The document provides an overview of financial accounting concepts. It discusses the meaning and objectives of financial accounting, the accounting cycle process, elements of financial statements including assets, liabilities, equity, income and expenses. It also outlines the key users of financial statements both internal and external to a business. Finally, it discusses the regulatory framework for financial reporting in India including different forms of business organizations and accounting concepts and conventions that govern financial statement preparation.

1. Topic 1 – Overview Of Financial accounting
Meaning of the terms Financial Accounting
There are different types of economic activities. Manufacturing & sales units, trading activities and
service sector are the main classes of businesses. Every sector, industry & business activity has to
keep a record of financial dealings of their business activities. This process is carried out through
financial accounting.
Book-keeping – It is the process of recording business transactions in a proper set of books so that
the concerned persons are able to understand details of business
Financial Accounting – It is the art & science of recording, classifying & summarizing in a
significant manner & in terms of money, transactions & events which are, in part at least, of a
financial character & interpreting the results thereof. (American Institute of CPA)
Users of Financial Statements
Financial accounting is the process of maintaining record of all business transactions. It provides the
owners & the managers of the business information about position of business. The information
given by financial accounting records is used by both internal and external users
 Internal users are people within a business organization who use financial information.
Examples of internal users are owners, managers, and employees.
 External users are people outside the business entity (organization) who use accounting
information. Examples of external users are suppliers, banks, customers, investors, potential
investors, and tax authorities.
a) Accounting supplies managers and owners with significant financial data that is useful for
decision making. Owners can assess how management has discharged its responsibility for
protecting and managing the company’s resources. Management can take information useful in
shaping decisions about when to borrow or invest company resources.
b) Employees and their unions use the information to get assurance about job & remuneration
continuity. They can judge company’s ability to pay increased wages, and bonus as well as its
financial abilityto provide long-term employment.
c) Debtors/customers can understand whether the company offer useful products at fair prices and
will the company survive long enough to honour its product warranties.
d) Creditors/ Dealers/ Suppliers judge the liquidity position of business & continuing the business
relationship
e) Government & legal authorities use the data to ensure fair pricing, to carry out tax calculation,
for ensuring compliances & allocating economic resources
f) Banks or lending institutions may use accounting information to guide decisions such as whether
to lend or how much to lend a business
g) Investors in market use the data for judging the profitability of business & taking investment
decisions

2. h) Future partners in trade/ competitors use the data to evaluate the business from competitive
point of view & to take collaboration related decision
Objectives of Accounting
The main objective of financial accounting is to provide a systematic, complete & permanent record
of business transactions during a period which will help the stakeholders in knowing know effect of
each & every transaction on financial position of business and the financial position of business on a
particular date. It also helps various business decision making and provides legal evidence of
transactions.
Financial accounting also fulfils the following operating objectives
1) It helps in knowing the efficiency of business as compared to other similar business concerns as
well as past performance of the same business
2) It helps in making timely payment to suppliers, to government (for taxes etc.) and for collecting
dues from customers
3) It helps in deciding costs & prices of various goods & services & in filing tenders.
4) It helps in taking decisions about investments, cash management, asset management etc.
5) It helps in controlling business activities & in improving profits by providing information about
losses, wastages & inefficiencies
Accounting Cycle
Any event occurring in relation to a business & that carries a monetary value is called as a
transaction. Each transaction gives two equal and opposite effects, denoting past, present or future
coat and benefit. The accounting process requires both effects to be recorded. The complete process
of recording all transactions to finally arriving at the summarized results of a business or economic
activity for internal and external users are called as the ‘Accounting cycle’ of a business.
The accounting cycle has five steps, repeated in each accounting period to prepare financial
statements for internal and external users.
The first step in the accounting cycle is to first analyze a transaction and its source documents,
then apply double-entry accounting to recognize its effect on account balances.
Next, record transactions in a General Journal. Journalizing leaves a record of all transactions in
one document, helping to prevent mistakes and linking the debits and credits for each transaction.
The third step in the accounting cycle is posting. After recording transactions in the journal, they
are transferred and posted to the ledger.
Accounting Cycle Step Four is Preparing the Trial Balance
In double-entry accounting, each transaction is recorded with equal debits and credits. If the sums of
the debit and credit entries do not match, this points to an error in one of the first three steps. The
fourth step, preparation of an unadjusted trial balance, checks these account balances and points to
errors before moving to step five in the accounting cycle.

3. Accounting Cycle Step five is Preparing Business Financial Statements
From the adjusted trial balance, a number of important financial statements are created. The Income
Statement and Statement of Owner's Equity are prepared first, followed by the Balance Sheet, which
pulls information from the Statement of Owner's Equity. Organizations may choose to create other
summaries or spreadsheets depending on how they intend to use the information.
Tus the accounting cycle steps can be summarized as follows:
1) Analysis of transaction – Locating the concerned accounts, their type (Real, nominal or personal)
& effects of debit & credit
2) Entering the transaction in journal
3) Posting the transaction from journal to the correct accounts in ledger
After a specific accounting period is over, the ledger accounts are balanced. Their balances are used
to prepare trial balance
4) Trial balance showing a gist of all accounting transactions in a period is prepared
5) From the trial balance, final accounts are prepared showing – a) Income statement or Profit or
loss account & b) Balance sheet.
Elements of Financial Statements
The basic accounting cycle for all business firms is the same. As a result of the accounting cycle, the
financial statements giving the position and results of a firm are prepared. The basic three elements
relating to the Statement of Financial Position (Balance Sheet) are asset, liability and equity and two
elements related to Statement of Comprehensive Income are income and expense.
1) ASSET : a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity. They give present or future economic benefit
and contribute, directly or indirectly, to the flow of cash and cash equivalents to the entity. Potential
to contribute may be either productive (e.g., Property, Plant and Equipment) or convertibility into
cash or cash equivalent (e.g., Receivables). Assets are not necessarily in physical form (like property,
plant and equipment). Copyright, trademark (intangibles), etc. also qualify as assets based on the
concept of future economic benefit .They are signified by legal right (assets under lease) and not be
with ownership right. The assets of an entity result from past transactions or other past events.
Transactions or events expected to occur in the future do not in themselves give rise to assets. here is
a close association between incurring expenditure and generating assets but the two do not
necessarily coincide.
2) LIABILITY: is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying economic benefits.
An obligation is a duty to perform in a particular manner, for example to pay interest of a loan at the
end of every quarter and repay the principal on a specific date. It may be legally enforceable.
Liabilities may arise from present or future obligations. They result from past transactions or other
past events.

4. 3) EQUITY IS THE OWNERS’: interest in the assets of the entity after deducting all its liabilities.
In a corporate entity, funds contributed by shareholders, retained earnings, reserves representing
appropriations of retained earnings (capital redemption reserve) and reserves representing capital
maintenance adjustments may be shown separately. The basic equity equation of a firm is
Equity = Capital +Profits – Drawings - Losses
4) INCOME is increases in economic benefits during the accounting period in the form of inflows. -
Income encompasses revenue and gain. While the former arises out of ordinary activities of an
entity, gain is not the outcome of the ordinary activities. Examples of revenue are (z) sale of goods,
(it) rendering services, ( iil) income, royalties and dividend arising out of use of entity ‘s assets by
others. Gains may be realised or unrealised. Examples are profit on sale of non-current assets, fair
value gain on assets, surplus on settlement of liabilities, etc. Although they are not different by
nature from revenue, they are presented in the income statement as separate elements. Gains are
often presented net of related expenses.
5) EXPENSES are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other
than those relating to distributions to equity participants.
Examples of expenses that arise in the course of the ordinary activities of the entity are cost of sales,
wages, repairs and depreciation. They usually take the form of an outflow or depletion of assets. On
the other hand, losses do not arise in the course of the ordinary activities of the entity

5. Unit2 – The Regulatory And Conceptual Framework for Financial Statements
The preparation of financial statements and financial reporting is governed and controlled by various
regulations and enactments. There are severalforms of business organizations in India and all are governed by
different enactments.
Various Forms of Business Organization
Some other major forms of business organization seen in India are as follows
(1) Sole Trading Concern /Sole proprietary concern - It is the business started,owned & run by a single
owner. Generally this is seen as a primitive business activity or professional service started by an
entrepreneur. The business is mostly small scale. The Ownership is that of a single person who enjoys its
profits &bears all losses. Owner has unlimited liability. The formation of such business requires no complex
registration. The governing act for reporting and filing returns depends on the business (For e.g.,shop act,,
various professional services enactments)
(2) Hindu Undivided Family- A HUF is a business owned by a joint family formed specifically under the
Hindu Family laws. The oldest male member of the family is called as ‘Karta’. He has the main right to
manage & take decisions regarding business. All other male members of the family are called ‘Co- Parceners’.
They can all participate in the management & bear equal shares in profits & losses. However, it is only the
karta who has unlimited liability. The family business requires no separate registration other than that required
by the specific nature of business.
(3) Partnership- When two or more persons come together under an agreement,pool their capitals to carry
out a business venture & agree to share its management duties, profits & losses, they are said to be carrying
out a partnership business. Their business group is collectively called a firm & individuals who are a part of
the agreement are called as partners. A firm may have minimum two & maximum 20 partners ( 10 in case of
banking business). Partners may share profits & losses equally or as specified in agreements. A firm can be
registered or unregistered under the Indian Partnership act 1932. Depending on the liability of partners and
other terms, partnership can be general or limited in nature.
(4) Company- A company is a legal entity. It comes in to existence out of registration under the law of the
country (for e.g. Indian companies ac 1956, as superseded by the Indian companies act 2013). For a company
to come in to existence, registration is compulsory. The owners of the company are the shareholders who
contribute parts of capital by buying its shares (units of total capital). Depending on the scope of shareholder
ship, a company can be private limited or public ltd. Private ltd company requires minimum 2 to maximum 50
shareholders while public company requires minimum 7 number for formation. A company is an artificial
legal person. It can hold property in its name, it can sue 7 be sued. A company as a person has common sealas
its signature. Shareholders of a company have limited liability unless otherwise specified. A company has
perpetual succession. Owners of company do not directly participate in its management. They appoint a group
of representatives for the same.
Depending on the terms of incorporation, a company may be a public limited company or a private limited
company. The other subtypes of company are company limited by shares,company limited by guarantee,
unlimited company, one person company or section 8 company. The legal and financial reporting rules of a
company are governed mainly by Companies’ act in India.
5) Co- operatives –This form of organization aims at protecting the economic interests of weaker sections of
society. The main purpose of forming a co-operative organization under control of government regulations is
to promote economic welfare of society rather than profit motive. It consists of share capital held by members
similar to a company. However the voting power per member is limited to one vote. The management is
democratic. It concentrates on pooling together the resources of economically backward sections of society &
using their combined efforts towards the business activities. The co-operatives in India are governed by
various enactments,Co-operative societies act 1912, Multi-state co-operative law 1984, to name a few
6) Limited Liability Partnership (LLP) - A limited liability partnership (LLP) is a partnership in which
some or all partners have limited liabilities. It has elements of partnerships and corporations. In an LLP, each
partner is not responsible or liable for another partner's misconduct or negligence. This is an important
difference from the traditional unlimited partnership under the Partnership Act 1890.Thus LLP is different

6. from a Limited Partnership. It operates like a limited partnership, but in an LLP each member is protected
from personal liability, except to the extent of their capital contribution in the LLP.In an LLP, some partners
have a form of limited liability similar to that of the shareholders of a corporation. The Limited Liability
Partnership Act 2008 is the governing act for LLPs. In India, for all purposes of taxation an LLP is treated like
any other Partnership firm. However,LLP shall be a body corporate and a legal entity separate from its
partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs and
there shall not be any upper limit on number of partners in an LLP unlike an ordinary partnership firm where
the maximum number of partners cannot exceed 20. LLP Act makes a mandatory statement where one of the
partners to the LLP should be an Indian.
7) Corporations – These are major business organizations formed under a special statute by government.
Majority of its share-holding is with government or other public corporations. These organizations are large
scale & mostly infrastructure industries. LIC, ESI corporation, GIC, IFCI are some of the examples of
corporations.
8) Other forms ofOrganizations
There are other forms of organizations like Trusts, banks and non-profit organizations which are governed by
respective enactments.
Financial Reporting under other laws Rules and regulations –
Irrespective of forms of organization, the basic accounting and reporting of financial information is defines by
Indian accounting standards.
Accounting Standards are the norms of accounting policies & practices by way of codes or guidelines to direct
as to how the items, which go to make up the financial statements,should be dealt with in accounts &
disclosed in the annual reports of performance. They are written statements issued from time to time by
institutions of the accounting professions or such authorities established for such purpose.
The Institute of Chartered Accountants of India (ICAI) has tried to improve the accounting & auditing
standards in India from 1964 onwards. It issues various statements from time to time to lay emphasis on
GAAP. ICAI & ICWAI are both members of IASC.
The various forms of organizations are also required to do reporting of financial information under returns
required to be filed under various taxation and commercial laws.
Concepts and conventions of Financial Accounting
The financial statements of a firm give information about its financial performance,the positions of its assets
and liabilities, other additional information and related analysis.
Various stakeholders are interested in the data for various reasons therefore it’s necessary to have uniformity
in financial reporting. The basic accounting rules governing the financial accounting and record keeping are
called as concepts and conventions
A) Accounting concepts: -
They are such ideas that must be followed during the accounting process. Important concepts are -
1) Business Entity - Organization is treated as a unit or entity separate from its owners. In case of a limited
company or a body corporate,the unit is treated as an artificial person having a separate legal entity. From the
accounting point of view the owners are treated as third parties. Only business transactions are recorded in the
books of accounts of the business. Personaltransactions of the owners are not at all taken into consideration.
This separation is necessary to know the profit or loss of the business as well as financial position of the
business.
2) Money measurement - The monetary unit (e.g. Rupee in India, Dollar in USA, Yen in Japan, Euro in
European union) is the principal means for measuring assets,liabilities and shareholders’ equity. It provides

7. the common denominator for quantifying the effects of a wide variety of transactions. Only the transactions
having monetary value are therefore recognized & recorded in accounting.
3) Dual Aspect – This concept is the basis of double entry accounting. Every transaction in business has two
monetary effects of equal magnitude and both of them have to be recorded for accurate and fair reporting.
4) Continuity or Going Concern:Here,the assumption is that an organization will continue to exist and
operate. It implies that a company will use existing resources to fulfill the general purposes of a continuing
entity rather than sell them in the market. It also implies that the company will pay its existing liabilities at
maturity in an orderly manner.
5) Accounting period – A business is expected to be a going concern but for the purpose of understanding
the results & for the sake of convenience the accounting of the business is done for specified accounting
periods, for e.g. one year.
6) Cost - The basis of recognizing expense is the cost recovery concept. A company carries forward as assets
such items as inventories, prepayments and equipment as they expect to recover the costs of these assets in the
form of cash inflows (or reduced cash outflows) in future periods.
7) Realization - It states that a company records revenue in its accounts only when it has earned and realized
the revenue. There are judgment issues and the accountants together with its auditor will decide when earning
and realization are sufficiently complete to recognize the revenue.
8) Matching cost with revenue - It is the linking of revenues with the expenses incurred to generate them.
Accountants apply this convention as follows -Identify the revenue recognized during the period (measured by
the selling prices of goods and services delivered) & Link the expenses to the recognized revenue directly
(e.g. sales commission) or indirectly (wages,supplies used). These are costs of operations during a specific
time period that have no measurable benefit for a future period and needs to be linked to the current period’s
revenues.
B) Accounting conventions:
These are certain recommendations that should be followed while maintaining accounts. They are as follows –
1) Conservatism - It means selecting the method of measurement that yields the gloomiest immediate results.
E.g. anticipate no gains, but provide for all possible losses. If any profit is in doubt, write it off. Closing stock
is valued at cost or market value whichever is lower. Provision for doubtful debts and discount on debtors are
made but provision for discount on creditors is not made. Small capital items are charged to revenue, instead
of showing as assets.
2) Consistency - It is required to have consistency in the accounting practices and methods adopted to have
comparable data over a number of years which will help the managers to arrive at important conclusions.
Hence accounting rules and conventions should be consistently observed and applied.
3) Materiality - A financial statement item is material if its omission or misstatement would be likely to
mislead a user of the financial statements. The accounting convention justifies the omission or misstatement
would not mislead a user of the financial statements. Only material information should be given & irrelevant
information should be avoided.
4) Disclosure – While keeping accounting records, all relevant information must be disclosed in order to
provide a true & fair picture. Nothing relevant should be omitted

8. Contents in a Published Financial Statement
The published financial statements of a firm are required to report about the financial results and the financial
position. The Indian accounting standard (Ind AS ) 1 governs the preparation of the same in India. It ensures
that financial statements are comparable with the firm’s financial statements of previous periods andthe
financial statements of other firms.The standard also gives overall requirements, guidelines and content
requirements for the presentation of financial statements. It applies to all types of entities, commercial,
industrial and business entities, both private
The main objective of the financial statements is to provide information and make true and fair presentation
about an entity’s financial position, its financial performance,and its cash flows for making economic
decisions and to also show the results of the management’s stewardship
The information is given by the statements is about
(a) assets;(b) liabilities;(c) equity;(d) income and expenses,including gains and losses;(e) contributions by and
distributions to owners in their capacity as owners; and(f) cash flows.
According to the standard the Complete Set of Financial Statements will include
1. Balance Sheet as at the end of the period
2. A statement of Profit and Loss for the period(also known as Statement of Comprehensive Income”)
3. A statement of changes in equity for the period to be shown as a part of Balance Sheet.
4. A statement of cash flows for the period;
5. Notes,comprising a summary of significant accounting policies and other
The details of the statements to be prepared are as follows –
1) Balance sheet –
It should show classification of current assets and non-current assets and current liabilities and non-current
liabilities. This statement of financial position shall include the items -
a. Property, plant and equipment;
b. Investment property;
c. Intangible assets;
d. Financial assets (excluding amounts shown under (e), (h) and (i));
e. Investments accounted for using the equity method;
f. Biological assets;
g. Inventories;
h. Trade and other receivables;
i. Cash and cash equivalents;
j. Trade and other payables;
k. Provisions;
l. Financial liabilities
m. Tax Liabilities
n. Deferred tax liabilities and deferred tax assets,as defined in Ind-As 12;
o. Non-controlling interests, presented within equity; and
p. Issued capital and reserves attributable to owners of the parent.

9. Each asset and liability should be presented in sub-groups with suitable headings. If required, all assets and
liabilities should be written in order of liquidity. Maturity dates of financial assets like debtors and financial
liabilities like creditors, expected date of recovery of assets such as inventories and expected date of
settlement for liabilities such as taxes due should be given.
2) Statement of Profit and Loss – Income Statement.
It should present all the items of income and expense of a business recognized in a period and also the results
of business operations i.e. either profit or loss for the given period. According to the reporting rules and
accounting standards, as a minimum, the Statement of Profit and Loss shall include line items that present the
following amounts for the period:
a. Revenues and costs under different categories (With classification if necessary)
b. Profits and losses from operating and non-operating activities
c. Tax expense
d. Profit or loss
3) Notes to Accounts
Notes are integral part of complete set of Financial Statements. They present
a) Information about the basis of preparation of the financial statements and the specific accounting policies;
b) And disclose information that is not presented elsewhere in the financial statements;
They are prepared as prescribed by accounting standards and are presented in a systematic manner.
Broad Contents of notes of a firm are
(a) Statement of compliance with Indian accounting standard
(b) Summary of significant accounting policies applied
(c) Supporting information for items presented in the statements of financial position and of Income statement
and that of statements of changes in equity and of cash flows
(d) Other disclosures, like Contingent liabilities
(e ) Non-financial disclosures, e.g. the entity’s financial risk management objectives and policies
4) Director’s report
The Directors' Report is a document produced by the board of directors under the under company law. It gives
details the state of the company and its compliance with a set of financial, accounting and corporate social
responsibility standards.
The duty of directors to produce a Directors' Report once a year is found in the Companies Act 2006 section
415. Under section 416, the contents must include the directors' names and the company's principal activities.
A business review must be carried out, though this is only for large companies. The directors must explain
how their leadership has lived up to the directors' duty in CA 2006 section 172 to "promote the success of the
company" with regard to all a company's stakeholders, including the long-term interests of shareholders,
employees, the environment, the community, maintaining a high business reputation, and so forth. A fair
review of risks and uncertainties facing the company must be outlined. It is the most important means of
communication of a company with its shareholders. It informs the shareholders about the performance and
various other aspects of the company, its major policies, relevant changes in management, future programmes

10. of expansion, modernization and diversification, capitalization or reserves,etc. The Report enables not only
the shareholders but also the lenders, bankers, government and the public to make an appraisal of the
company’s performance and provides an insight into the future growth and profitability of the company.
5) Statement of cash flows
Cash flow information provides users of financial statements with a basis to assess the ability of the entity to
generate cash and cash equivalents and the needs of the entity to utilize those cash flows. Ind-As 7 sets out
requirements for the presentation and disclosure of cash flow information. It is an interpretation of the
statement of changes in financial position. It is a statement that provides information about the cash receipts &
payments of a firm for a given period. It provides information that compliments the P & L & the Balance
sheet. A cash flow statement is different from a cash budget. Cash flow is a post mortem exercise of the firm’s
operations impacting its cash position. It consists of all cash flows divided in to the 3 categories given as
below. The statement as such provides reconciliation between the opening & closing cash balances while
describing the cash operations in between.
The cash flows are shown under the categories of
a)Cash flows from operating activities
b) Cash flows from investing activities
c) Cash flows from financing activities
By the direct method, the cash flowappears as follows
Cash flows from operating activities –
Cash receipts from customers
Cash payment to suppliers & employees
+
(-)
Cash generated from operations ***
Income tax paid (-)
Cash flow before extraordinary items ***
Extraordinary cash flows (+ / -
)
NET CASH FLOW FROM OPERATINGACTIVITIES(a) ***
Cash flows from investing activities
Purchase of fixed assets or investments
Proceeds from sale of fixed assets or investments
Interest received on investments
Dividend received on investments
Loans given to subsidiaries
(-)
+
+
+
(-)
NET CASH FLOW FROM INVESTINGACTIVITIES(b) ***

11. Cash flows from financing activities
Proceeds from issue of shares
Proceeds from long term borrowing
Repayment of long term borrowing
Interest paid
Dividend paid
+
+
(-)
(-)
(-)
NET CASH FLOW FROM FINANCINGACTIVITIES(c) ***
NET INCREASE OR DECREASE IN CAS OR CASH EQUIVALENTS DURINGTHE PERIOD
(a+b+c)
CASH & CASH EQUIVALENTS OPENINGBALANCE
+/-
***
CASH & CASH EQUIVALENTS CLOSINGBALANCE ***
Unit 3 – The Preparation and Presentation of Financial Statements

12. The most important step in financial reporting is preparation of final accounts. Final accounts are
prepared at the end of an accounting period for the following reasons-:
Objectives of preparation of financial statements.
 To find out the gross profit or loss for the period
 To find out the net profit or loss for the period
 To know the financial position of the business as on a particular date
 To prepare various statements to plan for the future
 To know how much are the debtors and creditors of the firm
 To know the sources of funds (liabilities) and the application of funds (assets)
 To calculate various ratios for analysis
 To provide audited financial statements and other documents to the bank for obtaining loans
 To find the tax payable and make advance tax payments.
The preparation of final accounts of different forms of organizations have some similarities and some
differences.
PreparationOf Final Accounts Of Sole Proprietor
The preparation of final accounts of any organization starts with the completion of trial
balance. Due to two fold effect of every transaction, the total of all debit balances on various
accounts must equal to the total of all the credit balances on the other accounts. A trial balance is a
statement or a list of debit and credit balances of all the ledger accounts as on a given date prepared
to check the arithmetical accuracy of ledger postings.
Trial Balance as on ___________________(date)

13. Particulars Debit Rs. Credit Rs.
Assets accounts such as (Debit Balances)
Land
Building
Machinery
Goodwill
Patent
Royalty
Investment
Stock in trade / Inventory
Cash
Bills Receivable
Sundry Debtors (Customers)
Drawings
Expenses or Losses such as(debit balance)
Purchases Account (Purchase returns is given as a credit balance)
Rent
Salaries
Power/ lighting
Telephone
Printing & Stationery
Interest paid
Commission paid
Depreciation
Charity / donation
Liability accounts such as: (Credit Balances)
Bills payable
Loans taken
Amounts due to others
Credit balances on personal accounts such as
Sundry Creditors (Suppliers)
Bank overdraft
Revenues,gains or profits such as(credit balance)
Sales Account (Sales returns is given as a debit balance)
Discount received
Commission received
Interest received
Proprietor’s Capital Account (will be credit balance unlessspecifically stated
as Dr balance)
Total Rs.

14. TRADING ACCOUNT
In the final accounts, Trading Account is prepared to ascertain the result of activity of buying
and selling of goods. i.e. Gross profit / loss by trading activity. (Excess of sales achieved over the
cost of the goods sold)
Balances of the accounts related to goods are taken in the Trading Account. All the incomes and
expenses related to basic operating activities of business i.e. purchase, production and sales are taken
to trading account.
Items appearing in the Debit side of Trading Account.
1. Opening Stock: Stock on hand at the commencement of the year or period is termed as the
Opening Stock.
2. Purchases: It indicates total purchases both cash and credit made during the year.
3. Purchases Returns or Returns out words: Purchases Returns must be subtracted from the
total purchases to get the net purchases. Net purchases will be shown in the trading account.
4. Direct Expenses on Purchases: Some of the Direct Expenses are.
 Wages: It is also known as productive wages or Manufacturing wages.
 Carriage or Carriage Inwards:
 Octroi Duty: Duty paid on goods for bringing them within municipal limits.
 Customs duty, dock dues, clearing charges, Import duty etc.
 Fuel, Power, Lighting charges related to production.
 Oil, Grease and Waste.
 Packing charges: Such expenses are incurred with a view to put the goods in the Saleable
Condition.
Items appearing on the credit side of Trading Account
1. Sales: Total Sales (Including both cash and credit) made during the year.
2. Sales Returns or Return Inwards: Sales Returns must be subtracted from the Total Sales to
get Net sales. Net Sales will be shown.
3. Closing stock: Generally, Closing stock does not appear in the Trial Balance. It appears
outside the Trial balance. It represents the value of goods at the end of the trading period.
At the end of the period there remain some goods unsold. For these unsold goods, a separate
“Stock Account” is opened. The stock at the end of the trading period is termed as ‘Closing Stock’.
As this stock is on hand at the beginning of the next year, it becomes “Opening Stock”. Thus, closing
stock of the last year forms the opening stock of the current year.
BALANCING OF TRADING ACCOUNT
The difference between the two sides of the Trading Account indicates either Gross Profit or Gross
Loss. If the total on the credit side is more, the difference represents Gross Profit. On the other hand,
if the total of the debit side is high, the difference represents Gross Loss. The Gross Profit or Gross
Loss is transferred to Profit and Loss A/c
Closing Entries of Trading A/c

15. Trading A/c is a ledger account. Hence, no direct entries should be made in the trading account.
Several items such as Purchases, Sales are first recorded in the journal and then posted to the ledger.
The Same accounts are closed by the transferring them to the trading account. Hence it is called as
closing entries.
Advantages of Trading Account
1. The result of Purchases and Sales can be clearly ascertained
2. Gross Profit ratio to Sales could also be easily ascertained. It helps to determine Price.
3. Gross Profit ratio to direct Expenses could also be easily ascertained. And so, unnecessary
expenses could be eliminated.
4. Comparison of trading account details with previous years details help to draw better
administrative policies.
Trading account is followed by the Profit and loss account which gives the final or net profit of the
business. The P & L account includes all incomes, expenses, gains and losses other than the above
mentioned.

16. PROFIT AND LOSS ACCOUNT
Trading account reveals Gross Profit or Gross Loss. Gross Profit is transferred to credit side
of Profit and Loss A/c. Gross Loss is transferred to debit side of the Profit Loss Account. Thus Profit
and Loss A/c is commenced. This Profit & Loss A/c reveals Net Profit or Net loss at a given time of
accounting year.
Items appearing on Debit side of the Profit & Loss A/c
The Expenses incurred in a business is divided in too parts. i.e. one is Direct expenses are recorded
in trading A/c., and another one is Indirect expenses, which are recorded on the debit side of Profit &
Loss A/c. Indirect Expenses are grouped under four heads:
1. Selling Expenses: All expenses relating to sales such as Carriage outwards, Travelling Expenses,
Advertising etc.,
2. Office Expenses: Expenses incurred on running an office such as Office Salaries, Rent, Tax,
Postage, Stationery etc.,
3. Maintenance Expenses: Maintenance expenses of assets. It includes Repairs and Renewals,
Depreciation etc.
4. Financial Expenses: Interest Paid on loan, Discount allowed etc., are few examples for Financial
Expenses.
Item appearing on Credit side of Profit and Loss A/c.
Gross Profit is appeared on the credit side of P & L. A/c. Also other gains and incomes of the
business are shown on the credit side. Typical of such gains are items such as Interest received, Rent
received, Discounts earned, Commission earned.

17. BALANCE SHEET
Trading A/c and Profit & Loss A/c reveals G.P. or G.L and N.P or N.L respectively, Besides the
Proprietor wants
i. To know the total Assets invested in business ii. To know the Position of owner’s equity iii. To
know the liabilities of business.
DEFINITION The Word ‘Balance Sheet’ is defined as “a Statement which sets out the Assets and
Liabilities of a business firm and which serves to ascertain the financial position of the same on any
particular date.” On the left hand side of this statement, the liabilities and capital are shown. On the
right hand side, all the assets are shown. Therefore the two sides of the Balance sheet must always be
equal. Capital arrives Assets exceeds the liabilities.
OBJECTIVES OF BALANCE SHEET:
1. It shows accurate financial position of a firm.
2. It is a gist of various transactions at a given period.
3. It clearly indicates, whether the firm has sufficient assents to repay its liabilities.
4. The accuracy of final accounts is verified by this statement
5. It shows the profit or Loss arrived through Profit & Loss A/c.
The Balance sheet contains two parts i.e.
1. Left hand side i.e. the Liabilities
2. Right hand side i.e. the Assets
ASSETS:
Assets represent everything which a business owns and has money value. Assets are always shown
as debit balance in the ledger. Assets are classified as follows.
1. Tangible Assets:-Assets which can be seen and felt by touch are called Tangible Assets. Tangible
Assets are
classified into two:
a. Fixed Assets:Assets which are durable in nature and used in business over and again are known
as Fixed Assets.
e.g. land and Building, Machinery, Trucks, etc.
b. Floating Assets or Current Assets:Current Assets are i. Meant to be converted into cash, ii.
Meant for resale, iii. Likely to undergo change e.g. Cash, Balance, stock, Sundry Debtors.

18. 2. Intangible Assets:Assets which cannot be seen and has no fixed shape. E.g., goodwill, Patents.
3. Fictitious assets:Assets which have no real value and will appear on the Assets side of B/S. are
known as fictitious assets: E.g. Preliminary expenses, Discount or creditors.
LIABILITIES:
All that the business owes to others are called Liabilities. It also includes Proprietor’s Capital. They
are known as credit balances in ledger.
Classification of Liabilities:
1. Long Term Liabilities: Liabilities will be redeemed after a long period of time 10 to 15 years E.g.
Capital, Long Term Loans.
2. Current Liabilities: Liabilities, which are redeemed within a year, are called Current Liabilities
or short-term liabilities E.g. Trade creditors, B/P, Bank Loan.
3. Contingent Liabilities: Liabilities, which have the following features, are called contingent
liabilities. They are:
a. Not actual liability at present
b. Might become a liability in future on condition that the contemplated event occurs. E.g. Liability
in respect of pending suit.
Equation of Balance Sheet:
Capital = Assets – Liabilities
Liabilities = Assets – Capital
Assets = Liabilities + Capital.

19. Formats of final accounts – (For Proprietors and Partnership Final Accounts)
Trading & Profit & Loss a/c
For the year ended……..
Particulars Details Amount Particulars Details Amount
To Opening stock
To Purchases (-) Returns
To Wages
To Carriage/ Freight inwards
To Cartage
To Power
To Coal, gas, water, fuel
To Factory expenses
To Import duty, Excise duty
Octroi
To Heating & Lighting
To Production Royalty
To Gross Profit c/d
By Sales (-) Returns
By Goods lost in –
- Accident
- Fire
- Theft
By goods given as
free samples
By Goods withdrawn
By proprietor
By closing Stock
To Office salaries
To Rent Rates & Taxes
To Printing & Stationery
To Postage &Telegram
To Telephone charges
To Office Expenses
To Insurance
To Audit & Accounting fees
To Sundry/ General expenses
To Office lighting
To Conveyance
To Entertainment expenses
To Bad debts
To Advertising & sampling
To Traveling expenses
To Commission paid
To Discount given
To Export duty
To Carriage/ freight outward
To showroom/ godown rent
To Interest paid
To Bank charges
To Interest on capital
To Depreciation on ALL
Assets
To Repairs & maintenance
To Loss by - Fire, Theft or
Accident
To loss on sale or revaluation
Of asset or investment.
To Net Profit c/d
By Gross Profit b/d
By Discount received
By Commission received
By Rent received
By Interest received
By Interest on drawings
By Sundry incomes
By Profit on sale or
Revaluation of assets
Or investments

20. Balance sheet as on………
Liabilities
Details Amt.
Assets Details Amt.
1) CAPITAL –
Opening balance
(+) Additional capital
(+) Interest on capital
(+) Net profit
(-) Drawings
(-) Interest on drawings
(-) Net loss
= Closing Capital
2) OTHER LONG TERM
LOANS & ADVANCES
3) CURRENT
LIABILITIES
AND PROVISIONS –
Sundry Creditors
Bills Payable
Outstanding Expenses
Pre-received Incomes
Provision for depreciation
Any other provisions
Any other short terms Loans,
Advances & Liabilities
1) FIXED ASSETS –
Goodwill
Land
Building
Plant
Machinery
Furniture
Fixtures
Fittings
Vehicles
Patents, Trademarks &
Copyrights
Livestock
Loose Tools
2) INVESTMENTS –
Government securities
Shares, Stocks
Debentures
Other Long/ Short Term
Investments
3) CURRENT ASSETS
Closing Stock
Debtors (-) RDD
Bills Receivables
Short Term Loans &
Advances given
Short term investments
Bank balance
Cash in Hand
Outstanding Income
Prepaid expenses

21. Important points to be remembered while preparing final accounts –
1. Closing stock - Opening stock is given in TB. Closing stock is in adjustments. It’s to be
written on TC & asset side of B/S. If it is given at both cost & market price, the lesser of the 2
is taken
2. Depreciation – if given in TB – Take to P& L debit only. But if given in adjustments – first
calculate & deduct the amount from respective assets & then take to P& L debit
3. Bad debts
a) Given only in TB – Old bad debts - P& L debit
b) Given only in adjustments – New bad debts – less from debtors & also P& L debit
c) Given in both TB & adjustments - TB bad debts are old, adjustment bad debts are
new – total (Old+ new) bad debts are to be taken to P& L debit & adjustment bad
debts (New) are to be deducted from debtors.
4. Reserve for bad debts -
a) RDD given in TB - It is the opening balance of RDD a/c – P& L Credit
b) RDD given in adjustment - describes new RDD calculation – New RDD created is
to P & L and less from debtors
5. Outstanding expenses : Add to the expense on P& L debit, Liability side of Balance sheet
6. Prepaid expenses – Less from the expense on P& L debit, Asset side of B/S
7. Outstanding incomes – Add to the income on P & L credit , Asset side of B/S
8. Pre-received incomes - Less from the income on P & L credit , Liability side of B/S
9. Losses by theft / fire /accident etc - Trading credit by the cost of goods going out, P& l
debit by the amount of loss
10. Goods given as samples - Trading credit by the cost of goods going out, P & L debit either
separately or adding to Advertisement Expenses
11. Goods taken by proprietor - Trading credit by the cost of goods going out, Less from
capital balance in liability side as ‘Drawings’
12. Interest on capital – P & L Debit, Add to capital in liability side of B/S
13. Interest on drawings - P & L Credit, less from capital in liability side of B/S

22. Preparation of final accounts of Partner
Partnership final accounts are prepared in a similar way as sole proprietorship accounts. They
include Trading A/c, Profit & Loss A/c and the Balance Sheet.
Final accounts of a partnership firm are similar to that of a sole trader. Only difference is that the
profit is distributed among the partners whereas in a sole proprietorship it is added to the proprietor’s
capital. Therefore separate calculations for all partners are required. First a trial balance is to be
prepared from all the debit and credit balances of all the ledger accounts. From this, trading and
profit & loss accounts are generated. Finally, a balance sheet is prepared to reflect the position as at
period end. A trading account shows the gross profit or loss whereas a profit & loss account reflects
the net position.
Preparation of final accounts of Company
Introduction to Company Balance sheet as per schedule 6
Format of Balance Sheet as per Schedule VI of Companies’ Act 1956
Liabilities
Amt.
Assets Amt.
1) SHARE CAPITAL –
Authorized Capital - … Shares of
Rs… Each
Issued Capital - … Shares of Rs…
Each
Subscribed Capital - … Shares of
Rs… Each
Called up Capital - … Shares of
Rs… Each ……..
(-) Unpaid calls on shares……..
=Paid up Capital - … Shares of
Rs… Each
Calls in Advance
Shares Forfeited account
2) RESERVES & SURPLUS
Capital Reserve
Capital Redemption Reserve
Share Premium a/c
Other Reserves
Surplus in Profit & Loss a/c
Sinking Fund
3) SECURED LOANS –
Debentures
Other Long term Loans and
Advances (from banks etc)
………...
………...
………...
……….
……….
……….
……….
……….
……….
……….
……….
……….
……….
1) FIXED ASSETS –
Goodwill
Land
Building
Plant
Machinery
Furniture, Fixtures & Fittings
Vehicles
Patents, Trademarks & Copyrights
Livestock
Loose Tools
2) INVESTMENTS –
Government securities
Shares, Stocks Debentures
Other Long/ Short Term Investments
3) CURRENT ASSETS, LOANS
AND ADVANCES
Closing Stock
Debtors …………..
(-) RDD ………….
Bills Receivables
Short Term Loans & Advances given
Bank balance
…………
…………
…………
…………
…………
…………
…………
…………
…………
…………
…………
…………
…………
…………
…………
…………
…………
…………

23. 4) UNSECURED LOANS –
Fixed Deposits
Other Long term Loans and
Advances (from banks etc)
5) CURRENT LIABILITIES
AND PROVISIONS –
Sundry Creditors
Bills Payable
Proposed dividend
Unclaimed dividend
Outstanding Expenses
Pre-received Incomes
Tax provision
Provision for depreciation
Any other provisions
Any other short terms Loans,
Advances & Liabilities
6) CONTINGENT
LIABILITIES –
Claims not acknowledged as debts
Liability on partly paid shares
Held as investment
Arrears of cumulative preference
Dividend
Legal claims under judicial
process
Any other contingent liability
……….
……….
………..
………..
……….
……….
……….
……….
……….
……….
……….
……….…….
Total
Cash in Hand
Outstanding Income
Prepaid expenses
Loose Tools & Consumables
4) MISCELLANEOUS
EXPENSES AND LOSSES –
Preliminary expenses
Discount & other expenses on issue
Of Shares & Debentures
Development expenses
Deferred Revenue expenses
Other Items
5) PROFIT AND LOSS
ACCOUNT DEBIT BALANCE -
…………
…………
…………
…………
…………
…………
…………
…………
…………
…………….
Total
Items on Liability side –
1) Share Capital – The share capital of the company is made up of different classes, preference
shares & Equity shares. The first amount stated for both the classes is ‘Authorized Capital’ It is the
total registered capital of the company authorized by its MOA. It’s the maximum limit up to which
the company can raise its capital. This figure does not appear in balance sheet total. ‘Issued capital’
is that part of total capital which is offered for public subscription. While ‘Subscribed capital’ is that
part of issued capital which is actually taken up by public. Out of the subscribed capital, the amount
per share actually demanded by the company is called as ‘Called up capital’. When share holders fail
to pay the call money, they appear as ‘Calls in arrears’. The actual amount received is the ‘Paid up
capital’. Such defaulting shares may be taken back from the shareholders. The money originally paid
on such shares before forfeiture appears in ‘shares forfeited account’
2) Reserves & Surplus – Reserves are accumulated profits. Various capital & revenue reserves
appear under this heading. Reserves may be created for specific purpose like dividend equalization
reserve or investment fluctuation reserve. Or it may be a general reserve. The reserve may be created
out of capital profits or out of revenue profits. This heading also shows the balance left in P & L a/c
as well as the Sinking fund.
3) Secured Loans – This category includes the debentures, bonds & any other loans taken by the
company against lien of its assets. Interest on debentures & secured loans which is outstanding will
also e shown here.

24. 4) Unsecured Loans – This will include short term loans & bank overdraft which does not have any
security against it. If the company has issued any fixed deposits, the same will also appear here.
5) Current liabilities & provisions – ‘Current liabilities’ include Creditors for goods & other
expenses, bills payables, income received in advance or outstanding expenses, unclaimed interest or
dividend, security deposits for employees etc. Provisions will include provision for taxation,
dividend, bonus for employees, staff welfare etc. Provisions are profits kept aside in anticipation of
future losses & expenses.
6) Contingent Liabilities – These liabilities are mentioned in the balance sheet, but they are not
taken as part of balance sheet. They are such liabilities, which may or may not occur in future. They
are mentioned in the balance sheet so that their occurrence in future does not result in unexpected
losses or payments for the shareholders.
Items on Asset side –
1) Fixed Assets – These are such assets of business that are used in the business for a specific period
for running of the business. They are held for a period of one year or more in the business. The
category will show the assets at their cost less depreciation value i.e. at their written down value.
2) Investments – These are assets purchased for the purpose of resale & not for use in course of
business. The main purpose is to take advantage of market conditions & generate income from such
assets. The investments may be long term or short term.
3) Current assets Loans & Advances – Current assets are those which are held by the business for
short term use. They are assets like inventory, debtors, bills receivable, cash & bank balance etc.
Debtors are shown net of provision for bad debt. This category also shows short term loans &
advances given by the business.
4) Miscellaneous expenses & losses - there are some items which are actually expenses paid
however their benefit is receivable over a long period. Therefore they are shown as part of the
balance sheet till they are fully realized & capitalized.
5) Profit & Loss account – The debit balance of P & L a/c signifies loss for the business & therefore
amount recoverable by the business from its owners. It is an asset for the business & is shown
accordingly.

25. In company final accounts an additional P & L appropriation account is prepared which
includes the following items:
Credit items
1) Net profit for the year brought down from the main profit and loss account.
2) Balance brought forward from last year / previous accounting period which appears in the
trial balance on the credit side. All the profits may not be appropriated during the period. Then there
will be a balance on the appropriation account, carried forward to the balance sheet
Debit items
1) Transfers to reserves -The directors may decide that some of the profits should not be included
in the calculation of how much should be paid out as dividends. These profits are transferred to
reserve accounts. There may be a specific reason for the transfer such as a need to replace fixed
assets. In this case, an amount would be transferred to a fixed assets replacement reserve account. Or
the reason may not be specific. In this case, an amount would be transferred to a general reserve
account.
2) Amount of Tax provision made during the year on net profit
3) Amounts of preliminary expenses or othe miscellaneous expenses written off - When a
company is formed, there are many kinds of expenses concerned with its formation. These include,
for example, legal expenses and various government taxes.
4) Interim and proposed Dividends - Out of the remainder of the profits, the directors propose
what dividends should be paid.
After the dividends have been proposed, there will probably be some profits that have not been
appropriated. These profits will be carried forward to the following year.

26. Unit 7 – Current Issues
Environmental Reporting
Environmental reporting is the process in which a company reports on its use of resources and its generation
and disposal of waste to the rightful authority
Environmental reporting is carried out by many different organisations and bodies and manifests itself in
many different forms, from country-level environmental reporting through to corporate environmental
reporting. For a number of years,companies have begun to produce regular environment or sustainability
reports which detail the company’s impacts upon the environment and the ways and means that the impacts
are measured and monitored.
As early as 1992, when the Rio Declaration on Environment and Development and Agenda 21 were adopted
during the United Nations Conference on Environment and Development (United Nations, 1992), people
recognised the need for sound environmental information for improved decision-making. Environmental
reporting arose out of this need for information, and can be found in many forms today:
• Country reporting to international conventions (e.g. United Nations Framework Convention on Climate
Change);
• Environmental reporting by non-governmental environmental agencies (e.g. World Conservation Union and
World Resources Institute);
• State of the Environment Reporting at global, regional, national and sub-national level;
• Corporate environmental reporting; and
• Sustainability reporting.
Reporting in the corporate world first began in the form of financial reporting, and was used as a means of
informing shareholders about the financial performance of a company. Additional types of corporate reporting
are now being used to gather a wider range of information, including health and safety reporting, quality
reporting, environmental reporting, social responsibility reporting, and most recently sustainability reporting.
These newer types of reporting are typically used to inform stakeholders (who include customers, employees,
neighbours, investors, government, non-governmental organisations (NGO’s), civic associations and the
public) about the overall performance of the organisation. There is little doubt that corporate environmental
reporting has become an international priority

27. Social accounting or corporate social reporting
Social accounting or corporate social reporting is the process of communicating the social and
environmental effects of organizations' economic actions to particular interest groups within society and to
society at large. Social reporting is commonly used in the context of business, or corporate social
responsibility (CSR),although any organization, including NGOs, charities, and government agencies may
engage in it too.
Social reporting emphasizes the notion of corporate accountability. It is an approach to reporting a firm’s
activities which stresses the need for the identification of socially relevant behaviour, the determination of
those to whom the company is accountable for its social performance and the development of appropriate
measures and reporting techniques." It is an important step in helping companies independently develop CSR
programs which are shown to be much more effective than government mandated CSR.
Social accounting is often used as an umbrella term to describe a broad field of research and practice. The use
of more narrow terms to express a specific interest is thus not uncommon.( Environmental accounting may
e.g. specifically refer to the research or practice of accounting for an organisation's impact on the natural
environment.)

28. Ethics of Accountants
The concept of ethical business practices is long debated. The main issues in question are
1) Can a firmwhich is aiming to have competitive success afford to be ethical in face of opposing factors?
2) What are ethics & what can be ethical management & businesspractices?
3) What are the visible & invisible benefitsof ethical management?
An organization may have good intentions of following ethical business practices, but there are several
elements that create obstacles in these intentions. Some of them are – a) Need to achieve results with
inadequate resources b) Pressure exerted by corruption in surrounding business environment or coercion in
open or hidden manner c) Inadequate protection of laws, ill framed legal recourse procedures,delays in
recourse d) Ambition of human beings involved at different stages e) Structural defects,authority –ambition
conflicts in organization f) Inefficiency of internal & external controls f) Capitalistic tendencies causing
ruthlessness in profit generation g) Non-supportive organization culture h) Rivalry. Nepotism or such negative
practices i) Lack of regular opportunities to grow on personal as well as business front j) Pressures from
society, family, political culture or economic culture of a country k) Rising inflation & heavy cost of living
etc. Due to these opposing factors at personal, professional & social levels it becomes difficult for people as
well as organization to be ethical in their dealing
Another question to be decided is what exactly is meant by ethics? Ethics is something beyond morals & laws.
It is defined as ‘Transparent,honest & clear view point in running business’ or’ Achievement of success
without compromising fundamental guidelines or rules of a nation, society or humanity’. It is really difficult
to pin-point ethical business practices. Sometimes something ethical may not be financially acceptable
(refusing a bribe to get a vital business contract),or something legal may not really be ethical (taking action
against a dishonest employee who is forced to do so by circumstances beyond his control). In general, it is
recommended that for any decision to be ethical it has to fulfill the norms for welfare of the universe, nation,
society, organization, division, group, family & self in that order of hierarchy. It is a complex situation. A
business has to always look for balancing of the 3 parameters – legality, economic considerations & ethicality
in its decision making. In context of legality & ethicality the nature of decisions is found to be a) Best – if it is
fully ethical & legal (refusal to pay bribe & legal action initiated against bribe demand) b) Master minded – if
is legally correct but not ethical ( some legal recourse is sought only after bribe is given & contract is
received) c) Flexible – if the solution is ethically correct but not legal (refusing bribe but not seeking legal
recourse) d) Worst – If the solution is both legally & ethically wrong (Bribe is offered & no legal recourse is
sought)
Similarly, in context of ethicality & economic considerations various degrees of solutions can be found. It is
choice for a business to reconcile these aspects. It needs creative thinking, full organization approach, efficient
information generation & circulation , clear understanding of business at micro & macro levels, patience &
development of understanding about legal, social & political issues.
In this situation, The nature of the work carried out by accountants and auditors requires a high level of ethics.
Shareholders, potential shareholders, and other users of the financial statements rely heavily on the yearly
financial statements of a company as they can use this information to make an informed decision about
investment. They rely on the opinion of the accountants who prepared the statements, as well as the auditors
that verified it, to present a true and fair view of the company. Knowledge of ethics can help accountants and
auditors to overcome ethical dilemmas, allowing for the right choice that, although it may not benefit the
company, will benefit the public who relies on the accountant/auditor's reporting.

29. Most countries have differing focuses on enforcing accounting laws. In Germany, accounting legislation is
governed by "tax law"; in Sweden, by "accounting law"; and in the United Kingdom, by the "company law".
In India too it’s a combination of these three.

30. Transition to IFRS
International Financial Reporting standards – International Financial Reporting Standards (IFRS) are
principles-based Standards, Interpretations and the Framework (1989) adopted by the International
Accounting Standards Board (IASB).Many of the standards forming part of IFRS are known by the older
name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of
the International Accounting Standards Committee (IASC). On 1 April 2001, the new IASB took over from
the IASC the responsibility for setting International Accounting Standards. During its first meeting the new
Board adopted existing IAS and SICs. The IASB has continued to develop standards calling the new standards
IFRS.The international accounting standards board (IASB) is based in London. It began operations in 2001. It
was established as part of the IASC foundation. It consists of 15 full time members & is entrusted with the
responsibility of developing documents like ‘Framework for the preparation & presentation of financial
statements’,exposure drafts & other discussion documents. There is also an ‘International Financial Reporting
Committee, entrusted with the preparation of interpretation of IFRS for approval of IASB. The Standard
Advisory council (SAC) is appointed to provide a formal vehicle for participation by organizations &
individuals with an interest in financial reporting.
In India, The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory
in India for financial statements for the periods beginning on or after 1 April 2016 in a phased manner. There
is a roadmap issued by MCA for adoption of IFRS.
Reserve Bank of India has stated that financial statements of banks need to be IFRS-compliant for periods
beginning on or after 1 April 2011.
The ICAI has also stated that IFRS will be applied to companies above INR 1000 crore (INR 10 billion) from
April 2011. Phase wise applicability details for different companies in India. Different phases of adoption are
defined for the same
On 22 January 2010, the Ministry of Corporate Affairs issued the road map for transition to IFRS. India has
deferred transition to IFRS by a year. In the first phase, companies included in Nifty 50 or BSE Sensex, and
companies whose securities are listed on stock exchanges outside India and all other companies having net
worth of INR 10 billion were to prepare and present financial statements using Indian Accounting Standards
converged with IFRS. According to the press note issued by the government, those companies would convert
their first balance sheet as at 1 April 2011, applying accounting standards convergent with IFRS if the
accounting year ends on 31 March. This implies that the transition date will be 1 April 2011. According to the
earlier plan, the transition date was fixed at 1 April 2010.
Companies, whether listed or not, having net worth of more than INR 5 billion would convert their opening
balance sheet as at 1 April 2013. Listed companies having net worth of INR 5 billion or less would convert
their opening balance sheet as at 1 April 2014. Un-listed companies having net worth of Rs5 billion or less
will continue to apply existing accounting standards, which might be modified from time to time.