It gives the knowledge to manage account

1. Accounting Standards

2. Introduction to Accounting Standards
(ASs)
• Meaning of Accounting Standards
• Accounting Standards are written policy
documents issued by expert accounting body
or by the government or other regulatory
body covering the aspects of recognition,
measurement, treatment, presentation, and
disclosure of accounting transactions in
financial statements.

3. Introduction to Accounting Standards
(ASs)
• Accounting Standards reduce the accounting
alternatives in the preparation of financial
statements within the bounds of rationality,
thereby ensuring comparability of financial
statements of different enterprises.

4. Classification of Enterprises
• The enterprises are classified and labeled as
Level I, Level II and Level III companies. Based
on this classification and the category in which
they fall the Accounting standards are
applicable to the enterprises

5. Level I Enterprises
• Enterprises which fall under any one or more category
below mentioned are termed as Level I Companies
• Enterprises whose equity or debt securities are listed
whether in India or outside India
• Enterprises which are in the process of listing their
equity or debt securities. Board of directors’
resolution must be available as an evidence
• Banks including co-operative banks
• Financial institutions
• Enterprises carrying on insurance business

6. Level I Enterprises
• All commercial, industrial and business reporting
enterprises, whose turnover not including ‘other
income’ for the immediately preceding accounting
period on the basis of audited financial statements
exceeds Rs. 50 crore
• All commercial, industrial and business reporting
enterprises having borrowings, including public
deposits, in excess of Rs. 10 crores at any time during
the accounting period
• Holding and subsidiary enterprises of any one of the
above at any time during the accounting period

7. Level II Enterprises
• Enterprises which fall under any one or more category
below mentioned are termed as Level II Companies
• All commercial, industrial and business reporting
enterprises, whose turnover (excluding ‘other income’) for
the immediately preceding accounting period on the basis
of audited financial statements is greater than Rs. 40 lakhs
but less than Rs. 50 crore
• All commercial, industrial and business reporting
enterprises having borrowings, including public deposits, is
greater Rs. 1 crore but less than Rs. 10 crores at any time
during the accounting period
• Holding and subsidiary enterprises of any one of the above
at any time during the accounting period

8. Level III Enterprises
• Enterprises which do not fall under Level I
and Level II, are considered as Level III
enterprises .

9. Benefits
• Accounting Standards the accountant has
following benefits:
• Standardization of alternative accounting
treatments: Standards reduce to a reasonable
extent or eliminate altogether confusing
variations in the accounting treatments used to
prepare financial statements.
• Requirements for additional disclosures: There
are certain areas where important information
not statutorily required to be disclosed.
Standards may call for disclosure if required by
law.

10. Benefits
• Comparability of financial statements: The
application of Accounting Standards would, to a
limited extent, facilitate comparison of financial
statements of companies situated in different
parts of the world, and also of different
companies situated in the same country.
However, it should be noted in this respect the
differences in the institutions, traditions and legal
systems from one country to another give rise to
differences in Accounting Standards adopted in
different countries.

11. Limitations
• there are some limitations of setting of Accounting
Standards:
• Difficulties in making choice between different
treatments: Different continues may give alternative
solutions to certain accounting problems and have
arguments to recommend them. Therefore, the choice
between different alternative accounting treatments
may become difficult.
• Lack of flexibilities: There may be a trend towards
rigidity which could lead different countries to be less
flexibility in applying the Accounting Standards.

12. Limitations
• Restricted scope: Accounting Standards
cannot override the statute. The standards are
required to be framed within the ambit of
prevailing statutes.

13. List of Accounting Standards as issued
by ICAI
• AS 1 Disclosure of Accounting Policies
• AS 2 (Revised) Valuation of Inventories
• AS 3 Cash Flow Statements
• AS 4 (Revised) Contingencies and Events
Occurring After Balance Sheet Date
• AS 5 Net profit or Loss for the period, Prior
Period Items and Changes in Accounting Policies
• AS 6 Depreciation Accounting
• AS 7 Accounting for Construction Contracts
• AS 8 Accounting for Research and Development

14. ACCOUNTING STANDARD AND
AUDITORS
• It is the duty of the auditors that while
discharging their function they have to ensure
that the Accounting Standards issued and
made mandatory by the Central Government
are compiled with. Section 143(3)(e) of the
Companies Act 2013 requires that the auditor
to report whether in his opinion the financial
statements comply with the Accounting
Standards referred in section 133 of the
Companies Act, 2013.

15. AS 01. Disclosure of Accounting
Policies
• Accounting policies are the specific accounting
principles and the methods of applying those
principles adopted by an enterprise in the
preparation and presentation of financial
statements.
• These assumptions are also known as concepts.
These are
• Going Concern
• Consistency
• Accrual

16. Areas -The AS -1 gives a list of areas
Accounting Policies are possible
• The following are examples of areas in which different
accounting policies may be adopted by organisations.
• Methods of depreciation, depletion and amortisation
• Treatment of expenditure during construction
• Conversion or translation of foreign currency items
• Valuation of inventories
• Treatment of goodwill
• Valuation of investments
• Treatment of retirement benefits
• Recognition of profit on long-term contracts
• Valuation of fixed assets
• Treatment of contingent liabilities

17. Considerations in the Selection of Accounting
Policies
• Prudence: In view of the uncertainty of future events,
profits are not anticipated but recognised only when
earned, though not necessarily in cash. However, provision
is made for all known liabilities and losses even though
the amount cannot be determined with certainty and
represents only an estimate.
• Substance over Form: The accounting treatment and
presentation of transactions and events in financial
statements should be governed by their substance and not
merely by the legal form.
• Materiality: Financial statements should disclose all
“material” items, i.e. items, the knowledge of which might
influence the decisions of the user of the financial
statements.

18. AS-1- Requires that:
• All significant accounting policies should be
disclosed. Such disclosure form part of financial
statements.
• the financial statement and the significant
accounting policies should normally be disclosed
in one place.
• Specific disclosure for the adoption of
fundamental accounting assumptions is not
required.
• Disclosure of accounting policies cannot remedy
a wrong or inappropriate treatment of the item
in the accounts.

19. AS-2 Valuation of Inventories
• Definition
I . Inventory includes the following:
• A. Held for sale in the normal course of business i.e finished
goods
• B. Goods which are in the production process i.e work in
progress
• C. Raw materials which are consumed during production
process or rendering of services (including consumable
stores item)
• II. Net Realisable Value (NRV):
• “Net realizable value is the estimated selling price in the
ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the
sale”.

20. Steps for valuation of inventories
• A. Cost of Inventories The cost of inventories
includes the following
• Purchase cost
• Conversion cost
• Other costs which are incurred in bringing the
inventories to their present location and
condition.

21. Steps for valuation of inventories
• B. Cost of Purchase While determining the
purchase cost, the following should be
considered:
• Purchase cost of the inventory includes duties
and taxes
• Freight inwards
• Other expenditure which is directly attributable
to the purchase
• Trade discounts, rebates, duty drawbacks and
other similar items are deducted in determining
the costs of purchase

22. Steps for valuation of inventories
• C. Cost of Conversion Cost of conversion
includes all cost incurred during the
production process to complete the raw
materials into finished goods. Cost of
conversion also includes a systematic
allocation of fixed and variable overheads
incurred by the enterprise during the
production process.

23. Following are the categories of
conversion cost
I. Direct Cost
• All the cost directly related to the unit of production such
as direct labor
II. Fixed Overhead Cost
• Fixed overheads are those indirect costs which are incurred
by the enterprise irrespective of production volume. These
are the cost that remains relatively constant regardless of
the volume of production, such as depreciation, building
maintenance cost, administration cost etc.
• The allocation of fixed production overheads is based on
the normal capacity of the production facilities. In case of
low production or idle plant allocation of these fixed
overheads are not increased consequently.

24. Following are the categories of
conversion cost
III. Variable Overhead Cost
• Variable overheads are those indirect costs of
production that vary directly with the volume of
production. These are the cost that will be
incurred based on the actual production volume
such as packing materials and indirect labor.
D. Other Cost
• All the other cost which are incurred in bringing
the inventories to the current location and
condition.

25. AS-2 Accounting Disclosure
• The following should be disclosed in the financial
statements:
a) Accounting policy adopted in inventory measurement
b) Cost formula used
c) Classification of the of inventory such as finished
goods, raw material & WIP and stores and spares etc
d) Carrying amount of inventories carried at fair value
less sale cost
e) Amount of inventories recognized as expense during
the period
f) Amount of any write-down of inventories recognized
as an expense and its subsequent reversal if any.

26. AS 3 Cash Flow Statements

27. Classification of Cash Flows as per
Accounting Standard 3

30. AS 04.Contingencies and Events Occurring After the
Balance Sheet Date
• This Standard deals with the treatment in financial
statements of
• a) contingencies, and
• b) events occurring after the balance sheet date.
• A contingency is a condition or situation, the ultimate
outcome of which, gain or loss, will be known or
determined
• only on the occurrence, or non-occurrence, of one or
more uncertain future events.

31. AS 04.Contingencies and Events Occurring After the
Balance Sheet Date
• Events occurring after the balance sheet date
are those significant events, both favourable
and unfavourable, that occur between the
balance sheet date and the date on which the
financial statements are approved by the
Board of Directors in the case of a company,
and, by the corresponding approving
authority in the case of any other entity.

32. AS 04.Contingencies and Events Occurring After the
Balance Sheet Date
• Events occurring after the Balance Sheet Date:
• Assets and Liabilities should be adjusted for
events occurring after the balance sheet date that
provide additional evidence to assist the
estimation of amounts relating to conditions
existing at the balance sheet date.
• Proposed or declared dividend after the balance
sheet date but before approval of the financial
statements should be adjusted.
• Material changes and commitments affecting the
financial position of the enterprise.

33. AS 05. Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies
• The objective of this Standard is to prescribe the
classification and disclosure of certain items in the
statement of profit and loss so that all enterprises
prepare and present such a statement on a uniform
basis.
• This Standard should be applied by an enterprise in
presenting profit or loss from ordinary activities,
extraordinary items and prior period items in the
statement of profit and loss, in accounting for changes
in accounting estimates, and in disclosure of changes in
accounting policies.

34. AS 05. Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies
• Ordinary activities;
• Related activities in which the enterprise engages in
furtherance of, incidental to, or arising from these
activities.
• Extraordinary items ;
• Not expected to recur frequently or regularly.
• Prior period items :
• Current period as a result of errors or omissions in the
preparation of the financial statements of one or more
prior periods.
• and Accounting policies.

35. AS-6- Depreciation Accounting
• This Standard deals with depreciation accounting
and applies to all depreciable assets, except the
following items to which special considerations
apply
• (i) forests, plantations and similar regenerative
natural resources;
• (ii) wasting assets including expenditure on the
exploration for and extraction of minerals, oils,
natural gas and similar non-regenerative
resources;
• (iii) expenditure on research and development;
• (iv) goodwill and other intangible assets;
• (v) live stock.

36. Main Principles
i) The depreciable amount of a depreciable asset should
be allocated on a systematic basis to each accounting
period during the useful life of the asset.
ii) The depreciation method selected should be applied
consistently from period to period. A change from one
method of Providing depreciation to another should
be made only if the adoption of the new method is
required by statute or for compliance with an
accounting standard or if it is considered that the
change would result in a more appropriate preparation
or presentation of the financial statements of the
enterprise.

37. Main Principles
iii) The useful life of a depreciable asset should be
estimated after considering the following factors:
• (i) expected physical wear and tear;
• (ii) obsolescence;
• (iii) legal or other limits on the use of the asset.
iv) The useful lives of major depreciable assets or
classes of depreciable assets may be reviewed
periodically Where there is a revision of the
estimated useful life of an asset, the unamortised
depreciable amount should be charged over the
revised remaining useful life.

38. Main Principles
v)The depreciation on such addition or extension may
also be provided at the rate applied to the existing
asset. Where an addition or extension retains a
separate identity and is capable of being used after the
existing asset is disposed of, depreciation should be
Provided independently on the basis of an estimate of
its own useful life.
vi) Where the historical cost of a depreciable asset has
under gone a change due to increase or decrease in
long term liability on account of exchange fluctuations,
price adjustments, changes in duties or similar factors,
the depreciation on the revised unamortised
depreciable amount should be provided prospectively
over the residual useful life of the asset.

39. AS– 7- Construction Contract
• Construction Contract: - A Construction contract is a
contract specifically negotiated for the construction of
an asset or a combination of assets that are closely
interrelated or interdependent in terms of their design,
technology and function or their ultimate purpose or
use.
• Recognition of contract revenue and contract cost
When the outcome of a construction contract can be
estimated reliably, contract revenue and contract cost
should be recognized as revenue and expenses by
reference to the stage of construction.

40. Disclosure
• Contract Revenue recognized as revenue
• Method used to determine the contract revenue
• Method used to determine the stage of
completion
• Contract costs incurred + Recognised Profit –
Recognised Loss
• Amount of advances received
• Amount due from customers
• Amount due to customers

41. AS-8 Accounting for Research and
Development
• This standard is withdrawn from 1.4.2004 for
all enterprises and its substance is now
covered under AS-26 Intangible assets.