Learn Accounting Basics Easy

AS 29 TO AS 32

2012-02-04T16:56:00.004+05:30

Provisions, Contingent Liabilities And Contingent Assets AS 29 : Objective of this standard is to prescribe the accounting for Provisions, Contingent Liabilitites, Contingent Assets, Provision for restructuring cost. Provision: It is a liability, which can be measured only by using a substantial degree of estimation. Liability: A liability is present obligation of the enterprise arising from past events the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Financial Instrument AS 30: Recognition and Measurement, issued by The Council of the Institute of Chartered Accountants of India, comes into effect in respect of Accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for An initial period of two years. This Accounting Standard will become mandatory in respect of Accounting periods commencing on or after 1-4-2011 for all commercial, industrial and business Entities except to a Small and Medium-sized Entity. The objective of this Standard is to establish principles for recognizing and measuring Financial assets, financial liabilities and some contracts to buy or sell non-financial items. Requirements for presenting information about financial instruments are in Accounting Standard. Financial Instrument presentation AS 31 : The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset. The principles in this Standard complement the principles for recognising and measuring financial assets and financial liabilities in Accounting Standard Financial Instruments: Financial Instruments, Disclosures and Limited revision to accounting standardsAS 32: The objective of this Standard is to require entities to provide disclosures in their financial statements that enable users to evaluate: the significance of financial instruments for the entity’s financial position and performance; and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks.

AS 28

2012-02-04T16:51:00.003+05:30

Simplified Accounting Standard 28 - AS 28 – Impairment of Assets According to Accounting standard 28 (AS 28) , when a businessman has utilized any asset and after it becoming useless , then it is the duty to calculate the difference between its sale value and its current carrying cost and this will be loss and these assets are become impaired and this impairment loss should mention in the statements of company . In this AS, there is no need to recognize the impaired loss of inventories, construction contracts, financial assets and deferred tax assets because, these are already mentioned in other accounting standards . Formula for Calculating Impaired loss =Carrying Amount of Asset – Net Selling Price Carrying amount is that amount which can be recognized in balance sheet after deducting any accumulated depreciation. This impairment loss should be recognized as an expense in statement of profit and loss. Related : Steps of Calculating Impairment Loss of Goodwill

AS 27

2012-02-04T16:50:00.001+05:30

Unsophisticated Explanation of Financial Reporting of Interests in Joint Ventures ( AS 27) Accounting standard 27 explains the joint venture and its accounting treatment. ICAI has defines joint venture, venturer and joint control and control in this standard. Joint venture means the contract between two or more parties for doing economic activity. Control on the business activities by both is called joint control. For making financial statement of joint venture , joint venture can be divide into two different aspects :- Ist When Joint Venture treated as joint operation:- In this aspect, there is not existence of any new corporate. Venturer join in the venture just for completing any project and uses their own assets, so there is no need to make separate financial statements. But in the books of venture, treated as investment and profit from joint venture will show as return on the joint venture investment. 2nd When joint venture treated as separated entity:- If the partners of joint venture create a corporate and do written agreement for doing specific project for earning profit. Then all financial books must be maintained due to separate entity of joint venture and financial statements are made just like other business organization’s financial statements.

AS 26

2012-02-04T16:49:00.001+05:30

Intangible Assets in Accounting Standard 26 Accounting standard 26 (AS 26) in Indian GAAP defines intangible assets and provide rule for calculation of cost intangible assets and showing it in financial statement. AS 26 states that any asset can include intangible asset if we can touch physically but these have future economic benefits. Goodwill is one of main examples of intangible asset. Except this many other intangible assets like technical know how and other trademarks but do not include any asset which are included any other accounting standard. How to calculate the cost of intangible asset:- Generally, if intangible asset is purchase from outside, hen its purchase price will be the cost of intangible asset and will be the part of total asset of financial statement. Making and publishing of website is exception case in AS 26. According to AS 26, it is not included in this standard but include fixed accounting standard. But if we see overall the balance sheet it will goes to the asset side and other general expenses for maintaining website will goes to profit and loss account.

AS 25

2012-02-04T16:48:00.003+05:30

Accounting Standard 25 - Interim financial Reporting Interim financial reporting means all financial statement which is related to the financial result of company less than one year . ICAI has given power to make financial statement for quarter or monthly basis or half yearly and show his performance to creditors, investors and shareholders for more close connection with them. But ICAI has made rules regarding this reporting and it is included in accounting standard 25. Any company who want to show or publish his interim financial reporting, it is very necessary to include following statements in these interim financial reporting. 1. Balance sheet 2. Profit and loss statement 3. Extra ordinary reports regarding new accounting and company policies. Many companies have different nature and their business must be updated before financial statement and to provide knowledge to interested party is also very important. So , this AS will guide CA to check interim financial reports .

AS 24

2012-02-04T16:47:00.002+05:30

Accounting Standard 24 ( AS 24 ) - Discontinuing Operations When, I have read this accounting standard, I find this accounting standard more interesting than other accounting standards. Because, ICAI gives some guidelines to auditors who check the financial statements of company. 1. To see the net profit or loss of discontinuing operations upto the date of dispose off, is mentioned in financial statement. 2 . To check the effect of discontinuing operation on financial statement especially in balance sheet. Before going to deepness of AS 24 we just discuss simple meaning of discontinuing operations and its accounting treatment under AS 24. Meaning of discontinuing operations A company starts many operations in same time and finds that one or some of these operations are not profitable, so company can stop to do activities in these operations. All these operation which is stopped by company is called discontinuing operations. But one more important thing is to know: Before closing any operation company has already purchased some asset and taken some loan for operating such operation, so proper accounting for this necessary. In accounting treatment of discontinuing operation, company should sell its all assets and paid its all liabilities and balance amount should add in capital or reserve of company. If time period to dispose off of discontinuing operation is more than one year then calculate its net annual profit or loss and show it in financial statement like other active operation.

AS 23

2012-02-04T16:47:00.000+05:30

Simple Explaination of Accounting Standard 2 Accounting for investment in associates in consolidated financial statements This accounting standard 23 ( AS 23 under Indian GAAP ) is very helpful to cooperate type investors. In this standard, the simple rule is that investor must record all investment in associates. Here, I want to explain associates. It is not subsidiary company but if an investor invests his fund‘s 20% or more in any other company then it becomes his associate. There are two methods to record investment in associate. Ist method: - Equity method:- Under this method, investment in associate is record on the real cost of investment. Equity means total assets minus liabilities and it is very simple to understand for accountant because what amount is paid for getting investment in associate will only recorded in books of investor. 2nd method - Non equity method:- After 1 June 2008, non equity method is also adopted, it is related with inflation accounting and if any fluctuation arise between the time of recording and the time of actual purchase, then this will also be recorded . Showing it in consolidated balance sheet If you have studied other accounting standard regarding subsidiary and holding company. You can understand what is consolidated balance sheet. Here, I brief introduction consolidated balance sheet shows all assets and liabilities of both holding and subsidiary company and showing investment relating to associate in consolidated balance sheet is not difficult. When you have recorded these type of investment its balance become automatically asset and this will go to asset side of balance sheet consolidated.

AS 22

2012-02-04T16:45:00.003+05:30

Accounting Standard 22 - Accounting for Tax of Income Accounting income is different from taxable income because way of calculating taxable income under income tax law does not include many expenses and income items for preparing statement of profit and loss . So, ICAI has made this standard - AS 22 with the name of Accounting for tax of Income . In this accounting standard 22 , accountant is also responsible to follow the rules of Income tax law for preparing statement of profit and loss . After this he will calculate income tax according to the corporate tax rates . In corporation , income tax is loss of business and it must be debited in statement of profit and loss . Taxable income must be calculated under the provisions of income tax law 1961 . 1. Some expenses which are not deducted for the purpose of calculating income tax will not be debited in profit and loss account . 2. Depreciation must be calculated on the basis of written down method of depreciation. If company calculates it on straight line method , then company accountant will calculate deferred tax and it will be addition charge on company . 3. There are also many incomes which will not show in statement of profit and loss for calculating taxable income . These income will not shown in profit and loss statement for calculating income tax purposes .

AS 21

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Accounting standard 21 - Simplified - Consolidated financial statement – AS 21 Accounting standard 21 explains the way of making consolidated financial statement properly. Consolidated financial statement means combined profit and loss account and balance sheet of holding company and subsidiary company. AS 21 provides following steps for making consolidated balance sheet . 1. Investment in subsidiary company by holding company will not be shown in consolidated balance sheet’s asset side . 2. Share capital of subsidiary company in holding company will not be shown in consolidated balance sheet of holding company. 3. Calculation of minority interest Minority interest means all shareholders who invest in subsidiary company but they are not shareholder of holding company. In other words any stock in subsidiary company which is not owned by parent company (holding company) so, when holding company will make his consolidated balance sheet minority interest will be shown in liability side.

AS 20

2012-02-04T16:41:00.003+05:30

Earning Per share AS 20 Earning per share (EPS)is a financial ratio that gives the information regarding earning available to each equiy share. It is very important financial ratio for assessing the state of market price of share. This accounting standard gives computational methodology for the determination and presentation of earning per share, which will improve the comparison of EPS. The statement is applicable to the enterprise whose equity shares or potential equity shares are listed in stock exchange.

AS 19

2012-02-04T16:35:00.003+05:30

Accounting standard 19 - Leases and its Accounting Treatment ( AS 19 ) Accounting standard 19 states that transaction of leases should be recorded in the books of account and also should show in financial statement with proper way . If we see dictionary meaning of lease , then we find that it is simple contract in which one person allows another person to use of land and other person gives rent for using land . But AS 19 defines leases in wide sense . According to accounting standard 19 , “ Leases include all agreement for (I) use of natural resources like oil , gas , timber , metal , mineral rights and land ( II ) Licensing agreement for producing film , plays and video recording . It also divides leases into two major categories ( I ) financial lease It is the agreement to purchase any fixed asset on installment, so financial lease must be shown asset and liability equal to present value of minimum lease payment from standpoint of the lease. (II ) Operating lease It is just contract only use of fixed asset and payment will be shown as expenses in the books of lessor (Customer )

AS 18

2012-02-04T16:34:00.002+05:30

Accounting Standard in India 18 – Simple explanation (AS 18 ) Related party disclosures Accounting standard 18 states that all related parties who are connected to your business with different financial transaction. Then it is the duty of accountant to disclose these financial transactions for public by making related parties report. I can explain it with simple example: suppose one company contracted with other company for control on the new investing business and they agreed to invest Rs. 1 crore as joint venture. Now it is the duty of board of directors to disclose it in their financial statement by making related parties reporting. The following matter must be written in the report :- I ) Nature of relationship II ) Current and future agreement with related parties relating to providing of goods , services or loan or investment .

AS 17

2012-02-04T16:33:00.002+05:30

Accounting Standards in India – Simple Explanation – Segment reporting (AS 17) Indian accounting standards in India is very useful for Indian Accountants , chartered accountants , commerce professors , company secretaries and cost and work accountants , So , it is included in the syllabus of B.Com , ICAI , C.S. , M.Com. , MBA, and UGC tests. Deep understanding of accounting standards can help you taking good decisions in the field of accounting and finance. But problem is that way of explaining accounting standards in text books are so boring and some tough explanation which is not needed. I am trying to explain it in very interesting and simple way, so that main aim of making accounting standard will be fulfill because without understanding, there will no benefit to write it in detail. After getting some queries from students in which they have liked my way to explain Indian accounting standards, I have already written 1 to 16 standards, after increasing the curiosity to know rest accounting standards from 17 to 32 in accounting education, I am starting again to write simple explanation of accounting standards in India and today, you can study Segment reporting today. It is seventeenth accounting standard. Segment reporting is very important accounting standard which is made by ICAI. In this standard ICAI has made simple rules relating to showing financial statement of each segment. First of all you should understand segment. Segment is smallest part of cost center in which attribute the cost of product. Moreover we can define that when we made any product, it is processed from different parts so every division is also segment or when we divide whole enterprise geographically then every part of enterprise is also called segment. Now you can understand segment reporting. It is the duty of board of director to disclose segment revenue and financial report because interested parties like customers and investors can get more idea about the performance of company in each division or segment of whole business. It may possible that whole performance of company is good but most divisions or segment are performing bad , then customers and investors can make better planning for taking decisions .

AS 16

2012-02-04T16:32:00.003+05:30

Simple definition of borrowing cost - Read and learn Accounting standard 16 explains deeply the definitions and accounting treatment of borrowing cost . Borrowing cost includes 1. Interest on loan taken by company 2. All financial charges for taking loan. 3. Bank charges for taken loan are also included in it. And these are the expenses for employer and will go to profit and loss account’s debit side. Cost for acquiring assets is capital cost and will be included in cost of fixed asset.

AS 15

2012-02-04T16:31:00.003+05:30

Accounting treatment of retirement benefits According to icai's AS 15 , retirement benefits include following amount which is contributed by employer :- Provident fund superannuation fund / pension fund Gratuity leave encashment benefits Post retirement health benefits Other retirement benefits All above benefits is part of employee's salary and calculation of employer's contribution depends on the salary grade of employee and rank of employee . Central govt. made special department of provident fund in which employer contributes . So , in profit and loss account above payment is an expense and will be debited in profit and loss account .

AS 14

2012-02-04T16:23:00.002+05:30

Accounting treatment for amalgamation under AS - 14 Accounting standard 14 provides the guidelines for accounting treatments of amalgamation or mergers. If we see corporate sector, every big company is purchasing other his competitors because of many benefits of monopoly. One of example of Google Inc. which is USA company and it purchased you tube, feed burner and also interested to buy other companies. In India, Satyam is purchased by tech mahindra. So, it is general word which is famous in corporate sector. Definition of Amalgamation ( I ) As a merge of two companies into one new companies Suppose A Co. and B co. merge into a new company C . This is amalgamation . ( II ) If one company is purchased by other company this is also amalgamation . Suppose A company is purchased by B co. , then this is called A is amalgamated into B Co. Its definition is under the pursuant of the provisions of Indian Company act 1956 and all rules and regulation of Indian company act will apply on accounting treatment of amalgamation. System of Accounting in Amalgamation If you understand the system of accounting in amalgamation, it is so interesting and high professional accountant can treat on correct accounting treatment of amalgamation. i) Amalgamation by Pooling of Interest or amalgamation as merge Under this system there are following rules and regulations will apply. (A) All the assets and liabilities of Transferor Company will become the assets and liabilities of Transferee Company. (B) All the shareholders of Transferor Company will become the shareholders of Transferee Company. ii ) Amalgamation by purchase consideration When a company purchases other company at this time company will pay purchase consideration to its shareholder under following method. a) Fixed and lump sum amount is given by purchasing company to amalgamating company Suppose A company is amalgamate into B co. and under agreement B Co. will pay $ 5000000. This is purchase consideration under lump sum method. b) Net word method Under this method a company who purchase other company calculates the net word of company and on the basis of net worth, purchase price is determined. Calculation of purchase price = Total assets purchased by co. Under agreed value - total liabilities taken by company Suppose A company purchases B co. and it taken the All assets at $ 100000 and also take its liabilities at $ 20000, then purchase price of company is = $ 100000 - $ 20000 Company can pay this purchase price in cash, bank or by issuing new shares or debenture by agreement between both companies. Journal entries of amalgamation related even is as same as dissolution of firm in vendor company . 1. When all assets purchased by other company , all assets will transfer to realization account Realisation account debit Assets Account Credit 2. When all liabilities taken by purchasing company , all liabilities will transfer to realization account Liabilities account debit Realisation account Credit 3. When purchase price is determined Purchase company account debit Realisation account credit 4. when vendor company receives the purchase price Bank Account debit Shares in purchasing company account debit Debenture in purchasing company account debit purchasing company accounting credit 6. Profit on sale of assets which is not taken over by purchasing company Bank account debit ( Getting the money from sale of assets ) To assets account ( Book value To realization account ( Profit ) 7. Treatment of liabilities which is not taken by purchasing company Liabilities account debit Realisation account debit ( If paid excess to creditors ) Bank account credit Realisation account credit ( If paid less to creditors ) 8. When liquidation expenses paid by vendor company Realisation account debit Bank account credit Closing of realization account 9. If profit on realization account Realisation account debit Shareholder account credit 10. If loss Shareholder account debit Realization account credit

AS 13

2012-02-04T16:21:00.000+05:30

Accounting of Investment under AS 13 Accounting standard 13 is related with proper accounting treatment of investment and disclosing the method of valuation of investment in financial statement. In simply, we can define investment as a asset which is held by businessman for earning of interest or dividend or any other motive. This is the source of earning of investors. Investment can be done in two types of assets. One is physical property like land and building and other is in shares and debentures this is physical property but these are the certificate which gives the power to get earning from these investments. Valuation of Current investments Any investment which is converted in to cash within one year. All current investments will be calculated on cost or fair market price which is less. Valuation of long term investments Long term investments are valued at its original cost for recording in the books of accounts. It is very necessary to disclose the method of valuation of investments in the financial statements because of other investor’s interest are affected from this point.

AS 9 TO AS12

2012-02-04T16:18:00.001+05:30

Accounting Standard 9 ( AS 9 ) Revenue recognition Accounting standard of India explains the concept of revenue deeply. When goods are sold or services rendered. At this time it is deemed that money is earned by enterprise. There is also revenue from interest, royalty and dividend. Revenue recognition standard comprises different earning relating to advertising and other services projects when these are completed by professionals. But this standard also provides guidance about revenue recognition in following cases. If stock is sold on approval basis then, revenue is generated only when the buyer gives the approval. In case of agency business revenue will be recognized when risk of ownership also transferred under consignment. Accounting Standard 10 (AS 10 ) (Accounting of fixed assets) Accounting standard 10 of ICAI helps professional accountants for proper accounting treatment of fixed assets. Determination of cost of fixed assets Assets purchase value + all cost to bring the fixed assets to plant. New extension of fixed assets Any new extensions are capital nature expenditure and it will include in the total value of respective fixed assets. Goodwill is also treated as fixed asset in balance sheet if the amount is for this paid. In fixed assets, Enterprise will also include the amount of know how and patents. Accounting standard 11 ( AS 11 ) Effect of changes of foreign exchange rates There are two main reasons for providing effect of changes of foreign exchange rates on accounting. When goods are sold or buy in price which is dominated in foreign currency. When enterprise is doing any foreign operations. Calculate the value of foreign exchange profit or loss It is very simple when any transaction is done, this date is called closing date and we can calculate foreign exchange profit or loss on the basis of exchange rate. If it is rated to purchasing or selling related profit from foreign exchange currency. Then it will show as capital reserve. Otherwise it is revenue earning and it will transfer to profit and loss account. Accounting standard 12 (AS 12) (Accounting treatment of Govt. grants) The Govt. grant means any benefit given by govt. in the form of subsidy, reduction in duty and taxes and other non monetary help . Accounting standard accepts two way for providing accounting treatment of govt. grants. If it is received by any special enterprise. First way To show as capital earning and include it in the value of shareholder fund in liability side of balance sheet and also shown in bank in current assets side . 2nd Way Transfer all govt. grants to the credit side of profit and loss account

AS 5 TO AS 8

2012-02-04T16:16:00.001+05:30

5. Accounting standard 5 ( AS 5) Profit or loss for the period prior of changing accounting policies:- ICAI’s this standard explains two simple rules 1. All ordinary and extraordinary item relating to the financial statement should be disclosed if it effects on profit or loss period before changing of accounting policies. 2. If accounting policies are changed. Then it is the duty of enterprise to disclose all important items relating to income and expenditures, so that profit or losses before the period and after period of changes of accounting policies can easily compare with other enterprises business. 6. Accounting standard 6 (AS 6 ) Accounting of Depreciation Accounting standard 6 explains rules and regulations regarding charging of depreciation on any fixed asset . These rules can be explained in following way. 1. Depreciation must be charged on fixed assets which is used in business for more than one year . 2. Depreciation should charge with consisted method of charging depreciation. Two famous method of charging depreciation are straight line and reducing balance method. 3. Rate of depreciation should be according to company law 1956 and if it is not written in it then companies are free to charge depreciation with appropriate rate of depreciation. 4. Any company can also change the method of charging depreciation. But its effect in the form of deficiency or surplus also should show in profit and loss account of business . 5. Deficiency due to changing the method of depreciation will be debited in profit and loss account and surplus due to changing the method of depreciation will be credited in profit and loss account of business. 7. Accounting standard 7 ( AS 7 ) Accounting of construction contracts Construction contracts are those contracts relating to build of dam, building, pipelines, ships and other fixed assets. The nature of business is different from business of general manufacturing. Because time of completing contract is more than the time of accounting period. So, ICAI makes some rules and regulation that should be adopt in the business relating to construction. 1. Construction Company should identify all their resources of revenue. It may be fixed at the time of contract or it may be cost plus profit basis. So, it is necessary to make contract account statement in which all revenue of construction business must be shown. 2. Costs of contract comprise all raw material labour and other expenses which incurred for completing of contact. These costs should also calculate and deduct from revenue for calculating net earning from each contract. 8. Accounting standard 8 (AS 8) (Accounting for research and development) Research and development is important department of any company. AS 8 cares its accounting treatment and related to calculate its proper cost and charging on profit and loss account.

AS 1 TO AS 4

2012-02-04T16:14:00.001+05:30

After becoming Indian Accounting standard board as the prime authority for making Indian Accounting Standard in 1977, it made Indian Accounting Standards in 1979. These are also called Indian GAAP. This board also made many amendments in these Accounting standards. I have already made AS 1 to AS 32 content list in General Accepted accounting principles (GAAP) article. But I could not write its simple explain. So, today, this tutorial is just simple explanation of Accounting Standard especially for students who are doing chartered Accountancy in India and accountants who is practising accounting profession in India . 1. Accounting Standard 1(AS 1) (Disclosure of accounting policies) This accounting standard guides to company accountants for making their companies financial statements. After making financial statement, it should disclose all financial information of business because business of company is not the business of one man. It is also duty of accountant to make and disclose also extra accounting policy if company is using different depreciation, stock and investment valuation method. This accounting standard is made also for public interest and providing them full financial information. After they can take the decision of investment by purchasing the shares of company from stock exchange. 2. Accounting Standard 2 ( AS 2 ) (Valuation of Inventories) This accounting standard is very helpful to calculate the value of inventories. ASB comprise all stocks which is purchased for sale or production in inventories. Value of stock is not fixed by single formula but this standard provides following guidelines for calculating the value of inventories. 1st stock must be valued on cost or net realizable value which is lower . 2nd Every company is free to use FIFO, LIFO or weighted average method for proper calculation of the value of inventories. 3rd Cost of inventories = cost of raw material + cost of direct labour + cost of direct expenses 4th Companies are also free to use standard cost method or retail cost method for calculating the value of inventories. 5th Inventories does not encompass the value of tools which is used for repair of machinery 3. Accounting Standard 3 ( AS 3) (Cash flow statement) Accounting standard three which is revised in 1997 states that cash flow statement is a necessary statement under this standard for banks , financial institute or any institute whose annual turnover is more than Rs. 50 crores or any institute who has borrowed money more than Rs. 10 crores . This standard does not provide the Proforma of cash flow statement but deeply explain the two way of making this statement . Ist Way Direct method Under this method, cash flow statement is made by inflow and outflow of cash in operating , investing and financial activities . 2nd way indirect method It is different from direct method. Under this method cash from operating activities is calculated on the basis of net profit after different adjustments of non cash and non operating items like depreciation , interest , dividend paid and also adjusting net changes in working capital . All other part of cash flow from investing and financial activities are as same as direct method. related see : Proforma of Cash flow statement 4. Accounting standard 4 (AS 4) (Contingencies and events occurring after the balance sheet date) Accounting standard four provides the rules of accounting treatment of losses due to contingencies and event happening after balance sheet date but before approving of balance sheet by board of directors. Any contingencies like loss by fire or liabilities due to employee’s accident should be provided in financial statement after these contingencies losses are confirmed. Impairment losses of assets is also covered under AS 4 Any losses due to happening of any event is also shown in financial statement before approving financial statement

Indian Accounting Standards

2012-02-04T16:10:00.000+05:30

Accounting is the art of recording transactions in the best manner possible, so as to enable the reader to arrive at judgments/come to conclusions, and in this regard it is utmost necessary that there are set guidelines. These guidelines are generally called accounting policies. The intricacies of accounting policies permitted Companies to alter their accounting principles for their benefit. This made it impossible to make comparisons. In order to avoid the above and to have a harmonised accounting principle, Standards needed to be set by recognised accounting bodies. This paved the way for Accounting Standards to come into existence. Accounting Standards in India are issued By the Institute of Chartered Accountanst of India (ICAI). At present there are 30 Accounting Standards issued by ICAI. Objective of Accounting Standards Objective of Accounting Standards is to standarize the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability of financial statements and the reliability to the financial statements. The institute of Chatered Accountants of India, recognizing the need to harmonize the diversre accounting policies and practices, constituted at Accounting Standard Board (ASB) on 21st April, 1977. Compliance with Accounting Standards issued by ICAI Sub Section(3A) to section 211 of Companies Act, 1956 requires that every Profit/Loss Account and Balance Sheet shall comply with the Accounting Standards. 'Accounting Standards' means the standard of accounting recomended by the ICAI and prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards(NACAs) constituted under section 210(1) of companies Act, 1956.

Bank Reconciliation Statement

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Definition and Explanation:

From time to time the balance shown by the bank and cash column of the cash book required to be checked. The balance shown by the cash column of the cash book must agree with amount of cash in hand on that date. Thus reconciliation of the cash column is simple matter. If it does not agree it means that either some cash transactions have been omitted from the cash book or an amount of cash has been stolen or lost. The reason for the difference is ascertained and cash book can be corrected. So for as bank balance is concerned, its reconciliation is not so simple. The balance shown by the bank column of the cash book should always agree with the balance shown by the bank statement, because the bank statement is a copy of the customer's account in the banks ledger. But the bank balance as shown by the cash book and bank balance as shown by the bank statement seldom agree. Periodically, therefore, a statement is prepared called bank reconciliation statement to find out the reasons for disagreement between the bank statement balance and the cash book balance of the bank, and to test whether the apparently conflicting balance do really agree.

Causes of Disagreement Between Bank statement and Cash book:

Usually the reasons for the disagreement are:
1.
That the banker might have allowed interest which have not yet been entered in the cash book.
2.
That the banker might have debited the account for any such item as interest on overdraft, commission for collecting cheque, incidental charges etc., which we have not entered in the cash book.
3.
That some of the cheque which we drew and for which we credited to bank account prior to the date of closing, were not presented at the bank and therefore, not debited in the bank statement.
4.
That some cheques or drafts which the organisation have paid into bank for collection and for which debited the bank account, were not realised within the due date of closing and therefore, not credited by the bank.
5.
The banker might have credited the account with amount of a bill of exchange or any other direct payment into bank and the same may not have been entered in the cash book.
6.
That cheques dishonoured might have been debited inthe bank statement but have not been given effect to in to the books.

Cash Book

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Cash book is a book of original entry in which transactions relating only to cash receipts and payments are recorded in detail. When cash is received it is entered on the debit or left hand side. Similarly, when cash is paid out the same is recorded on the credit or right hand side of the cash book.
The cash book, though it serves the purpose of a cash book of original entry viz., cash journal really it represents the cash account of the ledger separately bound for the sake of convenience. It is more a ledger than a journal. It is journal as cash transactions are chronologically recorded in it. It is a ledger as it contains a classified record of all cash transactions. The balances of the cash book are recorded in the trial balance and the balance sheet.

Vouchers:
For Every entry made in the cash book there must be a proper voucher. Vouchers are documents containing evidence of payment and receipts. When money is received generally a printed receipt is issued to the payer but counterfoil or the carbon copy of it is preserved by the cashier. The copy receipts are called debit vouchers, and they support the entries appearing on the debit side of the cash book. Similarly when payment is made a receipt is obtained from the payee. These receipts are known as credit vouchers. All the debit and credit vouchers are consecutively numbered. For ready reference the number of the vouchers are noted against the respective entries. A column is provided on either side of the cash book for this purpose.
Balancing Cash Book:

The cash book is balanced at the end of a given period by inserting the excess of the debit on the credit side as "by balance carried down" to make both sides agree. The balance is then shown on the debit side by "To balance brought down" to start the next period. As one cannot pay more than what he actually receives, the cash book recording cash only can never show a credit balance.
Types of Cash book:

1. Single column cash book – It is prepared by those companies whose all receipts and payments are made in cash only. In it receipts are shown on the left side while payments are shown on the right side of the cash book.
2. Double column cash book – This contain an additional column of bank account for recording those transaction which are affected through bank. In this there will be contra entries that are transfer of money from company to bank and from bank to company for official purpose and therefore these entries are posted on both side.
3. Petty cash book– This is used for the purpose of recording cash transactions which are small in value and of repetitive nature like conveyance, stationary etc…..This book is maintained so that huge number of transaction which are of small value can be recorded in it and therefore less pressure on person maintaining books.

Subsidiary Books

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Though the principle of journalising all transactions, known as continental system of bookkeeping is quite perfect in actual business but in a large business it is found inconvenient to Journalise every transaction and sometime it becomes rather impossible for one man to Journalise numerous transactions on a business in one journal. Therefore, the journal is sub-divided into different journals knownas the subsidiary books or books of prime entry or books of original entry . These are the books in which are recorded the details of transactions as they take place from day to day, in a classified manner.
In every trading concern, the transactions, however numerous they may be, can be grouped into small number of classes. They consist chiefly of receipts and payments of cash, purchases and sales of goods, returns of goods purchased and sold, bills receivable and bills payable. The journal is divided in such a way that a separate book is used for each class of transactions.
The important subsidiary books used in modern business world are the following:-
1.
Cash Book:
It is used to record all cash receipts and payments.
2.
Purchases Book:
It is used to record all credit purchases.
3.
Sales Book:
It is used to record all credit sales
4.
Purchases returns book:
It is used to record all goods returned by business to its suppliers.
5.
Sales Returns Book:
It is used to record all goods returned to business by its customers.
6.
Bills Receivable Book:
It is used to record all accepted bills received by business.
7.
Bills payable Book: It is used to record all bill accepted by business to its creditors.
8.
Journal Proper:
It is used for recording those transactions for which there is no separate book.
All these subsidiary books are called books of original entry , as transactions in their original form are entered therein.

Advantages of Different Journals:
The advantages of having several books of original entry in place of one journal may be stated to as follows:
1.
It may be impossible to record each transaction into the ledger as it occurs. Subsidiary books record the details of the transactions and therefore, helps the ledger to become brief.
2.
As similar transactions are recorded together in the same book, future reference to any of them becomes easy.
3.
The chance of fraudulent alteration in an account is reduced as the book of original entry keeps records of the transactions in a chronological order.
4.
The work of posting can been trusted to several clerks at the same time and thus the ledger of a large business can be written up much more quickly.
5.
As each journal contains separately transactions of similar nature any desired analysis can be made conveniently.

Trial Balance

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Definition and Explanation:
Trial balance may be defined as an informal accounting schedule or statement that lists the ledger account balances at a point in time compares the total of debit balance with the total of credit balance.
The fundamental principle of double entry system is that at any stage, the total of debits must be equal to the total of credits. If entries are recorded and posted correctly, the ledger will reflect equal debits and credits, and the total credit balance will then be equal tothe total debit balances.
Every business concern prepares final accounts at the end of the year to ascertain the result of the activities of the whole year.To ensure correct result, the concern must be free from doubt that the books of accounts have been correctly recorded throughout the year. Trial balance is prepared to test the arithmetical accuracy of the books of accounts. As we know that under double entry system for each and every transaction one account is debited and other account is credited with an equal amount. If all the transactions are correctly recorded strictly according to this rule, the total amount of debit side ofall the ledger accounts mustbe equal to that of credit side of all the ledger accounts. This verification is done through trial balance.
If the trial balance agrees we may reasonably assume that the books are correct. On the other hand, if it does not agree, it indicates that the books are not correct - there are mistakes somewhere. The mistakes are to be detected and corrected otherwise correct result cannot be ascertained. There are however, a few types of errors which the trial balance cannot detect. In other words, the trial balance will agree inspite of the existence of those errors.
The trial balance is not an absolute or solid proof of the accuracy of books of accounts. Thus if trial balance agrees, there may be errors or may not be errors. But if it does not agree, certainly there are errors.

Purposes of Trial Balance:

The trial balance serves two main purposes. These are as under:
1.
To check the equality of debits and credits - an arithmetical or mathematical test of accuracy.
2.
To provide information for use in preparing final accounts.
Methods of Preparing Trial Balance:
There are three methods for the preparation of trial balance. These methods are:
1.
Total or gross trial balance
2.
Balance or net trial balance
3.
Total - cum - balance trialbalance
The method 1 and 2 are described below:

Total or Gross Trial Balance:
Under this method the two sides of all the ledger accounts are totaled up. Thereafter, a list of all the accounts is prepared in a separate sheet of paper with two "amount" columns on the right hand side. The first one for debit amounts and the second one for credit amounts. The total of debit side and credit side of each account is then placed on "debit amount" column and "credit amount" column respectively of the list. Finally the two columns are added separately to see whether they agree of not. This method is generally not followed in practice.
Balance or Net Trial Balance:
Under this method, first of all the balances of all ledger accounts are drawn. Thereafter, the debit balances and credit balances are recorded in "debit amount" and "credit amount" column respectively and the two columns are added separately to see whether they agree or not. This is the most popular method and generally followed.
The various Steps involved in the preparation of Trial Balance under this method are given below:
1.
Find out the balance of each account in the ledger.
2.
Write up the name of account in the first column.
3.
Record the account number in second column.
4.
Record the debit balance of each account in debit column and credit balance in credit column.
5.
Add up the debit and credit column and record the totals.