Page 160 - DCOM409_CONTEMPORARY_ACCOUNTING

Unit 13: Critical Evaluation of Principles and Practices

Assets (Industrial Washing Machine), ` 1 lac = Liabilities + Owner’s Equity, ` 1 lac Notes
Ms. Sharda borrows another ` 3 lacs from the bank for buying a shop. This will change her
accounting records in two ways:

1. It would show ` 3 lacs increase in cash on the asset side, and
2. On the right hand side, it would show a liability of ` 3 lacs, which is the bank’s claim
against the asset.

Cash = ` 3 lacs Owner's equity = ` 1 lac
Machinery = ` 1 lac Bank loan = ` 3 lacs
Total Assets = ` 4 lacs Total liabilities = ` 4 lacs + Owner's Equity
There is no conceivable way that a transaction can result in only a single change in the accounts.
There is another system where only a single entry is maintained for every transaction but
companies cannot use this system in India, as the Companies Act does not allow it.

13.2.6 The Accounting Period Concept

Accounting measures activity for a specified interval of time, usually a year. Net income is easy
to measure if you are only dealing once but the company deals constantly and we expect the
company to continue forever (remember going concern principle). Therefore, it becomes difficult
to find out whether the business is earning anything or not. Both the managers and external
users are unwilling to wait for the closure of the business to know how the business has fared.
They need to know how things are going in the business at frequent intervals. This leads to the
accounting period concept. The first author of a known accounting text, Pacioli, wrote in 1494;
“Books should be closed each year, especially in a partnership, because frequent accounting
makes for long friendship.” Therefore, the books of the organisation are closed at regular
intervals (usually a year) and the financial statements prepared for reporting purposes. The
Companies Act also requires that a report should be prepared annually for reporting purposes
and income tax reporting is also on an annual basis.
In India, the majority of the businesses follow ‘April 1—March 31’ (April of this year and March
of next year) as the accounting year (also known as fiscal year) but many businesses also use
calendar year as the accounting year, especially the multinational companies. This is because its
makes it easier for them to club the result of their activities with the parent companies overseas
which normally use calendar year as the accounting year. Still, they have to prepare and report
to income tax authorities following the ‘April 1– March 31’ accounting year. The accounting
period for shareholder reporting purposes could be more or less than one year but for taxation
purposes it remains the same.

For internal reporting, there is no time period specified anywhere. Companies can use any
period that they want to as computerisation have made it easier for them to take out accounting
reports as and when required. Still, many of the companies, which are not dependent on the
computers, commonly use a month as the reporting period. SEBI requires that the companies
that are listed on the stock exchanges should issue quarterly income statements for the benefit of
the external users.

13.2.7 The Conservatism Concept

Anticipate no profits but provide for all possible losses. Like most humans, managers have a
tendency to give a favourable report of the working of the entity that is under them. Accounting
safeguards are designed to offset this natural tendency of optimism. The idea behind this principle
is that the recognition of increase in entity’s earnings requires better evidence then does the

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