Accounting standard-1: Disclosure of accounting

policies
This Standard deals with the disclosure of significant accounting policies followed in
preparing and presenting financial statements. The view presented in the financial
statements of an enterprise of its state of affairs and of the profit or loss can be significantly
affected by the accounting policies followed in the preparation and presentation of the
financial statements. The accounting policies followed vary from enterprise to enterprise.
Disclosure of significant accounting policies followed is necessary if the view presented is to
be properly appreciated.
The very purpose behind giving a statement of accounting policies is to encourage better
understanding of the financial statements. Further, it also helps in facilitating more
meaningful comparison between financial statements of various companies.

1. Fundamental Accounting Assumptions

As per Accounting Standards (AS-1) ‘Disclosure of Accounting Policies’ issued by Institute of
Chartered Accountants of India (ICAI), Certain assumptions are used in the preparation of
financial statements. They are usually not specifically stated because they are assumed to
be followed. Disclosure is necessary only if they are not followed. The following have been
generally accepted as fundamental accounting assumptions:
 Going Concern
 Consistency
 Accrual

2. Going Concern Assumption

The enterprise is normally viewed as a going concern, i.e. as continuing operations for the
foreseeable future. It is assumed that the enterprise has neither the intention nor the
necessity of liquidation or cut down its scale of operations. If an enterprise is not a going
concern, valuation of its assets and liabilities on historical cost becomes irrelevant and as a
consequence its profit/loss may not give reliable information.

- Implications of Going concern

It is because of the going concern assumption:

 That the assets are classified as current assets and fixed assets.
 That the liabilities are classified as shirt term liabilities and long term liabilities.
 That the unused resources are shown as utilised costs as against the break-up values
as in case of liquidating enterprise.
3. Consistency Assumption
It is assumed that accounting policies are consistent frim one period to another. This adds
the virtue of comparability to accounting data. If comparability is lost, the relevance of
accounting data fir user judgement and decision making is gone. Whatever accounting
practices are selected for a given category of transactions, they should be followed on a
horizontal basis from one period to another to achieve comparability.
The consistency principle is applied when alternative methods of accounting are equally
acceptable.

4. Accrual Assumption
Revenues and costs are accrued, that is, recognised as they are earned or incurred (and not
as money is received or paid) and recorded in the financial statements of the periods to
which they relate. This assumption is the core of accrual accounting system. For companies
it is mandatory to keep account on accrual basis under the companies act 2013.

Accounting Principles
Basic principles of accounting are essentially, the general decision rules which govern the
development of accounting techniques. The principles guide how transactions should be
recorded and reported.
Generally Accepted Accounting principles may be defined as those rules of action or
conduct which are derived from experience and practice and when they prove useful, they
become accepted as principles of accounting.

1. Business Entity Principle

According to this principle, business has a distinct and separate entity from its owners. It
means that for the purposes of accounting, the business and its owners are to be treated as
two separate entities. The accounting records are made in the book of accounts from the
point of view of the business unit and not that of the owner. The personal assets and
liabilities of the owner are, therefore, not considered while recording and reporting the
assets and liabilities of the business.
If this principle is not followed, true financial position and true financial performance of a
business entity cannot be ascertained. For example, if the personal expense ($10,000) of
owner is shown as business expense, then the profits of the business will be understand to
the extent of $10,000.

2. Money Measurement Principle

The concept of money measurement states that only those transactions and happenings in
an organisation which can be expressed in terms of money such as sale of goods or
payment of expenses or receipt of income, etc., are to be recorded in the book of accounts.
All such transactions or happenings which cannot be expressed in monetary terms, for
example, the appointment of a manager, capabilities of its human resources or creativity of
its research department or image of the organisation among people in general do not find a
place in the accounting records of a firm. Another important aspect of the concept of
money measurement is that the records of the transactions are to be kept not in the
physical units but in the monetary unit

- Limitation
The money measurement assumption is not free from limitations. Due to the changes in
prices, the value of money does not remain the same over a period of time. The value of
rupee today on account of rise in prices is much less than what it was, say ten years back.
The money measurement assumption is not free from limitations. Due to the changes in
prices, the value of money does not remain the same over a period of time. The value of
rupee today on account of rise in prices is much less than what it was, say ten years back.

3. Accounting Period Principle

Accounting period principle refers to the span of time at the end of which the financial
statements of an enterprise are prepared, to know whether it has earned profits or incurred
losses during that period and what exactly is the position of its assets and liabilities at the
end of that period. The financial statements are, therefore, prepared at regular interval,
normally after a period of one year, so that timely information is made available to the
users. This interval of time is called accounting period.

- Implication of accounting period principle

The use of this assumption requires the allocation of expenses between capital and
revenue. That portion of capital expenditure which is consumed during the current period is
charged as an expense and the unconsumed portion is shown as asset in the balance sheet
for future consumption.

4. Full Disclosure Principle

According to full disclosure principle, the financial statements should act as an means of
conveying not concealing.
The principle of full disclosure requires that all material and relevant facts concerning
financial performance of an enterprise must be fully and completely disclosed in the
financial statements and their accompanying footnotes. This is to enable the users to make
correct assessment about the profitability and financial soundness of the enterprise and
help them to take informed decisions.

5. Materiality Principle
The concept of materiality requires that accounting should focus on material facts. Efforts
should not be wasted in recording and presenting facts, which are immaterial in the
determination of income.
The question that arises here is what is a material fact. The materiality of a fact depends on
its nature and the amount involved. Any fact would be considered as material if it is
reasonably believed that its knowledge would influence the decision of informed user of
financial statements. For example, money spent on creation of additional capacity of a
theatre would be a material fact as it is going to increase the future earning capacity of the
enterprise.
All such information about material facts should be disclosed through the financial
statements and the accompanying notes so that users can take informed decisions. In
certain cases, when the amount involved is very small, strict adherence to accounting
principles is not required. For example, stock of erasers, pencils, scales, etc. are not shown
as assets, whatever amount of stationery is bought in an accounting period is treated as the
expense of that period, whether consumed or not.

6. Matching Principle
The process of ascertaining the amount of profit earned or the loss incurred during a
particular period involves deduction of related expenses from the revenue earned during
that period. The matching concept emphasises exactly on this aspect. It states that
expenses incurred in an accounting period should be matched with revenues during that
period. It follows from this that the revenue and expenses incurred to earn these revenues
must belong to the same accounting period.
As already stated, revenue is recognised when a sale is complete or service is rendered
rather when cash is received. Similarly, an expense is recognised not when cash is paid but
when an asset or service has been used to generate revenue. For example, expenses such
as salaries, rent, insurance are recognised on the basis of period to which they relate and
not when these are paid.

7. Historical Cost Principle

According to historical cost principle, an asset is ordinarily recorded in the accounting
record at the price paid to acquire it at the time of acquisition and the cost becomes the
basis for the accounts during the period of acquisition and subsequent accounting periods.
If nothing is paid to acquire an asset; the same will not be usually recorded as an asset.

- Advantage of historical cost principle

This brings in objectivity in the process of recording and makes the accounting statements
more acceptable to various users.
It may be noted that the purpose of depreciation is to allocate the cost of an asset over its
useful life and not to adjust its cost so as to bring it close to the market value.

8. Prudence Principle
According to Prudence Principle, the principle of ; ‘Anticipate no profit but provide for all
probable losses’ should be applied. The principle states that a conscious approach should
be adopted in ascertaining income so that profits of the enterprise are not overstated. If the
profits ascertained are more than the actual, it may lead to distribution of dividend out of
capital, which is not fair as it will lead to reduction in the capital of the enterprise. The
concept of conservatism requires that profits should not to be recorded until realised but all
losses, even those which may have a remote possibility, are to be provided for in the books
of account.

- Example

Valuing closing stock at cost or market value whichever is lower; creating provision for
doubtful debts, discount on debtors; writing of intangible assets like goodwill, patents,
etc. from the book of accounts are some of the examples of the application of the
principle of conservatism.

9. Duality Principle
Dual aspect is the foundation or basic principle of accounting. It provides the very basis for
recording business transactions into the book of accounts. This concept states that every
transaction has a dual or two-fold effect and should therefore be recorded at two places. In
other words, at least two accounts will be involved in recording a transaction.
The two-fold effect in respect of all transactions must be duly recorded in the book of
accounts of the business.
- Example of duality principle
Mr. X sold goods for cash 1000 to Mr. Y. In this case the dual aspects of this transaction for
Mr X and Mr Y are as follows:

Dual Aspect for Mr X Dual Aspect For Mr Y

1) Receipt of cash 1000 1) Payments of Cash 1000

2) Foregoing pf Goods pf 1000 2) Receipt of Goods of 1000

10. Double Entry System of Book-keeping

Double entry system is a complete system as both the aspects of a transaction are recorded
in the book of accounts.
Double entry system is based on the principle of “Dual Aspect” which states that every
transaction has two effects, viz. receiving of a benefit and giving of a benefit. Each
transaction, therefore, involves two or more accounts and is recorded at different places in
the ledger. The basic principle followed is that every debit must have a corresponding
credit. Thus, one account is debited and the other is credited.

- Advantages of double entry system

It facilitates the ascertainment of financial performance.
It facilitates the ascertainment of financial position.

Ind AS-8 Accounting Policies, Changes in Accounting

Estimates and Errors
Ind AS 8 specifies the criteria for selecting and changing accounting policies, together with
the accounting treatment and disclosure of changes in accounting policies, changes in
accounting estimates and corrections of errors. The Standard is intended to enhance the
relevance and reliability of an entity’s financial statements, and the comparability of those
financial statements over time and with the financial statements of other entities.

1. Selection and Application of Accounting Policies

Accounting policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
First of all the entity must assess, if an Ind AS specifically applies to a transaction, other
event or condition. If it applies then, the accounting policy or policies to be applied shall be
determined by applying Ind AS. If the Ind AS does not apply then the management shall use
its judgement in formulating and applying an accounting policy that results in information
that is relevant to the economic decision-making needs of users; and reliable, in that the
financial statements:

- represent accurately the financial position, financial performance and cash

flows of the entity;

- reflect the economic substance of transactions, other events and conditions,

and not merely the legal form;

- are neutral, ie free from bias;

- are prudent; and

- are complete in all material respects.

An entity must apply the accounting policies consistently for similar transactions, other
events and conditions unless otherwise mentioned in Ind AS.

2. Changes in accounting policy

An organisation shall change an accounting policy only if the change:

(a) is ordained by an Ind AS; or

(b) results in the financial statements providing accurate and more relevant information
about the effects of transactions, other events or conditions on the entity’s financial
performance, financial position or cash flows.
It would be changed as retrospectively. It means adjust the opening balance of each
affected component of equity for the earliest prior period presented and comparative
amounts disclosed for each prior period presented as if the new accounting policy had
always been applied.

3. Changes In Accounting Estimates

Accounting estimate is, an approximation of the amount to be debited or credited on items
for which no precise means of measurement are available. They are based on specialized
knowledge and judgment derived from experience and training. Examples of accounting
estimates include Useful life of non-current assets.
To the extent that a change in an accounting estimate gives rise to changes in assets and
liabilities, or relates to an item of equity, it shall be recognised by adjusting the carrying
amount of the related asset, liability or equity item in the period of the change.
The effects of other changes in accounting estimates shall be recognised prospectively by
including them in profit or loss in:
(a) the period of the change, if the change affects that period only; or
(b) the period of the change and future periods, if the change affects both.

4. Prior Period Error

Prior Period Items are income or

expenses, which arise, in the
current period
because of errors or omission in
the preparation of financial
statements of one or
more prior periods.
 Prior Period Items are income or
expenses, which arise, in the
current period
because of errors or omission in
the preparation of financial
statements of one or
more prior periods.
Prior Period Items are income or
expenses, which arise, in the
current period
because of errors or omission in
the preparation of financial
statements of one or
more prior periods.
Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to use, or misuse of, reliable
information that was available when financial statements for those periods were approved
for issue and could reasonably be expected to have been obtained and taken into account
in the preparation and presentation of those financial statements.
The Standard requires an entity to correct material prior period errors retrospectively in the
first set of financial statements approved for issue after their discovery by:
(a) restating the comparative amounts for the prior period(s) presented in which the error
occurred; or
(b) if the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities and equity for the earliest prior period presented.