Competitive Exams Accounting Standards in India

Simple Explanation- (AS 1 to AS 12)

After becoming Indian Accounting standard board as the prime authority for making Indian Accounting Standard in 1977, it made Indian Accounting Standards in 1979. These are also called Indian GAAP. This board also made many amendments in these Accounting standards. I have already made AS 1 to AS 32 content list in General Accepted accounting principles (GAAP) article. But I could not write its simple explain. So, today, this tutorial is just simple explanation of Accounting Standard especially for students who are doing chartered Accountancy in India and accountants who is practising accounting profession in India.

  1. Accounting Standard 1 (AS 1): (Disclosure of accounting policies) This accounting standard guides to company accountants for making their companies financial statements. After making financial statement, it should disclose all financial information of business because business of company is not the business of one man. It is also duty of accountant to make and disclose also extra accounting policy if company is using different depreciation, stock and investment valuation method. This accounting standard is made also for public interest and providing them full financial information. After they can take the decision of investment by purchasing the shares of company from stock exchange.

  2. Accounting Standard 2 (AS 2): (Valuation of Inventories) This accounting standard is very helpful to calculate the value of inventories. ASB comprise all stocks which is purchased for sale or production in inventories. Value of stock is not fixed by single formula but this standard provides following guidelines for calculating the value of inventories.

    1. 1st stock must be valued on cost or net realizable value which is lower.

    2. 2nd Every company is free to use FIFO, LIFO or weighted average method for proper calculation of the value of inventories.

    3. 3rd Cost of inventories = cost of raw material + cost of direct labour + cost of direct expenses

    4. 4th Companies are also free to use standard cost method or retail cost method for calculating the value of inventories.

    5. 5th Inventories does not encompass the value of tools which is used for repair of machinery

  3. Accounting Standard 3 (AS 3): (Cash flow statement) Accounting standard three which is revised in 1997 states that cash flow statement is a necessary statement under this standard for banks, financial institute or any institute whose annual turnover is more than Rs. 50 crores or any institute who has borrowed money more than Rs. 10 crores. This standard does not provide the Proforma of cash flow statement but deeply explain the two way of making this statement. Ist Way Direct method: Under this method, cash flow statement is made by inflow and outflow of cash in operating, investing and financial activities. 2nd way indirect method: It is different from direct method. Under this method cash from operating activities is calculated on the basis of net profit after different adjustments of non cash and non operating items like depreciation, interest, dividend paid and also adjusting net changes in working capital. All other part of cash flow from investing and financial activities are as same as direct method.

  4. Accounting standard 4 (AS 4): (Contingencies and events occurring after the balance sheet date) Accounting standard four provides the rules of accounting treatment of losses due to contingencies and event happening after balance sheet date but before approving of balance sheet by board of directors. Any contingencies like loss by fire or liabilities due to employee's accident should be provided in financial statement after these contingencies losses are confirmed. Impairment losses of assets is also covered under AS 4 Any losses due to happening of any event is also shown in financial statement before approving financial statement

  5. Accounting standard 5 (AS 5): Profit or loss for the period prior of changing accounting policies. ICAI's this standard explains two simple rules:

    1. All ordinary and extraordinary item relating to the financial statement should be disclosed if it effects on profit or loss period before changing of accounting policies.

    2. If accounting policies are changed. Then it is the duty of enterprise to disclose all important items relating to income and expenditures, so that profit or losses before the period and after period of changes of accounting policies can easily compare with other enterprises business.

  6. Accounting standard 6 (AS 6): Accounting of Depreciation Accounting standard 6 explains rules and regulations regarding charging of depreciation on any fixed asset. These rules can be explained in following way.

    1. Depreciation must be charged on fixed assets which is used in business for more than one year.

    2. Depreciation should charge with consisted method of charging depreciation. Two famous method of charging depreciation are straight line and reducing balance method.

    3. Rate of depreciation should be according to company law 1956 and if it is not written in it then companies are free to charge depreciation with appropriate rate of depreciation.

    4. Any company can also change the method of charging depreciation. But its effect in the form of deficiency or surplus also should show in profit and loss account of business.

    5. Deficiency due to changing the method of depreciation will be debited in profit and loss account and surplus due to changing the method of depreciation will be credited in profit and loss account of business.

  7. Accounting standard 7 (AS 7): Accounting of construction contracts Construction contracts are those contracts relating to build of dam, building, pipelines, ships and other fixed assets. The nature of business is different from business of general manufacturing. Because time of completing contract is more than the time of accounting period. So, ICAI makes some rules and regulation that should be adopt in the business relating to construction.

    1. Construction Company should identify all their resources of revenue. It may be fixed at the time of contract or it may be cost plus profit basis. So, it is necessary to make contract account statement in which all revenue of construction business must be shown.

    2. Costs of contract comprise all raw material labour and other expenses which incurred for completing of contact. These costs should also calculate and deduct from revenue for calculating net earning from each contract.

  8. Accounting standard 8 (AS 8): (Accounting for research and development): Research and development is important department of any company. AS 8 cares its accounting treatment and related to calculate its proper cost and charging on profit and loss account. Ist part: Calculate the cost of research and development with following formula = Cost of raw material used in research and development + Cost of wages and salaries of employees working in this department + depreciation of assets used in this department + amortization cost of patents and licenses + other related cost 2nd part: This part is related to charge the written off proportion to profit and loss account. For this company's accountant should see what will company gets future benefits and how many years will company get these profits. On this estimation, company will charge written off cost to debit side of profit and loss account and rest amount of deferred expenditure of research and development will be shown in balance sheet's asset side under miscellaneous expenditures.

  9. Accounting Standard 9 (AS 9): Revenue recognition: Accounting standard of India explains the concept of revenue deeply. When goods are sold or services rendered. At this time it is deemed that money is earned by enterprise. There is also revenue from interest, royalty and dividend. Revenue recognition standard comprises different earning relating to advertising and other services projects when these are completed by professionals. But this standard also provides guidance about revenue recognition in following cases.

    1. If stock is sold on approval basis then, revenue is generated only when the buyer gives the approval.

    2. In case of agency business revenue will be recognized when risk of ownership also transferred under consignment.

  10. Accounting Standard 10 (AS 10): (Accounting of fixed assets): Accounting standard 10 of ICAI helps professional accountants for proper accounting treatment of fixed assets. Determination of cost of fixed assets Assets purchase value + all cost to bring the fixed assets to plant. New extension of fixed assets: Any new extensions are capital nature expenditure and it will include in the total value of respective fixed assets. Goodwill is also treated as fixed asset in balance sheet if the amount is for this paid. In fixed assets, Enterprise will also include the amount of know how and patents.

  11. Accounting standard 11 (AS 11): Effect of changes of foreign exchange rates. There are two main reasons for providing effect of changes of foreign exchange rates on accounting. Calculate the value of foreign exchange profit or loss It is very simple when any transaction is done, this date is called closing date and we can calculate foreign exchange profit or loss on the basis of exchange rate. If it is rated to purchasing or selling related profit from foreign exchange currency. Then it will show as capital reserve. Otherwise it is revenue earning and it will transfer to profit and loss account.

    1. When goods are sold or buy in price which is dominated in foreign currency.

    2. When enterprise is doing any foreign operations.

  12. Accounting standard 12 (AS 12): (Accounting treatment of Govt. Grants)

The Govt. Grant means any benefit given by govt. In the form of subsidy, reduction in duty and taxes and other non monetary help. Accounting standard accepts two way for providing accounting treatment of govt. Grants. If it is received by any special enterprise.

First way: To show as capital earning and include it in the value of shareholder fund in liability side of balance sheet and also shown in bank in current assets side.

2nd Way: Transfer all govt. Grants to the credit side of profit and loss account