Generally Accepted Accounting Principles

Generally Accepted Accounting Principles refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or Standard Accounting Practice. These include the standards, conventions, and rules that accountants follow in recording and summarizing, and in the preparation of financial statements.

Accounting - DefinitionA record of financial transactions for an asset or individual, such as at a bank, brokerage, credit card company, or retail store.. Accounting is define as an art of recording, classifying and summarizing in a systematic manner and in terms of money, transactions and events which are in part atleast of a financial character and interpreting the results thereof. American Institute of Certified Public Accountants

Objectives of Accounting To keep systematic recordsTo protect business propertiesTo ascertain profit or lossTo ascertain the financial position of the businessTo facilitate rational decision making

Functions of Accounting Recording: Basic function of accounting. Record all transactions that are financial characterIn an chronological order.

Classifying: Concerned with systematic analysis of recorded facts.Done in the book called LedgerLedger contains different pages for individual accounts.Summarizing: Involves presenting the classified data in a manner, which is understandable and useful to the internal and external end-users i.e. trial balance, income statement, balance sheet

AnalyzingIt establish the relationship between the items of P&L account and Balance sheet

Purpose of analyzing is to identify the financial strength and weakness of the business

Interpreting: Final function of the accounting.

The recorded financial data is interpreted in a manner that the end- users can make a meaningful judgement about financial condition and profitability of the business operations.

This data is used for preparing the future plans and framing new policies.

Classification of Accounts

Personal accounts

Includes the accounts of a persons with whom the business deals.

Natural Persons Persons who are created by god. Eg. Ram, Raja etc.

2. Artificial Persons Organizations and companies which are created by natural persons are called artificial persons. eg. LIC, Bank, Companies etc

3. Representative persons Amounts outstanding and prepaid represents the person involved. Eg. Rent outstanding represents the landlord, insurance prepaid represents the insurance company

Rules of Personal accounts Debit the receiver Credit the giver

Real accounts

Real accounts includes all categories of Assets. i.e Fixed assets, current assets and fictitious assts.

Eg. Buildings, Cash and goodwill

Rules of Real accountsDebit what comes inCredit what goes out

Nominal accounts

Nominal accounts covers all expenses, losses, all incomes and gains. Eg. Salary, rent, wages, bad debts etc.

Rules of Real accountsDebit all expenses and lossesCredit all incomes and gains

Branches of Accounting

Financial Accounting:

It is the original form of accounting.

Concerned with the preparation of financial statements like P&L a/c, balance sheet to show the operations of a business for a specific period of time.

Useful for the outsiders like shareholders, debenture holders, creditors, banks and financial institutions.

Two principal statements of Financial accounting are Income and Expenditure statement and Balance Sheet.

Accounting principles

Accounting principles may be defined as those rules of action or conduct, which are adopted by the accountants universally while recording accounting transactions.

Business entity conceptGoing concern conceptMoney measurement conceptCost conceptDual aspect conceptAccounting period conceptMatching conceptRealization conceptConservatismFull disclosureConsistencyMateriality

Accounting concepts

The term concept includes basic assumptions or conditions upon which the science of accounting is based. The important concepts are described as below

Business Entity Concept

Business entity concept implies that a business unit is separate and distinct from the person who supplies capital to it, irrespective of the organization.

Going concern concept

Going concern concept implies that the business concern will exist upto the foreseeable future.This concept assumes that the business concern has perpetual life, assets and liabilities are valued on the basis of their potential and not on their market value.

Money measurement Concept

Money measurement concept implies that only transactions involving money or moneys worth will be recorded in the books of the business. Because money is the only practical unit of measurement.

Cost concept

The cost concepts assumes that the price to acquire an asset is the basis for subsequent accounting for the asset.

Dual aspect Concept

Every business transaction has two aspects: giving and receiving: and ultimately it effects a change in the composition of assets or liabilities or both.

Example: Ram commenced business with a cash of Rs.1,00,000

Now the business is having Rs.1,00,000 (ASSET) and the business owes its proprietor, i.e. Ram Rs.1,00,000.

Accounting period concept

The life of the business is divided into appropriate segments say 12 months. Interim reports are also prepared for internal reporting and evaluation.

Matching concept

to ascertain the profit it is necessary that revenue of the period should matched with expenses of the same period. It involves identification of revenue and expenses for the period, adjustment of outstanding and prepaid expenses and incomes, and sufficient provision for depreciation.

Realisation concept

According to realization concept revenue is recognized when a sale is made. When sale is considered to be made at the point when the property in goods passes to the buyer, and he becomes legally liable to pay.

ACCOUNTING CONVENTION

The term conventions includes those customs or traditions which guide the accountant while preparing accounting statements.Convention ConservatismFull disclosureConsistencyMateriality

ConservatismConvention of conservatism is a policy of playing safe and it had its origin as a safeguard against possible losses in a world of uncertainty.

It compels the businessman to wear a Risk proof jacket for the working rule anticipate no profit for possible losses.

Full DisclosureFull DisclosureThe accountant should attach only those important materials details and avoid those insignificant. Otherwise, accounting will be over burdened with minute details.

MaterialityAll material information should be revealed while preparing final accounts.

All information which is of material interest to proprietors, creditors, or investors should be disclosed in accounting statements.

ConsistencyThe accounting practice should remain the same from one year to another. Because the evaluation of performance by the comparison of results of different accounting periods can be significant. Eg. Various methods of depreciation.

Journal:

Journal is derived from the French word Jour which means a day.

Journal means a daily record of business transactions. Journal is a books of original entry because transaction is first written in the journal.

Ledger:

A book in which the monetary transactions of a business are posted in the form of debits and credits. A book to which the record of accounts is transferred as final entry from original postings.

Functions of accounting

Keeping Systematic records

The main function of HRA is to keep a systematic record of the events. This function embraces recording transaction in journal and subsidiary books like cash book, sales book etc.

Communicating the results:

The second main functions of accounting is to communicate the financial facts of the enterprise to various interested parties like owners, investors, creditors, employees, governments etc.

Meeting the legal requirements

accounting aims at fulfilling the legal requirements, especially to the tax authorities and regulators of the business.

Protecting the proprietor of the business

Accounting helps protecting the property of the business.

Planning and controlling the business activities

Accounting also helps planning future activities of an enterprise and controlling its day to day operations. This function is done mainly to promote maximum operational efficiency.

INFLATION ACCOUNTING

Inflation normally refers to the increasing trend in general price levels.

In economic sense inflation refers to a state in which the purchasing power of money goes down or conversely there is more money in circulation.

Meaning of inflation accounting

The accounting system adopted for converting the past financial expenditure and receipts according to the current price level is called inflation accounting.

Also called as Price level accounting.

It is based on the principle that the prices of products at different periods are at different levels.

American Institute of Certified Public Accountants defines the inflation accounting as a system of accounting, which purports to record as a built in mechanism, all economic events in terms of current cost..

Features of inflation accounting:

The inflation accounting has an inbuilt and automatic recording procedure.

The unit of measurement is not stable like traditional or historical accounting.

It takes into consideration all the elements of financial statements for reporting.

Methods of inflation accounting:

Current Purchasing Power Method (CPP)

Current Cost Accounting Method (CCA)

Hybrid Method (a mixture of CPP & CCA)

Current Purchasing Power Method (CPP)

In this method the increase of decrease of price level in a period should be adjusted with the items in the Profit and Loss account and Balance Sheet.

Also called as Constant rupee methodThe method is based on General Price Index.Accounting to the Price Index the items should be adjusted to know the real values.

Procedure for inflation accounting under CPP method

Calculation of conversion factor

Current Price Index (consumer Price Index)Conversion factor = -------------------------- Previous Price Index

2. Calculation of converted value

Converted value = Historical value X Conversion Factor

Consumer Price Index: The Consumers Price Index (CPI) is a measure of the price change of goods and services purchased by private Indian households

Current Cost Accounting Method

CCA was introduced during 1975 by the British Government through a committee known as Sandilands Committee, headed by Francis C.P. Sandilands.

Human Resource AccountingHuman Resource Accounting (HRA) is a new branch of accounting.

HR is the most important factor in the organization. Among 4 factors of production. Material Machine Land & Men

The effective utilization of other factors depends upon the efficiency of human resource.

The accounting information helps to evaluate the number of employees and their performances and changes over a period of time about the number and performance.

Definition:

HRA is the process of identifying and measuring data about human resources and communicating the information to interested parties to facilitate effective management within the organization.

- American Accounting Association Committee

Definition:

HRA is an attempt to identify and report about investment made in human resources of an organization that are presently not accounted for under conventional accounting practice. Basically, it is information system that tells the management what changes over time are occurring to the human resources of the business.- Woodraff Jr.

The accounting about cost and value factors of human resources is the purpose of Human Resource Accounting.

Objectives of HR Accounting The objective of HRA is not merely the recognition of the value of all resources used by the organisation, but it also includes the management of human resource which will ultimately enhance the quantity and quality of goods and services. The main objectives of HR Accounting system are as follows:

To furnish cost value information for making proper and effective management decisions about acquiring, allocating, developing and maintaining human resources in order to achieve cost effective organisational objectives.

To monitor effectively the use of human resources by the management.

To have an analysis of the human assets i.e. whether such assets are conserved, depleted or appreciated.

To aid in the development of management principles. and proper decision making for the future by classifying financial consequences of various practices.

In all, it facilitates valuation of human resources recording the valuation in the books of account and disclosure of the information in the financial statement.

It helps the organisation in decision making in the following areas:

Direct Recruitment vs. promotion, transfer vs. retention, retrenchment vs. retention, impact on budgetary controls of human relations and organisational behaviour, decision on reallocation of plants closing down existing units and developing overseas subsidiaries etc.

Methods of HR Accounting

Human Resources Cost Accounting

HRCA is concerned with the cost aspect involved in recruitment and maintaining of human resources.

It is the process of the costs incurred for the recruitment, training and replacement of employees in an organisation.

It is like ascertainment of cost of any other fixed assets of a concern.

Three kinds of HRA are

1. Historical cost method

This approach was developed by William C. Pyle and R.G. Barry corporation, Ohio (USA) in 1967.

According to this method, the cost of human resources is measured on the basis of actual cost incurred for it.

It is the cost for recruitment, training and developing the human resources of the organisation.

The present cost for recruitment and training of human resources who are already employed will not be considered by this method.

2. Replacement Method

In this method, the cost of HR is ascertained on the basis of the cost required to replace the entire employees of a concern.

This cost will be definitely high when compared to the actual cost of recruitment, training and development.

This method was suggested by Rensis Likert.

According to him, there may be situation where all employees may leave the and only chairman of the concern may exist. In such a situation there is a need for the concern to recruit all new employees.

3. Opportunity cost method

Also known as Market value method.

Hekimian and Jones suggested the concept of opportunity cost for valuing human resources in a company.

Opportunity cost means the most profitable opportunity cost that was foregone due to the adoption of this method..

Or the next probable alternative with low cost.

Opportunity cost for valuing human resources is based on the chance for the selection of the employees in other departments of the same organisations or in other organizations.

If the employees have the chance of being selected in other places, the remuneration of those better place has been foregone by them due to the present employment.

According to this method the value of the employees are assessed on the basis of the foregone better remuneration.

The opportunity cost method is possible only when there is scarcity of qualified people.

Happens only in rare situations.

This method is not a popular one for valuing the human resources of a company.

II. Human Resource Value Accounting

This method of accounting of HR is based on the Discounting factor of cost and revenue related to HR in future.

The value of HR depends upon the excess of revenue generated due to it, over the cost incurred for it.

i.e. the cost and the revenue aspects include the present and future cost and revenue.

Cost = cost of recruitment, training and development

For calculating the cost ,

The present cost should be taken as its is, and

The future expected cost should be converted into present cost by discounting factor.

Like this the revenue should be determined.

Different valuation models developed by scholars.

Present value of future earnings model

Lev and Schwartz (1971) proposed an economic valuation of employees based on the present value of future earnings.

According to this model, like any other investment of capital the capital invested in human resource will give return in future.

The basis of ascertainment of the human value is the remuneration given to them.

The present value of it should be determined through discounting factor of the revenue (remuneration) for the employees.

This concept of valuation should be adopted for each individual (employees) of the organisation

Flamholtz Stochastic Rewards Valuation Model

This model states that the individuals value in an organisation is the expected realizable value.

i.e. Present value of the expected service provided by the individual to the organisation during his employment.

Based on the revenue aspect of the concern.

Prof. S.K.Chakraborthys Model

According to this model the value of human resources is Determined on Aggregate basis and not on individual basis.

In this method, the cost involved for recruitment, replacement, training and development should be shown separately in Deferred Revenue Expenditure Account.