Financial and Management Accounting Unit 2

Unit 2 Accounting Concepts, Principles,

Bases, and Policies
Structure:
2.1 Introduction
Objectives
2.2 Generally Accepted Accounting Principles
2.3 Accounting Concepts
Business separate entity concept
Going concern concept
Money measurement concept
Periodicity concept
Accrual concept
2.4 Accounting Conventions
Convention of income recognition
Convention of matching cost and revenue
Convention of historical costs
Convention of full disclosure
Convention of double aspect
Convention of materiality
Convention of consistency
Convention of conservatism or prudence
2.5 Accounting Policies
Changes in accounting policies
Disclosure in case of changes in accounting policies
Mandatory and voluntary disclosures
2.6 Accounting Standards
Scope and functions of Accounting Standards Board of ICAI
2.7 International Financial Reporting Standards (IFRS)
Objectives of IFRS
Scope of IFRS
List of IFRS
2.8 Summary
2.9 Glossary
2.10 Terminal Questions
2.11 Answers
2.12 Case study
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2.1 Introduction
In the previous unit, we discussed the meaning and objectives of
accounting, the accounting process, and the distinction between book-
keeping and accounting. However, accounting is based on certain
postulates, concepts, and policies. In this unit, we will understand the
concepts, principles, and policies of accounting. We will also focus on a
brief introduction to Accounting Standards issued by Accounting Standards
Board of ICAI and International Financial Reporting Standards (IFRS).
Objectives:
After studying this unit, you should be able to:
 explain the meaning of GAAP and enumerate its components
 define the accounting concepts, principles, policies, and standards
 explain the different accounting concepts and principles and their
implications on financial statements
 describe the major considerations governing accounting policies
 define the scope and functions of Accounting Standards
 state the meaning and objectives of IFRS

2.2 Generally Accepted Accounting Principles (GAAP)

Accounting information is used by various stakeholders. The stakeholders
need to understand the accounting language and also the principles,
concepts, and policies based on which the financial statements have been
prepared.
Accounting principles
Accounting principles are the basic rules of action, which are adopted by the
accountants while recording accounting transactions and in preparing and
presenting financial statements. The principles are doctrines associated with
theory and procedures and current practices of accounting.
GAAP are the accounting principles that are accepted universally by
accountants, professional accounting bodies, and business entities across
the world. GAAP consists of two components.
 The accounting concepts
 The accounting conventions

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These are explained below.

Accounting concepts
These are basic or fundamental assumptions or conditions, which guide the
accountants while preparing accounting statements. These concepts are so
basic that most accountants do not consciously think of them; they are
regarded as being self-evident. They are also called Postulates of
Accounting.

Example: A business is started with an assumption that it shall continue

for a long period of time and none of the stakeholders would wish the
business to close down within a short period of time.

Based on this assumption, businesses purchase fixed assets, use long term
source to fund the fixed assets, etc. This strong assumption that the
business will continue for a long period of time is called as the going
concern concept.
Accounting conventions
Conventions are those customs and traditions that guide the accountants
while preparing the financial statements.

Example: Inventory (stock) in a business is valued at the end of an

accounting period, at either cost or market price, whichever is lower. This
is an accepted convention or a practice in accounting.

Though the concepts and conventions are fundamentally the same, there
may be some differences in the methodology or practice from one region to
another. Hence the GAAP is identified with a region. For example, the
accounting principles accepted and followed in the US and the surrounding
regions came to be identified as US GAAP, the accounting principles
accepted and followed in Japan and the surrounding regions came to be
identified as Japanese GAAP, the accounting principles accepted and
followed in India and the surrounding regions came to be identified as Indian
GAAP, the accounting principles accepted and followed in China and the
surrounding regions came to be identified as Chinese GAAP, etc. Of all the
GAAP, the US and the Chinese GAAP are known to be the most
conservative.

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Figure 2.1 summarises the relationship between accounting principles,

accounting concepts, and accounting conventions.

Figure 2.1: Relationship Between Accounting Principles, Accounting

Concepts, and Accounting Conventions

Self Assessment Questions

1. Accounting principles are _______ associated with theory and practice
of accounting.
2. Accounting principles are classified as ________ and ________.
3. A business is started with an assumption of making profit. Is this
assumption a concept or a convention?
4. The purpose of establishing ICAI and ASB is to ________.
5. How many accounting standards are issued by ASB so far?

2.3 Accounting Concepts

As mentioned earlier, accounting concepts are the basic conditions or
assumptions upon which the science of accounting is based. There are five
basic concepts of accounting, namely – business entity concept, (separate
entity concept), going concern concept, money measurement concept,
periodicity concept, and accrual concept. These are explained in Figure 2.2.

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Figure 2.2: Basic Concepts of Accounting

Let us now study the concepts in detail.

2.3.1 Business separate entity concept
This concept states that business is a separate entity and it is different from
the proprietor or the owner. In this concept a company can own assets and
incur liabilities in its own name. This separation not only has important legal
implication but also has an accounting implication. This enables the
business to segregate the transactions of the company from the private
transactions of the proprietor(s). It distinguishes between the personal
assets and liabilities of the owners with that of the business.

Example: Personal bank account of the proprietor, cash withdrawal from

business for private purpose should be accounted separately.

This legal separation between business and ownership is kept in mind while
recording the transactions in the books of business.

Self Assessment Questions

6. If the household expenses of Rs. 25,000 of a proprietor are shown as
business expenses, the profit of the business will be understated to the
extent of Rs. 25,000. (True/False)
7. If a proprietor invests Rs.1,00,000 in business, it is deemed that the
proprietor has given Rs.1,00,000 to the ‘business’ and it is shown as an
asset in the books of the business. (True/False)
8. Business and its owner are _______________ entities.
9. Profits earned in business form an addition to the _____________ of
the owner.
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2.3.2 Going concern concept

In this concept the business entity will continue fairly for a long time to
come. It assumes that there is neither the necessity nor the intention to
close down either the entire business or substantial operations of the
business.

Self Assessment Questions

10. Classification of assets as current and fixed assets is the application of
going concern concept. (True/False)
11. Why compliance of AS 1 need not be disclosed in the financial
statement?
12. When the government declares a company sick the concept of going
concern is not valid. (True/False)
2.3.3 Money measurement concept
All transactions of a business are recorded in terms of money.
This concept is basically concerned with the problem of measuring the value
of transactions. Certain transactions are either already expressed in terms
of money or easily measured in terms of money. For example, cost of
inputs, prices of assets, etc. Other assets or transactions that are difficult to
measure and express in terms of money are ignored. For example, value of
the brand, intelligence of people, etc.

Activity 1:
Give three transactions that are expressed in monetary terms:
1. ______________________________________________________
2. ______________________________________________________
3. ______________________________________________________
Give three transactions that are not expressed in monetary terms:
1. ______________________________________________________
2. ______________________________________________________
3. ______________________________________________________

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Self Assessment Questions

13. Inflation or changes in the purchasing power are ignored in money
measurement concept. (True/False)
14. Apple Inc. had announced that its CEO Steve Jobs was on an
unexpected period of absence due to ill health. We know that Steve
Jobs involvement in the success of the company’s products and
services are critical. Can this event be monetised? (True/False)
2.3.4 Periodicity (accounting period) concept
As per the going concern concept, the life of business is indefinite. This
makes it difficult to wait indefinitely to stop and look back at how the
company performed and also makes it too late to take corrective actions if
any. Hence, the indefinite life of business is split into regular intervals of
time. Such regular time intervals are called accounting periods.
2.3.5 Accrual concept
The following are the features of this concept:
 Expenses incurred for an accounting period must be recorded in that
accounting period regardless of whether it is actually paid in that
accounting period or not.
 Income earned for an accounting period must be recorded in that
accounting period regardless of whether it is actually received in that
accounting period or not.
Example: On 31st December, 2006, interest receivable on fixed deposit
was Rs. 12000. The interest amount was credited to a bank account in
February 2007 (two months later). According to accrual concept, the
income from interest is Rs.12000 though it is received after 31st
December, 2006.

Self Assessment Questions

15. Interest earned but not received within an accounting period is called
_______.
16. Accrued income should be _________ to compute profit and prepaid
expenses should be _____ according to accrual concept of accounting.
17. Accrual concept considers not only cash transactions but also ______
transactions.

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2.4 Accounting Conventions

Accounting conventions are the rules based on which accounting takes
place and these rules are universally accepted. There are ten types of
accounting conventions, namely convention of income recognition,
convention of expense, convention of matching cost and revenue,
convention of historical cost, convention of full disclosure, convention of
double aspect, convention of modifying, convention of materiality,
convention of consistency, and convention of conservatism. They are
explained briefly in the following sections.
2.4.1 Convention of income recognition
According to this concept, revenue is considered as being earned on the
date on which it is realised, i.e., the date on which goods and services are
transferred to customers for cash or for promise.

 A sale is considered to be made when the property in goods

(ownership) is transferred from the seller to buyer.
 In case of services, revenue is said to be earned when the service has
been delivered.

Self Assessment Questions

18. Income is considered as earned only when it is ____________.
19. Income is realised whether it is actually received in cash or promised to
be received. (True/False)
20. Income realised is different from cash received. (True/False)
21. A sale is made on credit. Does it constitute income realisation?
22. An order is received for sale of goods. Is it realisation of income?
23. An order is received with an advance of Rs.1,00,000 cash. Can this be
called income?
2.4.2 Convention of matching cost and revenue
According to this concept, revenue earned during a period is compared with
the expenditure incurred to earn that income, irrespective of whether the
expenditure is paid during that period or not. This is also called matching
cost and revenue principle.

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 Sales revenue in 2010 – Rs. 50,00,000

 Expenses incurred during the year – Rs. 30,00,000
 Expenses actually paid during the year – Rs.29,00,000
 Rs.1,00,000 though not paid, is still debited to the profit and loss
account of 2010.

While preparing the final accounts, adjustments are made for outstanding
expenses, prepaid expenses, outstanding income, and income received in
advance.

Self Assessment Questions

24. Matching concept of accounting considers only revenue incomes and
expenses relating to a particular accounting period. (True/False)
25. Income and expenses for an accounting period are considered to
compute _____.
26. Expenditure paid or payable and revenue earned whether realised or
not in cash are taken into account to find out profit or loss. (True/False)
2.4.3 Convention of historical costs
This convention says that all transactions must be recorded at a value at
which they were incurred. Such a value is called ‘Historical Cost’ and this
principle is called the Convention of ‘Cost’. An asset or transaction may
have many other values associated with it like market value or replacement
cost. But all assets are recorded at the cost of acquisition and this cost is
the basis for all subsequent accounting for the assets. The expenses and
the goods purchased are shown at the value at which they are incurred.

Example: Land bought for Rs. 5,00,000 will be shown at purchase price
irrespective of the market value.

Self Assessment Questions

27. All assets are shown at historical cost in the balance sheet.
(True/False)
28. Depreciation is charged against the historical cost of assets.
(True/False)
29. Historical cost is the cost at which an asset is actually purchased.
(True/False)

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30. Machinery is bought for Rs. 2,00,000 and its market value is
Rs.80,000. Which of these values do you mention in the balance sheet
according to cost principle?
2.4.4 Convention of full disclosure
This convention requires a business to disclose the following:
 All the accounting policies adopted in the preparation and presentation
of financial statements.
 If there is any change in the accounting policies in the current year as
compared to the previous year/s, the effects of such changes and the
reason/s thereof.
 The implications (in terms of money value) on the financial statements
due to such change.

Self Assessment Questions

31. Non-disclosure of material information amounts to ___________.
32. Disclosing about assets without disclosing about liabilities is against the
principle of full disclosure. (True/False)
2.4.5 Convention of double aspect
This concept states that every transaction has two aspects. One is the
receiving aspect and the other is the giving aspect. In accounting language,
these two aspects are called ‘debit’ and ‘credit’.
The claims on assets will always be equal to the assets. The claims on
assets may be of the owners or of the outsiders (creditors). While the claims
of owners are called Equity or Capital, the claims of outsiders are called
Liabilities. Therefore, total liabilities are equal to total assets. This concept
gives rise to the balance sheet equation, i.e., Assets=Liabilities + Capital.
The following balance sheet illustrates this.
BALANCE SHEET as on ……..

Liabilities Rs. Assets Rs.

Capital 1,20,000 Land 1,00,000
Bank loan 60,000 Building 80,000
20000 1,80,000

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From the above balance sheet it is clear that the firm has total assets worth
Rs. 1,80,000. Owners have a claim on these assets to the extent of
Rs.1,20,000, while the outsiders’ claim on these assets is Rs. 60,000.
This concept is also the basis for the established principle of accounting that
for every debit there is an equivalent credit.

Self Assessment Questions

33. Under dual aspect principle, total benefits received by business should
match the total benefits given. (True/False)
34. Total liabilities should be equal to ___________ as per dual aspect
principle.
35. For every debit, there should be an equivalent credit. This is called
_________ of accounting.
2.4.6 Convention of materiality
This convention states that the benefit derived from measuring, recording,
and processing a transaction should justify the cost of doing it.
2.4.7 Convention of consistency
This convention requires that the accounting policies must be consistently
applied year after year. Consistency is required to help comparison of
financial data from one period to another. Once a method of accounting is
adopted, it should not be changed. A change in an accounting policy may be
done only when:
 It is required by law
 It is felt that the new policy reflects the financial performance or position
better than the old policy
Such changed policy must be consistently applied for the subsequent
periods. As stated under the full disclosure convention, the change in the
accounting policy along with the reason/s and the financial implications on
the financial statements should be disclosed to the users.

Self Assessment Questions

36. The purpose of principle of consistency is to help ______ from one
period to another period.
37. Consistency principle helps for proper assessment of profit or loss.
(True/False)

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2.4.8 Convention of conservatism or prudence

Accountants follow the rule “anticipate no profits but provide for all
anticipated losses“. Whenever loss is anticipated, sufficient provisions
should be made. But if a profit is anticipated, it should not be recorded until
it is actually realised.

Self Assessment Questions

38. Provision should be made whenever _____________ is anticipated.
39. The underlying spirit of principle of conservatism is __________.
40. State the relevant accounting principle for the following statements.
a. Following FIFO method of stock valuation year after year
b. Appending notes to the financial statements
c. Anticipating no profit but providing for all probable losses

2.5 Accounting Policies

It refers to specific accounting principles and methods of accounting
adopted by enterprises while preparing and presenting the financial
statements. The management of each enterprise has to select appropriate
accounting policies based on the nature and circumstances of their
business. Some of the areas in which different accounting policies may be
adopted are:
 Methods of depreciation, amortisation
 Treatment of expenditure during construction
 Conversion or translation of foreign currency items
 Valuation of inventories
 Treatment of goodwill
 Valuation of investments
 Treatment of retirement benefits
 Recognition of profit on long-term contract
 Valuation of fixed assets
 Treatment of contingent liabilities
The major considerations governing the selection and application of
accounting policies are:
 Prudence – Uncertainties are a fact and they are inevitable. This should
be recognised by exercising prudence in preparing financial statements.

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 Substance over form – Transactions and events should be accounted

for and presented in accordance with their substance and financial
reality and not merely with their legal form.
 Materiality – Financial statement should disclose all material items
which might influence the decision of the users of the financial
statement.
2.5.1 Change in accounting policies
The change in accounting policies is recommended only in the following
circumstances:
1. If it is required by statute for compliance with an accounting standard.
2. If it is considered that the change would result in a more appropriate
presentation of the financial statements of an enterprise.
2.5.2 Disclosure in case of change in accounting policy
In case of any changes in the accounting policies, the following must be
disclosed:
 If the change has a material effect in current period and the effect of
change is ascertainable, the amount of change should be disclosed.
 If the change has a material effect in current period and the effect of
change is not ascertainable wholly or in part, the fact should be
disclosed.
 If the change has no material effect in current period but is reasonably
accepted to have a material effect in later periods, the fact of such
change should be appropriately disclosed.
2.5.3 Mandatory and voluntary disclosures
The disclosures required by the statutory bodies, government or regulatory
bodies or accounting standards are called mandatory disclosures. This is
the minimum disclosure that a company must and should give.
However, over and above the mandatory disclosures, the company may
give additional disclosures. These are called voluntary disclosures. These
days the tendency is to give maximum possible information to the users to
ensure transparency and build confidence among the users. Hence, most of
the companies provide a lot of information in their annual reports and on
their websites

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Activity 2:
Visit the websites of one or two companies like Infosys or HDFC Bank and
take a cursory look at their Annual Report. Focus on Accounting Policies.

2.6 Accounting Standards

As explained earlier (section 2.2), there are divergences in GAAPs of
different regions. This renders the financial statements of such regions
incomparable. Presently, businesses have become large, globalised, and
have stake holders across the globe. Therefore, the need to have uniformity
in the preparation and presentation of financial statement has given rise to
accounting standards.
An accounting standard is a selected set of accounting policies or broad
guidelines regarding the principles and methods to be chosen out of several
alternatives. Standards adhere to certain laws, customs, usage, and
business environment in which they operate.
The basic purpose of accounting standards is to harmonise the diverse
accounting policies and practices. The adoption of accounting standards
ensures uniformity, comparability, and qualitative improvement in the
preparation and presentation of financial statements. Accounting standards
facilitates more disclosure of financial information that is beyond the
statutory limits.
The earliest attempt towards harmonisation of accounting practices at the
international level was made by the International Accounting Standards
Committee (IASC). IASC was formed in 1973 to come out with the
statements of standard accounting practices intended to be adopted by
corporate sector across the globe. Such statements of standard accounting
practices issued by the Board of IASC are called International Accounting
Standards (IAS). IAS were issued by the IASC from 1973 to 2000.
The International Accounting Standards Board (IASB) replaced the IASC in
2001. Since then, the IASB has amended some IAS and has proposed to
amend others. IASB has also replaced some IAS with new International
Financial Reporting Standards (IFRS), and has adopted or proposed certain
new IFRS on topics which had no previous IAS.

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Most of the countries also have their own Accounting Standards (AS). In
India, the Institute of Chartered Accountants of India (ICAI) established
Accounting Standards Board (ASB) in 1977. There are altogether 32 AS
issued by ASB.
Of the 32, some are recommendatory (optional) in nature while others are
mandatory (compulsory).
Annexure 1, given at the end of this unit provides the details of 32 AS
2.6.1 Scope and functions of ASB of ICAI
The ASB was constituted by the ICAI on 21st April, 1977. The aim of the
board was to bring in uniformity among various accounting policies and
practices that are practised in India.
To determine the broad areas in which accounting standards need to be
formulated, the board holds a dialogue with various representatives of the
government, industry, and other organisations to ascertain their views. On
the basis of the discussions they hold, the board prepares and issues a draft
proposal for comments by the members of the institute and the public.
After modification (if any), a final draft is submitted to the council of the
institute. The accounting standard will then be issued under the authority of
the council. At present, there are 32 accounting standards issued by the
council.

2.7 International Financial Reporting Standards (IFRS)

IFRS are standards, interpretations, and framework for the preparation and
presentation of financial statements. IFRS are issued by International
Accounting Standards Board (IASB).
2.7.1 Objectives of IFRS
The objectives of IFRS as given by IASB are reproduced below :
 To develop a set of high quality, understandable, and enforceable global
accounting standards that require high quality, transparent, and
comparable information in financial statements and other financial
reporting. Such information will help participants in the world's capital
markets and other users to make economic decisions.
 To promote the use and rigorous application of those standards.

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 To fulfil the objectives associated with (1) and (2), taking into account,
the special needs of small and medium-sized entities and emerging
economies.
 To bring about convergence of national accounting standards, IAS and
IFRS to high quality solutions.
2.7.2 Scope of IFRS
IASB Standards are known as IFRS.
The scope of IFRS as given by IASB are reproduced below:
 All IAS and Interpretations issued by the former IASC and Standard
Interpretation Committee (SIC) continue to be applicable unless and
until they are amended or withdrawn.
 IFRS apply to the general purpose financial statements and other
financial reporting by profit-oriented entities – those engaged in
commercial, industrial, financial, and similar activities, regardless of their
legal form.
 Entities other than profit-oriented business entities may also find IFRS
appropriate.
 General purpose financial statements are intended to meet the common
needs of shareholders, creditors, employees, and the public at large for
information about an entity's financial position, performance, and cash
flows.
 Other financial reporting includes information provided outside financial
statements that assists in the interpretation of a complete set of financial
statements or improves users' ability to make efficient economic
decisions.
 IFRS apply to individual company and consolidated financial statements.
 A complete set of financial statements includes a balance sheet, an
income statement, a cash flow statement, a statement showing either all
changes in equity or changes in equity other than those arising from
investments by and distributions to owners, a summary of accounting
policies, and explanatory notes.
 If an IFRS allows both a 'benchmark' and an 'allowed alternative'
treatment, financial statements may be described as conforming to IFRS
whichever treatment is followed.

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 In developing standards, IASB intends not to permit choices in

accounting treatment. Further, IASB intends to reconsider the choices in
existing IAS with a view to reduce the number of those choices.
 IFRS will present fundamental principles in bold face type and other
guidance in non-bold type (the 'black-letter'/'grey-letter' distinction).
Paragraphs of both types have equal authority.
 The provision of IAS 1 that conformity with IAS requires compliance with
every applicable IAS and Interpretation requires compliance with all
IFRS.
2.7.3 List of IFRS
The following is a list of IFRS.
 IFRS 1 – First-time adoption of IFRS
 IFRS 2 – Share-based payment
 IFRS 3 – Business combinations
 IFRS 4 – Insurance contracts
 IFRS 5 – Non-current assets held for sale and discontinued operations
 IFRS 6 – Exploration for and evaluation of mineral assets
 IFRS 7 – Financial instruments: disclosures
 IFRS 8 – Operating segments
 IFRS 9 – Financial instruments

2.8 Summary
Let us recapitulate the important concepts discussed in this unit:
 Accounting principles are the rules of action adopted by the accountants
universally while recording accounting transactions.
 Accounting conventions are those customs and traditions that guide the
accountants while preparing the financial statements.
 Accounting concepts are the basic assumptions or conditions upon
which the science of accounting is based. There are five basic concepts
of accounting, namely – business entity concept (separate entity
concept), going concern concept, money measurement concept,
periodicity concept, and accrual concept.

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 Accounting policy refers to the specific accounting principles and

methods of applying those principles adopted by the enterprise in the
preparation and presentation of financial statements.
 An accounting standard is a selected set of accounting policies or broad
guidelines regarding the principles and methods to be chosen out of
several alternatives. There are altogether 32 accounting standards
issued by ASB. Companies are required to make disclosures of
accounting policies in their annual report.

2.9 Glossary
Consistency: Being stable in using accounting policies.
Conservatism: Being prudent in identifying profit and loss.
Disclosure: Providing all important information to the users of information.
Historical cost: Cost at which a transaction is incurred.

2.10 Terminal Questions

1. What are the basic principles of accounting?
2. The salaries paid in 2004 is Rs. 5,00,000; Salaries outstanding is
Rs. 20,000; Salaries paid in advance for 2004 is Rs. 30,000. What is the
actual salary expenditure for 2004? Which accounting principle is
involved in this?
3. What is wrong if assets like buildings are shown at market value in the
balance sheet?
4. A business receives capital of Rs. 1,00,000 and a loan is raised for
Rs. 50,000. This is represented by cash Rs.15,000; machinery
Rs. 85,000; furniture Rs. 20,000, and goods Rs. 30,000. Find the total of
debits and credits from business point of view. Which accounting
principle is involved in this?
5. What is substance over form?

2.11 Answers
Self Assessment Questions
1. Doctrines
2. concepts, conventions
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3. Concept
4. Form accounting standards
5. 32
6. True
7. False
8. Separate
9. Capital
10. True
11. Acceptance and use is assumed
12. False
13. False
14. No
15. Accrued
16. Added, deducted
17. Credit
18. Realised
19. True
20. True
21. Yes
22. No
23. No
24. True
25. Profit
26. True
27. True
28. True
29. True
30. Rs. 200000
31. Fraud
32. True
33. True
34. Total Assets
35. Double entry principle
36. Comparison

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37. True
38. Risk
39. Anticipate no profit but provide for all anticipated losses
40. a. Principles of consistency
b. Principles of full disclosure
c. Principles of conservatism

Terminal Questions
1. Income recognition, principle of expense, matching of cost and revenue,
historical cost principle, full disclosure principle, double aspect principle,
modifying principle, materiality principle, consistency principle and
conservatism principle.
2. Rs. 490000 (500000 + 20000 – 30000); Matching cost and revenue
principle.
3. If assets like building are shown at market value instead of historical
cost in the balance sheet, the profit or loss arising out of such valuation
is against to the principle of income recognition. The profit or loss is said
to arise only when the asset is sold or revalued for a specific purpose.
The day when the assets are valued, the market value may be high and
later the prices may fall. Therefore it is wrong to consider the unrealised
or anticipated profit. Hence the assets should be shown at historical cost
in the balance sheet.
4.
Liabilities Assets
Capital 100000 Cash 15000
Loan 50000 Machinery 85000
Furniture 20000
Goods 30000
Total 150000 Total 150000

It is as per double aspect principle.

5. Transactions and events should be accounted for and presented in
accordance with their substance on financial reality and not with their
legal forms. Refer unit 2.5.

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2.11 Case Study

Infosys Technologies
Following are some extracts from the annual report of Infosys Technologies
Ltd, from the section “Significant accounting policies and notes on accounts”
pertaining to disclosure of accounting policies adopted by them.

13.2.1 Capital commitments and contingent liabilities

1. The estimated amount of contracts remaining to be executed on
capital account, and not provided for (net of advances) is
Rs. 1,21,56,43,540 as on 30th September, 2000. The amount of such
contracts as on 30th September, 1999 was Rs. 61,66,53,437 and as
on 31st March , 2000 was Rs. 80,31,29,007.
2. The company has outstanding guarantees and counter guarantees
of Rs. 6,51,30,000 as on 30th September , 2000, to various banks, in
respect of the guarantees given by the banks in favour of various
government authorities and a customer. The guarantees and counter
guarantees outstanding as on 30th September , 1999 were
Rs.1,58,84,263 and as on 31st March, 2000 were Rs. 5,26,30,000.
3. Claims against the company, not acknowledged as debts, amounted
to Rs. 8,75,532 as on 30th September, 2000. Such claims, as on 30th
September, 1999 were Rs. 17,91,814 and as on 31st March, 2000
were Rs. 32,89,661.
13.2.11 Provision for contingencies
The company had instituted a contingency plan effective 1st October,
1998 and made a total provision of Rs. 9,99,00,000 to meet any possible
disruption in client support due to the year 2000 impact on the technology
and communication infrastructure provided to the company by its
vendors. For the year ended 31st March, 2000, Rs. 2,42,29,154 was
spent towards the year 2000 transition effort, which was set off against
the provision and the remainder of Rs. 7,56,70,846 was written back to
the profit and loss account.
(Source: Infosys Technologies Ltd )

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Financial and Management Accounting Unit 2

Discussion Questions:
1. Why do you think these disclosures are important?
2. What is the implication of the matter stated in these disclosures on the
reported profit of the company?
3. What is the implication of the matter stated in these disclosures on the
reported financial position of the company?

Hint to Case Study

1. The matter stated in these disclosures may have implication on the
reported profit and the reported financial position of the company.
Therefore it is important to make these disclosures.
2. Contracts remaining to be executed: profit may reduce or increase after
completion.
Year 2000 transition: The expenses related to this are an abnormal item.
The company may have additional payments on account of this.
3. Outstanding guarantees and counter guarantees: Payment to the extent
stated there in may devolve on the company.
Claims against the company, not acknowledged as debts: Payment to
the extent stated there in may devolve on the company.

Reference:
 Maheshwari S.N, Maheshwari S.K., Advanced Accounts – Vol 1

E-References:
 www.icai.org – retrieved on December-21st 2011
 www.aicpa.org – retrieved on December-21st 2011
 http://www.sec.gov – retrieved on December-21st 2011
 www.fasb.org – retrieved on December-21st 2011
 www.gasb.org – retrieved on December-21st 2011
 http://www.iasb.org.uk – retrieved on December-21st 2011
 www.iasplus.com – retrieved on December-21st 2011
 www.indiastudychannel.com – retrieved on December-21st 2011
 www.infosys.com – retrieved on December-21st 2011

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Financial and Management Accounting Unit 2

ANNEXURE 1

ACCOUNTING STANDARDS
Mandatory
from
Recommended accounting
AS No. Title
0r Mandatory period
beginning
on or after
AS-1 Disclosure of Accounting Policies Mandatory 1.4.1991
AS-2 Valuation of Inventories Mandatory 1.4.1999
AS-3 Cash Flow Statement Mandatory 1.4.2000
AS-4 Contingencies and events
occurring after the Balance Sheet Mandatory 1.4.1995
date (revised)
AS-5 Prior Period and extraordinary
items and changes in Accounting Mandatory 1.1.1987
Policies
AS-6 Depreciation Accounting (revised) Mandatory 1.4.1995
AS-7 Accounting for construction
Mandatory 1.4.1991
contracts
AS-8 Accounting for Research and
withdrawn
Development
AS-9 Revenue Recognition Mandatory 1.4.1991
AS-10 Accounting for Fixed Assets Mandatory 1.4.1991
AS-11 Accounting for the effects of
changes in foreign exchange Mandatory 1.4.1995
rates (Revised)
AS-12 Accounting for Government
Mandatory 1.4.1994
Grants
AS-13 Accounting for Investment -------- -------
AS-14 Accounting for Amalgamation Mandatory 1.4.1995
AS-15 Accounting for retirement benefits
in the financial statement of Mandatory 1.4.1995
employers
AS-16 Borrowing Costs Mandatory 1.4.2000
AS-17 Segment Reporting Mandatory 1.4.2001
AS-18 Related party disclosure Mandatory 1.4.2001
AS-19 Leases Mandatory 1.4.2001

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Financial and Management Accounting Unit 2

AS-20 Earnings Per Share Mandatory 1.4.2001

AS-21 Consolidated financial statement Mandatory 1.4.2001
AS-22 Accounting for taxes on income Mandatory 1.4.2001
AS-23 Accounting for investments in
associates in consolidated Mandatory 1.4.2002
financial statements
AS-24 Discontinuing operations Mandatory 1.4.2002
AS-25 Interim financial reporting Mandatory 1.4.2002
AS-26 Intangible assets Mandatory 1.4.2003
AS-27 Financial reporting of interests in
Mandatory 1.4.2002
joint venture
AS-28 Impairment of assets Mandatory 1.4.2004
AS-29 Provisions, Contingent Liabilities
Mandatory 1.4.2004
& Contingent Assets
AS-30 Financial Instruments:
Mandatory from
Recognition, Measurement and 1.4.2009
1.4.2011
Limited Resources
AS-31 Financial Instruments: Mandatory from
1.4.2009
Presentation 1.4.2011
AS-32 Financial Instruments: Disclosure
and limited revision to AS 19 Mandatory from
1.4.2009
(leases) 1.4.2011

 AS 8 was withdrawn in pursuant to AS 26 becoming mandatory.

 29 accounting standards are issued as of date and only 28 is applicable.
 AS 30, 31, 32 are published but they will come into effect from 1.4.2009.
It is mandatory on or after 1.4.2011.

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