Accounting Standards

Accounting Standards:- Disclosure of Accounting Policies.

1. Which Accounting standards deals with disclosure of accounting policies:-
AS1 “Disclosure o accounting Policies”, issued by the Institute of Chartered Accountant of
India. Deals with disclosure of significant policies followed In preparing and presenting final
accounts.

2. AS1 is mandatory (compulsory). It must be followed by all concerns whether a company, a firm
or proprietorship.

3. The purpose of AS1 is a state which accounting policies should be disclosed in the final accounts
and in what manner.

4. The fundamental Accounting Assumptions:-

A. Going Concern:- the concern is normally viewed as a going concern that is, as continuing
in operation in future. It is assumed that the concern has neither the intention nor the
necessity of liquidation or of reducing level of its operation.
B. Consistency:- It is assuming that accounting policies are considered from one accounting
year to another.
C. Accrual:- Revenues and cost are accrued, that is, recorded as they are earned or
incurred and recorded in the final accounts of the period to which they relate.

5. Meaning of accounting policies:-

Accounting policies refers to the specific accounting principles and use method of applying
those principles adopted by the concern in the preparation and presentation of final a/c.

6. Main features or requirements of AS1:-

a.) All significant accounting policies adopted in the preparation and presentation of
financial statement should be disclose.
b.) If the fundamental accounting assumptions are followed in financial statements, specific
disclosure is not required. If a fundamental accounting assumption is not followed the
fact should be disclosed.
c.) Any changes in the accounting policies which has a material effect in the current period
or which is reasonably expected to have a material effect in later periods should be
disclosed.
d.) The disclosure of the significant accounting policies as such should from part of the
financial statement and the significant accounting policies should normally be disclosed in
one place.

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7. Accounting policies vs Accounting Assumptions:-

Accounting Policies Accounting Assumptions

a. Accounting policies are different for a. Fundamental accounting assumption do
different assets, liabilities, incomes, not differ from item-to-item.
expenses. These are items specific. They
change from item-to-item.

b. A concern has a choice regarding A concern has no choice regarding what it

accounting policies. The concern can should treat as fundamental accounting
choose their SLM or WDV for depreciation. assumption.

c. Different concern adopt different All concerns adopt the same fundamental
accounting policies accounting assumptions. These do not
differ from concern to concern.

d. AS1 requires disclosure of significant Disclosure Is required only if fundamental

accounting policies as part of financial accounting assumptions are not followed.
statements.

Accounting Standard 2:- Valuations of inventories.

1. Which accounting standard deals with valuation of invemtories:-

AS2, “Valuation of inventory. It is issued by ICAI and applicable from 1st April 1999”.

2. How is “inventory” defined:-

As2 defines “inventory as asset –
a. Held for sale in the ordinary courses of business.
b. I the process of production for such scale or,
c. In the form of materials or supplies to consumed in the production process or the
rendering of services.
3. Which items are covered under the term Inventory:- AS2 states that inventories cover-
a. Goods purchased and held for resale, e.g goods purchased by a retailer and held for
resale, land or other property held by developer, computer software held for resale.
b. Financial goods purchased or work-in-progress being produced by concern.
c. Raw materials, maintenance supplies, consumable and loose tools awaiting use in the
production process

4. What is meant by valuation of stock:-

Valuation of stock means finding out the proper value of which the closing stock is to be
brought in the books and shown in final accounts.

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5. What is the basic rule regarding valuation of stock:-

AS2 specifically lays down the rule that inventories should be valued at the lower of cost and
net realizable value. Thus, normally stock are valued at cost. Only if NRV is lower than cost.

6. Why are stocks basically valued at cost:-

Stocks are valued at cost following the basic accounting principles of marketing cost with
revenue. The cost of goods sold must be deducted from the income from goods sold in order to
compute the profits. This requires the adjustment of cost of closing stock. The closing stock is
valued at cost so that the cost of unsold goods is carried forward to be deducted from the
income from their sale in future.

7. What is meant by net realizable value:-

Net realizable value means the estimated selling price in the ordinary coerces of business less
the estimated cost of completion of work-in-progress and estimated costs of making the sale.

8. Which cost should be included in cost of purchase:-

According to AS2 cost of purchase consist of i) purchase price, ii) Duties and taxes other than
those subsequently recoverable from taxing authorities, iii) fright inwards and iv) other
expenditures directly applicable to the acquisition. Trade discounts, rebates, duty drawbacks
and other similar items are deducted in determining the cost of purchases.

9. At which rate are stocks valued under FIFO:-

The stock valued under FIFO method, at the rate of latest purchase cost.

10. At which rate stock are valued under weighted average method:-
The stock are valued under average cost method at a rate weighted average of all purchase

11. Which formula FIFO or Weighted Average should be used:

According to AS2 the formula should be used which helps to ascertain fair cost incurred in
bringing the items of inventories to their present location and condition.

12. What are the main features or requirements of AS2:

A. AS2 applies to the valuation of all inventories except work-in-progress shares, debentures
etc. held as stock-in-trade; and producers inventories of livestock, agricultural and forest
products and mineral oils, ores and gases.
B. Inventories should be valued at the lower of cost and net realizable value cost of
inventories include:- i) all cost of purchase, ii) cost of conversion and iii) other cost
incurred in bringing the inventories to their present location and condition.
C. The cost of other inventories of items that are not ordinarily interchangeable or produced
for specific projects should be assigned by specific identification of their individuals cost.
D. The cost of other inventories should be assigned by the first in first out [FIFO] pr weighted
average cost formula .

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E. The retain method may be used for onvenence if the results give the approximate actual
cost.

Accounting Standard 9

1. Which accounting standard deal with recognition of revenues:

AS 9 deals with recognitions of revenue in the profit and loss account of concern. The income
may be from slae of goods or fees from services or interest, royalty dividends etc.

2. Which is the key issues handled by AS9:-

The key issues handled by the AS9 in the timing of recognition of revenue i.e. when the
income should be booked.

3. Since when is the AS9 mandatory:-

AS9 is mandatory in respect of account whose period begins on or after 1st April, 1991.

4. What is the meaning of revenue.

According to As9 revenue means the amount earned from customers for goods sold, services
given, or for use of funds or assets. Total revenues is compounded by adding up the sales price
pf the goods sold, fees for services, interest on loan given, dividend on shares and royalty for
use of patents, knowledge etc.

5. What are the main features or requirement of AS9:-

A. Revenues from sales of goods should be recognized when the seller of the goods has
transferred to the buyer the property in goods for price, or all significant risk and rewards
of ownership have been transferred to buyer and the seller retains no effective control of
goods.
B. Revenue from retaining of services should be recognized on the basis of the performance
of the proportionate completion method or on the basis of completed service contract
method.
C. Interest should be recognized on time proportion basis taking into account the principle
outstanding.
D. Royalties should be recognized on accrual basis in accordance with the term of relevant
agreement.
E. Dividends should be recognized when its right to receive the dividend payment is
established.
F. Revenue should be recognized only when no significant uncertainty exists regarding the
amount of the consideration that will be derived and abord its ultimate collectability

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