04-05-2013, 04:18 PM
ACCOUNTING STANDARDS
ACCOUNTING STANDARDS.docx (Size: 69.91 KB / Downloads: 20)
INTRODUCTION
ACCOUNTING
Accounting is the language of business. It is the system of recording, summarizing, and analyzing an economic entity's financial transactions. Effectively communicating this information is key to the success of every business. Those who rely on financial information include internal users, such as a company's managers and employees, and external users, such as banks, investors, governmental agencies, financial analysts, and labor unions. Accountants must present an organization's financial information in clear, concise reports that help make questions like these easy to answer. The most common accounting reports are called financial statements. Accounting information helps businesses be accountable.
General Accounts related to business
Accounting is essentially an "information process" that serves several purposes: Providing a record of assets owned, amounts owed to others and monies invested.
• Providing reports showing the financial position of an organisation and the profitability of its operations
• Helps management actually manage the organisation
• Provides a way of measuring an organization’s effectiveness (and that of its separate parts and management)
• Helps stakeholders monitor an organisations activities and performance
ACCOUNTING STANDARDS
Accounting Standards are the statements of code of practice of the regulatory accounting bodies that are to be observed in the preparation and presentation of financial statements. In layman terms, accounting standards are the written documents issued by the expert institutes or other regulatory bodies covering various aspects of measurement, treatment, presentation and disclosure of accounting transactions.
DEFINITION
A principle that guides and standardizes accounting practices. The Generally Accepted Accounting Principles (GAAP) are a group of accounting standards that are widely accepted as appropriate to the field of accounting. Accounting standards are necessary so that financial statements are meaningful across a wide variety of businesses; otherwise, the accounting rules of different companies would make comparative analysis almost impossible.
The Accounting Standards Committee (ASC) duties included developing standards for financial reporting and accounting, recording these standards and communicating them through press releases and publications.
“Accounting standards may be defined as uniform rules for external financial reporting which may be applicable either to all or a certain clan of entity.”-R.K.Lele and Jawahar Lal.
Dictionary of accounting defines as “advocates of accounting standards put forward the following arguments in their favors accounting information is of the nature of a public good so the forces of demand and supply will not operate effectively standards provide a generally accepted language for financial statements the renders them more comprehensible to user standards given financial statements credibility in the eyes of non-accountants standards may be set either in the public sector or in the private sector”.
Level II Company:
Enterprises, which are, not Level I enterprises but fall in any one or more of the following categories are classified as Level II enterprises;
i) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 4 million, but does not exceed Rs. 500 million. Turnover does not include ‘other income’.
ii) All commercial, industrial and business reporting enterprises having borrowing, including public deposits, in excess of Rs. 10 million but not in excess of Rs. 100 million at any time during the accounting period.
iii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
PRACTISES OF ACCOUNTING STANDARDS IN INDIA
With a view to harmonrse varying accounting policies and practices currently in use in India, the Institute of Chartered Accountants of India (ICAI) formed the Accounting Standards Board (ASB) in April 1977 which includes representatives form industry and government. In line with the procedure followed in other countries, the preliminary drafts prepared by the study groups and approved by ASB are circulated amongst various external agencies, including the representative bodies of trade commerce and industry. So far, twenty eight standards have been issued by ASB.
The standards are recommendatory in nature in the initial years. They are recommended for use by companies listed on a recognised Stock Exchange and other large commercial, industrial and business enterprises in the public and private sectors.
Regarding the position in India, It has been stated that the standards have been developed without first establishing the essential theoretical framework. Without such a framework, it has been contended, any accounting standards and principles developed are likely to lack direction and coherence. This type of shortcoming also existed in UK and USA but then it was recognised and remedied long back. In the United States the first task which FASB undertook was to develop a conceptual framework project which aimed at defining the objectives of financial reporting. This was to be followed by the spelling out of concepts and standards establishing what have been frequently referred to as,generally accepted accounting principles (GAAP).
DISCLOSURE OF ACCOUNTING POLICIES
This standard deals with disclosure of significant accounting policies followed in the preparation and presentation of the financial statements and is mandatory in nature. The accounting policies refer to the specific accounting principles adopted by the enterprise. Proper disclosure would ensure meaningful comparison both inter/intra enterprise and also enable the users to properly appreciate the financial statements. Financial statements are intended to present a fair reflection of the financial position financial performance and cash flows of an enterprise. Areas involving different accounting policies by different enterprises are
• Methods of depreciation, depletion and amortization
• Treatment of expenditure during construction
• Treatment of foreign currency conversion/translation, Valuation of inventories
• Treatment of intangible assets
• Valuation of investments
• Treatment of retirement benefits
• Recognition of profit on long-term contracts Valuation of fixed assets
• Treatment of contingent liabilities
CASH FLOW STATEMENT
Cash Flow Statement deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.
• Cash comprises cash on hand and demand deposits with banks.
• Cash equivalents are short term, highly liquid investments that are readily convertible
into known amounts of cash and which are subject to an insignificant risk of changes in value.
• Cash flows are inflows and outflows of cash and cash equivalents.
• Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.
• Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
• Financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in the case of a company) and borrowings of the enterprise.
CONCLUSION
Accounting as a field of study in its developmental process has evolved a theoretical framework consisting of principles or standards over period of time. These standards enjoy a wide measure of support of the accounting profession ; that is why they are known as Generally Accepted Accounting Principles (GAAP) . Several standards and their implications for business and information users were discussed in this project. Since the accounting principles are broad guidelines for general application, they permit a wide variety of methods and practices. The lack of uniformity in accounting practice makes it difficult to compare the financial reports of different companies. Moreover, the multiplicity of accounting practices makes it possible for management to conceal economic realities by selecting those alternative presentations of financial result which allow earnings to be manipulated. The financial statements prepared under such conditions, therefore, may have limited usefulness for several users of information. This problem has been recognized all over the world and various professional bodies are engaged in the task of standardizing accounting practices. There is a movement towards consensus building even at the international level. Such professional bodies, in fact , first look at the practices used by practicing accountants They then try to obtain a refinement of those practices by a process of consensus. It is in this manner that the theory of accounting is built . In India also, some headway has been made by establishing twenty eight standards for accounting practice.