Accounting Principles & Standards

Accounting Principles and Standards form the bedrock of financial record-keeping in banking and commerce. For the JAIIB exam, a thorough understanding of accounting concepts, conventions, and the regulatory framework governing accounting standards in India is essential. This topic covers the fundamental principles that guide how transactions are recorded, reported, and interpreted.

1. Business Entity Concept

The business is treated as a separate entity from its owner(s). Personal transactions of the owner are excluded from the books of the business. Owner's capital is treated as a liability of the business (what the business owes to the owner).

2. Going Concern Concept

The business is assumed to continue operating indefinitely — it is not expected to be liquidated in the near future. This concept justifies:

• Recording fixed assets at historical cost (not liquidation value)
• Treating prepaid expenses as assets (they will benefit future periods)
• Deferring certain expenses over multiple periods

3. Historical Cost Concept

Assets are recorded at the price actually paid to acquire them, regardless of their current market value. The cost includes all expenses incurred to bring the asset to a usable condition (purchase price + transport + installation).

Example: If machinery is purchased for Rs 4,00,000 with Rs 50,000 transport and Rs 25,000 installation (trade discount Rs 10,000), the capitalised cost = Rs 4,00,000 + Rs 50,000 + Rs 25,000 - Rs 10,000 = Rs 4,65,000. Maintenance costs are NOT capitalised.

4. Money Measurement Concept

Only transactions that can be expressed in monetary terms are recorded. Events like employee morale or brand reputation, though valuable, cannot be recorded.

5. Dual Aspect Concept

Every transaction has two aspects — a debit and a credit of equal amount. This leads to the fundamental accounting equation:

Assets = Liabilities + Owner's Equity

Convention of Conservatism (Prudence)

• Recognise future losses but NOT future gains
• Closing stock is valued at cost or net realisable value, whichever is lower
• Provision for bad and doubtful debts is created even when exact amount is unknown

Convention of Consistency

• Accounting methods should remain uniform from year to year
• Changes in method should be disclosed and justified

Convention of Materiality

• Only significant items that can influence decisions need to be disclosed separately
• Immaterial items can be aggregated

Convention of Full Disclosure

• Financial statements must disclose all material information to users
• Supports transparency and informed decision-making

Revenue is recognised when it is realised (i.e., when goods are delivered or services rendered), not when cash is received. This is distinct from:

• Accrual Concept: Revenue and expenses are recorded when earned or incurred, regardless of cash flow
• Matching Concept: Expenses are recognised in the same period as the revenue they help generate

Example: Salaries for March 2025, paid in April 2025, are recorded as an expense in March under the accrual/matching concept.

Accounting Standards in India are issued by the Accounting Standards Board (ASB) of ICAI (Institute of Chartered Accountants of India).

Key Standards for Banking:

Ind AS (Indian Accounting Standards)

• Converged with IFRS (International Financial Reporting Standards)
• Ind AS-1 requires complete financial statements to include: Statement of Financial Position, Statement of Profit and Loss, Statement of Changes in Equity, Cash Flow Statement, and Notes
• An auditor's declaration certificate is NOT a required component of financial statements under Ind AS-1

Cash Flow Statement (AS-3)

Cash flows are classified into three activities:

• Operating Activities: Day-to-day business operations
• Investing Activities: Purchase/sale of long-term assets (e.g., purchase of machinery)
• Financing Activities: Raising/repaying capital (e.g., issuing shares, dividend payments)

Note: Interest paid can be classified under operating or financing; dividends paid under financing.

Funds Flow vs Cash Flow Statement

Example (WDV): Asset cost Rs 4,00,000, WDV rate 15%

• Year 1: Rs 4,00,000 x 15% = Rs 60,000
• Year 2: Rs 3,40,000 x 15% = Rs 51,000

Principal Books of Account (Banking Regulation Act)

• General Ledger (including Loan Ledger, RD Ledger, Investment Ledger)
• Profit and Loss Ledger
• Subsidiary books reduce workload by segregating recurring transactions

Subsidiary Books

• Cash Book, Purchase Book, Sales Book, Bills Receivable Book, Bills Payable Book, Journal Proper
• They do not replace ledgers and journals — they classify and segregate data for easier posting

Petty Cash Book

• Handles minor day-to-day expenses like postage, conveyance, stationery
• Operates on the imprest system — a fixed amount is given, and only the spent amount is replenished

• Business Entity Concept: Business and owner are distinct; personal transactions excluded
• Going Concern justifies treating prepaid insurance as an asset
• Historical Cost: Assets recorded at acquisition price, not market value
• Conservatism: Recognise anticipated losses, NOT anticipated profits
• Accrual Concept: Record when earned/incurred, not when cash moves
• Matching Concept: Match expenses to the revenue they generate
• Realisation Concept governs revenue recognition
• Accounting Standards in India are issued by ASB of ICAI
• AS-3 classifies cash flows into Operating, Investing, and Financing
• WDV method does NOT follow straight-line reduction
• Capitalised cost includes purchase + transport + installation, but NOT maintenance
• Subsidiary books segregate recurring transactions to reduce workload
• Funds Flow tracks working capital changes; Cash Flow categorises by activity type