AFM NOTES | JAIIB MAY 2024 | IMPORTANT TOPIC: ACCOUNTING STANDARDS

AFM NOTES | JAIIB MAY 2024 | IMPORTANT TOPIC: ACCOUNTING STANDARDS

In this article, we are providing you with some important notes on Accounting Standards from Accounting & Financial Management for Bankers – IIBF prescribed syllabus applicable for Junior Associate of the Indian Institute of Bankers (JAIIB) MAY 2024 Exams. This concept is important to pass the JAIIB Exam 2024.

DEFINITION, SCOPE, AND ACCOUNTING STANDARDS

ACCOUNTING

Accounting is popularly known as a business language. Like any other language, the purpose that accounting serves is a means of communication. In this context, the basic function of accounting is to report the operations of the business and the financial health of the business.

FEATURES OF ACCOUNTING 

It is basically an art through which business transactions are recorded, classified and summarised. Not only recording but accounting records business transactions in an orderly manner, classification is done on the basis of the nature of transactions before they are actually recorded in the books of accounts.

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The recorded data is summarised so that it could be presented in a systematic way: Three forms or formats in which the accounting data can be presented:

• Trial Balance
• Profit and loss account and 
• Balance sheet

MONEY MEASUREMENT: In accounting, transactions are recorded in terms of money. And because money is the only unit of measurement for recording transactions and business, any other transactions which cannot be measured in terms of money, will not find their way into the books of accounts. 

Although having transactions that can be measured in money is more meaningful. This way, it can be safely said that: 

• Accounting because transactions have a financial character. 

• Accounting interprets the data given in financial terms.

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PURPOSE AND OBJECTIVES OF ACCOUNTING 

The main purpose of accounting is given below:

• To maintain records in a systematic way 
• To find out the results of the business operations 
• To find out where the business stands in financial terms
• To help make rational decisions based on data 
• To fulfil the requirements of the Companies Act, societies act, Income Tax Act and many more Acts.

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TYPES OF ACCOUNTING:

Accounting is done in different aspects of businesses such as:

• Financial Accounting
• Management Accounting
• Human Resource Accounting
• Cost Accounting
• Social Responsibility Accounting
• Inflation Accounting

ACCOUNTING STANDARDS IN INDIA AND ITS DEFINITION AND SCOPE

In 1977, the need to harmonize the diverse policies and practices of accounting was recognised by ICAI (The Institute of Chartered Accountants of India), as a result of which the ‘Accounting Standards Board’ came into existence. The main function of the ASB was to roll out accounting standards so that the ICAI counsel can issue such a standard as mandatory standards.

This board will be responsible to determine the areas in which accounting standards will be formulated or are required to be formulated and as well as determining the priority of selecting thereof.

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For the preparation of accounting standards, the accounting standards board will get assistance from various study groups which will study details of specific subjects. These groups will hold dialogues with representatives of public and private sector industries as well as other organizations to understand their views.

Based on the gathered information, an exposure draft will be prepared for the proposed standard which will be issued to the members of ASB for comments and the public at large. 

After getting the feedback and taking it into consideration, ASB will finalize the exposure draft which will then be submitted to the ICAI council.

An accounting standard that has been issued as a mandatory requirement for the preparation of financial statements, if not followed or in case of any inconsistency, requires that the auditors (members of ICAI) qualify their audit reports. If auditors fail to report such deficiencies, then they will be guilty of professional misconduct.

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It is required the auditors qualify the audit reports which do not conform to the mandatory accounting standards by both SEBI & Companies Act 2013. 

Company Act’s section 134(5) puts the responsibility on the board of directors they comply with the accounting standards which are mandatory to be followed. 

As per section 129(5) of the Companies Act, if accounting standards are not followed for the preparation of financial statements, companies are required to disclose the following: 

• Deviations from the accounting standards 
• The reason why this division was allowed 
• Any financial effects which have resulted from such revision.

ACCOUNTANCY STANDARDS

So far, the Institute of Chartered Accountants of India has issued 29 standards which are mentioned below:

LIST OF MANDATORY ACCOUNTING STANDARD

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LIST OF RECOMMENDATORY ACCOUNTING STANDARD

US GAAP – GENERALLY ACCEPTED ACCOUNTING PRINCIPLES OF THE USA

GAAP or generally accepted accounting principles are referred to the set of rules which contains all the details, complexities, and legalities which year related to business and corporate accounting. GAAP is used as a Foundation by FASB (financial accounting standards board) for its set of approved accounting methods and practices.

The law in the United States of America requires that the businesses whose stocks are being traded on stock exchanges, have to release their financial statements which have been prepared taking into account the following key concepts (GAAP guidelines):

• Principle of regularity: Accountants who are required to follow GAAP, have to strictly adhere to the rules and regulations which have been established for the purpose.
• Principle of consistency: The standards are required to be applied consistently and throughout the process of financial reporting
• Principle of sincerity: Accountants have to follow these standards accurately and with impartiality. 
• Principle of permanence of methods: Procedures that are followed for the preparation of all the financial reports have to be consistent.
• Principle of non-compensation: All positive or negative aspects of the performance of the organization have to be fully reported.
• Principle of prudence: Speculation should not be a part of the financial data which is being reported.
• Principle of continuity: While making the valuations of the assets it is assumed that the efficiency of the organization will continue in the near future.
• Principle of periodicity: The revenues are reported after being divided by the time periods. e.g. Fiscal quarters or years.
• Principle of materiality: Financial reporting is done to report and disclose all the monetary situation which is material in nature.
• Principle of utmost good faith: It is basically assumed that all the parties which are involved in the preparation of financial statements are acting honestly.

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