Accounting System and Accounting Standards

Accounting System and Accounting Standards

There are two types of systems in accounting to record transactions in the books of accounts. These are Double entry system and Single entry system. In double entry system the principle of Dual Aspect is applicable which states that every transaction has two effects i.e. receiving a benefit from others or giving a benefit to others. There are two or more accounts are involved in double entry system and are recorded in different ledger accounts. According to this principle every debit must have its corresponding credit. If an account is debited, the other account must be credited.

The system of double entry is accurate and competes as both the aspects of a transaction are recorded in the books of accounts. This system is more reliable as there are less possibility of frauds and mis-appropriations. While preparing trial balance the arithmetic inaccuracies in accounting records can be checked. Double entry system can be implemented in big as well as in small businesses.

Single entry system is not a complete and accurate system to record financial transactions. Two- fold effect of every transaction cannot be recorded under this system. Only personal accounts and cash book can be maintained as per single entry system. This system can be implemented by small organizations as it is flexible and simple but is not completed and systematic.

Basis of Accounting

There are two broad approaches to accounting according to the timing of recognition of revenue and expenses or cost. These main approaches are:

  • Cash Basis
  • Accrual Basis

Cash Basis of Accounting

Cash basis refers to the recording of transactions in the books of accounts when cash is paid or received and not when the receipt or payment becomes due. For example if office expenses like electricity bill due for January and paid in February, this would be recorded in the books only in the month of February.

Accrual Basis of Accounting

In accrual basis of accounting the revenue and the costs of a business are recognized for a period in which they are occur either paid or unpaid. A difference is made between receipts of cash and cash to be received and payment of cash and cash to be paid. Under this system the effects of a transaction in monetary values are recorded in the period in which they are occurred rather than in the period in which payment or receipt has been made. Accrual basis of accounting is more appropriate for calculations of profit and losses which must be matched against the revenue earned during the period.

Accounting system and Accounting Standards

The written policy documents which covers the aspects of recognition, measurement, accounting treatment, presentation of accounting information and presentation of accounting transactions in financial statements for an accounting period. ICAI is a professional body of accounting in India and accounting standards is a legal or authoritative statement issued by ICAI. Accounting standards refers to the policies, norms of valuation and disclosure of data and information in order to enhance the reliability of financial statements.

Need of Accounting Standards

Because the information generated through the financial statements is disclosed to its internal and external users for decision making, the accuracy and uniformity of the information is very important. Accounting standards facilitates many other alternate valuation norms and accounting treatment which can be used by any business to maintain the quality financial statements.

Characteristics of Accounting Standards

Accounting standards may help to compare financial statements of inter and intra companies. It may call for disclosure of the relevant information which may not required by law but may be useful for its users like general public, creditors and investors. Accounting standards are helpful to get rid of many variations in accounting treatment to prepare financial statements of a business.

Limitations of Accounting Standards

There are choices between different alternate accounting treatments which are difficult to apply. As there is no guidelines are provided in accounting standards to make appropriate choices between alternatives, it is very hard to choose the appropriate alternative. For examples if stock is valued by LIFO, FIFO and Weighted average methods, choosing between these methods is very hard. Accounting standards have to be framed as per laws prevailing and cannot over ride the statue or laws which can limit the scope of best policies as per situation.

Accounting standards are applicable to all the commercial, industrial and business entities like Sole Proprietorship firms, Partnership firms, Societies, Trusts, HUF (Hindu Undivided Family), Association of Persons, Companies, and Cooperative Societies etc. These accounting standards are not applicable on charitable organizations which are purely charitable and do not have any of the above commercial and industrial activities. To know more details of Accounting standards Click Here

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