CONTENTS

S.NO PARTICULARS PAGE NO

1 ACCOUNTING CONCEPTS WITH EXAMPLES 3-5

2 STATEMENT AND ITS ACCOUNTING PRINCIPLE 6–7

3 CONSISTENCY PRINCIPLE 7

4 RATIONALE CONVERSION OF IAS WITH IFRS 7–8

5 VARIOUS STAGES IN ACCOUNTING PROCESS 9

6 NOTES TO ACCOUNTS 9 - 10

7 ITEMS OF FINANCIAL INFORMATION 10 – 11

8 DIFFERENTIATE CURRENT LIABILITIES AND NON-CURRENT 11

LIABILITIES

9 CLASSIFICATION OF ITEMS IN BALANCE SHEET 11-12

10 DISTINGUISH BETWEEN PRE-TAX PROFIT, CASH 13-14

OPERATING PROFIT, EBIT, PROFIT AFTER TAX

11 REFERENCES 15

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 UNIT I & II

1. EXPLAIN THE FOLLOWING ACCOUNTING PRINCIPLES WITH SUITABLE

EXAMPLES.

A) ACCOUNTING PERIODS:

The accounting period concept is based on the theory that all accounting
transactions of a business should be divided into equal time periods, which are
referred to as accounting periods. The purpose of such a time period is that financial
statements can be prepared and presented to the investors and also help in comparing
the performance of the business with each time period. By preparing financial
statements within a particular time period, a company is able to determine the profit
and loss that occurred during the period for the business.

The lack of a proper accounting period will result in variations of results and make
it difficult to determine the financial position of the company at that time.

Generally, an accounting period is of 12 months (1 year). While the time period is

fixed, the month can vary from company to company.

Types of Accounting Periods in Accounting

The following types of accounting periods can be seen in accounting:

1. Calendar Year

2. Fiscal Year

Calendar Year: The companies that follow the calendar year, their accounting period
starts from 1st January to 31st December of the same year.

Fiscal Year: For companies that follow the fiscal year, the accounting period starts
from the first day of any other month apart from January.

EXAMPLES-:

Example - 1

Every year, a corporation records its transactions from January 1st to December
31st and then closes its books. The billing period, in this case, is one year, from
January 1st to December 31st. However, not all businesses must adhere to a single
year.

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Example - 2

A corporation records its transactions from January 1st to June 30th of each year
and then closes its books of accounts. The accounting period, in this case, is half a
year, from January 1st to June 30th, and the next period is from July 1st to December
31st.

B) SEPARATE ENTITY:

The business entity concept is one of the accounting concepts that states that a
business and the owner are two separate entities and therefore, should be considered
separate from each other. As per this concept, the financial transactions pertaining
to the business entity should be recorded separately from the business owner’s
transactions.

This concept is also known as the Economic Entity Concept, which means that the
owner of the business and the business itself are considered as two separate entities.

EXAMPLES-:

Consider a business owner who buys a new laptop for personal use and another one
specifically for business operations. According to the separate entity concept, only
the expenses related to the business laptop would be recorded in the company’s
financial statements. The personal laptop expense would not be included

C) MONEY MEASUREMENT:

According to the Money Measurement Concept, a company should record only those
events or transactions in its financial statement that can be measured in terms of
money and where assigning the monetary value to the transactions is not possible.
It will not be recorded in the financial statement.

EXAMPLE-:

Cash and Bank Balances: A company’s cash reserves and balances in bank accounts
are prime examples of the money measurement concept. The monetary value of
these assets is directly observable and aligns with the principal’s emphasis on
quantifiability.

Accounts Receivable: When a business extends credit to customers, resulting in

outstanding payments for products or services rendered, these accounts receivable
represent future cash inflows. Despite being intangible, their value can be readily
measured in monetary terms.

Inventory: The value of inventory, comprising goods held by a company for

eventual sale, offers a tangible embodiment of the money measurement concept.

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This valuation clearly represents the worth of these items within the financial
statements.

D) SUBSTANCE OVER FORM:

Substance Over Form concept in accounting means recording financial transactions

to truly represent the essence in statements, focusing on economic reality rather than
just legal appearances. It involves complete disclosure and aims to reveal the
genuine intent of transactions. This accounting principle is more focused on the true
nature of the transaction and not just the legal form that could be used to mislead
the company’s readers and investors.

EXAMPLE-:

One firm acting as an agent for another and only recording sales on behalf of the
second company in their commission amount. But to make their sales look big, they
record the total sale amount as revenue. This way, businesses hide their debt
liabilities as their debt does not appear on the balance sheet.

E) HISTORICAL COST-:

In accounting, the historical cost of an asset refers to its purchase price or its original
monetary value. Based on the historical cost principle, the transactions of a business
tend to be recorded at their historical costs. The concept is in conjunction with the
cost principle, which emphasizes that assets, equity investments, and liabilities
should be recorded at their respective acquisition costs.

EXAMPLES-:

A company that purchased a building in 1955 for a price of $20,000. In its

accounting record, the asset value is $20,000. In the real market, however, this asset
is valued at $875,000. Under the historical cost principle, the asset would remain in
the company's books at $20,000.

F) DUAL ASPECT:

The Dual Aspect Concept is fundamental in accounting. It states that every

financial transaction has two equal and opposite effects. This principle is the
foundation of the double-entry bookkeeping system. It means that for every value
received (debit), a value is given (credit). Dual aspect of accounting, also known as
the Duality Concept of Accounting. It ensures that every financial transaction has
equal and opposite effects on assets and equities, maintaining balance in the
fundamental equation. It enhances accuracy, detects errors, and provides a
complete financial picture, supporting informed decision-making and compliance
with accounting standards.

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EXAMPLE -:

If a company buys machinery for ₹50,000 cash, the machinery account is debited
(representing an increase in assets), and the cash account is credited (representing a
decrease in assets). This dual recording ensures the accounting equation (Assets =
Liabilities + Equity) always balances.

2. ‘GAINS ARE RECORDED IF REASONABLY CERTAIN, WHEREAS LOSSES

ARE RECORDED EVEN IF REASONABLY PROBABLE’- EXPLAIN THE
STATEMENT AND IDENTIFY THE ACCOUNTING PRINCIPLES INVOLVED

This statement relates to the treatment of gains and losses in accounting, reflecting
the principles of conservatism (or prudence) and the matching principle.

1. Conservatism Principle:

This principle guides accountants to exercise caution in the face of uncertainty and
the potential for bias. It suggests that gains should only be recognized when they
are realized or reasonably certain. Conversely, losses should be recognized as soon as
they are reasonably probable.

The rationale behind this principle is to avoid overestimating the financial health
of a business by recognizing potential gains too early while ensuring that potential
losses are accounted for promptly to give a true and fair view of the financial
position.

2. Matching Principle:

This principle states that expenses should be matched with the revenues they help
to generate. It ensures that income statements reflect the actual performance of a
company over a specific period.

In the context of this statement, recognizing losses even when reasonably probable
aligns with ensuring that all potential expenses (or reductions in revenue) are
accounted for in the period they are expected to occur, thus providing an accurate
picture of profitability.

Application of Principles:

Gains: A company should not record gains until there is a high degree of certainty
that they will be realized. This could mean waiting until a transaction is finalized or
when payment is assured.

Losses: On the other hand, if there is reasonable evidence that a loss might occur,
such as a pending lawsuit where the company is likely to be held liable, it should be
recorded immediately. This proactive approach prevents overstating the company's
financial health.
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In summary, the conservatism principle ensures that gains are not overstated and
losses are not understated, thus protecting users of financial statements from
potential misrepresentation of a company's financial position. The matching
principle complements this by ensuring that all revenues and expenses are
appropriately aligned with the correct reporting periods.

3) AS PER THE CONSISTENCY PRINCIPLE, ACCOUNTING POLICIES ONCE

CHOSEN CANNOT BE CHANGED. DO YOU AGREE?

Yes, we agree. The consistency principle states that businesses should maintain the
same accounting methods or principles throughout the accounting periods so that
users of the financial statements or information are able to make meaningful
conclusions from the data. It has the following advantages.

1. It helps accountants in recording of financial transactions and managing the

company accounts in a better way.

2. It enables auditors to perform a comparative analysis of the financial

performance of the business by taking into account data obtained from different
accounting periods.

3. It makes the management familiar with the accounting principles and practices
and therefore is in a better position to make business decisions.

4. Following a consistent accounting principle helps reduce the need for training of
the staff which reduces the training cost.

5. Consistency in accounting principles is helpful in performing a comparative

study of the financial performance of the business.

4) WHAT IS THE RATIONALE OF CONVERGENCE OF INDIAN ACCOUNTING

STANDARDS WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS?

The convergence of Indian Accounting Standards (Ind AS) with International

Financial Reporting Standards (IFRS) is important for several reasons:

 Global Comparability: It allows financial statements of Indian companies to

be easily compared with those of companies around the world, improving
transparency and consistency.

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 Investor Confidence: It boosts confidence among international investors by
providing reliable and comparable financial information, making it easier
for Indian companies to attract foreign investment.

 Access to Global Markets: Companies can more easily raise capital globally,
as international investors and financial institutions prefer businesses that
follow well-known international standards.

 Economic Integration: As India becomes more integrated with the global

economy, having common accounting standards simplifies cross-border
trade and investment.

 Improved Reporting Quality: IFRS is known for its detailed disclosure

requirements, leading to more comprehensive and high-quality financial
reports.

 Regulatory Alignment: Aligning with global norms makes regulatory

oversight more efficient and helps reduce the compliance burden for
companies operating internationally.

 Professional Development: Convergence enhances the skills of accounting

professionals in India, making them more globally competitive.

 Economic Growth: Better financial reporting can attract more foreign direct
investment, support business expansion abroad, and ultimately contribute
to the growth of the Indian economy.

the convergence of Indian Accounting Standards with IFRS is aimed at

fostering a more transparent, reliable, and globally integrated financial
reporting environment in India. This alignment not only benefits companies
and investors but also supports the broader economic and regulatory
landscape, promoting sustained growth and development.

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5) DESCRIBE VARIOUS STAGES IN ACCOUNTING PROCESS

The accounting process involves gathering, recording, analyzing, summarizing,

and sharing financial information. This helps businesses keep track of their
financial transactions, understand their financial health, and manage their cash
flow. Financial statements, which summarize this information, are used to help
make business decisions. There are 8 stages in the accounting process, they are
represented as below.

6) What are Notes to Accounts? For better understanding of financial statement, it

is important to go through the notes to accounts. Do you agree?
Notes to Accounts are additional details provided in a company's financial
statements. They provide explanations, breakdowns, and additional context to the
figures reported in the main financial statements such as the balance sheet, income
statement, and cash flow statement.
Clarification: Notes explain what the numbers in the main financial statements
actually mean. They offer insights into how figures are calculated and what
accounting methods are used.

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Extra Details: They include important information that is not obvious just from
looking at the financial statements, like potential future liabilities or significant
events that could impact the company.
Transparency: Notes to accounts help to ensure that the company is transparent
about its financial situation and complies with accounting rules. They provide a
clearer picture of what’s really going on.
Understanding Risks: They often outline risks and uncertainties, so you get a better
sense of potential challenges the company might face.
Detailed Breakdown: Notes to accounts can break down large figures into more
detailed components, giving you a deeper look at things like asset values or revenue
by region.
In short, notes to accounts give you the full story behind the numbers and help you
make better-informed decisions about the company’s financial health offering
crucial insights and details that the main financial statements alone cannot provide.

7) IDENTIFY FINANCIAL STATEMENTS WHICH INCLUDE THE FOLLOWING

INFORMATION.
A) SHARES ISSUED DURING THE YEAR:
This inflow of funds is not treated as an income as it's not a profit rather it is an
investment into the capital of a company and therefore it is treated as a liability
under the Separate entity principle, this information will be available in the balance
sheet under Capital and equity.
B) OTHER INCOMES EARNED DURING THE YEAR:
Other incomes are quite literally other influxes of income that is not involved
with the daily workings of the company, For example, income from rent of a
building received by a college whose product is education. This information will be
available in the P&L Account under Miscellaneous Income.

C) TRADE RECEIVABLES AT THE END OF THE YEAR:

Trade Receivables are essentially goods sold on credit, these creditors are expected
to usually pay within a year due to the nature of these transactions being fast-paced.
It is recorded in the P&L statement as an income and also in the balance sheet as a
current asset.
D) DEPRECIATION ON ASSETS CHARGED DURING THE YEAR:
Depreciation is a reduction of value due to the wear and tear of an asset due
to use and passage of time, this is done to provide for the reduction in value of the
asset until it is eventually scrapped for a way lower value than its cost price, this

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leads to a more transparent and realistic look into the financial situation of a
company. This information will be available in the P&L account as an expense and
it will also be represented in the balance sheet as a reduction to the value of an asset.
E) DIVIDEND RECEIVED DURING THE YEAR:
This refers to dividends earned by the company due to its ownership of shares of a
company and is treated uniquely based on the nature of the company. This will be
Recorded in the P&L account as an Income and may either come under
miscellaneous if the firm’s business is not in dividends or under revenue if for
example the firm is involved with dividends as it is a mutual fund scheme.
F) LOAN OUTSTANDING:
As the name suggests this account is involved with outstanding loans taken by the
company that are yet to be paid, it is usually a non-current liability as loans are
taken usually for a period of more than one year however it’s not the rule. This will
be available in the Balance Sheet as a Liability either current or long-term
depending on the maturity period of the loan.
G) INTEREST EXPENSES DURING THE YEAR:
These are the Interests accrued on loans or other outstanding liabilities of a
company. This will always be recorded in the P&L Account as an expense however
it may also be recorded in the balance sheet as an addition to outstanding
loans/liabilities if it is not paid as it is accrued.

8) HOW DO YOU DIFFERENTIATE CURRENT LIABILITIES AND NON-

CURRENT LIABILITIES
The main differentiation between Current and Non-Current Liabilities is the
Maturity period of the liability, if the liability reaches maturity within one year it
is classified as a current or short-term liability ( Accounts payable, short-term loan,
and accrued expenses), if it takes more than one year to reach maturity it will be
classified as a Non-current or long term liability( Long-term loans, bonds payable,
and deferred tax liabilities).
A good example of Current liability is Trade Payables as they are paid within one
year due to the nature of the agreements regarding the same, for Non-current
liabilities an example would be Bank loans as they are usually taken for a period of
5 years which is longer than the one-year principle used to differentiate Current and
Non-Current liabilities.

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 Particulars Current liabilities Non-Current liabilities

Definition It is all liabilities that It is all liabilities that mature/are

mature/are meant to be paid meant to be paid over a period of
within a time period of one time longer than a period of one
year year

Purpose Current liabilities are usually Non-current liabilities are taken

taken up by a company in up by a company most of the
order to meet short-term time solely for asset acquisition or
expenses such as the other expansionary practices and
purchase of raw materials or as such involve a large sum
overhead expenses

Examples Some examples of Current Some examples of non-current

liabilities are Trades payable, liabilities are Bank loans and
short-term securities like long-term securities like
bonds, etc. Debentures etc.

9) HOW WILL YOU CLASSIFY THE FOLLOWING ITEMS IN THE BALANCE

SHEET OF A COMPANY?
A) GOODWILL:
Goodwill is an intangible asset that is recorded when one company is purchased by
another. It is the portion of the purchase price that is higher than the sum of the net
fair value of all of the assets purchased in the acquisition and the liabilities assumed
in the process.
This difference is due to things like the value of a company’s name, brand
reputation, etc and it represents a value that can give the acquiring company a
competitive advantage.
Goodwill is classified as an Intangible asset and thus it’s not represented in the
balance sheet until a takeover or merger by a different company.
B) TRADE PAYABLES:
Trade payables (also called trade accounts payable) are the money a business owes
for goods and services when buying them on credit.
It is classified as a Liability and comes under Current liabilities in the balance sheet
as it is usually paid within a year unless in a few cases where it can take a more than
a year leading to it being paid.

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C) PROVISIONS FOR DOUBTFUL DEBTS/ DEPRECIATION:
The provision for doubtful debts is an estimated quantity of bad debts that are likely
to arise from the accounts receivable that have been given but not yet collected from
the debtors, the provision for Depreciation is a provision created to record the value
of depreciation on assets separately. The purpose of this account is to provide for
the loss on value of assets before they take place in order to have a more conservative
view of the financial situation of the company
Both are classified as liabilities due to their similar nature and come under current
liabilities.
D) SECURITIES PREMIUM ACCOUNT:
The securities premium is considered as a capital receipt on the part of the company.
Capital receipts refer to funds received by the company which are not eligible to be
considered as income. Hence, companies are allowed to make use of capital funds
only for specific purposes, and for this reason, it is shown on the liabilities side of
the balance sheet and comes under reserves and surplus
E) CURRENT INVESTMENTS:
Current Investments are Investments with a short maturity period or is meant to
be liquidated within one year, these investments may be form of money market
instruments like Treasury bills or Capital market instruments like futures and
options, on the other end assets that are also expected to be liquidated within one
year also come under Current investments. These investments are shown on the
asset side of the balance sheet under current assets.
F) INVESTMENT PROPERTY:
An investment property refers to a real estate property acquired to obtain a return
on the investment by rental income, the property's potential resale, or both. It
comes under the asset side of the balance sheet and is either a long-term or short-
term asset depending on how long it is planned to be held on for.
G) CONTINGENT LIABILITIES:
A contingent liability is a liability that may occur depending on the outcome of an
uncertain future event. A contingent liability has to be recorded if the contingency
is likely and the amount of the liability can be reasonably estimated.
As the name suggests they are liabilities but are shown in the footnote of the balance
sheet due to their nature of being uncertain however if it is likely to happen, it will
be shown in the Balance sheet as a Current liability.

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 10) DISTINGUISH BETWEEN PRE-TAX PROFIT, CASH OPERATING PROFIT,
EBIT, AND PROFIT AFTER TAX

Details Pre-tax Profit Cash Operating profit EBIT Profit after tax

Definition Pre-tax Profit is Cash Operating EBIT (earnings Profit after tax is
the total profit profit is calculated before interest the net profit of
before taxes as the Total revenue and tax) is the company after
essentially the in cash minus Cost of calculated taxes have been
Net profit on goods sold operating as revenue minus levied this is This
which taxes are expenses this is the expenses is calculated as
excluding tax and
levied. It is amount of cash pre-tax profit
interest, This is
calculated as flowing into the minus taxes.
the earnings of a
Revenue minus company as opposed company without This is the net
Expenditure (R- to going out interests or taxes earnings of a
E) levied company

Purpose This variable is This information is EBIT is a more This amount is

used in order to useful for stock concept of a the most
calculate the understanding the company’s important
Profitability of turnover of the activities and as variable as Profit
the company company’s revenue- such is utilized for after tax leads to
without the generating activities calculating the dividends and
intervention of and is commonly genuine bonuses and as
tax and is one of compared with Pre- performance of such is the most
the most tax profit for the company commonly noticed
commonly understanding the excluding its value by a
utilized financial margin of profit in a temporary shareholder of a
information by venture. commitments and company,
Stockholders gains in the form
of interest, while
also removing the
equation of
taxation which is
subject to
subsidies or
increases based on
the company.

Advantage An advantage of The advantage of EBIT is a useful Profit after tax is

Pre-tax Profit is Cash operating variable to realize the end all be all
that it is useful in profit over other proper of the financial

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 finding the variables is the clear comparisons of a situations of a
profitability of a understanding of a company’s company; this
company in all of company’s actual workings without value decides the
its activities both cash inflow which the effects of dividends of the
financial and can be utilized as one external shareholders and
operational. of the many factors components the success of the
to calculate allowing for company making
liquidity. company-to- it the most
company or year- important of
to-year analysis. them all.

Disadvantage It does not show Cash operating EBIT being a Profit after tax
the effects of profit is not as useful stock concept does not cover the
taxation making as it used to be with does not account actual sources of
it an incomplete the advent of a more for the flow of the the profit and as
analysis of the Credit culture in the company such is a 2
industry’s corporate world happenings and Dimensional
profitability as a essentially lacks figure of the
whole contextually financial health of
based analysis the company
when utilized
alone without
other variables

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REFERENCES:
1.https://biz.libretexts.org/Bookshelves/Accounting/Intermediate_Financial_Accoun
ting_1__(Arnold_and_Kyle)/03%3A_Financial_Reports_Statement_of_Income_Co
mprehensive_Income_and_Changes_in_Equity.
2. https://www.superfastcpa.com/what-is-a-change-in-accounting-policy/
3. https://www.delapcpa.com/business-advisory/inventory-costing-method/
4. https://www.investopedia.com/terms/a/accounting-principles.asp
5. https://www.accountingtools.com/articles/basic-accounting-principles
6. https://unacademy.com/
7. https://www.investopedia.com/

BOOK:
1. Financial Management Accounting- An Introduction by Pauline Weetman
(5th edition)
2. Financial Accounting for Managers (Third edition) by Sanjay Dhamija

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