BASICS OF ACCOUNTING By: Vikram.G.B Lecturer, P.G. Dept. of Commerce V.D.C Bangalore-55
HISTORY OF ACCOUNTING:- Accounting has evolved and emerged, as have medicine, law, and most other fields of human activity, in response to the social and economic needs of society. The history of accounting can be traced as far back as to the dawn of commerce. Sufficient evidence exists to conclude that art and practice of accounting existed even in Vedic times. There are references to kraya (sale), Vanij (merchant), sulka (price) in Rigveda. Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents.
According to the Qur’an, followers are required to keep records of their indebtedness (Sura 2, ayah 282), thus Islam provides general approval and guidelines for the recording and reporting of transactions. Kautilya’s Arthashastra contains details on business of keeping up accounts in the office of accountants Earliest Accounting: Jericho, an ancient city located near the Jordan River in the West bank is estimated to be at least 11,000 years old. The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years. The Res Gestae Divi Augusti (Latin: "The Deeds of the Divine Augustus") is a remarkable account to the Roman people of the Emperor Augustus stewardship. It listed and quantified his public expenditure.
The earliest extant evidence of full double-entry book- keeping is the Farolfi ledger of 1299-1300. The oldest discovered record of a complete double-entry system is the Messari (Italian: Treasurers) accounts of the city of Genoa in 1340. Luca Paciolis "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" (Latin: "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494. It included a 27-page treatise on book-keeping. It represents the first known printed treatise on book- keeping. It was during the 19th century that a move from book- keeping to accounting was seen. The end of the 19th century was marked by the most extraordinary expansion of the business.
MEANING AND DEFINITIONS:- The word "Accountant" is derived from the French word „Compter‟, which took its origin from the Latin word „Computare‟. The word was formerly written in English as "Accomptant", but in process of time the word, which was always pronounced by dropping the "p", became gradually changed both in pronunciation and in orthography to its present form. Book keeping:- 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. Book-keeping is mechanical and repetitive while dealing with business transactions. According to North Cott Book-keeping is defined as “the art of recording in the books of accounts the aspect of commercial or financial transactions.”
Accounting: Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.“ Accounting aims at designing a satisfactory information system which may fulfill informational needs of different users and decision-makers. Accounting primarily focuses on measurement, analysis, interpretation and use of information. Accountancy: Accountancy is defined by the Oxford English Dictionary (OED) as "the profession or duties of an accountant". Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user and is reliable.
Accounting Postulates are basic assumptions concerning the business environment. They are generally accepted as self-evident truths in accounting. Accounting Concepts are also self-evident statements or truths. Accounting concepts are so basic that people accept them as valid without questioning. They provide the conceptual guidelines for application in the financial accounting process. Accounting Principles are not laws of nature. They are broad areas developed as a way of describing current accounting practices and prescribing new and improved practices. Accounting principles are general decision rules derived from the accounting concepts.
MEANING & DEFINITION:- Accounting Standards are the statements of code of practice of the regulatory accounting bodies that are to be observed in the preparation and presentation of financial statements. Accounting standards deal mainly 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 measurement and disclosure. Without standards, comparisons between companies would be difficult. Bromwich defines accounting standards as “uniform rules for financial reporting applicable either to all or to a certain class of entity promulgated by what is perceived of as predominantly an element of the accounting community specially created for this purpose. Standard setters can be seen as seeking to prescribe a preferred a accounting treatment from the available set of methods for treating one or more accounting problems. Other policy statement by the profession will be referred to as recommendation.”
OBJECTIVES OF ACCOUNTING STANDARDS:- The basic objective is to remove variations in the treatment of several accounting aspects and to bringing standardization in presentation. They intent to harmonize the diverse accounting policies followed in the preparation and presentation of financial statements. They intent to standardize 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.
BENEFITS OF ACCOUNTING STANDARD:- To improve the credibility and reliability of financial statements. Benefits to accountants and auditors Determining managerial accountability Reform in accounting theory and practice
TYPES OF ACCOUNTING STANDARDS:-Accounting standards may be classified by their subject matterand by how they are enforced. According to subject-matter,standards may be as follows Types of Accounting standards Disclosure Presentation Content standards standards standards
Accounting standards may be based upon their method ofpreparation and enforcement. Such standards are: Types of Accounting standards Evolutionary and voluntary Privately set Government compliance standards standards standards
WHO WILL SET THE STANDARDS?? Government as a Standard Setter: It is argued that government should act as standard setter because government would be free of conflicts of interest. It can better enforce compliance with accounting standards in that it is backed by the enforcement power of law. Finally, government would act more quickly on pressing problems. Private sector body as Standard setter: Certain opinions have also been advanced for giving standard setting task to private sector body because it is argued that government could neither attract enough high quality talent nor devote sufficient resources to standard setting. government would be susceptible to undue political influence from special influence groups. Finally, a private sector body would be more responsive to the needs of diverse interests. Some agency is involved in standard setting: Both government and private sector body have their own advantages and disadvantages as well. So in this situation it appears a governmental agency may prove useful as compared to standard setting in public and private sector.
DIFFICULTIES IN STANDARD SETTING:- Difficulties in definition Political bargaining in standard setting Conflict in accounting theories Pluralism
STANDARD SETTING IN INDIA:- In India, we have standard bodies which are, in practice, the national regulations, which have the legal authority to set and implement regulatory rules and procedures in the financial sector. The Ministry of Company Affairs, provides legal framework for incorporation and proper functioning of companies. Further, we have self-regulatory organization such as the Indian Bank Association (IBA), Fixed Income Money Market and Derivates Association of India (FIMMDA), Association of Merchant Bankers of India (AMBI), Association of Mutual Funds of India (AMFI), Foreign Exchange Dealers Association of India (FEDAI), Primary Dealers Association of India (PDAI), among others, which play a critical role in developing codes of conduct and setting and maintaining standards.
GOVERNMENT BODIES RESPONSIBLE SETTING UP AS IN INDIA:- ICAI: The institute of chartered accountants of India on April 21, 1975 established accounting standard board. The main function assigned to the ASB was to formulate accounting standards from time to time. However ICAI with ASB is carrying a good work of formulation and issuance of accounting standards. The Institute of Chartered Accountants of India (ICAI) is a statutory body established under the Chartered Accountants Act, 1949 (Act No. XXXVIII of 1949) for the regulation of the profession of chartered accountancy in India. Accounting Standard and SEBI: Securities and Exchange Board of India was established in 1982 and it deals with the formulation of laws, by –laws, rules and amendments for the purpose of giving smooth and strong support to stock market. SEBI also focuses on protecting to interest of investor.
Accounting Standard and Income Tax Act 1961: Section 145 of the income tax Act 1961 deals with the method of accounting to be adopted for computing the income under the head of “Profit and gains from business and Profession.” The finance Act 1995 had amended section 145 w.e.f. from 1st April 1997. Accounting standard and company law: Accounting standards and company bill 1997, 415(2) of the company‟s bill 1999 now (withdrawn) proposed prescription of accounting standard by the central government in consultation with the national Advisory committee on Accounting Standards (NACAS) established with sub- clause of the clause 415, companies bill 1997 defines Accounting Standards to means standards of Accounting recommended by the institute of chartered Accountants on India constituted under the chartered Accountants Act 1949 as may be prescribed by the control government in consultations with NACAS, established under sub-section (1) of the clause 415, companies bill 1997 define.
PROCEDURE OF ISSUING AS (INDIA) ASB of ICAI after consultation with various study groups prepares the draft of AS. The draft as prepared will be circulated to Council members of ICAI and to the specified bodies like ICSI, ICWAI, CBDT, FICCI, ASSOCHAM, RBI, SEBI etc for their comments. After the meeting with the above bodies the exposure draft is finalized and is issued to ICAI and public for their comments. After considering the comments received, the draft is finalized by ASB and submitted to ICAI. The ICAI if found necessary may with consultation with ASB make required modification and issue the final AS. NACAS to recommend to MCA for notifying the AS.
PRESENT STANDARD SETTING PROCESS IN INDIA Identification of the broad areas by the ASB for formulating the Accounting Standards. Constitution of the study groups by the ASB for preparing the preliminary drafts of the proposed Accounting Standards. Consideration of the preliminary draft prepared by the study group by the ASB and revision, if any, of the draft on the basis of deliberations at the ASB. Circulation of the draft, so revised, among the Council members of the ICAI and 12 specified outside bodies such as Standing Conference of Public Enterprises (SCOPE), Indian Banks‟ Association, Confederation of Indian Industry (CII), Securities and Exchange Board of India (SEBI), Comptroller and Auditor General of India (C& AG), and Department of Company Affairs, for comments.
Meeting with the representatives of specified outside bodies to ascertain their views on the draft of the proposed Accounting Standard. Finalization of the Exposure Draft of the proposed Accounting Standard on the basis of comments received and discussion with the representatives of specified outside bodies. Issuance of the Exposure Draft inviting public comments. Consideration of the comments received on the Exposure Draft and finalization of the draft Accounting Standard by the ASB for submission to the Council of the ICAI for its consideration and approval for issuance. Consideration of the draft Accounting Standard by the Council of the Institute, and if found necessary, modification of the draft in consultation with the ASB. The Accounting Standard, so finalized, is issued under the authority of the Council.