Introduction to
Accounting
Standard
By Dr. Akhil Shetty
Introduction
Financial reporting standards provide principles for preparing
financial reports and determine the types and amounts of
information that must be provided to users of financial statements,
including investors and creditors, so that they may make informed
decisions.
An understanding of the underlying framework of financial
reporting standards, which is broader than knowledge of specific
accounting rules, will allow an investors and analyst to assess the
valuation implications of financial statement elements and
transactions.
Standard Setting Bodies
International
Institute of Chartered Financial Accounting
Financial Reporting
Accountants of India Foundation (FAF)
Standards (IFRS)
(ICAI) (1949) (1973)
Foundation (2001)
International Financial Accounting
Accounting Standards
Accounting Standards Standards Board
Board (ASB) (1977)
Board (IASB) (2001) (FASB) (1973)
IFRS Indian Ind-AS US
GAAP (2016) GAAP
Regulatory Bodies
A distinction must be made between standard-setting bodies
and regulatory authorities. Standard-setting bodies, such as the
IASB and FASB, are typically private sector, self-regulated
organizations with board members who are experienced
accountants, auditors, users of financial statements, and
academics.
The requirement to prepare financial reports in accordance with
specified accounting standards is the responsibility of regulatory
authorities.
Regulatory authorities have the legal authority to enforce
financial reporting requirements and exert other controls over
entities that participate in the capital markets within their
jurisdiction
Examples of regulatory authorities are Securities and Exchange
Board of India (SEBI) of India, The Accounting and Corporate
Regulatory Authority in Singapore, The Securities and Exchange
Commission (SEC) in the United States, and the Securities and
Exchange Commission of Brazil
Introduction to Accounting: Concept, rules
and conventions
Accounting is the process of recording, classifying, summarizing, and analyzing
financial transactions of an entity.
It provides information that is used to make informed decisions about the financial
position and performance of a business or organization.
Key Concepts in Accounting
Economic Entity Concept: This principle states that the business is treated as a
separate entity from its owners. All financial transactions are recorded separately
from the personal transactions of the owners or other businesses.
Monetary Unit Assumption: This concept assumes that all financial transactions
are recorded in a consistent monetary unit (e.g., INR, US dollars, Euros). This
standardizes reporting and allows for the meaningful comparison of financial data.
Going Concern Concept: This principle assumes that a business will continue its
operations for the foreseeable future. It implies that the business has no intention
of liquidating or reducing its operations significantly.
Introduction to Accounting: Concept, rules
and conventions
Key Concepts in Accounting
Accrual Basis of Accounting: Under this concept, transactions are recorded
when they are incurred, not necessarily when cash changes hands.
Matching Concept: Expenses should be recognized in the same period as
the revenues they help generate
Consistency Concept: Consistency in accounting practices is essential for
comparability. This concept requires that the same accounting methods and
principles be used over time unless a clear and reasonable justification for
change is provided.
Materiality: This concept suggests that all significant information must be
reported in financial statements. The threshold for what is considered
"material" can vary depending on the size and nature of the business, but
generally, an item is material if its omission or misstatement could influence
the economic decisions of users.
Conservatism Principle: This principle advises caution in reporting financial
data. When faced with uncertainty, accountants should choose the method
that results in lower profits or asset values. It ensures that potential
expenses and liabilities are not understated, thereby avoiding an overly
optimistic view of the company's financial health.
Basic Accounting Rules:
Debit & Credit
The left-hand side of any account is arbitrarily called the Debit side
and the right-hand side is called credit side.
Amounts entered on the left-hand side are called debits and
amounts entered on the right-hand side are called credits.
The verb to debit means to make an entry in the left-hand side of
an account and the verb to credit mean to make an entry in the
right-hand side of an account.
The word debit and credit have no other meaning in accounting.
In ordinary usage these words have other meanings. Credit has a
favourable connotation (such as “she is a credit to her family”) and
debit has an unfavourable connotation (such as “chalk up a debit
against him”)
In accounting these words do not imply any sort of value
judgement, they means simply “left” and “right”
Debit and credit are usually abbreviated as dr. and cr.
Basic Accounting Rules
The core of accounting is the balance sheet equation:
Assets = Liabilities + Owner's Equity
This equation must always balance. Any transaction you make must keep this
equation intact.
The fundamental accounting principles are often remembered through the
following set of rules, also known as the Golden Rules of Accounting:
Personal accounts: It relate to individuals, companies, or organizations. They
include accounts of debtors, creditors, banks, and capital accounts.
Accounting Rule for Personal Accounts: Debit the receiver, Credit the
giver.
Real accounts: It relate to assets and properties, whether tangible (like land,
buildings, machinery) or intangible (like patents, goodwill).
Accounting Rule for Real Accounts: Debit what comes in, Credit what
goes out.
Nominal accounts: It relate to expenses, losses, incomes, and gains. They
represent all income, expenses, profits, and losses.
Accounting Rule for Nominal Accounts: Debit all expenses and losses,
Credit all incomes and gains.
Golden Rules of Accounting
Nominal Account
Personal Account Real Account
(Debit all expenses
(Debit the (Debit what comes
and loses & Credit
Receiver & Credit in & Credit what
all income and
the Giver) goes out)
gains)
Natural Artificial Representative Tangible Intangible Accounts related to Income and
Persons Persons Personal Assets Assets Expenses
Represent For Eg: Land, For Eg: Goodwill, For Eg: Salary A/C, Rent A/C,
Humans Created by
certain person or Building, Trademark, Purchase A/C, Commission A/C,
law. Eg: SBI,
group of person. Machinery, Cash, Patent, Franchise Sales A/C
TCS Stock,
Eg: o/s Rent A/C,
Capital A/C investments
Accounting Process
Analyse Analyse the transaction
Journalize Journalize original entries
Post Post journal entries to ledger
Identify, journalize and
Identify, journalize and post adjusting entries
post
Trail Balance Lists the adjusted closing balances of all the general ledger accounts
Prepare Prepare financial statement
Examples of Financial Transaction
Sam started Campus Pizzeria Inc. on 1st August. Sam was a sole owner of the company.
Following are the financial transaction of Campus Pizzeria for the month of August.
On August 1, Sam invested $5000 in the business as owner
On August 1, the firm paid $750 rent for the month of August
The firm borrowed $4000 from the bank at 9% with interest payable quarterly and principal due at
the end of 2 years
Equipment costing $7,200 was purchased for cash. The expected life of the equipment was 10 years
An initial inventory of pizza ingredients and boxes was purchased on credit for $800
On Aug 13, the firm catered a party for a fee of $200 and payment would be received at the month
On Aug 29, the firm received $200 for the party which was scheduled on 13th Aug
In August pizza sales were $12,000 all for cash
During August the pizzeria’s employees were paid $3,000 in wages
During the month, an additional $5,750 of ingredients and boxes was purchased on credit
August sales consumed $6000 of ingredients and boxes
At the end of the month, bills for various utilities used in August were received totalling $450
During the month $4,800 of accounts payable was paid
