Fundamentals of Financial Accounting - Module 1 PDF

**[MEANING AND DEFINITION OF ACCOUNTING]** Accounting is generally known as a language of business. As a language of business of business, it communicates information regarding business activities to owners and other parties in the business. It records, classifies, analyses and communicates all the...

**[MEANING AND DEFINITION OF ACCOUNTING]** Accounting is generally known as a language of business. As a language of business of business, it communicates information regarding business activities to owners and other parties in the business. It records, classifies, analyses and communicates all the business transactions that have taken place during a particular period to the owners. Now let us examine some of the definitions of accounting. According to American Institute of Certified Public Accounts (AICPA), \"accounting is the art of recording, classifying and summarizing in a significant manner in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof\". In the words of Bierman and Derbin \"Accounting may be defined as the identifying, measuring, recording and communicating of financial information\". In short, accounting means not only recording of business transactions, but also summarizing the transactions, analyzing and interpreting their effect on working of the business. It is the art of recording and reporting economic data. Features or Characteristics (Nature) of Accounting Following are the features or characteristics of accounting: 1\. Accounting is a science: Accounting is a science because it is based on established laws, principles or rules. 2\. Accounting is an art: Accounting is an art because it shows the way through which goals can be achieved in the best possible way. 3\. Recording: Accounting is the art of recording the transactions in the books of original entry (journal) as soon as they take place. 4\. Financial transactions: Accounting records only those transactions and event which are of financial character. If a transaction has no financial character, it cannot be measured in terms of money. Hence it will not be recorded. 5\. Classifying: Accounting classifies the recorded information (transactions) in a systematic manner. This is done by writing the recorded transactions in the \'Ledger\' under suitable groups or heads or accounts according to nature. 6\. Summarizing: Accounting summarises the classified information. Summarizing is the art of presenting the classified data (ledger) in a manner which is understandable and useful to management and other interested parties. 7\. Analysis and interpretation: Accounting analyses and interprets the summarized data for the benefit of management, outsiders and shareholders. 8\. Communicating: The results of analysis and interpretation are communicated to the management and other interested parties such as creditors, investors, employees etc. This helps the management and interested parties in decision making. Now-a-days the three functions, namely, recording, classifying and summarizing are performed by electronic data processing devices. The accountants have to concentrate mainly on the interpretation aspects of the accounting. **[Meaning of Accountancy]** Accountancy is a broader term. It covers the basic functions of book keeping and accounting in addition to formulating of concepts, principles, methods and techniques of accounting. It has two branches, namely, book-keeping and accounting. **[Accounting and Book Keeping]** Book-keeping should be distinguished from accounting which has been defined earlier. Book- keeping is a process of accounting concerned merely with recording transactions and keeping records. Book-keeping is a small and simple part of accounting. It is mechanical and repetitive while dealing with business transactions. Accounting, on the other hand, aims at designing a satisfactory information system which may fulfil informational needs of different users and decision makers. Accounting primarily focusses on measurement, analysis, interpretation and use of information. It highlights the relevance and relationship of the information produced by the accounting process and effects of different accounting alternatives. Accounting includes budgeting, strategic planning, cost analysis, auditing, income-tax preparation, performance measurement, evaluation, control, preparing managerial reports for decision making, etc. **[Scope of accounting]** Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of an organization to provide information for decision-making. Its scope encompasses various aspects: 1. **Recording Transactions:** Capturing financial activities like sales, purchases, and expenses. 2. **Financial Reporting:** Summarizing recorded data into financial statements such as the balance sheet, income statement, and cash flow statement. 3. **Analysis:** Interpreting financial data to assess the financial health and performance of the organization. 4. **Auditing:** Reviewing financial statements to ensure accuracy and compliance with accounting standards. 5. **Management Accounting:** Providing internal stakeholders with financial information for planning, decision-making, and control. 6. **Taxation:** Calculating and managing taxes owed to government authorities. 7. **Financial Advisory:** Offering insights and advice based on financial analysis to support strategic decision-making. In short, accounting plays a crucial role in both financial reporting and managerial decision-making processes, making it integral to the functioning and governance of businesses and organizations **[Accounting principles]** Accounting principles are general decision rules derived from the accounting concepts. According to AICPA (US), a principle means \"a general law or rule adopted or professed as a guide to action: a settled ground or basis of conduct or practice\". Accounting principles are characterised as \'how to apply\' concepts. Anthony and Reeece\' comment: \"Accounting principles are man-made. Unlike the principles of physics, chemistry and other natural science, accounting principles were not deducted from basic axioms, nor can they be verified by observation and experiment. Instead, they have evolved. This evolutionary process is going on constantly; accounting principles are not eternal truths\". A principle is an explanation concisely framed in words to compress an important relationship among accounting ideas into a few words. Principles are concise explanations. Accounting principles do not suggest exactly as to how each transaction will be recorded. This is the reason that accounting practices differ from one enterprise to another. The differences in accounting practices is also due to the fact that GAAP provides flexibility in the recording and reporting of business transactions. Accounting principles influence the development of accounting techniques which are specific rules to record specific transactions and events in an organisation. The need for accounting principles arises because different parties such as investors, creditors etc. are interested to know about the affairs of the business and if every business applies its own way of accounting practices, the final accounts may not be understandable to all such parties. In order to make the final accounts understandable and to maintain uniformity in accounting system, accounting should be based on certain standards. These standards are known as Accounting Principles. In the words of A.W. Johnson, \"Accounting principles are the assumptions and rules of accounting and the application of these rules, methods and procedures to the actual practice of accounting\". Accounting principles are rules of conduct or procedures which are adopted by the accountant universally while recording the accounting transactions. If these principles are followed while recording the transactions, it is possible to ensure uniformity, clarity and understanding. The accounting principles are generally divided into three categories (a) Accounting postulates, (b) Accounting concepts and (c) Accounting conventions. **[Accounting Postulates]** Accounting postulates are basic assumptions which are generally accepted as self-evident truths in accounting. Postulates are established or general truths which do not require any evidence to prove them. They are the propositions taken for granted. Belkaoui\' defines accounting postulates, \"as self-evident statements or axioms, generally accepted by virtue of their conformity to the objectives of financial statements, that portray the economic, political, sociological and legal environments in which accounting must operate\". 1. **Business Entity Postulate:** The entity postulate assumes that the financial statements and other accounting information are for the specific business enterprise which is distinct from its owners. Attention in financial accounting is focussed on the economic activities of individual business enterprises. Consequently, the analysis of business transactions involving costs and revenue is expressed in terms of the changes in the firm\'s financial conditions. Similarly, the assets and liabilities devoted to business activities are entity assets and liabilities. This concept defines the accountant\'s area of interest and limits the number of objects, events, and their attributes that are to be included in financial statements. The transactions of the enterprise are to be reported rather than the transaction of the enterprise\'s owners. This concept, therefore, enables the accountant to distinguish between personal and business transactions. The concept applies to sole proprietorship, partnership, companies, and small and large enterprise. It may also apply to a segment of a firm, such as division, or several firms, such as when inter-related firms are consolidated. The assumption of a business entity somewhat apart and distinct from the actual persons conducting its operations is a conception which has been greatly deplored by some writers and staunchly defended by others. The distinction between the business entity and outside interests is a difficult one to make in practice in those businesses in which there is a close relationship between the business and the people who own it. In the case of small firms where the owners exert day-to-day control over the affairs of the business and personal and business assets are intermingled, definition of the business activity is more difficult for financial as well as management accounting purposes. However, in the case of a company, the distinction is often quite easily made. A company has a separate legal entity, separate from persons who own it. One possible reason for making distinction berween the business entity and the outside world is the fact that an important purpose of financial accounting is to provide the basis for reporting on stewardship. Owners, creditors, banks and other strust funds to management and management is expected to use these funds effectively. Financia ccounting reports are one of the principle means to show how well this responsibility, or steward ship, has been discharged. Also, one entity may be a part of a larger entity. For example, a set of accounts may be prepared for different major activities within a large organisation, and still another vet of accounts may be prepared for the organisation as a whole. 2. **Going Concern Postulate**: An accounting entity is viewed as continuing in operation in the absence of evidence to the contrary. Because of the relative permanence of enterprises, financial accounting is formulated assuming that the business will continue to operate for an indefinitely long period in the future. Past experience indicates that continuation of operations is highly probable for most enterprises although continuation cannot be known with certainty. An enterprise is never viewed as a going concern if liquidation appears imminent. The going-concern postulate justifies the valuation of assets on a non-liquidation basis and it calls for the use of historical cost for many valuations. Also, the fixed assets and intangibles are amortised over their useful life rather than over a shorter period in expectation of early liquidation. The significance of going-concern postulate can be indicated by contrasting it with a possible alternative, namely, that the business is about to be liquidated or sold. Under the later assumption, accounting would attempt to measure at all times what the business is currently worth to a buyer, but under the going-concern concept, there is no need to do this, and it is, in fact, not done. Instead, a business is viewed as a mechanism for creating value, and its success is measured by the difference between the value its outputs (i.e. sales of goods and services) and the cost of resources used in creating those outputs. The going-concern postulate leads to the proposition that individual financial statements are part of a continuous, inter-related series of statements. This further implies that data communicated are tentative and that current statements should disclose adjustments to past year statements revealed by more recent developments. 3. **Money Measurement Postulate**: A unit of exchange and measurement is necessary to to account for the transactions of business enterprises in a uniform manner. The common denominator chosen in accounting is the monetary unit. Money is the common denominator in terms of which the exchangeability of goods and services, including labour, natural resources and capital are measured. Money measurement concept holds that accounting is a measurement and communication process of the activities of the firm that are measurable in monetary terms. Obviously, financial statements should indicate the money used. Money measurement postulate implies two limitations of accounting. First, accounting is limited to the production of information expressed in terms of a monetary unit: it does not record and communicate other relevant but non-monetary information. Accounting does not record or communicate the state of chairman\'s health, the attitude of the employees, or the relative advantages of competitive products or the fact that the sales manager is not on speaking terms with the production manager. Accounting, therefore, does not give a complete account of the happenings in a business or an accurate picture of the condition of business. Accounting information is perceived as essentially monetary and quantified, while non-accounting information is non-monetary and non-quantified. Although accounting is a discipline concerned with measurement and communication of monetary activities, it has been expanding into areas previously viewed as qualitative in nature. In fact, a number of empirical studies refer to the relevance of non-accounting information compared with accounting information\... Secondly, the monetary measurement postulate concerns the limitations of the monetary unit itself as a unit of measure. The primary characteristics of the monetary unit purchasing power, or the quantity of goods or services that money can acquire is of concern. Traditionally, financial accounting has dealt with this problem by starting that this concept assumes either that the purchasing power of the monetary unit is stable over time or that the changes in prices are not significant. While still accepted for current financial reporting, the stable monetary unit concept is the object of continous and persistent criticism. 4\. **Accounting Period Postulate**: Financial accounting provides information about the eco- nomic activities of an enterprise for specified time periods that are shorter than the life of the enter- prise. Normally, the time periods are of equal length to facilitate comparison. The time period is identified in the financial statements. The time periods are usually of twelve months. Sometimes quarterly or half-yearly statements are also issued. These are considered interim and different from annual statements. For managerial use, statements covering shorter periods such as a month or a week may also be prepared. Dividing business activities into specific time periods creates a number of measurement problems in financial accounting such as allocation of the cost of an asset to specific periods, determining income and costs associated with long-term contracts covering several accounting periods, treatment of R & D costs, etc. Accounting measurements must be resolved in the light of particular circumstances. There is no easy, general solution. The accountant and the manager rely on their experience, knowledge and judgment to come to the appropriate answer. 5.**Property rights Postulate**: This is an essential condition for business. The term \'property right\' means the right of accounting entities to possess and alienate property - value. In the context of accounting, this implies that the things of value to an entity can be transferred from one entity to another. Thus, this becomes the basis of business transactions. [ ] **[ACCOUNTING CONCEPTS ]** Accounting concepts are also self-evident statements or truths. Accounting concepts are so basic that people accept them as valid without any questioning. Accounting concepts provide the conceptual guidelines for application in the financial accounting process, i.e., for recording measurement, analysis and communication of information about an organisation. These concepts provide help in resolving future accounting issues on a permanent or a longer basis, rather than trying to deal with each issue on an ad-hoc basis. The concepts are important because they (a) help explain the \'why\' of accounting (b) provide guidance when new accounting situations are encountered, and (c) significantly reduce the need to memorise accounting procedures when learning about accounting 1\. **Cost concept**: The cost principle requires that assets be recorded at the exchange price, i.e, acquisition cost or historical cost. Historical cost is recognised as the appropriate valuation basis for recognition of the acquisition of all goods and services, expenses, costs and equities. In other words, an item is valued at the exchange price at the date of acquisition and shown in the financial statements at that value or an amortised portion of it. For accounting purposes, business transactions are normally measured in terms of the actual prices or costs at the time the transaction occurs, i. e. financial accounting measurements are primarily based on exchange prices at which economic resources and obligations are exchanged. Thus, the amounts at which assets are listed in the accounts of a firm do not indicate what the assets could be sold for. However, some accountants argue that accounting would be more useful if estimates of current and future values were substituted for historical costs under certain conditions. The extent to which cost and value should be reflected in the accounts is central to much of the current accounting controversy. The historical cost concept implies that since the business is not going to sell its asset as such there is little point in revaluing assets to reflect current values. In addition, for practical reasons, the accountant prefers the reporting of actual costs to market values which are difficult to verify. By using historical costs, the accountant\'s already difficult task is not further complicated by the need to keep additional records of changing market value. Thus, the cost concept provides greater objectivity and greater feasibility to the financial statements. 2. **Dual-Aspect concept: This** principle lies at the heart of the whole accounting process. The accountant records events affecting the wealth of a particular entity. The question is - which aspect of this wealth are important? Since an accounting entity is an artificial creation, it is essential to know to whom its resources belong to or what purpose they serve. It is also important to know what kind of resources it controls. e.g. cash, buildings or land. Accounts recording systems have therefore developed so as to show two main things: (a) the sources of wealth, and b) the form it takes. This is the basic concept of accounting. According to this concept, every transaction has two aspects. These two aspects are (a) receiving of benefit, and (b) giving of that benefit. These two aspects should be recorded. Thus, at a given point of time total benefits received should be equal to total benefits given. For example, X starts business with Rs. 2,00,000. In this transaction, there are two aspects. On the one hand, the business has an asset or benefit received (cash). At the same time business (separate from the proprietor) is liable to pay Rs. 2,00,000 to the owner (benefit given). It is because of this concept that the total equity is always equal to total assets of the business. This may be expressed in the form of an equation (accounting equation): Capital - Total Assets - Liabilities Or Total Assets = Capital + Liabilities Or Total Assets= Total Liabilities (from the point of business capital is also a liability) 3\. **Realisation concept:** According to this concept, revenue is recognized when a sale is made or a service is rendered to customers, whether it is a cash sale, a credit sale or as instalment sales. This means revenue realization does not necessarily mean that revenue must realize in cash. If a firm transfers or sells goods in March and receive cash in May, revenue will be considered as earned or realized in March, when the goods were transferred. Realisation concept is also known as revenue recognition concept: 4\. **Matching concept**: According to this concept, cost or expenses of a business of a particular period are matched or compared with the revenue of that period in order to ascertain the net profit or net loss. If revenue earned is more than the cost, the result is net profit. If costs are more than the revenue, the difference is net loss. 5\. **Objectivity concept**: This concept requires that accounting data should be verifiable and free from personal bias of the accountant. This means each recorded transaction in the books of account should have adequate evidence to support it. In historical cost accounting, the accounting data are verifiable because the transactions are recorded on the basis of documents such as vouchers, receipt, invoices etc. **[Accounting Conventions (Doctrine of Accounts)]** Accounting conventions are the customs and traditions which guide the accountant while preparing accounting statements. Conventions are based on practicability and usage. For instance, the relationship of 12 units forming a \'dozen\' is a convention. The following are the main accounting conventions: 1\. **Convention of consistency:** This principle requires that once an organisation has decided on one method, it should use the same method for all subsequent transactions and events of the same nature unless it has sound reasons to change methods. If accounting methods are frequently changed. Comparison of financial statements for one period with those of another period would be difficult. The consistent use of accounting methods and procedures over time will check the distortion of profit and loss account and the balance sheet and the possible manipulation of these statements. Consistency is necessary to help external users in comparing financial statements of a given firm over time and in making sound economic decisions. If the new method is found more useful, the present method can be changed. 2\. **Convention of conservatism**: This is a convention of caution or playing safe which is followed while preparing the financial statements. The idea of this statement is to consider all possible losses (and make provision for such losses) and to ignore all probable profits (unrealized profits). Conservatism is the defensive accounting mechanism against uncertainty and risk. The valuation of stock on cost price or market price, whenever less is is based on the convention of conservatism. Similarly it is on the basis of this convention, provision is made for bad debts and discount on debtors. 3\. **Convention of materiality**: Materiality concept implies that the transactions and events that have immaterial or insignificant effects should not be recorded and reported in the financial statements. It is argued that the recording of insignificant events cannot be justified in terms of its subsequent poor utility to users. There is no agreement as to the meaning of materiality and what can be said to be material or immaterial events or transactions. It is for the preparer of accounts to interpret what is and what is not material. Probably the materiality of an event or transaction can be decided in terms of its impact on the financial position, results of operations, changes in the financial **position of an organisation and on evaluation or decisions made by users.** **4. Convention of full disclosure**: The principle of full disclosure requires that a business enterprise should provide all relevant information to external users for the purpose of sound economic decisions. This concept implies that no information of substance or of interest to the average inves tors will be omitted or concealed from an entity\'s financial statements. The objective of accounting is to provide true and accurate information. Hence, accounting records and statements should be honest and informative. They should not be misleading. The convention of disclosure requires that all significant information should be disclosed in the financial statements. Further the accounting records and statements should conform to generally accepted accounting principles. In short, the convention of disclosure requires that accounts and statements should disclose all the information needed for users in a meaningful and clear manner. The convention of materiality should not be confused with the convention of full disclosure. The convention of full disclosure requires that all facts necessary to ensure that the financial statements are not misleading, must be disclosed. But the convention of materiality requires that the items or events which have insignificant economic effect or irrelevant to the users\' need may not be disclosed. **GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)** Financial accounting follows a set of ground rules or accounting principles (discussed earlier) in presenting financial information which are known as Generally Accepted Accounting Principles (GAAP). In fact, to be useful, financial accounting information should be collected, classified, summarised and reported objectively. Those who use such information and rely on such data have a right to be assured that the data are reliable, free from bias and consistencies, whether deliberate or otherwise. For this reason, financial accounting depends on certain guidelines or standards that have proved useful over the years in accounting and reporting information. In this task, GAAP plays a vital role and financial accounting information can be meaningful only when prepared according to some agreed upon standards and procedures, i.e., Generally Accepted Accounting Principles Generally Accepted Accounting Principles incorporate the consensus at a particular times as to which economic resources and obligations should be recorded as assets and liabilities by financial accounting, which changes in assets and liabilities should be recorded, when these changes are to be recorded, how the assets and liabilities and changes in them should be measured, what information should be disclosed and which financial statements should be prepared.\" GAAP are simply guides to action and may change over time. Sometimes specific principles must be altered or new principles must be formulated to fit changed economic circumstances of changes in business practices. Accounting principles originate from problem situations such as changes in the law, tax regulations, new business organisational arrangements, or new financing or ownership techniques. Certain accounting techniques or procedures are tried in response to the effect such problems have on financial reports. Through comparative use and analysis, one or more of these techniques are judged most suitable, obtain substantial authoritative support and are then considered a generally accepted accounting principle. In India, organisations such as the Accounting Standards Board (ASB), Institute of Chartered Accountants of India, Department of Company Affairs (Government of India), Securities and Exchange Board of India (SEBI), Institute of Costs and Works Accountants of India, Institute of Company Secretaries, Stock Exchanges, and the literature each of these publishes, are instrumental in the development of most accounting principles. In the US, Financial Accounting Standards Board (FASB), American Institute of Certified Public Accountants (AICPA), Securities and Exchange Commission (SEC), Internal Revenue Service and the American Accounting Association are instrumental in the formulation of accounting principles. **ACCOUNTING STANDARDS AND ACCOUNTING POLICIES** Accounting is the language of business, and like any language, it must adhere to certain rules and structures to ensure clarity and consistency. This is where accounting standards and accounting policies come into play. While they both serve to guide the preparation and presentation of financial statements, they operate at different levels within the accounting framework. This essay explores the concepts of accounting standards and accounting policies, their significance, and how they interrelate in the financial reporting process. **Accounting Standards: A Framework for Uniformity:** Accounting standards are authoritative guidelines issued by recognized accounting bodies, such as the International Accounting Standards Board (IASB) or the Financial Accounting Standards Board (FASB). These standards dictate how specific transactions and events should be accounted for in financial statements, ensuring consistency, transparency, and comparability across different entities and over time. **Purpose and Objectives:** The primary objective of accounting standards is to provide a consistent framework that companies must follow when preparing their financial statements. This consistency is crucial for investors, regulators, and other stakeholders who rely on these statements to make informed decisions. By standardizing the accounting practices across different companies and jurisdictions, accounting standards help reduce the risk of financial misstatements and fraud. **Types of Accounting Standards:** There are various types of accounting standards, including International Financial Reporting Standards (IFRS), Generally Accepted Accounting Principles (GAAP), and country-specific standards. Each set of standards has its nuances, but they all aim to promote high-quality financial reporting. For instance, IFRS is used globally and focuses on principles-based standards, while U.S. GAAP is more rules-based, offering detailed guidance on specific issues. **Application and Enforcement**: The application of accounting standards is typically mandatory for publicly listed companies and other entities that are required to produce general-purpose financial statements. Regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States, enforce compliance with these standards, ensuring that companies adhere to the prescribed accounting treatments. **Accounting Policies: Customization within a Framework** While accounting standards provide the overarching rules, accounting policies are the specific practices and methods that a company chooses to adopt within the framework of these standards. These policies are the detailed principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting its financial statements. **Flexibility and Judgment:** Accounting policies allow for a degree of flexibility and require management to exercise judgment in areas where the accounting standards provide options or where there is ambiguity. For example, under IFRS, a company may choose between the straight-line method and the reducing balance method for depreciating its assets. The choice of method constitutes the company's accounting policy for depreciation. **Disclosure and Transparency**: Accounting policies are disclosed in the notes to the financial statements, providing stakeholders with insight into the methods and assumptions used in the preparation of the financial statements. This disclosure is vital for users to understand the financial statements fully and to make meaningful comparisons with other entities. **Impact on Financial Statements:** The choice of accounting policies can have a significant impact on the financial statements. For instance, different inventory valuation methods (e.g., FIFO vs. LIFO) can lead to different profit figures, especially in times of inflation. Therefore, companies must carefully select their accounting policies, considering both the standards and the specific circumstances of their business. **The Interrelationship between Accounting Standards and Policies** Accounting standards and accounting policies are closely interrelated. Accounting standards set the framework within which accounting policies are formulated. In areas where the standards are prescriptive, companies have little to no discretion. However, in areas where the standards are more principles-based, companies have the flexibility to choose from a range of acceptable accounting policies. For example, IFRS 15 provides a detailed framework for revenue recognition but allows companies to develop specific accounting policies for recognizing revenue in their particular business context. Similarly, while IFRS and GAAP provide guidance on how to account for leases, companies must establish policies regarding lease classification, discount rates, and the treatment of variable lease payments. Accounting standards and accounting policies are fundamental components of the financial reporting process. Accounting standards provide the necessary consistency and comparability across companies and jurisdictions, ensuring that financial statements are prepared on a common basis. Accounting policies, on the other hand, offer companies the flexibility to tailor their financial reporting to reflect their specific circumstances while remaining within the boundaries set by the standards. The effective interplay between accounting standards and policies is crucial for producing high-quality financial statements that faithfully represent a company's financial position, performance, and cash flows. As businesses continue to evolve and financial transactions become more complex, the role of both accounting standards and accounting policies in ensuring transparent and reliable financial reporting will only grow in importance. **ACCOUNTING STANDARDS** The term \'accounting standard\' is defined as written statements issued from time to time by institutions of the accounting profession or institutions in which there is sufficient involvement and which are established expressly for this purpose. Such accounting institutions or bodies are currently found in many countries of the world, e.g., Accounting Standards Board (India), Financial Accounting Standards Board (US), Accounting Standards Committee (UK), Accounting Standards Committee (Canada), etc. At the international level, International Accounting Standards Board (IASB) (earlier IASC) has been created \"to formulate and publish, in the public interest, basic standards to be observed in the presentation of audited accounts and financial statements and to promote their worldwide acceptance and observance.\" Accounting standards mainly deal with financial measurements and disclosures used in producing a set of fairly presented financial statements. In this respect, accounting standards can be thought of as a system of measurements and disclosure. They also draw the boundaries within which acceptable conduct lies and in that and many other respects, they are similar in nature to laws. **BENEFITS OF ACCOUNTING STANDARDS** Accounting standards have evolved to curb the abuse of flexibility in adoption of accounting policies by business enterprises. Standards help accounting practitioners to apply those accounting practices regarded as the most suitable for the circumstances covered. Further, they help individual companies and their managements to justify the adoption of certain practices when producing their financial statements. The benefits of accounting standards may be listed as follows: 1**. To Improve the Credibility and Reliability of Financial Statements**: Financial statements of business enterprises are used by a diverse group of users for making sound economic decision. The users are shareholders (existing and potential), trade creditors, customers, suppliers, employees, taxation authorities and other interested parties. It is necessary, therefore, that the financial statements the users use and upon which they rely, present a fair picture of the position and progress of the enterprises. It is the function of accounting (and auditing) standards to create this general sense of confidence by providing a framework within which credible financial statements can be produced. Accounting standards are required in order to meet a basic need of managers, investors and creditors to compare results and financial conditions of different segments of firms, different periods of a firm, different firms and different industries. In the absence of standards, there would be no incentives to encourage an enterprise to conform to any particular model for sake of comparison. Thus, the main aim of accounting standards is to protect users\' interest by providing them with information in which they can have confidence. 2\. **Benefits to Preparers and Auditors:** Preparers and auditors, with the passage of time and changing climate of opinion, have to work in an environment where they face the threat of stern sanctions and a bad name to their professions. These result partly from changed penalties and remedies available under the company law and partly from the greater willingness of aggrieved parties to take their causes before the courts. The risk of these developments are considerable to auditors whether in terms of uncovered financial exposure to liability or adverse effects on professional reputation resulting from unfavourable publicity. Particularly dangerous are causes of undetected fraud, and audited accounts, which are held to be misleading due to insufficient disclosure or use of inappropriate accounting principles. Given the increasing risks, the accounting profession realised that it needed to have the accounting standards for their own benefits. 3**. Determining Managerial Accountability**: Accounting standards facilitate in determining specific corporate accountability and regulation of the company. They help in assessing managerial skill in maintaining and improving the profitability of the company, depicting the progress of the company, its solvency and liquidity. Generally, they are important factors in assessing the effectiveness of management\'s performance of its duties and leadership. Standards aim to ensure consistency and comparability in place of (imposed) uniformity in financial reporting to permit better comparisons in profitability, financial position, future prospects and other performance indicators associated with different business firms. Management\'s basic purpose should be to opt for the best method (standards) available. Accounting standards should significantly reduce the amount of manipulation of reported net profit that is likely to occur in the absence of standards. **[ACCOUNTING STANDARDS IN INDIA]** The Institute of Chartered Accountants of India constituted the Accounting Standard Board (ASB) in April 1977, recognising the need to harmonise the diverse accounting policies and practice in India and keeping in view the international development in the field of accounting. The ASB is entrusted with the following functions: 1\. To formulate accounting standards which may be established by the Council of ICAI in India. While formulating standards, the ASB is required to take into consideration the applicable laws, customs and usages and business environment; it is also required to give due consideration to International Accounting Standards Issued by IASB and to integrate them, to the extent possible, in the light of the conditions and practices prevailing in India. 2\. To propagate the Accounting Standards and persuade the concerned parties to adopt them the preparation and presentation of financial statements. 3\. To issue guidance notes on the Accounting Standards and give clarifications on issues arising therefrom. 4\. To review the accounting standards at periodic intervals. The date from which a particular standard will come to effect, as well as the class of enterprises to which it will apply, will also be specified by the Institute. Unless otherwise stated, no standard will have retrospective application. Normally, before formulating the standards, ASB will hold discussions with the representatives of the government, public sector undertakings, industry and other organisations, for ascertaining their views. An Exposure Draft of the proposed standard will be prepared and issued for comments by members of the institute and the public at large. After considering the comments received, the draft of the proposed standard will be finalised by ASB and submitted to the Council which will study it, modify it if necessary and issue it under its own authority. **Auditor\'s Duties in Relation to Accounting Standards**: In case the company does not conform to any of the mandatory accounting standards, the auditor will have to qualify his report. In case he fails to do so the ICAI can take disciplinary action against him on the grounds of professional misconduct. **ACCOUNTING STANDARDS ISSUED BY ASB** The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India, has in line with the International Standards, issued the following accounting standards so far to be followed by its members while auditing the accounts of the companies. These are: 1\. Disclosures of Accounting Policies (AS 1) 2\. Valuation of Inventories (AS 2) 3\. Cash Flow Statements (AS 3) 4\. Contingents and Events Occurring After the Balance Sheet Date (AS 4) 5\. Net profit or Loss for the period, prior period Items and Changes in Accounting Policies (AS 5) 6\. Depreciation Accounting (AS 6) 7\. Accounting for Construction Contract (AS 7) 9\. Revenue Recognition (AS 9) 10\. Property, plant and Equipment (AS 10) 11\. Accounting for the Effects of Changes in Foreign Exchange Rates (AS 11) 12\. Accounting for Government Grants (AS 12) 13\. Accounting for Investments (AS 13) 14\. Accounting for Amalgamation (AS 14) 15\. Employee benefits (AS 15) 16\. Borrowing Cost (AS 16) 17\. Segment Reporting (AS 17) 18\. Related Party Disclosures (AS 18) 19\. Leases (AS 19) 20\. Earnings Per Share (AS-20) 21\. Consolidated Financial Statements (AS 21) 22\. Accounting for taxes on income (AS 22) 23\. Accounting for Investments in Associates in Consolidated Financial Statements (AS 23) 24\. Discontinuing Operations (AS 24) 25\. Interim Financial Reporting (AS 25) 26\. Intangible Assets (AS 26) 27\. Financial Reporting of Interest in Joint Venture (AS 27) 28\. Impairment of Assets (AS 28) 29\. Provisions, Contingent Liabilities and Contingent Assets (AS 29) In addition to these standards, the Institute of Chartered Accountants of India has issued Statements, Guidance Notes and Opinions which seek to bring uniformity in corporate accounting and reporting practices.