Page 17 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes The IFRS is full of words and phrases that are open to interpretation. The accompanying
table has a selection of the probabilities in IFRS literature that a user is expected to interpret
in the context of understanding what an accounting standard requires.
Ian Wright also identifies other issues that are potentially problematic.
The IFRS literature contains an increasing range of technical terms which don’t translate
well into languages other than English. Also, the standards were written in different eras
and sometimes by individual national standard-setters due to which the usage of the
English language differs resulting in them being structured in disparate ways.
One can therefore see the potential hazards in interpreting a principle-based accounting
standard that contains highly subjective phraseology.

In this context, one can expect problems of interpretation in India also. For instance, the
word “shall” (a key word in accounting standards) is used in a manner that is completely
different from its usage in countries where English is the mother tongue. Any user of IFRS
would therefore need to be alive to these issues when interpreting IFRS.
Hint: The preparation of financial statements in accordance with the GAAP in a rule-based
environment.
Source: www.thehindubusinessline.com

1.6 Basic Accounting Terms

The terms, which are generally used in the day-to-day business, are called accounting
terminology. So it is very much necessary to know all the terms properly. Some of the terms
which are frequently used are given below:
1. Capital: It is the money invested by the owner of the business. It is also known as owners’
equity or as net worth. It is the total assets minus the liabilities. In other words, excess of
assets over liabilities is termed as capital. As we know that business is considered as a
separate entity, hence capital introduced by the owner is also considered as liability for
the business. This can be shown in an algebraic way as follows:

Capital = total assets – total liabilities
2. Assets: Assets are the things/properties of value used by the business in its operations. In
other words, anything by which the firm gets some benefit, is termed as asset. According
to Finny & Miller, “Assets are future economic benefits, the rights which are owned or
controlled by an organization or individual” whereas Kohler in Dictionary for Accountants
says “Any owned physical object (tangible) or right (intangible) having economic value
to the owner is an asset. The Institute of Chartered Accountants of India defines assets as,
“tangible objects or Intangible rights owned by an enterprise and carrying probable
future benefits”. Thus, it is clear from the above definitions that an asset must have future
economic benefit which must be controlled by an enterprise. The assets may be broadly
classified as fixed assets and current assets:

(i) Fixed Assets are the assets which are purchased for the purpose of operating the
business and not for resale such as land and building, plant and machinery and
furniture, etc.
(ii) Current Assets are the assets which are kept for short-term for converting into cash
or for resale such as unsold goods, debtors, bills receivable, bank balance, etc.

3. Liability: It may be defined as currently existing obligations which a business enterprise
requires to meet sometime in future. According to Finny and Miller, “Liabilities are debts,

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