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NIOS Class 12 Accountancy Chapter 3 Accounting Conventions and Standards
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Accounting Conventions and Standards
Chapter: 3
| Module – 1: Basic Accounting |
INTEXT QUESTIONS 3.1
Fill in the blanks with suitable word/words:
(i) Convention of consistency means that same accounting principles should be used for preparing financial statements __________.
Ans: Year after year.
(ii) Unsold goods are valued at cost price or __________ whichever is __________.
Ans: Market price, lower.
(iii) Precious metals, like gold, mineral and others are generally valued at __________.
Ans: Market price.
(iv) As per the convention of __________, year after year same methods are followed.
Ans: Consistency.
INTEXT QUESTIONS 3.2
Fill in the blanks with appropriate word/words:
(i) The shareholders would like to know about the __________ of the business.
Ans: Profitability.
(ii) The convention of full disclosure requires that there should be full, __________ and __________ disclosure of accounting information.
Ans: Fair and adequate.
(iii) The creditors are interested to know the __________ of the business.
Ans: Solvency.
(iv) All relevant material facts should be __________ in the financial statements.
Ans: Disclosed.
(v) The full disclosure convention presents __________ information.
Ans: Reliable.
INTEXT QUESTIONS 3.3
Fill in the blanks with suitable word/words:
(i) __________ convention states that to make financial statements more meaningful, only significant and important items should be supplied to the users.
Ans: Materiality.
(ii) Convention of materiality states that significant items should be disclosed under __________.
Ans: Separate head.
(iii) __________ convention keeps accounts manager to focus on important / significant items.
Ans: Materiality.
(iv) __________ means the information which will influence the decision of its users.
Ans: Material fact.
INTEXT QUESTIONS 3.4
Give your decision in the following situations:
(i) A business has unsold stock at the end of year. The cost price is ₹2,00,000 and the market price is ₹2,50,000. At which price should the unsold stock be recorded?
Ans: Cost price i.e. ₹2,00,000.
(ii) What will be your decision if the cost price in the above case is ₹2,10,000?
Ans: Cost price i.e. ₹2,10,000.
(iii) A businessman anticipates that it may not be possible to collect ₹50,000 from one of his debtors. Will he record this transaction in the books of accounts and at what value?
Ans: Yes, as a bad debt ₹50,000.
INTEXT QUESTIONS 3.5
Fill in the blanks with appropriate words:
(i) AS1 deals with __________.
Ans: Disclosure of accounting policies.
(ii) AS29 deals with __________.
Ans: Provisions, contingent liabilities and contingent assets.
(iii) AS26 deals with __________.
Ans: Intangible assets.
(iv) AS20 deals with __________.
Ans: Earning per share.
(v) AS21 deals with __________.
Ans: Consolidated financial statements.
(vi) AS22 deals with __________.
Ans: Accounting for taxes on income.
(vii) GAAP stands for __________.
Ans: Generally Accepted Accounting Principle.
(viii) Accounting Standard Board (ASB) was established __________.
Ans: April, 1977.
(ix) International Accounting Standard Committee was established __________.
Ans: 1973.
(x) AS2 deals with __________.
Ans: Inventory valuation.
| TERMINAL EXERCISE |
(a) Explain the convention of consistency with example.
Ans: The Convention of Consistency means that the same accounting principles and methods should be followed year after year while preparing financial statements. This helps in making the financial results of different years comparable and reliable. If accounting methods are changed frequently, correct comparison of financial statements becomes difficult.
Example:
If a business uses the Straight Line Method of depreciation for fixed assets, it should continue using the same method every year. Similarly, if closing stock is valued at cost or market price whichever is lower, the same method should be followed in future years.
This convention ensures uniformity and meaningful analysis of financial statements.
(b) Explain the accounting convention of conservatism with example.
Ans: The Convention of Conservatism is based on the principle “Anticipate no profit, but provide for all possible losses.” According to this convention, profits should not be recorded until they are actually realised, but all expected losses should be recognised immediately. The main objective is to avoid overstatement of profits and to protect the capital of the business.
This convention follows a policy of playing safe, especially in situations of uncertainty. Showing higher profits than actual may lead to payment of dividends out of capital, which is not desirable. Therefore, only minimum and realistic profit is shown in the accounts.
Example:
(i) Closing stock is valued at cost or market price whichever is lower.
(ii) Provision for doubtful debts is created to account for possible bad debts, even though the loss has not yet occurred.
Thus, the convention of conservatism ensures that financial statements present a true and cautious view of the business.
(c) What do you mean by accounting standards? Enumerate the accounting standards issued by the ASB from time to time.
Ans: Accounting Standards are written statements of uniform accounting rules, principles, and guidelines issued to ensure consistency, transparency, and comparability in financial statements. They provide a common framework for recording, measuring, and presenting accounting information.
In India, accounting standards are formulated and issued by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI).
The Accounting Standards issued by the ASB from time to time are as follows:
AS-1 Disclosure of accounting policies (January 1979). This standard deals with the disclosure of significant accounting policies in the financial statements.
AS-2 Valuation of Inventories (June 1981). This standard deals with the principles of valuing inventories for the financial statements.
AS-3 (Revised) Cash flow statement (June 1981, Revised in March 1997). This standard deals with the financial statement which summarises for a given period the sources and applications of an enterprise.
AS-4 Contingencies and events occurring after the Balance Sheet date (November 1982, Revised in April, 1995) This standard deals with the treatment of contingencies and events occurring after the balance sheet date.
AS-5 Net profit or loss for the period, prior period (period before the date of balance sheet) items and changes in accounting policies (November 1982, Revised in February 1997). This standard deals with the treatment in financial statement of prior period and extraordinary items and changes in accounting policies.
AS-6 Depreciation Accounting (November 1982). This standard applies to all depreciable assets. But this standard does not apply to assets in the category of forests, plantations and similar natural resources and wasting assets.
AS-7 Accounting for construction contracts (December 1983, revised in April 2003). This standard deals with accounting for construction contracts in the financial statements of contractors.
AS-8 Accounting for Research and Development (January 1985). This standard deals with the treatment of costs of research and development in financial statements.
AS-9 Revenue Recognition (November 1985). This standard deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise.
AS-10 Accounting for fixed assets (November 1991). This standard deals with recognition of fixed assets grouped into various categories, such as land, building, plant and machinery, vehicles, furniture and gifts, goodwill, patents, trading and designs.
AS-11 Accounting for the effects of change in foreign exchange Rates. (August 1991 and Revised in 1993). This standard deals with the issues relating to accounting for effect of change in foreign exchange rates.
AS-12 Accounting for Government grants (April 1994). This standard deals with the accounting for government grants.
AS-13 Accounting for investments (September 1994). This standard deals with accounting aspect concerning investments in the financial statements. These include classification, determination of cost for initial recognition, disposal and re-classification of investment.
AS-14 Accounting for amalgamation (October 1994). This standard deals with accounting treatment of any resultant goodwill or reserves in amalgamation of companies.
AS-15 Accounting for retirement Benefits in the financial statements of employers (January 1995). This standard deals with accounting for retirement benefits in the financial statements of employers.
AS-16 Borrowing Costs (April 2000). This standard deals with the uses involved relating to capitalization of interest on borrowings for purchase of fixed assets.
AS-17 Segment reporting (October 2000). This standard applies to companies which have an annual turnover of `50 crores or more. These companies have to present segment wise financial statements and consolidated financial statements.
AS-18 Related party disclosures (October 2000 revised 1st July 2003). This standard requires certain disclosure which must be made for transactions between the enterprise and related parties.
AS-19 Leases (January 2001). This standard deals with the accounting treatment of transactions related to lease agreements.
AS-20 Earning per share (April 2001). This standard deals with the presentation and computation of earning per share (EPS).
AS-21 Consolidated financial statements (April 2001). This standard deals with the preparation of consolidated financial statements with an intention to provide information about the activities of a group.
AS-22 Accounting for taxes on Income (April 2001). This standard deals with determination of the account of tax expenses for the related revenue.
AS-23 Accounting for investments in Associates in consolidated financial statements (July 2001). This standard deals with the principles and procedures to be followed for recognising, in the consolidated financial statement.
AS-24 Discontinued operations (February 2002). This standard deals with the principles of discontinuing operations of an enterprise with the activities which are continuing.
AS-25 Interim financial reporting (February 2002). This standard deals with the minimum content of interim financial report.
AS-26 Intangible Assets (February 2002). This standard prescribed the accounting treatment for intangible assets which are not covered by any other specific accounting standard.
AS-27 Financial reporting of interest for joint venture (February 2002). This standard sets principles and procedures for accounting for interest in joint venture.
AS-28 Impairment of Assets (2004). This standard prescribed procedures to ensure that an asset is carried at no more than its carrying amount and procedures as to when to recognise an asset as impaired.
AS-29 Provision for contingent labilities and contingent assets (2004). This standard deals with measurement and recognition criteria in three areas, namely provisions, contingent liabilities and contingent assets.
All the above standards issued by the Accounting Standards Board are recommended for use by companies listed on a recognized stock exchange and other large commercial, industrial and business enterprises in the public and private sectors.
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