Accounting Standards. Introduction To Accounting Standards Essay Example

align="justify">Accounting views the business as a going concern, which implies that it is anticipated to operate for a significant duration unless there is substantial evidence indicating otherwise. The enterprise is perceived as remaining in operation, at least for the foreseeable future.

The owners have no intention of closing or dissolving the business, which is important for accounting valuations and allocations. Depreciation calculations and investor decisions rely on this belief that the business will remain operational. Therefore, accounting functions are being conducted because it is believed that the business will continue its operations.

The accounting process can only remain stable and achieve its objective of accurately recording and reporting on the capital invested, the efficiency of management, and the position of the enterprise as a going concern, if it is based on this assumption.

Cost Concept

The historical cost concept asserts that the value of an asset is equivalent to the price or expense incurred to obtain it. Consequently, assets are documented at their initial purchase price, which acts as the basis for all subsequent accounting pertaining to them. It should be emphasized that the assets listed in financial statements might not represent their present market value.

The market value of assets is not impacted by depreciation. Depreciation aims to distribute the cost of an asset over its useful life, rather than adjusting the cost to align with the market value.

Accrual Concept

The accrual concept highlights the distinction between cash receipt and the entitlement to receive it, as well as between cash payment and the legal responsibility to pay. In practical business transactions, there may be a discrepancy in timing between actual cash

movement and the obligation to pay.

When selling goods, revenue can be received before or after the right to receive arises. The accrual concept guides accountants on how to handle cash receipts and related rights. If the right to receive has not yet arisen, the receipt is not recognized as revenue for that period. However, if the right to receive has been created, the revenue is recognized even if it is received in a later period. This same treatment applies to expenses incurred by the company.

Cash payments for expenses can be made either before or after the due date. Only expenses that are due and payable will be taken into consideration. If a payment is made in advance (i.e., not within the current accounting period), it will not be considered as an expense. Instead, the person who received the cash will be treated as a debtor until their right to claim the cash has fully matured. On the other hand, if an expense has been incurred during the accounting period but no payment has been made yet, the expense must still be recorded, and the person who should have received the payment will be shown as a creditor.

The concept of conservatism, also known as prudence, emphasizes caution in accounting practices. It involves recording assets and revenues at their lowest possible value while liabilities and expenses are recorded at their highest possible value. In accordance with this principle, revenues or gains should only be recognized when they are received in cash or assets (typically legally enforceable debts) whose ultimate cash realization can be reasonably assessed.

It is crucial to allocate funds for all recognized liabilities,

expenses, and losses, regardless of whether the exact amount is known or estimated based on available information. Additionally, it is important to consider potential losses associated with any future uncertainties.

Materiality Concept

In business, there are numerous trivial or insignificant events that do not warrant the cost of recording and reporting due to the limited usefulness of the information obtained.

The materiality concept states that items of small significance do not need to be treated strictly according to theory. Deciding if something is material or not should be based on its relationship to other items and the surrounding circumstances. The consistency concept requires a company to continue using the same method or approach for subsequent events of the same nature, unless there is a valid reason to deviate.

If the company decides to deviate from its current method for valid reasons, the financial statements must clearly state the impact of this change in the year it occurs. The consistency concept dictates that once a company has chosen a method and used it for a period of time, it should stick to that method for all similar events unless there is a justified reason to switch.

If the company deviates from its current method during valid seasons, the financial statements must disclose the impact of this change in the year it occurs.

Periodicity Concept

While the exact results of a business operation can only be known after its closure, sale of assets, and payment of liabilities, it is also important to periodically assess the outcomes. Waiting until the end is not feasible for those who are interested in the business's operating results.

The parties

involved in a firm's financial reporting requirements push accountants to report on changes in the firm's wealth over short time periods. These time periods can vary, but a year is the most common interval due to established business practices, tradition, and government regulations. Some firms use the calendar year, while others follow the government's financial year. The use of a twelve-month period is only for external reporting, while internal reporting typically uses shorter intervals such as one or three months.

Furthermore, the dual aspect concept serves as the foundation of accounting. It dictates that every transaction has a dual effect and should be recorded in two places. In other words, at least two accounts are involved in recording a transaction. The dual aspect concept is crucial to accounting and should always be kept in mind when managing books of accounts.

Matching Concept

The concept involves comparing all expenses and revenues in the accounting period to determine profits or losses for the year. Revenues are amounts received or expected from selling goods or services, while expenses include costs like salaries, raw materials, and labor related to production. The Verifiable Objective Concept requires that accounting transactions have supporting business documents such as invoices, vouchers, and correspondence.

The certified auditors of the company could verify these supporting documents, which should provide objective evidence for the transaction.

Disclosure Concept

Accounting policies, as well as details of contingent liabilities, contingent assets, and legal proceedings, need to be disclosed to help users understand the basis of accounting and make informed decisions. Additionally, significant events that occur between the date of the financial statements and the issuance of the statements, such

as events after the balance sheet date, should also be disclosed. While property, plant, and equipment details cannot be shown on the balance sheet directly, a comprehensive schedule explaining the changes in cost and accumulated depreciation should be included in the notes.

Realization Concept

The idea of realization pertains to the identification of when revenues are acquired. As per this notion, revenue is deemed earned solely upon delivery of goods to the customer, whether in exchange for immediate payment or a commitment to pay at a later date. The goals of Accounting Standards.

Accounting is performed to maintain systematic records of financial transactions. Without accounting, there would be a tremendous burden on human memory that would often be impossible to bear.

Accounting ensures the protection of business assets by supplying information to the manager or owner, helping to prevent unauthorized and unnecessary usage.

Accounting aids in calculating the net profit or loss resulting from operating activities: It assists in determining the net profit earned or loss incurred as a result of business operations.

To maintain a detailed record of revenues and expenses within a specific timeframe is the essence of the process. Once this period ends, a profit and loss account is generated. A profit occurs when revenue earned surpasses expenses incurred, while a loss arises if expenses exceed revenue.

To determine the financial standing of a business, the profit and loss account presents the amount of profit or loss generated by the business within a specific timeframe.

Nevertheless, the businessman must have knowledge of his financial position, that is, his standing and the details of his debts and assets. This information is provided

by the balance sheet or position statement.

To simplify cantonal decision making: Accounting currently plays a crucial role in collecting, analyzing, and reporting information to the relevant authorities promptly. This is done with the aim of aiding rational decision making.

Benefits of Accounting Standards

Implementing accounting standards ensures that the interests of investors are protected, as they can have confidence in the validity and accuracy of the documents they review. Investors care about their funds generating returns and being reimbursed, and accounting standards enhance their trust. Moreover, adhering to accounting standards is crucial for companies to meet government regulations, benefiting both investors and customers by safeguarding them against fraudulent business activities.

The promotion of transparency in business transactions can ultimately lead to improved market efficiency.

Accounting standards allow businesses to assess their performance and compare themselves with others, revealing strengths and weaknesses. Through analyzing past and current performances, businesses can also gauge the effectiveness of their strategies.

Limitations of Accounting Standards

Financial accounting is a retrospective process in which the net impact of past transactions is recorded. It serves as a postmortem analysis of all business events that have occurred. However, it does not provide assistance in future planning or other managerial decision-making. While it showcases the profitability of a business, it does not discern whether it is favorable or unfavorable. Additionally, financial accounting does not identify the causes behind a low profitability position.

Financial accounts deal with the overall profitability and position.

Financial accounting solely documents activities and transactions that can be quantified in monetary terms, but it fails to capture or convey various non-financial aspects of business including effective management, product

demand, industry relationships, and a favorable working environment.

Financial reports are interim reports: They are the financial accounting's interim report of all business work conducted by a firm. However, it is important to acknowledge that the accuracy of the financial position and profitability presented in these reports may be incomplete.

The adoption of the cost concept in financial accounting ensures that all transactions are recorded at their original cost. However, as time passes, it becomes necessary to modify the value of assets and liabilities due to market inflation. Unfortunately, financial accounting does not include these adjustments for inflation, resulting in inaccurate financial statements that do not truly represent the business's position.

Inadequate understanding of cost:

Financial accounting lacks comprehensive knowledge of cost. Accountants do not calculate the total cost of each individual product, which prevents financial accounting from determining the price of a business' products. Additionally, financial accounting does not assist organizations in cost control as it lacks provisions for tracking and managing expenses. Expenses are only recorded in financial accounting if they have been paid, thus there is no room for improvement or a thorough examination of all expenses.

Financial statements are influenced by personal judgments: The accountant's personal judgment affects many aspects of financial statements, including the method used, the rate of provision for doubtful debts, and the valuation method.

The financial statements do not accurately represent the business as per the Accounting Standards of India. The Institute of Chartered Accountants of India (CIA), a member body of the IAC, established the Accounting Standards Board (ASP) on April 21st, 1977 to harmonize accounting policies and practices in India. As

Indian economic policies embraced liberalization and globalization in the early 'ass and corporate governance became a major concern, Accounting Standards gained significant importance.

When formulating accounting standards, the ASP takes into account the applicable laws, customs, usages, and business environment in the country. The ASP also considers International Financial Reporting Standards (Firms)/International Accounting A standard (Sass) issued by SAAB and attempts to incorporate them, as much as possible, based on the conditions and practices in India.

Indian Accounting Standard (Mind AS)

Presentation of Financial Statements Objective: This Standard establishes the framework for presenting general purpose financial statements to promote comparability with the entity's previous financial statements and those of other entities. It outlines general requirements for the presentation of financial statements, provides guidelines for their structure, and specifies minimum content requirements.

Scope:

This Standard must be followed by an entity when preparing and presenting general purpose uncial statements, as per Indian Accounting Standards (Mind ASs).

The Other Mind ASS establishes guidelines for acknowledging, assessing, and disclosing specific transactions and events.

This Standard does not apply to the structure and content of condensed interim financial statements prepared in accordance with Mind AS 34 Interim Financial Reporting, except for paragraphs 15-35 which do apply to such financial statements.

This Standard is applicable to all entities, including those that present consolidated financial statements and those that present separate financial statements, as defined in Mind AS 27 Consolidated and Separate Financial Statements.

The terminology used in this Standard is suitable for profit-oriented entities, including public sector business entities. However, not-for-profit entities in the private or public sector may have to adjust the descriptions used for

specific line items in the financial statements and for the financial statements themselves if they adopt this Standard. Moreover, entities with share capital that is not classified as equity may need to alter how members' interests are presented in the financial statements. The primary objective is to accurately depict the entity's financial position, financial performance, and cash flows through the financial statements. To achieve this, it is crucial to faithfully represent the impacts of transactions, other events, and conditions based on the definitions and recognition criteria outlined in the Framework.

It is assumed that using Mind ASs will produce financial statements that accurately represent the true and fair view, with additional disclosure whenever necessary.

An entity using Mind ASS in their financial statements must explicitly declare their compliance with Mind ASS in the notes. Financial statements cannot be labeled as compliant with Mind Ass unless they meet all Mind ASs' requirements.

An entity is unable to correct unsuitable accounting policies through the disclosure of the accounting policies utilized or by means of notes or explanatory material.

Indian Accounting Standard (Mind AS) 7: The statement of cash flows discloses an entity's cash flow information, which is crucial for financial statement users to assess its capacity to generate and utilize cash and cash equivalents. Additionally, users must evaluate the timing and certainty of the entity's cash generation to make informed economic decisions.

This Standard aims to require entities to disclose their historical changes in cash and cash equivalents by presenting a statement of cash flows. The statement should classify cash flows into operating, investing, and financing activities.

Scope:

According to this Standard, all entities must prepare

and include a statement of cash flows in their financial statements for all periods. This statement is crucial for users of an entity's financial statements as it demonstrates how the entity generates and utilizes cash and cash equivalents. This requirement applies to all types of entities, including financial institutions where cash is considered the primary product. Entities require cash for various reasons such as conducting operations, meeting obligations, and providing returns to investors. Consequently, this Standard mandates that all entities present a statement of cash flows.

Advantages of cash flow information:

When the statement of cash flows is analyzed alongside other financial statements, it allows users to evaluate how an entity's net assets, financial structure (including liquidity and solvency), and its capacity to impact cash flows adapt to changing conditions. This information is crucial for assessing an entity's ability to generate cash and cash equivalents, as well as aiding users in constructing models for comparing the present value of future cash flows among various entities.

Furthermore, it helps improve the comparability of operating performance reporting across various entities as it eliminates discrepancies resulting from diverse accounting treatments applied to identical transactions and events.

Historical cash flow information plays a significant role in determining the amount, timing, and certainty of actual cash flows. It is also beneficial for verifying the accuracy of past forecasts regarding future cash flows and analyzing the relationship between profitability and net cash flow. Additionally, it helps understand the impact of price fluctuations.

Indian Accounting Standard (Mind AS):

This Standard aims to provide guidelines for adjusting financial statements for events after the reporting period and for disclosing the

date of approval for issue and events occurring after the reporting period. Additionally, it states that if events after the reporting period suggest that the going concern assumption is inappropriate, the entity should not prepare financial statements based on this assumption.

The purpose of this Standard is to provide guidance on how to account for and disclose events that occur after the reporting period. This includes recognizing and measuring these events.

An entity must make adjustments to the amounts stated in its financial statements in order to reflect adjusting events that occur after the reporting period.

The examples of adjusting events after the reporting period that require an entity to adjust the amounts agonized in its financial statements, or to recognize items that were not previously recognized include: (a) The settlement of a court case after the reporting period which confirms the entity's present obligation at the end of the reporting period.

The entity makes adjustments to any provision related to this court case based on Mind AS 37 Provisions, Contingent Liabilities and Contingent Assets. This could involve adjusting a previously recognized provision or recognizing a new one. The entity does not simply disclose a contingent liability, as the settlement provides additional evidence that is considered under paragraph 16 of Mind AS 37. Additionally, if information is received after the reporting period indicating that an asset was impaired or that a previously recognized impairment loss for that asset needs adjustment, the entity takes appropriate action.

After the reporting period, if a customer goes bankrupt, it confirms that there was a loss on a trade receivable at the end of the reporting period. This requires adjusting

its carrying amount. Likewise, selling inventories after the reporting period can give information about their net realizable value at the end of the reporting period.

The determination of the cost of assets purchased or the proceeds from assets sold before the end of the reporting period takes place after the reporting period.

The entity's obligation to make profit-sharing or bonus payments after the reporting period depends on whether there was a legal or constructive obligation at the end of the reporting period. The obligation is based on events that occurred before that date, as stated in Mind AS 19 Employee Benefits.

The identification of fraudulent activities or errors that indicate the inaccuracy of the financial statements.

Indian Accounting Standard (Mind AS): This Standard aims to provide guidelines on the accounting treatment of income taxes.

The main focus of income tax accounting is to determine how to account for the current and future tax consequences related to: (1) The eventual recovery or settlement of assets or liabilities recorded in a company's balance sheet, and (2) Transactions and events that occur during the current period and are recognized in a company's financial statements. This Standard applies to how income taxes should be accounted for. For the purposes of this Standard, income taxes refer to all domestic and foreign taxes imposed on taxable profits.

Income taxes include withholding taxes that must be paid by a subsidiary, associate, or joint venture when distributing funds to the reporting entity. To calculate current tax liabilities (assets) for both present and past periods, it is crucial to determine the anticipated amount that will be paid to or recovered from taxation authorities. This

determination should consider the officially enacted or substantially enacted tax rates (and tax laws) by the end of the reporting period. Similarly, deferred tax assets and liabilities should be calculated based on the expected tax rates at the time when the asset becomes realizable or liability is settled. These calculations also rely on officially enacted or substantially enacted tax rates (and tax laws) by the end of the reporting period. Generally, both current and deferred tax assets and liabilities are determined using officially enacted tax rates (and tax laws).

In some places, government announcements about tax rates and laws can have the same effect as a formal law, even if it takes several months for the formal law to be enacted. In these cases, tax assets and liabilities are calculated based on the announced tax rate and laws. If different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using projected average rates that will likely be applied to taxable profit or loss when temporary differences are expected to be reversed.

Indian Accounting Standard (Mind AS):
The objective of this Standard is to establish the appropriate accounting policies and disclosure requirements for lessees and lessors in regards to leases. The scope of this Standard includes all leases, except for:

• Leases to explore for or use minerals, oil, natural gas and similar no regenerative resources
• Licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.
• However, this Standard shall not be applied as the basis of measurement for:
• Property held by lessees

that is accounted for as investment property (see Mind AS 40 Investment Property);

This Standard applies to agreements involving the transfer of assets for use, even if significant services are needed for operation or maintenance. However, it does not apply to agreements that solely involve contracts for services without transferring asset rights.

Classification of leases: The classification of leases in this Standard is determined by the extent to which risks and rewards associated with owning a leased asset are assumed by either the lessor or the lessee.

Ownership of an asset carries risks such as losses from unused capacity or outdated technology, and changes in profitability due to economic shifts. However, there are also potential rewards like the expectation of profitable operation and the possibility of the asset's value appreciation or residual value generation. When a lease transfers most of these risks and rewards, it is classified as a finance lease.

An operating lease is classified as such when it does not transfer most of the risks and rewards of ownership. It is crucial to use consistent definitions when discussing the lease agreement between the lessor and lessee. However, depending on each party's specific circumstances, the same lease may be categorized differently. This can happen if the lessor obtains a residual value guarantee from an unrelated third-party.