loans and advances
 12.Investment
 13.Debtors
 14.Creditors
Parties interested in financial information

 1.Owners /Investors
 2.Management
 3.Potential investors
 4.Suppliers and other creditors
 5.Lenders
 6.Employees
 7.Government and other agencies
 8.Public
 9.Customers
The Basic Accounting Equation
 Financial accounting is based upon the accounting equation.
Assets = Liabilities + Owners' Equity
 This is a mathematical equation which must balance.
 If assets total 500 and liabilities total 200, then owners' equity must be 300
 The balance sheet is an expanded expression of the accounting equation

Balance Sheet
Assets Liabilities and Owners’ Equity
Cash 5,000 Liabilities
Accounts receivable 7,000 Accounts payable 8,000
Inventory 10,000 Notes payable 2,000
Equipment 7,000 Total liabilities 10,000
Owners’ equity 19,000
Total assets 29,000 Total liabilities and
owners’ equity 29,000
 Assets are valuable resources that are owned by a firm.
 They represent probable future economic benefits and arise as the result of past transactions
or events.
 Liabilities
 Liabilities are present obligations of the firm.
 They are probable future sacrifices of economic benefits which arise as the result of past
transactions or events.
 Owners' Equity
 Owners' equity represents the owners' residual interest in the assets of the business.
 Residual interest is another name for owners' equity.
 Owners may make a direct investment in the business or operate at a profit and leave
the profit in the business.
 Yet another name for owners' equity is net assets.
 Indicates that owners' equity results when liabilities are subtracted from assets.
Owners’ Equity = Assets – Liabilities
 The Basic Accounting Equation
 Both liabilities and owners' equity represent claims on the assets of a business.
 Liabilities are claims by people external to the business.
 Owners' equity is a claim by the owners.
 A transaction may do one of several things:
 It may increase both the asset side and the liabilities and owners' equity side.
 It may decrease both the asset side and the liabilities and owners' equity side.

 It may cause both an increase and a decrease on the asset side.

 It may cause both an increase and a decrease on the liabilities and owners' equity side.
 Regardless of what transaction occurs, the accounting equation must be in balance after
the transaction is analyzed.
Revenues and Expenses
 Revenues increase owners' equity.
 Expenses decrease owners' equity.
 Revenues are inflows of assets (or reductions in liabilities) in exchange for providing
goods and services to customers.
 Critically important point:
 Cash need not be received in order for revenue to be recorded.
 Revenues are earned when a company does what it is supposed to do according to a contract.
 Accounts receivable are promises by a customer or client to pay cash in the future.
 A related concept concerns cash received before a service is performed or goods are
delivered.
 Consider the following example:
 A magazine company receives 30, which represents a year's subscription.
 The subscriber, of course, pays in advance.
 The magazine company may not record revenue because it has not earned revenue yet.
 To earn revenue, it must send the subscriber one magazine a month for twelve months.
 It owes magazines to the subscriber and thus has a liability (called Unearned Revenue),
not revenue.
 As magazines are sent, revenues may be recorded.
 Unearned revenues are usually settled by the performance of a service, unlike other
liabilities which are usually settled by the payment of cash.
 Expenses
 Expenses occur when resources are consumed in order to generate revenue.
 They are the cost of doing business.
 Examples include rent, salaries and wages, insurance, electricity, utilities, and the like.

 Adjustments to Accounts
 Several adjustments must be made to accounting records at the end of the accounting
period.
Revenues and Expenses
 Remember that four transactions affect owners' equity.
 Owner investments increase owners' equity.
 Owner withdrawals decrease owners' equity.
 Revenues increase owners' equity.
 Expenses decrease owners' equity.
What is GAAP?
•
Generally Accepted Accounting Principles are a specific set of directions that aid publicly traded companies prepare their financial
statements
•
These guidelines, long standing assumptions and methodologies are an aftermath of years of thought and experience
 GAAP
 •
 The Financial Accounting Standards Board (FASB) has been the primary U.S. accounting rule maker since
the early 1970s.
 •
 Accounting Standard Updates(ASU), keeps the professionals updated about the accounting issues this can be
reached through the website of FASB
 •
 The standards of the IASB are also known as IFRS (International Financial Reporting Standards). The objective
of FASB and IASB is to bring about a single set of norms and procedures to facilitate comparison and consistency
 •
 Securities and Exchange Commission(SEC)came into force to regulate and stabilize the capital markets of USA
 GAAP can be broadly classified into Accounting Assumptions, Principles and Constraints
 Assumptions

 Entity
 Going Concern
 Periodicity
 Monetary Unit

 Principles

 Historical Cost
 Revenue Recognition
 Matching Principle
 Full Disclosure
 Constraints
 •
 Conservatism
 •
 Materiality
 •
 Consistency
 Entity
 •
 A company is distinct from its members; it is considered a separate fictional being in the
eyes of law i.e. the owners and the company are not one and the same.
 •
 Hence transactions are recorded from the point of view of the company and not the
owner.
 Hence capital is a liability & drawings is an asset or deducted rom the capital
 •
 It also promotes Ownership in business as the liability of the members is limited. Precisely
insolvency of the company is not the insolvency of its members.
Going-Concern

 •
 Going-Concern is primarily an assumption that the business/organisation will continue
to operate for a substantial period
 •
 This basically facilitates allocation of long-term costs and revenues
 •Thus the fixed assets are recorded at book value & not MV as they are not supposed to
be sold
 If there is serious doubt about the above assumption and the management has no
concrete plans to address such issues than a disclosure is mandatory and the financial
statements will be presented at estimated liquidation values
The Fiscal Period/Periodicity

 All reporting is done for fixed periods of time; months, quarters or annual
periods.
 •
 These fiscal periods usually coincide with calendar periods and not
necessarily calendar year.
 •
 A few companies define their fiscal month as 28 days and their calendar year
as 13 of those months. Other companies adopt a fiscal year of, say, July 1 to
June 30.
 Monetary Unit\ Money measurement

 The monetary unit assumption means that accounting measures transactions and
events in units of money only
 •Following are not recorded : Demise of a CEO, low morale of employees
 The monetary unit assumption is core and essential to the double-entry, self-
balancing accounting model.
 •
 Financial statements are prepared by recording the transactions and events at
the current value.
 •
 The selling prices of the products and the value of assets might be different
today, but they are not adjusted to reflect current economic conditions.
Principles

 Historical Cost\ Cost Concept

 •
 The transactions and events are recorded at cost of acquisition
 •
 Under GAAP, original purchase price or the book value will continue even though
the market value changes
 •
 This eliminates the need for continuous revaluation
 •
 This assumption essentially minimizes subjectivity
Revenue Recognition \ Accrual
 •
 Accrual basis of accounting dictates that revenues must be recorded when earned and
measurable.
 •
 It determines the specific conditions under which revenue is recognized or accounted
for
 •
 Only when a specific critical event has occurred and the amount of revenue is
measurable
 •
 However there might be exceptions
 Matching Principle
 •
 Under the matching principle, costs associated with making a product must be
matched to the revenue generated from that product during the same period.
 •
 It directs a company to report an expense on its income statement in the
same period as the related revenues
Disclosure

 Companies must reveal all relevant economic information that can be useful to the
users, owners, government etc. Such disclosure should be made through
 •
 Financial statements
 •
 Notes to financial statements
 •
 Supplementary information
 •
 Annual Reports
Constraints

 Conservatism
 •” Anticipate no profits but provide for all losses”
 Financial statements should be prepared in precautious manner which means assets and
revenues should not be over stated, while liabilities and expenses should not be
understated
 •If two estimates are there or any future amount then:
 In case of assets & revenues lower amount should be taken e.g. closing stock
 In case of liabilities & expenses higher amount should be taken
 Provisions are generally made for anticipated losses & not or revenues
 For Inventory Valuation and like wise market value or book value whichever is lower is
considered
 This approach is followed because in any case profits of the company should never
be misreported
Materiality

 •
 Any event that might be significant, is one that may affect the judgment, analysis, or
perception of the user of financial
 •
 This is a relative concept. Something that is significant in a company with annual
revenues of $20 million might be largely irrelevant in a multibillion-dollar enterprise
Consistency

 The preparation of financial statements must utilize measurement techniques and

assumptions that are consistent from one period to another
 •
 companies can choose among several different accounting methods to measure their
inventories, depreciation, etc. But what is paramount is to use the same methods
throughout the fiscal years
 •
 Any change in such reporting should be backed by concreting reasons and should result
in giving true and fair view to the users of financial statements.
 What Are Accounting Principles?
 Accounting principles are the rules and guidelines that companies and other bodies must
follow when reporting financial data. These rules make it easier to examine financial data
by standardizing the terms and methods that accountants must use.
 The International Financial Reporting Standards (IFRS) is the most widely used set of
accounting principles, with adoption in 167 jurisdictions. The United States uses a
separate set of accounting principles, known as
generally accepted accounting principles (GAAP)
 Accounting standards are implemented to improve the quality of financial information
reported by companies.
 In the United States, the Financial Accounting Standards Board (FASB) issues generally
accepted accounting principles (GAAP).
 GAAP is required for all publicly traded companies in the U.S.; it is also routinely
implemented by non-publicly traded companies as well.
 Internationally, the International Accounting Standards Board (IASB) issues International
Financial Reporting Standards (IFRS).
 The FASB and the IASB sometimes work together to issue joint standards on hot-topic
issues, but there is no intention for the U.S. to switch to IFRS in the foreseeable future.
 What Are the Basic Accounting Principles?
 Some of the most fundamental accounting principles include the following:
 Accrual principle
 Conservatism principle
 Consistency principle
 Cost principle
 Economic entity principle
 Full disclosure principle
 Going concern principle
 Matching principle
 Materiality principle
 Monetary unit principle
 Reliability principle
 Revenue recognition principle
 Time period principle
 The most notable principles include the revenue recognition principle, matching principle,
materiality principle, and consistency principle. Completeness is ensured by the materiality
principle, as all material transactions should be accounted for in the financial statements.
 Generally Accepted Accounting Principles (GAAP)
 Generally accepted accounting principles (GAAP) are uniform accounting principles
for private companies and nonprofits in the U.S. These principles are largely set by
the Financial Accounting Standards Board (FASB), an independent nonprofit
organization whose members are chosen by the Financial Accounting Foundation.2
 A similar organization, the Governmental Accounting Standards Board (GASB), is
responsible for setting the GAAP standards for local and state governments.3 And a
third body, the Federal Accounting Standards Advisory Board (FASAB), publishes the
accounting principles for federal agencies.4
 Although privately held companies are not required to abide by GAAP, publicly
traded companies must file GAAP-compliant financial statements to be listed on a
stock exchange. Chief officers of publicly traded companies and their independent
auditors must certify that the financial statements and related notes were
prepared in accordance with GAAP.5

 Privately held companies and nonprofit organizations also may be required by

lenders or investors to file GAAP-compliant financial statements. For example,
annual audited GAAP financial statements are a common loan covenant required
by most banking institutions. Therefore, most companies and organizations in the
U.S. comply with GAAP, even though it is not a legal requirement.
 International Financial Reporting Standards (IFRS)
 The International Accounting Standards Board (IASB) issues International Financial
Reporting Standards (IFRS). These standards are used in more than 120 countries,
including those in the European Union (EU).6
 The Securities and Exchange Commission (SEC), the U.S. government agency responsible
for protecting investors and maintaining order in the securities markets, has expressed
interest in transitioning to IFRS. However, because of the differences between the two
standards, the U.S. is unlikely to switch in the foreseeable future.
 However, the FASB and the IASB continue to work together to issue similar regulations
on certain topics as accounting issues arise. For example, in 2014, the FASB and the IASB
jointly announced new revenue recognition standards.
 Since accounting principles differ around the world, investors should take caution when
comparing the financial statements of companies from different countries. The issue of
differing accounting principles is less of a concern in more mature markets. Still,
caution should be used, as there is still leeway for number distortion under many sets of
accounting principles.
 Who sets accounting principles and standards?
 Various bodies are responsible for setting accounting standards. In the United States,
generally accepted accounting principles (GAAP) are regulated by the Financial
Accounting Standards Board (FASB). In Europe and elsewhere, International Financial
Reporting Standards (IFRS) are established by the International Accounting Standards
Board (IASB).
 How does IFRS differ from GAAP?
 IFRS is a standards-based approach that is used internationally, while GAAP is a rules-
based system used primarily in the U.S. IFRS is seen as a more dynamic platform that
is regularly being revised in response to an ever-changing financial environment, while
GAAP is more static.
 Several methodological differences exist between the two systems. For instance,
GAAP allows companies to use either first in, first out (FIFO) or last in, first out
(LIFO)as an inventory cost method.
 LIFO, however, is banned under IFRS.
 What are some critiques of accounting principles?
 Critics of principles-based accounting systems say they can give companies far too
much freedom and do not prescribe transparency.
 They believe because companies do not have to follow specific rules that have been
set out, their reporting may provide an inaccurate picture of their financial health.
 In the case of rules-based methods like GAAP, complex rules can cause unnecessary
complications in the preparation of financial statements.
 These critics claim having strict rules means that companies must spend an unfair
amount of their resources to comply with industry standards.
 The 10 Key Principles of GAAP
 There are 10 general concepts that lay out the main mission of GAAP.2
 1. Principle of Regularity
 The accountant has adhered to GAAP rules and regulations as a standard.
 2. Principle of Consistency
 Accountants commit to applying the same standards throughout the reporting process, from
one period to the next, to ensure financial comparability between periods. Accountants are
expected to fully disclose and explain the reasons behind any changed or updated standards in
the footnotes to the financial statements.
 3. Principle of Sincerity
 The accountant strives to provide an accurate and impartial depiction of a company’s financial
situation.
 4. Principle of Permanence of Methods
 The procedures used in financial reporting should be consistent, allowing a comparison of the
company's financial information.
 5. Principle of Non-Compensation
 Both negatives and positives should be reported with full transparency and without the
expectation of debt compensation.
 6. Principle of Prudence
 This refers to emphasizing fact-based financial data representation that is not
clouded by speculation.
 7. Principle of Continuity
 While valuing assets, it should be assumed the business will continue to operate.
 8. Principle of Periodicity
 Entries should be distributed across the appropriate periods of time. For example,
revenue should be reported in its relevant accounting period.
 9. Principle of Materiality
 Accountants must strive to fully disclose all financial data and accounting
information in financial reports.
 10. Principle of Utmost Good Faith
 Derived from the Latin phrase uberrimae fidei used within the insurance industry. It
presupposes that parties remain honest in all transactions.
 GAAP vs. IFRS
 GAAP is focused on the accounting and financial reporting of U.S. companies. The
Financial Accounting Standards Board (FASB), an independent nonprofit organization, is
responsible for establishing these accounting and financial reporting standards.5 The
international alternative to GAAP is the International Financial Reporting Standards
(IFRS), set by the International Accounting Standards Board (IASB).
 The IASB and the FASB have been working on the convergence of IFRS and GAAP since
2002.7 Due to the progress achieved in this partnership, the SEC, in 2007, removed the
requirement for non-U.S. companies registered in America to reconcile their financial
reports with GAAP if their accounts already complied with IFRS.8U.S. Securities and
Exchange Commission. "
Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordan
ce With International Financial Reporting Standards Without Reconciliation to U.S. GAA
P
,"
 This was a big achievement because prior to the ruling, non-U.S. companies trading on
U.S. exchanges had to provide GAAP-compliant financial statements.
Some differences that still exist between both accounting rules include:

 LIFO Inventory: While GAAP allows companies to use the Last In First Out
(LIFO) as an inventory cost method, it is prohibited under IFRS.
 Research and Development Costs: These costs are to be charged to expense
as they are incurred under GAAP. Under IFRS, the costs can be capitalized and
amortized over multiple periods if certain conditions are met.
 Reversing Write-Downs: GAAP specifies that the amount of write-down of an
inventory or fixed asset cannot be reversed if the market value of the asset
subsequently increases. The write-down can be reversed under IFRS.
 As corporations increasingly need to navigate global markets and conduct
operations worldwide, international standards are becoming increasingly
popular at the expense of GAAP, even in the U.S. Almost all S&P 500
companies report at least one non-GAAP measure of earnings as of 2019
Standard IFRS Requirements
 IFRS covers a wide range of accounting activities. There are certain aspects of
business practice for which IFRS set mandatory rules.
 Statement of Financial Position: This is the balance sheet. IFRS influences the ways
in which the components of a balance sheet are reported.
 Statement of Comprehensive Income: This can take the form of one statement or be
separated into a profit and loss statement and a statement of other income, including
property and equipment.
 Statement of Changes in Equity: Also known as a statement of retained earnings, this
documents the company's change in earnings or profit for the given financial period.
 Statement of Cash Flows: This report summarizes the company's financial
transactions in the given period, separating cash flow into operations, investing, and
financing
 A parent company must create separate account reports for each of its subsidiary
companies.
Indian Accounting Standards or Ind AS
 Accounting Standards Definition
 Accounting standards (AS) are a set of principles, standards, and procedures that
serve as the foundation for financial accounting policies and practices.
 Indian Accounting Standards (Ind AS) are IFRS-converged standards issued by the
Central Government of India under the supervision and control of the Accounting
Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) and
in consultation with the National Financial Reporting Authority (NFRA).
 The Indian Accounting Standard (Ind-AS) is the accounting standard used by Indian
companies and is issued under the supervision of the Accounting Standards Board,
which was established in 1977.
 Indian Accounting Standards or Ind AS are rules that determine how Indian
companies prepare and present their financial statements.
 Adopting Ind AS helps companies become more transparent. It helps them comply
with global best practices.
 The accounting standards harmonize with IFRS, making Indian businesses familiar
with international norms.
 They improve the reliability of company information, enabling appropriate
evaluation and decision-making.
History of Indian Accounting Standards (IND AS)

 India used the Indian Generally Acceptable Accounting Principles (IGAAP) as its
accounting standards before the adoption of the Ind-AS.
 Indian GAAP refers to generally accepted accounting principles that apply in India, as
established (1) by the Indian Institute of Chartered Accountants and (2) under the
Companies Act, 1956.
 Indian GAAP is primarily comprised of 18 accounting standards issued by the Institute of
Chartered Accountants of India (ICAI).
 Who Issues Accounting Standards in India
 The accounting standards are prepared by the Institute of Chartered Accountants of India
(ICAI). It is done under the administrative control of the Ministry of Corporate Affairs,
Government of India.
 There are currently 41 accounting standards that have been published by the Council of
the Institute of Chartered Accountants of India (ICAI).
 It recommends to the Government of India Accounting Standards (Indian Accounting
Standards (Ind AS) and Accounting Standards (AS) for notification under relevant
provisions of various statutes, such as the Companies Act 2013, and Limited Liability
Partnership Act, 2008.
Objectives of Accounting Standards (IND AS)

 Note- IAS is International Accounting Standards (non revised AS more emphasis on

reporting than accounting)
 InD-AS – is Indian Accounting Standards which is Indian GAAP which is the
converged version of IFRS & U.S.GAAP
 Objectives of Accounting Standards of India include:
 The Indian Accounting Standards (IND AS) primary objective is to ensure that large-
scale activities are properly accounted for through continuous disclosure, treatment,
and reformation.
 IND AS standardizing accounting policies and principles for the country’s economy.
 Provides a unified framework for the preparation of books of accounts and ensures
financial transparency.
 The Indian Accounting Standards (IND AS) ensure that all institutions and
governmental bodies are accepted globally.
Applicability of Ind AS

 Ind AS or Indian Accounting Standards were made applicable in a phased manner. They were not
applied to all companies at once.
 Initially, in 2015, Ind AS was made mandatory only for large companies and listed companies. They
were voluntary for others.
 From 2016-17, all companies with net worth above ₹500 crores had to adopt Ind AS. This included
listed as well as unlisted firms.
 From 2017-18, companies with net worth between ₹250-500 crores were required to implement Ind
AS.
 Small companies with a net worth of up to ₹250 crores continue to follow Indian GAAP. They have an
option to voluntarily adopt Ind AS.
 Among listed companies, those with a net worth of more than ₹1,000 crores had to mandatorily
implement Ind AS from 2016-17.
 Smaller listed companies with a net worth between ₹500-1,000 crores were given time till 2018-19 to
implement Ind AS.
 The phased implementation of Ind AS gives companies more time for the transition. It eases the
transition process.
 The applicability of Ind AS also considers companies' needs based on the following:
 size,
 resources, and
 capabilities to implement the new standards.
List of Indian Accounting Standards (InD-AS)

Ind AS 101 First-time adoption of Ind AS

Ind AS 102 Share Based payments

Ind AS 103 Business Combination

Ind AS 104 Insurance Contracts

Non-Current Assets Held for Sale and

Ind AS 105
Discontinued Operations

Exploration for and Evaluation of Mineral

Ind AS 106
Resources

Ind AS 107 Financial Instruments: Disclosures

List of Indian Accounting Standards
Ind AS 108 Operating Segments

Ind AS 109 Financial Instruments

Ind AS 110 Consolidated Financial Statements

Ind AS 111 Joint Arrangements

Ind AS 112 Disclosure of Interests in Other Entities

Ind AS 113 Fair Value Measurement

Ind AS 114 Regulatory Deferral Accounts

Ind AS 115 Revenue from Contracts with Customers

List of Indian Accounting Standards
Ind AS 1 Presentation of Financial Statements

Ind AS 2 Inventories Accounting

Ind AS 7 Statement of Cash Flows

Accounting Policies, Changes in Accounting

Ind AS 8
Estimates and Errors

Ind AS 10 Events after Reporting Period

Ind AS 11 Construction Contracts

Ind AS 12 Income Taxes

Ind AS 16 Property, Plant and Equipment

Ind AS 17 Leases
List of Indian Accounting Standards
Ind AS 19 Employee Benefits

Accounting for Government Grants and

Ind AS 20
Disclosure of Government Assistance

The Effects of Changes in Foreign Exchange

Ind AS 21
Rates

Ind AS 23 Borrowing Costs

Ind AS 24 Related Party Disclosures

Ind AS 27 Separate Financial Statements

Ind AS 28 Investments in Associates and Joint Ventures

Financial Reporting in Hyperinflationary

Ind AS 29
Economies

Ind AS 32 Financial Instruments: Presentation

List of Indian Accounting Standards

Ind AS 33 Earnings per Share

Ind AS 34 Interim Financial Reporting

Ind AS 36 Impairment of Assets

Provisions, Contingent Liabilities and

Ind AS 37
Contingent Assets

Ind AS 38 Intangible Assets

Ind AS 40 Investment Property

Ind AS 41 Agriculture
Indian Accounting Standard : Ind AS 1: Presentation of Financial Statements

 Indian Accounting Standard 1 sets out the overall framework and responsibilities for the
presentation of financial statements, guidelines for their structure and minimum
requirements for the content of the financial statements.
 It does not however prescribe any fixed format for presentation of Financial Statements.
It applies to all general purpose financial statements based on Ind AS.
 To meet that objective, financial statements provide information about an entity's
Assets; Liabilities; Equity; Income and expenses, including gains and losses; Other
changes in equity; and Cash flows.
 This information, along with other information in the notes, assists users of financial
statements in predicting the entity's future cash flows and, in particular, their timing and
certainty.
Basis of Preparation of Financial Statements
 Fair presentation and Compliance with Ind AS:Ind AS 1 requires that an entity whose
financial statements comply with all the requirements of every Ind ASs, to make an
explicit and unreserved statement of such compliance in the notes.
 Going Concern: An entity preparing Ind AS financial statements is presumed to be
a going concern. If management has significant concerns about the entity's ability to
continue as a going concern, the uncertainties must be disclosed.
 Accrual basis of accounting: Ind AS 1 requires that an entity prepare its financial
statements, except for cash flow information, using the accrual basis of accounting.
 Consistency of Presentation: The presentation and classification of items in the
financial statements should be retained from one period to the next unless a change is
justified either by a change in circumstances or a requirement of a new Ind AS.
 Materiality and Aggregation: Each material class of similar items must be presented
separately in the financial statements. Dissimilar items may be aggregated only if they
are individually immaterial and are of similar nature or function.
 Frequency of reporting: Financial statements are usually prepared annually. If the
annual reporting period changes and financial statements are prepared for a different
period, then the enterprise must disclose the reason for the change and a warning about
problems of comparability.
Basis of Preparation of Financial
Statements
 Current/ Non- current distinction-Ind AS1 states that an entity should make a distinction
between current and non- current assets and liabilities, except when the presentation
based on liquidity provides information that is more reliable and relevant.
 Information to be presented either in the Balance Sheet or in the notes
 Statement of Cash Flows The detailed requirements for preparation and presentation of
Statement of Cash Flows have been dealt in Ind AS 7
AS 2 Valuation of Inventory

 The accounting treatment for inventories is prescribed in AS 2 valuation of inventory,

which provides guidance for determining the value at which inventories are carried
out in the financial statement until related revenues are recognized.
 This AS 2 Valuation of Inventory is not applicable in the following cases
Work in progress under construction contracts, including directly related service
contracts (It is specifically covered by AS-7 construction Contracts)
 Work in progress in the ordinary course of business of service providers;
 Shares, debentures and other financial instruments held as stock-in- trade
 Producers’ inventories of livestock, agricultural and forest products, and mineral
oils,ores and gases to the extent that they are measured at net realizable value in
accordance with well established practices in those industries.
Key Terms used in AS 2 Valuation of Inventory:

 Inventories : It is an asset:
Held for sale in ordinary course of business(Finished Goods)
 In the process of production for such sale (WIP and Raw material)
 In the form of materials or supplies to be consumed in the production
 process or in the rendering of services (Stores, spares and consumables)
 Measurement of Inventories
Inventories should be valued at the lower of cost and net realizable value.
 Composition of cost
Cost consists of :
Purchase Cost
 Conversion Cost
 Other cost incurred in bringing the inventories to the present location and condition.
Key Terms used in AS 2 Valuation of Inventory:

 Cost Formula
When the goods lying in the stock can be specifically identified the cost is determined
specifically as segregated for producing or purchasing such goods. Where specific
identification method cannot be applied, the costs of inventories are determined using:
 First In First Out Method (FIFO Method)
 Weighted Average Cost Method (WAC Method)
 Disclosure
Following disclosures as per AS 2 are to be made in Financial statements of the
enterprise:
Accounting policy adopted to measure value of the inventories
 Cost formulae used
 Total carrying amount of inventories
 Classification adopted by enterprise.
 Here we learn that AS 2 deals with valuation of inventory and how we need to do valuation
of inventory in the financial statement on the closing date. what are the inventories,how
valuation is done for raw material ,work in progress(WIP) and finished goods in case of
manufacturers and in case of traders finished goods as inventory.
AS-16 BORROWING COSTS

 Borrowing Costs include:


Interest and commitment charges on borrowings.
 Amortization of discounts or premiums relating to borrowings.
 Amortization of ancillary costs incurred in connection with the arrangement of borrowings.
 Exchange difference arising from borrowings to the extent it amounts to interest costs.
 Borrowing costs should be recognized as an expense in the period in which they are incurred.

Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset should be capitalized as part of that asset.
 Qualifying Asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale. e.g. Heavy Plant & Machinery.
 Disclosure:

The Accounting Policies adopted for borrowing costs.
 The amount of borrowing costs capitalized during the period.
AS 18 - Related Party Disclosure
 AS 18 or Accounting Standard 18 on "Related Party Disclosures" is a standard issued by the
Institute of Chartered Accountants of India (ICAI) that requires companies to disclose the
nature and extent of their related party transactions in their financial statements.
 Related parties are defined as individuals or entities that are closely connected to the
company, such as its owners, directors, key management personnel, subsidiaries,
associates, and joint ventures.
 The purpose of related party disclosures is to ensure transparency and prevent any
potential conflicts of interest that may arise from such transactions.
 Under AS 18, companies are required to disclose the following in their financial
statements:
 The name of the related party and its relationship with the company.
 The nature of the related party transaction, including the amount involved and any
terms and conditions of the transaction.
 The amounts of outstanding balances, including any advances, loans, or guarantees
provided by the company to the related party.
 The amounts of income, expenses, gains, or losses arising from related party
transactions.
Examples of related party transactions that would require
disclosure under AS 18 in India:
 1. The company sells goods or services to a subsidiary or associate company at a price that
is lower or higher than the prevailing market rate.
 2. The company provides a loan or advance to a director or key management personnel at a
lower rate of interest than the market rate.
 3. The company enters into a lease agreement with a related party for a property or asset.
 4. The company provides a guarantee or security for a loan taken by a related party.
 5. The company purchases goods or services from a related party at a price that is higher
than the prevailing market rate.
 6. The company enters into a joint venture or partnership agreement with a related party.
 7. The company provides a loan or advance to a subsidiary or associate company at a lower
rate of interest than the market rate.
 8. The company provides services to a related party at a price that is lower than the
prevailing market rate.
 9. The company sells an asset to a related party at a price that is lower or higher than the
prevailing market rate.
 10. The company enters into a licensing or royalty agreement with a related party for the
use of intellectual property.
Introduction to IND AS 7
(Statement of Cash Flows)

 Purpose of Cash Flow Statements As per IND AS 7

 The purpose of cash flow statements is to provide information about an entity’s cash
inflows and outflows during a given period.
 This information is useful for investors, creditors, and other stakeholders in making
decisions about the entity’s financial health and future prospects
 The cash flow statement helps users to understand the differences between net income
and cash flow from operating activities, as well as to identify the cash flows from
investing and financing activities.
 It also provides insights into an entity’s liquidity, solvency, and ability to generate cash
flows. Furthermore, cash flow statements can help users to identify potential risks and
opportunities for the entity, such as the need for additional financing, the ability to pay
dividends, or the ability to fund future growth.
 Overall, the primary purpose of cash flow statements as per IND AS 7 is to provide
relevant and reliable information about an entity’s cash flows to assist users in their
decision-making process.
Key Features of IND AS 7 IND AS 7
 Some of these features include:
 Classification of cash flows: The standard requires entities to classify their cash flows into
three categories: operating, investing, and financing activities. This helps users to better
understand the sources and uses of cash, as well as the timing and magnitude of these
activities.
 Direct or indirect method: IND AS 7 allows for the use of either the direct or indirect
method of presenting cash flows from operating activities. The direct method shows the
actual cash inflows and outflows, while the indirect method reconciles net income to
cash flows from operating activities.
 Consistency and comparability: IND AS 7 emphasizes the importance of consistency and
comparability in presenting cash flow information. Entities are encouraged to use the
same methods and classifications from period to period, which helps users to better
understand changes in the entity’s cash flows over time.
 Usefulness for decision-making: The ultimate goal of IND AS 7 is to provide relevant and
reliable information about an entity’s cash flows to assist users in their decision-making
process. The standard emphasizes the importance of providing information that is
understandable, transparent, and free from bias.
Preparation of Cash Flow Statements
 The preparation of cash flow statements under IND AS 7 involves several steps. These
steps are:
 Identify the cash inflows and outflows: The first step in preparing a cash flow
statement is to identify all the cash inflows and outflows that occurred during the
period.
 This includes cash receipts from customers, cash paid to suppliers, interest and
dividend payments, and cash spent on investments and financing activities.
 Classify cash flows: The next step is to classify these cash flows into the three
categories: operating, investing, and financing activities.
 Operating activities involve cash flows related to the entity’s core business operations,
investing activities relate to cash flows related to the acquisition and disposal of long-
term assets, and financing activities relate to cash flows related to the entity’s
financing activities.
 Choose the direct or indirect method: The third step is to choose between the direct
and indirect method of presenting cash flows from operating activities. The direct
method shows the actual cash inflows and outflows, while the indirect method
reconciles net income to cash flows from operating activities.
Preparation of Cash Flow Statements
 Prepare the statement: The fourth step is to prepare the cash flow statement itself.
 The statement should show the beginning and ending cash and cash equivalents
balances, as well as the cash flows from operating, investing, and financing activities.
 The statement should also include any significant non-cash transactions, such as the
acquisition of long-term assets through a capital lease.
 Disclose supplementary information: Finally, the entity should disclose any additional
information required by IND AS 7.
 This includes information about the entity’s use of cash and cash equivalents, such as
restrictions on their use or any significant changes in their balances.
 The entity should also provide information about the effects of exchange rate changes
on cash flows, and any significant non-cash transactions that occurred during the
period.
Few example:
 Cash and cash equivalents Cash in hand
 Money in a checking account
 Petty cash fund
 Treasury bills
 Money market funds
 > Operating activities
 Payment of salaries and wages to employees
 Payment of rent and utilities
 Payment for raw materials or inventory
 Collection of accounts receivable
 Payment of income tax
 > Investing activities

Purchase of property, plant, and equipment

 Purchase of long-term investments
 Sale of property, plant, and equipment
 Purchase of patents or other intangible assets
 Purchase of marketable securities
Few example:
 > Financing activities
 Issuance of Share Capital
 Payment of dividends to shareholders
 Repayment of long-term debt
 Payment of interest on outstanding debt
 Purchase of treasury stock
 > Significant events or transactions.
 Merger or acquisition of another company
 Sale or closure of a major business segment
 Lawsuit settlement or judgment
 Major changes in accounting policies or estimates
 Issuance of a significant amount of debt or equity securities.
Non cash item that should be considered in cash flow statement
Under IND AS 7,

 The following non-cash items should be considered in the cash flow statement:
 Depreciation and amortization: These represent the use of economic resources over time, even though no
cash outflows occurred during the period.
 Impairment losses: These are non-cash charges that reduce the value of assets and can occur due to a
decline in the asset’s fair value or impairment of the asset’s future economic benefits.
 Write-offs of intangible assets: These are non-cash charges that represent the loss of value of an intangible
asset due to factors such as obsolescence or expiration of legal rights.
 Gain or loss on disposal of assets: These represent the difference between the proceeds received from the
sale of an asset and the carrying amount of the asset at the time of sale.
 Deferred taxes: These represent the temporary differences between the carrying amount of an asset or
liability and its tax base, which can result in future tax benefits or obligations.
 Changes in fair value of financial instruments: These represent the changes in the fair value of financial
instruments, such as derivatives, that are not settled during the period.
 Accruals and provisions: These represent non-cash charges that are recognized in the financial statements
to account for expected future payments or obligations, such as accruals for employee benefits or provisions
for warranty costs.
 It is important to note that these non-cash items should be separately disclosed in the cash flow statement
to provide users with a clear understanding of the entity’s cash flows.
Disclosure requirements IND AS 7,
 The disclosure requirements are as follows:
 Cash and cash equivalents: The entity should disclose the policy used in determining what constitutes
cash and cash equivalents, as well as any restrictions on their use.
 Operating activities: If the indirect method is used to present cash flows from operating activities, the
entity should disclose the reconciliations between net income and cash flows from operating activities.
This includes the adjustments made for non-cash items, such as depreciation and amortization, as well
as any changes in working capital.
 Investing activities: The entity should disclose the nature of its investing activities, including the
acquisition and disposal of long-term assets, such as property, plant, and equipment, and any proceeds
from the sale of investments.
 Financing activities: The entity should disclose the nature of its financing activities, including any
proceeds from the issuance of debt or equity securities, as well as any payments made to reduce debt.
 Non-cash transactions: The entity should disclose any significant non-cash transactions that occurred
during the period, such as the acquisition of long-term assets through a capital lease.
 Changes in exchange rates: The entity should disclose the effects of changes in exchange rates on cash
and cash equivalents.
 Significant events or transactions: The entity should disclose any significant events or transactions that
occurred during the period that had a material effect on the cash flows of the entity.
 Dividends: The entity should disclose any dividends paid during the period, including the amount and the
date of payment.
Ind AS 33: Earnings Per Share

 Objective and Scope:

 The principal objective of Ind AS 33 is to prescribe principles for determining and presenting
earnings per share (EPS) amounts in order to improve performance comparisons between
different entities in the same period and between different accounting periods for the same
entity.
 However, the prime focus of this Standard is on the denominator of the earnings per share
calculation.

 This standard is not mandatory on all entities.

 However, in Indian context, this standard must be applied to all companies that have issued
ordinary shares and to which Ind AS notified under Companies Act applies. Any other entity that
voluntarily presents EPS must comply with this standard.
 In case where both consolidated and separate statements are prepared, disclosures pertaining to
this standard must apply to both statements.
 Important Terms
An ordinary share is an equity instrument that is subordinate to all other classes of equity
instruments.
 A potential ordinary share is a financial instrument or other contract that may entitle its holder
to ordinary shares
Requirement of Ind AS 33

 An entity should present basic and diluted EPS for each class of ordinary share that has a different
right to share in profit for the period. The EPS should be presented for all periods presented and with
equal prominence.
 An entity that reports a discontinued operation should disclose the basic and diluted amounts per
share for the discontinued operation either in the Statement of Profit and Loss or in the notes.
 In Ind AS, EPS is calculated both in case of Separate Financial Statements and Consolidated Financial
Statements
 EPS is reported for profit or loss attributable to equity holders of the parent entity, for profit or loss
from continuing operations attributable to equity holders of the parent entity, and for any
discontinued operations.
 In consolidated financial statements, EPS reflects earnings attributable to the parent’s shareholders.
 Basic earnings per share should be calculated by dividing profit or loss attributable to ordinary equity
holders of the parent entity (the numerator) by the weighted average number of ordinary shares
outstanding (the denominator) during the period. In other words, basic EPS=earnings numerator: after
deduction of all expenses including tax, and after deduction of non-controlling interests and
preference dividends/ denominator: weighted average number of shares outstanding during the
period.
 The weighted average number of ordinary shares outstanding during the period and for all periods
presented should be adjusted for events, other than the conversion of potential ordinary shares, that
have changed the number of ordinary shares outstanding without a corresponding change in resources
Diluted EPS calculated as follows:
 Dilution is a reduction in EPS or an increase in loss per share on the assumption that
convertible instruments are converted, that options or warrants are exercised, or that
ordinary shares are issued when specified conditions are met.
 Earnings numerator: the profit for the period attributable to ordinary shares is increased by
the after-tax amount of dividends and interest recognised in the period in respect of the
dilutive potential ordinary shares (such as options, warrants, convertible securities and
contingent insurance agreements), and adjusted for any other changes in income or expense
that would result from the conversion of the dilutive potential ordinary shares;

 Denominator: adjusted for the number of shares that would be issued on the conversion of
all of the dilutive potential ordinary shares into ordinary shares; and If the number of
ordinary or potential ordinary shares outstanding increases as a result of a capitalization,
bonus issue or share split, or decreases as a result of a reverse share split, the calculation of
basic and diluted earnings per share for all periods presented should be adjusted
retrospectively.
 Anti-dilutive potential ordinary shares are excluded from the calculation.
Indian AS 101 – First time adoption of Indian Accounting standards

 What is the purpose of this standard?

 The purpose of this standard is to ensure that the company’s first Ind AS financial
statements and interim statements contain information that is transparent and
comparable, the cost does not exceed the benefits and the statements provide a
suitable starting point for accounting in accordance with Indian Accounting Standard.
 Which statement does this standard apply to?
 This standard applies to the first Ind AS financial statements and each interim financial
report if any. But this standard does not apply to changes in accounting policies for an
organisation that already applies Ind AS, such changes are subject of requirements of
Ind AS 8 or specific transitional requirements of other Ind AS.
 Implementation of Ind AS
 Selection of Accounting Policies
 Preparation of Opening Ind AS Balance sheet
 Presentation and disclosure in an entity’s in Ind AS Financial Statements and Interim
Financial Reports
Indian AS 101
 Selection of Accounting Policies
 An entity must use the same accounting policies in its opening Ind AS balance sheet and
throughout all periods that are presented in the first Ind AS.
 Those accounting policies must comply with all the Ind AS effective during the reporting
period of first Ind AS except as stated in Ind AS 101.
 The accounting policies that are used in the preparation of the opening Ind AS Balance
sheet may differ from the ones used by the entity while using previous GAAP on the same
date.
 The resulting adjustments arise from events and transactions prior to the date of the
Opening Ind AS Balance sheet and hence must be adjusted in retained earnings.
Preparation of Opening Ind AS Balance Sheet

 On the date of transition to Ind AS, an entity shall prepare and present an opening Ind
AS Balance Sheet. This is the starting point for it’s accounting according to Ind AS
subject to requirements of Ind AS. Except for restrictions spelt out in the AS, an entity
must in its Opening Ind AS Balance sheet:
 recognise all assets and liabilities for which recognition is required by Ind AS
 derecognise items as assets and liabilities if Ind AS does not permit such recognition.
 if the Ind AS requires a particular asset, liability or component of equity to be
recognised differently from its previous recognition under GAAP, then reclassify it.
 apply Ind AS in measuring all recognised assets and liabilities.
Presentation and Disclosure

 This Ind AS does not provide exceptions from the presentation and disclosure
requirements in other Ind AS. The Ind AS established two types of exemptions from the
requirement that an entity must apply each Ind AS in preparation of Opening Ind AS
Balance sheet.
 Prohibit retrospective application of some aspects of Ind ASs Grant exemptions from
some requirements of Ind ASs
 The exemptions to the retrospective application of other Ind AS are: –
 Derecognise financial assets and liabilities
 An entity can derecognise assets and liabilities as per AS 109, prospectively from the
date of transition to the Ind AS. However it can derecognise it retrospectively provided
the information required for derecognising it as per Ind AS 109 was obtained at the
time of initially accounting for these transactions.
 Hedge Accounting
 As required by Ind AS 109 on the date of transition to Ind AS an entity shall measure all
derivatives at fair value and shall eliminate all deferred losses and gains arising on
derivatives on account of previous GAAP and recognise them as assets and liabilities.
 As per Ind AS 109, if a hedge accounting does not qualify for accounting then it should
not be recognised in the opening Ind AS
Non–controlling interests

 The following requirements of Ind AS 110 shall be applied by prospectively

from the date of transition to Ind AS by a first-time adopter:
 (a) that total comprehensive income is attributed to the owners of the parent
and to the non-controlling interests even if this results in the non-controlling
interests having a deficit balance;
 (b) for accounting for changes in the parent’s ownership interest in a
subsidiary that do not result in a loss of control; and
 (c) for accounting for a loss of control over a subsidiary, and Non-current
assets held for sale and discontinued operations.
 However, if a first-time adopter elects to apply Ind AS 103 retrospectively to
past business combinations, it shall also apply Ind 110.
Classification and measurement of financial asset

 An entity shall assess whether a financial asset meets the conditions specified in Ind AS
109, on the date of transition from previous GAAP to Ind AS.
 If it is impracticable to assess the time value of money element in accordance with Ind
AS 109 and/or whether the fair value of prepayment feature is insignificant as per Ind AS
109 on the basis of the facts and circumstances that exist on the date of the transition to
Ind AS then the entity shall assess the contractual cash flow characteristics of that
financial asset on the basis of the facts and circumstances that existed on the date of
transition and accordingly disclose it without taking into consideration the requirements
of Ind AS 109.
 If it is impracticable* for an entity to apply retrospectively the effective interest method
in Ind AS 109, the fair value of the financial asset or the financial liability at the time of
transition shall be the new gross carrying amount of that financial asset or the new
amortised cost of that financial liability.
Impairment of financial assets

 At the time of transition, the entity shall determine the credit risk, at the date when
such instruments were initially recognised.
 For determining if there has been a significant increase in credit risk, if an entity has
to incur undue cost or effort then an entity shall recognize a loss allowance at an
equal amount to lifetime expected credit losses at each reporting date until that
financial instrument is low credit risk at a reporting date.

 For determining the loss allowance on financial instruments prior to the date of initial
application, an entity shall consider information that is relevant in determining or
approximating the credit risk at initial recognition.
 Embedded Derivatives
 Assess if an embedded derivative needs to be separated from the host contract and
accounted for as a derivative on the basis of the conditions at later of the date that
existed first became a party to the contract and the date a reassessment as required
by Ind AS 109.
Government Loans

 A first-time adopter shall classify all government loans received as a financial liability
or equity instrument as per Ind AS 32.
 The exception being a loan taken at a rate lower than the market rate. Also, apply the
requirements the of Ind AS 109 and Ind AS 20 prospectively to the government loans
existing at the date of transition.

However, an entity is not precluded from applying the requirements retrospectively

provided the information required to do so is available at the time of accounting.
 The standard also defines other exemptions available and in detail disclosure
requirements.
What Is an Asset?

 An asset is a resource with economic value that an individual, corporation, or

country owns or controls with the expectation that it will provide a future
benefit.
 Assets are reported on a company's balance sheet.
 They are bought or created to increase a firm's value or benefit the firm's
operations.
 An asset is something that may generate cash flow, reduce expenses or
improve sales, regardless of whether it's manufacturing equipment or a
patent.
 Assets can be classified as current, fixed, financial, or intangible.
Types of Assets

 Current Assets
 In accounting, some assets are referred to as current. Current assets are short-term
economic resources that are expected to be converted into cash or consumed within one
year. Current assets include cash and cash equivalents, accounts receivable, inventory,
and various prepaid expenses.
 While cash is easy to value, accountants periodically reassess the recoverability of
inventory and accounts receivable. If there is evidence that a receivable might be
uncollectible, it'll be classified as impaired. Or if inventory becomes obsolete,
companies may write off these assets.
 Some assets are recorded on companies' balance sheets using the concept of historical
cost. Historical cost represents the original cost of the asset when purchased by a
company. Historical cost can also include costs (such as delivery and set up) incurred to
incorporate an asset into the company's operations.
Fixed Assets

 Fixed assets are resources with an expected life of greater than a year, such
as plants, equipment, and buildings. An accounting adjustment called
depreciation is made for fixed assets as they age. It allocates the cost of the
asset over time. Depreciation may or may not reflect the fixed asset's loss of
earning power.
 Generally accepted accounting principles (GAAP) allow depreciation under
several methods. The straight-line method assumes that a fixed asset loses its
value in proportion to its useful life, while the accelerated method assumes
that the asset loses its value faster in its first years of use
 Financial Assets
 Financial assets represent investments in the assets and securities of other institutions.
Financial assets include stocks, sovereign and corporate bonds, preferred equity, and
other, hybrid securities. Financial assets are valued according to the underlying security
and market supply and demand.
 Intangible Assets
 Intangible assets are economic resources that have no physical presence. They include
patents, trademarks, copyrights, and goodwill. Accounting for intangible assets differs
depending on the type of asset. They can be either amortized or tested for impairment
each year
 While an asset is something with economic value that's owned or controlled by a person
or company, a liability is something that is owed by a person or company. A liability could
be a loan, taxes payable, or accounts payable.
What Are Non-Physical Assets?

 Non-physical or intangible assets provide an economic benefit even though you cannot
physically touch them. They are an important class of assets that include things like
intellectual property (e.g., patents or trademarks), contractual obligations, royalties,
and goodwill. Brand equity and reputation are also examples of non-physical or
intangible assets that can be quite valuable.
 Is Labor an Asset?
 No. Labor is the work carried out by human beings, for which they are paid in wages or a
salary. Labor is distinct from assets, which are considered to be capital.
 How Are Current Assets Different From Fixed (Noncurrent) Assets?
 In accounting, assets are categorized by their time horizon of use. Current assets are
expected to be sold or used within one year. Fixed assets, also known as
noncurrent assets, are expected to be in use for longer than one year. Fixed assets are
not easily liquidated. As a result, unlike current assets, fixed assets
undergo depreciation.
What Is a Liability?
 A liability is something a person or company owes, usually a sum of money. Liabilities are
settled over time through the transfer of economic benefits including money, goods, or
services.
 Recorded on the right side of the balance sheet, liabilities include loans, accounts payable
, mortgages, deferred revenues, bonds, warranties, and accrued expenses.
 Liabilities can be contrasted with assets. Liabilities refer to things that you owe or have
borrowed; assets are things that you own or are owed.
 A liability (generally speaking) is something that is owed to somebody else.
 Liability can also mean a legal or regulatory risk or obligation.
 In accounting, companies book liabilities in opposition to assets.
 Current liabilities are a company's short-term financial obligations that are due within one
year or a normal operating cycle (e.g. accounts payable).
 Long-term (non-current) liabilities are obligations listed on the balance sheet not due for
more than a year.
How Liabilities Work

 In general, a liability is an obligation between one party and another not yet
completed or paid for. In the world of accounting, a financial liability is also an
obligation but is more defined by previous business transactions, events, sales,
exchange of assets or services, or anything that would provide economic benefit at a
later date. Current liabilities are usually considered short-term (expected to be
concluded in 12 months or less) and non-current liabilities are long-term (12 months or
greater).
 Liabilities are categorized as current or non-current depending on their temporality.
They can include a future service owed to others (short- or long-term borrowing from
banks, individuals, or other entities) or a previous transaction that has created an
unsettled obligation. The most common liabilities are usually the largest like accounts
payable and bonds payable. Most companies will have these two line items on their
balance sheet, as they are part of ongoing current and long-term operations.
 Liabilities are a vital aspect of a company because they are used to finance
operations and pay for large expansions. They can also make transactions between
businesses more efficient. For example, in most cases, if a wine supplier sells a case
of wine to a restaurant, it does not demand payment when it delivers the goods.
Rather, it invoices the restaurant for the purchase to streamline the drop-off and
make paying easier for the restaurant.
 The outstanding money that the restaurant owes to its wine supplier is considered a
liability. In contrast, the wine supplier considers the money it is owed to be an
asset.
 Liability may also refer to the legal liability of a business or individual. For example,
many businesses take out liability insurance in case a customer or employee sues
them for negligence.
Types of Liabilities

 Businesses sort their liabilities into two categories: current and long-term. Current
liabilities are debts payable within one year, while long-term liabilities are debts payable
over a longer period. For example, if a business takes out a mortgage payable over a 15-
year period, that is a long-term liability. However, the mortgage payments that are due
during the current year are considered the current portion of long-term debt and are
recorded in the short-term liabilities section of the balance sheet.
Current (Near-Term) Liabilities

 Ideally, analysts want to see that a company can pay current liabilities, which are due
within a year, with cash. Some examples of short-term liabilities include payroll
expenses and accounts payable, which include money owed to vendors, monthly
utilities, and similar expenses. Other examples include:
 Wages Payable: The total amount of accrued income employees have earned but not
yet received. Since most companies pay their employees every two weeks, this liability
changes often.
 Interest Payable: Companies, just like individuals, often use credit to purchase goods
and services to finance over short time periods. This represents the interest on those
short-term credit purchases to be paid.
 Dividends Payable: For companies that have issued stock to investors and
pay a dividend, this represents the amount owed to shareholders after the dividend was
declared. This period is around two weeks, so this liability usually pops up four times
per year, until the dividend is paid.
 Unearned Revenues: This is a company's liability to deliver goods and/or services at a
future date after being paid in advance. This amount will be reduced in the future with
an offsetting entry once the product or service is delivered.
 Liabilities of Discontinued Operations: This is a unique liability that most people
glance over but should scrutinize more closely. Companies are required to account for
the financial impact of an operation, division, or entity that is currently being held for
Non-Current (Long-Term) Liabilities

 Considering the name, it’s quite obvious that any liability that is not near-term falls under
non-current liabilities, expected to be paid in 12 months or more. Referring again to the AT&T
example, there are more items than your garden variety company that may list one or two items.
Long-term debt, also known as bonds payable, is usually the largest liability and at the top of the
list.
 Companies of all sizes finance part of their ongoing long-term operations by issuing bonds that are
essentially loans from each party that purchases the bonds. This line item is in constant flux as
bonds are issued, mature, or called back by the issuer.
 Analysts want to see that long-term liabilities can be paid with assets derived from future earnings
or financing transactions. Bonds and loans are not the only long-term liabilities companies incur.
Items like rent, deferred taxes, payroll, and pension obligations can also be listed under long-term
liabilities. Other examples include:
 Deferred Credits: This is a broad category that may be recorded as current or non-current
depending on the specifics of the transactions. These credits are basically revenue collected before
it is recorded as earned on the income statement. It may include customer advances, deferred
revenue, or a transaction where credits are owed but not yet considered revenue. Once the
revenue is no longer deferred, this item is reduced by the amount earned and becomes part of the
company's revenue stream.
 Post-Employment Benefits: These are benefits an employee or family members may receive upon
his/her retirement, which are carried as a long-term liability as it accrues. In the AT&T example,
this constitutes one-half of the total non-current total second only to long-term debt. With rapidly
Liabilities vs. Expenses

 An expense is the cost of operations that a company incurs to generate revenue. Unlike
assets and liabilities, expenses are related to revenue, and both are listed on a company's
income statement. In short, expenses are used to calculate net income. The equation to
calculate net income is revenues minus expenses.
 For example, if a company has had more expenses than revenues for the past three years,
it may signal weak financial stability because it has been losing money for those years.
 Expenses and liabilities should not be confused with each other. One—the liabilities—are
listed on a company's balance sheet, and the other is listed on the company's income
statement. Expenses are the costs of a company's operation, while liabilities are the
obligations and debts a company owes. Expenses can be paid immediately with cash, or
the payment could be delayed which would create a liability.
 Like most assets, liabilities are carried at cost, not market value, and under
generally accepted accounting principle (GAAP) rules can be listed in order of preference
as long as they are categorized. The AT&T example has a relatively high debt level under
current liabilities. With smaller companies, other line items like accounts payable (AP)
and various future liabilities like payroll, taxes will be higher current debt obligations.
What Is a Contingent Liability?
 A contingent liability is an obligation that might have to be paid in the future,
but there are still unresolved matters that make it only a possibility and not a
certainty.
 Lawsuits and the threat of lawsuits are the most common contingent
liabilities, but unused gift cards, product warranties, and recalls also fit into
this category.
 What Is Accrual Accounting?

 Accrual accounting is a financial accounting method that allows a company to record

revenue before receiving payment for goods or services sold and record expenses as they
are incurred.
 In other words, the revenue earned and expenses incurred are entered into the
company's journal regardless of when money exchanges hands. Accrual accounting is
usually compared to cash basis of accounting, which records revenue when the goods and
services are actually paid for.
 Accrual accounting is an accounting method where revenue or expenses are recorded
when a transaction occurs vs. when payment is received or made.
 The method follows the matching principle, which says that revenues and expenses
should be recognized in the same period.
 Accrual accounting uses the double-entry accounting method.
 This method allows the current and future cash inflows or outflows to be combined to give
a more accurate picture of a company's current and long-term finances.
 Accrual accounting follows the matching principle, which states that revenues and
expenses should be recorded in the same period.
 Accrual accounting is encouraged by International Financial Reporting Standards(IFRS) and
Generally Accepted Accounting Principles (GAAP). As a result, it has become the standard
accounting practice for most companies except for very small businesses and individuals.
 Larger companies are required to use the accrual method of accounting
 Accrual accounting is always required for companies that carry inventory or make sales on
credit, regardless of the company size or revenue.
 The accrual method does provide a more accurate picture of the company's current
condition, but its relative complexity makes it more expensive to implement.
 This method arose from the increasing complexity of business transactions and a desire for
more accurate financial information. Selling on credit, and projects that provide revenue
streams over a long period, affect a company's financial condition at the time of a
transaction. Therefore, it makes sense that such events should also be reflected in the
financial statements during the same reporting period that these transactions occur.
 Accrual accounting

 Under accrual accounting, firms have immediate feedback on their expected cash
inflows and outflows, making it easier for businesses to manage their current resources
and plan for the future.
 Accrual accounting provides a more accurate picture of a company’s financial position.
However, many small businesses use cash accounting because it is less confusing.