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 - Definition
A 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 records

To protect business properties
To ascertain profit or loss
To ascertain the financial position of the
business
To facilitate rational decision making

Functions of Accounting
Recording:
Basic function of accounting.
Record all transactions that are financial character
In an chronological order.
Classifying:
Concerned with systematic analysis of recorded facts.
Done in the book called Ledger
Ledger 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 endusers i.e. trial balance, income statement, balance sheet

Analyzing
It 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.
1.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 accounts

Debit what comes in
Credit 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 accounts

Debit all expenses and losses
Credit 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 concept

Going concern concept
Money measurement concept
Cost concept
Dual aspect concept
Accounting period concept
Matching concept
Realization concept

Conservatism
Full disclosure
Consistency
Materiality

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

Conservatism
Full disclosure
Consistency
Materiality

Conservatism
Convention 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 Disclosure
Full Disclosure
The accountant should attach only those important materials
details and avoid those insignificant. Otherwise, accounting
will be over burdened with minute details.

Materiality
All 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.
Consistency
The 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 method
The 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

1.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 Accounting

Human 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
efficiency of human resource.

other factors depends upon the

Need for Human Resource Accounting

Internal

Need for the owners and

Board of Directors.
Employees

Internal

Customers
Creditors
Banks
Financial
institutions
Government

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
management.

effectively the use of human resources by the

To have an analysis of the human

are conserved, depleted or appreciated.

assets i.e. whether such assets

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.