Accounting Standards I AS - 1 I Disclosure of Accounting Policies I Hasham Ali Khan I
Summary
TLDRIn this educational video, Hashem Ali Khan delves into Accounting Standard 1, focusing on the critical aspect of disclosing accounting policies. He explains the significance of these policies in shaping financial statements and their impact on an organization's financial presentation. Khan emphasizes the necessity for transparency to enable accurate financial statement interpretation and comparison across different entities. He outlines the fundamental accounting assumptions, such as the going concern, consistency, and accrual, which underpin financial reporting. The video also touches on the selection criteria for accounting policies, influenced by prudence, substance over form, and materiality, concluding with guidelines for the disclosure of accounting policies in financial statements.
Takeaways
- 😀 The video is part of a series on accounting standards, specifically focusing on unit two which delves into the details of accounting standard one (AS1) - Disclosure of Accounting Policies.
- 📚 AS1 is crucial for understanding the financial statements as it outlines the specific accounting principles and methods applied by an enterprise.
- 🔍 The purpose of AS1 is twofold: to enhance the comprehensibility of financial statements and to enable meaningful comparison across different organizations' financial statements.
- 🏢 Fundamental accounting assumptions such as the going concern, consistency, and accrual are underlying principles that do not require explicit disclosure unless not followed.
- 📈 Accounting policies can vary widely and are influenced by the nature of the business, its transactions, and specific circumstances, necessitating management's prudent selection.
- 🛠️ Different methods for accounting treatments, like depreciation, inventory valuation, and goodwill calculation, are examples where enterprises might adopt varying policies.
- 📋 Disclosure of accounting policies is mandatory for all significant ones used in financial statement preparation and should be clearly stated in the notes to the accounts.
- 🔄 If a change in accounting policy occurs, its material impact on the current or future financial periods must be discussed, or if uncertain, this uncertainty should be disclosed.
- 📝 The video emphasizes the importance of a careful and concentrated viewing to grasp the intricacies of accounting standards, suggesting the audience to take screenshots of key points for reference.
- 🔮 The next video in the series will continue the exploration of accounting standards, moving on to accounting standard two.
Q & A
What is the main focus of the video by Hashem Ali Khan?
-The main focus of the video is to explain Accounting Standard 1, which deals with the disclosure of accounting policies.
Why is the disclosure of accounting policies important according to the video?
-The disclosure of accounting policies is important because it promotes a better understanding of the financial statements and facilitates meaningful comparison of financial statements between different organizations.
What are the three fundamental accounting assumptions that every business organization must follow?
-The three fundamental accounting assumptions are the going concern, consistency, and accrual.
What does the 'going concern' assumption imply in accounting?
-The 'going concern' assumption implies that the business is expected to continue operating for the foreseeable future and is not expected to be liquidated or cease operations in the near term.
What is the significance of the 'consistency' principle in accounting?
-The 'consistency' principle in accounting requires that once an accounting method is adopted, it should be consistently applied from one period to another, ensuring uniformity in financial reporting.
How does the 'accrual' concept affect the preparation of financial statements?
-The 'accrual' concept requires that all incomes and expenses related to the current period be recognized, regardless of whether the income is received or the expense is paid, ensuring that financial statements reflect the true financial performance of the period.
What are some examples of different accounting policies that can be adopted by an enterprise?
-Examples of different accounting policies include methods of depreciation, valuation of inventories, calculation of goodwill, and treatment of contingent liabilities.
What are the factors that influence the selection of an accounting policy according to the video?
-The factors that influence the selection of an accounting policy include the need to present a true and fair view of the financial statements, prudence, substance over form, and materiality.
What should be done if a business needs to change its accounting policy?
-If a business needs to change its accounting policy, the impact of the change on the current period's income or expected future periods should be disclosed.
What is the purpose of disclosing accounting policies in the notes to the accounts?
-The purpose of disclosing accounting policies in the notes to the accounts is to provide transparency and allow users of the financial statements to understand the basis on which the financial statements are prepared.
Why might a business not need to disclose certain fundamental accounting assumptions?
-A business might not need to disclose certain fundamental accounting assumptions like going concern, consistency, and accrual if they are being followed; disclosure is only required if these assumptions are not followed.
Outlines
📚 Introduction to Accounting Standards
Hashem Ali Khan introduces the second unit on accounting standards, focusing on Accounting Standard 1 (AS1) which deals with the disclosure of accounting policies. He summarizes the content of the first unit, which covered the meaning, objectives, advantages, and limitations of accounting standards, the process of formulating these standards, a list of standards issued by ASB, and the need for conversion of Indian accounting standards to IFRS. The speaker emphasizes the importance of understanding AS1 for examinations, as it requires explaining the disclosure of accounting policies and their significance in financial statement preparation.
🔍 Purpose and Importance of Accounting Policies
The paragraph delves into the purpose of AS1, which is to enhance the understanding of financial statements by disclosing the accounting policies adopted. It explains that without such disclosure, users cannot comprehend the basis of financial statements. The speaker also discusses the necessity for consistency in accounting policies for meaningful comparison between different organizations' financial statements. Fundamental accounting assumptions such as the going concern, consistency, and accrual are introduced, noting that these are usually not disclosed as they are assumed to be followed unless a business explicitly states otherwise.
📈 Nature and Selection of Accounting Policies
This section discusses the nature of accounting policies, which are specific principles and methods adopted by an enterprise for financial statement preparation. It highlights that there is no single list of applicable accounting policies as they vary based on business circumstances and transactions. The speaker provides examples of different accounting policies in areas such as depreciation methods, inventory valuation, and goodwill calculation. The management's responsibility in selecting an appropriate accounting policy is emphasized, with factors influencing the selection including the nature of the business and its transactions.
📋 Factors Influencing Accounting Policy Selection
The speaker outlines the factors that should be considered by management when selecting an accounting policy. These include ensuring that financial statements present a true and fair view of the enterprise's state of affairs, adhering to the principles of prudence, substance over form, and materiality. Prudence involves recording expected losses but not gains, substance over form prioritizes the economic substance of transactions over legal form, and materiality requires the separate disclosure of significant items in financial statements.
🗒️ Disclosure Rules for Accounting Policies
The final paragraph focuses on the rules for disclosing accounting policies as per AS1. It states that all significant accounting policies must be disclosed in the notes to the financial statements, which should be an integral part of those statements. The disclosure should be consolidated in one section, and any changes in accounting policies that have a material impact on the current or future periods must be discussed. If the impact of a change in policy cannot be determined, this fact must be disclosed. Lastly, it mentions that while specific disclosure of fundamental accounting assumptions like going concern, consistency, and accrual is not required if they are followed, deviation from these requires disclosure.
Mindmap
Keywords
💡Accounting Standards
💡Disclosure of Accounting Policies
💡Financial Statements
💡Accounting Policies
💡Fundamental Accounting Assumptions
💡Going Concern
💡Consistency
💡Accrual
💡Materiality
💡Prudence
💡Substance Over Form
Highlights
Introduction to Unit 2 on Accounting Standards by Hashem Ali Khan.
Explanation of Accounting Standard 1: Disclosure of Accounting Policies.
Importance of disclosing accounting policies for financial statement users.
Definition of accounting policy and its role in financial statement preparation.
Impact of different accounting policies on financial statement figures.
Purpose of Accounting Standard 1: To promote better understanding and facilitate comparison.
Fundamental accounting assumptions that underlie financial statement preparation.
Clarification on the disclosure requirement of fundamental accounting assumptions.
Nature of accounting policies and their dependence on business circumstances.
Examples of different accounting policies in areas like depreciation and inventory valuation.
Responsibility of management in selecting appropriate accounting policies.
Factors influencing the selection of accounting policy: Prudence, Substance over Form, and Materiality.
Final rules for the disclosure of accounting policies in financial statements.
Requirement to disclose significant accounting policies and their placement in financial statements.
Guidance on disclosing changes in accounting policies and their material effects.
Instructions for disclosing when the impact of a change in accounting policy cannot be ascertained.
Disclosure requirements for fundamental accounting assumptions if not followed by the enterprise.
Conclusion and预告 of the next video on Accounting Standard 2.
Transcripts
hello viewers so welcome to my channel I
am Hashem Ali Khan
now I am going to start the unit number
two in the subject accounting standards
the last unit number one four videos I
have completed the first video regarding
the meaning of accounting standard
objective advantages and limitations in
the first video second video what is the
process of formulation of accounting
standards what are the complete steps
required in formulating the accounting
standards then I have explained about
the list of accounting standards issued
by ASB and last fourth video I have
explained about the need for conversion
conversion of Indian accounting standard
with the IFRS what are the benefits of
this conversion
so all these things I have already
explained in the first unit now I'm
going to start unit number two in this
unit a number of accounting standards
I'm going to explain first of all in
this video accounting standard one that
is disclosure of accounting policies
that I am going to explain in the
complete video
in examination you will be asked to
explain accounting standard one
disclosure of accounting policies then
you have to write all these points I
have written the important points on the
board and I'll explain each and every
point in detail so watch the video till
the end don't skip in between
have some patience if you watch the
video with full concentration
with full interest then definitely you
can get a lot of command on this topic
of accounting standards take the
screenshot of the points which I have
written on the board then I'll explain
all the points
now as1
accounting standard one the title of
this accounting standard is
closure of accounting policies
what are the accounting policies the
first of all we'll discuss what do you
mean by accounting policies
accounting as one deals with disclosure
of accounting policies followed in
preparing and presenting the financial
statements
and preparing the financial statements
in number of policies principles have to
be adopted then what are the policies
principles adopted in preparing the
financial statement that should be
disclosed
if they are not disclosed the user
cannot be able to understand on what
basis the financial statements are
prevent that is the purpose of this as
one now accounting policies what is the
meaning of the term accounting policy
accounting policy refers to the specific
accounting principles
adopted by the Enterprise and the
methods of applying those principles in
the preparation and presentation of
financial statements the first line I
have given the meaning of the term
accounting policy
accounting policy of the specific
accounting principles which are adopted
by an Enterprise while preparing and
presenting the financial statement those
accounting principles are called
accounting policies now disclosure of
accounting policy are important as
different accounting policy can result
in different amount being presented in
the financial statements the different
policies will give different amounts
when different amounts are taken in the
financial statements the income the
profitability the position will change
that means the values in financial
statements depends on the treatment of
the accounting policy Which accounting
policy we have applied on that basis the
amount will depend
next also different organization may
follow different policies and comparison
of financial statements of two
organization will not be meaningful
see we don't have a single one method of
accounting policy we have different
methods of accounting policy
some follows one method the other
business will follow another method so
when different businesses follow
different accounting policies then
definitely the financial statements will
show different amounts
then what will happen we cannot be able
to make the comparison
comparison will be different will be
difficult because different
organizations are following different
policies
then is clearly by the user accounting
policies are normally disclosed in notes
to the accounts
whenever we prepare the financial
statements we will we should have some
notes in those notes two final accounts
in those notes we have to specify what
are the accounting policies we have
adopted while preparing the financial
statements
these are the basic points you have to
write next one is purpose why this
accounting standard one disclosure of
accounting policies is made what is the
purpose the first purpose is to promote
better understanding of the financial
statements
so when we clearly disclose what
accounting policy we have adopted then
understandability of financial statement
will increase the user of financial
statement can easily understand the
financial statements if he is provided
the method the policies then secondly to
facilitate meaningful comparison of the
financial statements of different
organizations nowadays in order to check
whether our business is going better or
not we have to compare our performance
with the competitors performance the
other organization's performance the
comparison is possible
only
when both the businesses follow the same
method of accounting or same accounting
policies simple example if you want to
compare the height of two persons both
should stand on the same platform if one
person is standing on the ground and
another person is standing on the chair
can we be able to compare prudently
compare the height no because both are
not standing on the same ground
similarly when we compare two
organization's performance both
organizations must follow the same
accounting policies
so to facilitate comparison we need to
disclosure of accounting policies so
these two are the purpose now
fundamental accounting assumptions
some accounting assumptions are there
which are fundamental basic every
business organization must follow those
fundamental accounting assumptions what
are those now I am going to explain
certain fundamental accounting
assumption underlie the preparation and
presentation of financial statements
whichever organization whenever they
make the financial statements they have
to follow
some basic fundamental accounting
assumption every business organization
must follow those assumptions and they
are usually not stated because they are
acceptance and usage are assumed
fundamental accounting assumptions need
not be disclosed the business should not
declare that we are following this
fundamental accounting assumption no
it is assumed that every business is
following certain fundamental accounting
assumption huh if it is not following
then it has to specify that our business
is not following the fundamental
accounting assumption if following no
need of disclosure
because accounting standard one requires
that an organization which is not
following this assumption must disclose
the fact to all its stakeholders
if they are not following then only it
has to declare disclose otherwise if the
organizations are following no need to
declare so what are those fundamental
accounting assumptions
there are three fundamental accounting
assumptions they are going concern
consistency and accrual these three are
called fundamental accounting
assumptions which every Enterprise will
follow and it is not required to be
disclosed it is understood assumed
her first one going concern concept
according to going concern concept the
accounting should view should imagine
should assume that this business is
going to continue for a long period of
time there is neither the necessity nor
the intention of the owner to stop the
business the business is not going to be
stopped in the very near future the
business is going to continue for a long
period of time that is the assumption on
that assumption only the accounting is
made secondly consistency consistency
means uniformity whatever accounting
methods practices We are following the
same method should be continued from one
year to another year
method should not be changed
once a method is adopted the same method
should be continued that is consistency
huh if the method is changed then
disclosure is required accrual
according to a cruel concept all the
incomes and expenditure relating to the
current period should be taken whether
the income is received or not whether
the expenditure is paid or not all the
incomes and expenditure relating to the
current year only should be considered
for that purpose only any outstanding or
prepaid should be adjusted
the outstanding expenditure should be
added similarly the prepaid expenditure
should be deducted
outstanding income should be added
income received in advance should be
deducted so all these adjustment we are
making because we have to follow a cruel
system
so these three are called fundamental
accounting assumptions
now nature of accounting policies
so accounting policy refer to the
specific accounting principles and
methods of those principles adopted by
the Enterprise in the preparation and
presentation of financial statements
already in the beginning I told you
about the meaning of the term accounting
policy
it refers to specific accounting
principles which are adopted by an
Enterprise
while preparing and presenting the
financial
statements now there is no single list
of accounting policy which are
applicable in all circumstances remember
there is no exhaustive list of all the
accounting policy we have innumerable
accounting policies
now the accounting policy depends on the
circumstances on the nature of the
business on the nature of the
transactions then this is because
different organizations operate in
different situations
the nature of business is different the
method of running the business is
different so we cannot say the same
accounting policy will be adopted by
every business organization simply we
can say a doctor cannot prescribe the
same medicine for every patient because
every patient is different one the
nature of disease of every patient is
different so how the doctor can be able
to prescribe the same medicine no it
differs same is the case with accounting
policy the nature of the business is
different the needs of the transaction
is different
so there are we are innumerable
accounting policies now it is a
responsibility of the management to
select an appropriate accounting policy
ultimately
it depends on the management to select
and appropriate accounting policy for
our business now some of the examples
were different accounting policies now
what are the areas or what are the
transactions on which we have different
accounting policies
first example is method of depreciation
you might be knowing that depreciation
we have different methods called
straight line method diminishing balance
method annuity method sinking fund
methods sum of digits number method
and machine or method revaluation method
different methods of depreciation are
there
so we cannot say always straight line
method is good or not always diminishing
balance method is good
now it depends on the nature of the
business
so we have different options available
for valuation for methods of
depreciation similarly valuation of
inventories we can value the inventory
at cost basis or market value basis or
whichever is lower basis the different
methods of accounting are there for
valuation of inventory similarly
valuation of Goodwill how to calculate
the Goodwill of a business we have
different methods average price method
super price method capitalization method
so many methods are there every method
will give you a different amount of
Goodwill next one is validation of
Investments then valuation of fixed
assets treatment of contingent
liabilities few examples I have given
where we don't have a single method we
have different types of method the
business has to select the management
has to select any one of the method of
accounting and same method should
consistently be adopted every year
that's all now factors influences in
selection of accounting policy just now
I told you the management is responsible
for selecting an appropriate accounting
policy now on what basis he has to
select it does not depend on the will of
the management some factors should be
considered while selecting the
accounting policy so what are the
factors first of all the primary
consideration in selection of accounting
policy should be to prepare and present
financial statement in such a way that
they represent a true and Fair View of
the State of Affairs of the Enterprise
the only thing to be remembered by the
management is while selecting the
accounting policy the policy should be
such that
the financial statements should show the
true and Fair View of the State of
Affairs of the business that means the
financial statement consists of profit
and loss account
the profit and loss account should show
the true profit earned during the year
similarly the statement of financial
position that is called balance sheet
the balance sheet must show the true
financial position as on the last date
so keeping in mind that the financial
statement should show the true and Fair
View we have to select an appropriate
accounting policy
the management of each Enterprise must
select appropriate accounting policy
keeping in view of the three major
consideration
three major considerations the
management must keep in view
considering these three factors
then only we have to select an
appropriate accounting policy what is
the first Factor the first factor is
prudence
the meaning of prudence is record all
expected losses but don't record any
expected gain
the accountant should be prudent in
recognizing the income and expenditure
The Profit should not be overstated
neither The Profit should be understated
that means all expected losses and
expenses should be recorded
but any expected gain should not be
recorded that is according to Prudence
next second one is substance over form
this is the second consideration to be
kept in Mind by the management in
selecting an appropriate accounting
policy substance overfall the accounting
treatment and presentation of
transaction and even should be governed
by the substance and not merely by the
legal form
that means while deciding which policy
we are to adopt the management must go
into the substance of the transaction
the management simply should not depend
on merely the form legal form third
materiality
financial statements should disclose all
material items separately it should not
be clubbed with any other item simply
all significant items or material items
should be separately disclosed so these
three considerations
the management must take into account
while deciding the accounting policy
first one Prudence second substance over
form and third one is materiality that's
it now next thing is disclosure of
accounting policy the last topic of this
video in this uh as1 is the disclosure
of accounting policy the final rules for
disclosure of accounting policy first of
all
all significant accounting policy
adopted in the preparation of financial
statement should be disclosed first
point
in examination you must write these
final points these six points the first
final Point all significant accounting
policies adopted by the Enterprise in
preparing the financial statement should
be disclosed
should be disclosed in the notes
secondly such a disclosure should be
part of financial statements
that means whatever disclosure you are
making in the notes that note should be
a part of the financial statements
thirdly they shouldn't be disclosed at
one place
all the accounting policies should be
placed at one at one point it should not
be scattered then any change in the
accounting policy which has a material
effect in the current period or which is
expected to have a material effect in
later period should be discussed
if a business is required to change the
accounting policy
that means the circumstances are such
that the management has to change it
then what this as one says as1 says if a
business wants to change the accounting
policy then what would be the impact of
this change on the income of the current
year
or what it will have the change in the
future expected future years what is the
effect of the change in the accounting
policy
the next fifth point is the impact of
the change in policy cannot be
ascertained
if the impact if the impact of the
change in accounting policy cannot be
ascertained it is not us it cannot be
ascertain then in that case a fact
should be given that the impact of the
change is unassertainable
it cannot be asserted that fact should
be written in the disclosure then last
one if the fundamental accounting
assumption namely going concern
consistency and accrual are followed in
financial statements specific disclosure
is not required if they are not followed
then disclosure is required
certain fundamental accounting
assumptions like the fundamental
accounting assumptions like going
concern consistency and accrual these
three fundamental accounting assumptions
if it is followed no need to disclose
no need to write that we are following
going concern We are following
consistency We are following accrual no
need to disclose huh if a business is
not following those fundamental
accounting assumption then it has to be
disclosed that's all so I have explained
all the points regarding as1 accounting
standard one disclosure of accounting
policy in the next video I'll start the
next accounting standard that is
accounting standard two
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