Accounting is the art of accumulating, analyzing, recording, publishing and communicating financial information that reflects the financial standing of a company at a given point in time. It can be treated like a language with its own set of semantics and lingo. As such, it is a complex procedure and understanding it fully involves understanding a lot of inter-related parameters. More importantly, it is of paramount importance that accounting follow specific standardization. If a proper convention is not followed there is a high probability that financial statements become uninterpretable. This is why an accounting course generally has modules on accounting standards.
Accounting standards imply a standardized set of principles, procedures and conventions that define the basis of financial accounting policies and practices. Accounting standards increases the quality of financial reporting around the world. Without standards, users of financial statements would need to learn the accounting rules of each company, and comparisons between companies across based in different countries would be difficult.
Accounting standards in use today are referred to as Generally Accepted Accounting Principles (GAAP). These principles have been set by regulatory bodies and global accountancy has accepted them as appropriate. International companies follow the International Financial Reporting Standards (IFRS), which are set by the International Accounting Standards Board (IASB) and serve as the guideline for non-U.S. GAAP companies reporting financial statements.
Similarly, India has formulated her own set of Accounting Standards in line with her own Accounting and economic scenario.
Accounting Standards in India – History and Evolution
India used to follow accounting standards from Indian Generally Acceptable Accounting Principle (IGAAP) prior to adoption of the Ind-AS.
After having realized India needed some specialized accounting standards, the Council of the Institute of Chartered Accountants of India formed the Accounting Standards Board (ASB) in April, 1977.
ASB has been tasked to devise the accounting standards for India. There were originally 32 Accounting Standards (AS) formulated initially by ICAI but there are 27 Ind-AS in India after a series of deprecation, revisions and mergers.
Types of Business Entities
For the purpose of applicability of Ind-AS, entities are grouped as follows:
SMC stands for Small and Medium Company.
(Source : ICAI)
All the Ind-AS standards
We list out all of the Ind-AS are as follows :
Cash vs Accrual Basis of Accounting
The Cash Basis of Accounting identifies and records revenues when cash is received, and expenses when they are paid. This method does not take into consideration the accounts receivable or accounts payable. Most small businesses are in favor of using the cash basis of accounting as it is simple to maintain.
On the other hand, Accrual Basis of Accounting is a method of accounting where revenues and expenses are recorded when they are earned, regardless of when the money is actually received or paid. For example, an accountant should record revenue when a project is completed, rather than when the firm gets paid. This method is more common than the Cash Basis. This is because it provides a more realistic idea of expenses and income during a time period, therefore providing a long-term picture of the business that cash accounting can’t provide.
The difference between these two methods is important to understand for any accounting course you may enroll in.
The ICAI considers Going Concern (a business that is operating and making a profit), Accrual and Consistency as fundamental concepts in Indian Accounting. What this means is it will be implicitly assumed that the financial statements have been drawn up on accrual basis, without any change in the accounting policies and without there being any necessity or intention to liquidate (wind up) the firm or a substantial portion of it.
The Going Concern assumption is very important. Fixed assets can be stated at cost less depreciation and their realizable value can be ignored using this assumption, or else things might get complex. Liabilities arise only when the firm goes bankrupt. These can be ignored as long as the firm is a going concern. It can be easily concluded that if the going concern assumption is not valid, the financial statements as ordinarily drawn up, will all stand untrue.
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