Accounting Standards in India – Simple Explanation - Part one (AS 1 to AS 4 )

After becoming Indian Accounting standard board as the prime authority for making Indian Accounting Standard in 1977, it made Indian Accounting Standards in 1979. These are also called Indian GAAP. This board also made many amendments in these Accounting standards. I have already made AS 1 to AS 32 content list in General Accepted accounting principles (GAAP) article. But I could not write its simple explain. So, today, this tutorial is just simple explanation of Accounting Standard especially for students who are doing chartered Accountancy in India and accountants who is practising accounting profession in India .




1. Accounting Standard 1(AS 1)

(Disclosure of accounting policies)


This accounting standard guides to company accountants for making their companies financial statements. After making financial statement, it should disclose all financial information of business because business of company is not the business of one man. It is also duty of accountant to make and disclose also extra accounting policy if company is using different depreciation, stock and investment valuation method. This accounting standard is made also for public interest and providing them full financial information. After they can take the decision of investment by purchasing the shares of company from stock exchange.



2. Accounting Standard 2 ( AS 2 )

(Valuation of Inventories)
This accounting standard is very helpful to calculate the value of inventories. ASB comprise all stocks which is purchased for sale or production in inventories.

Value of stock is not fixed by single formula but this standard provides following guidelines for calculating the value of inventories.

1st stock must be valued on cost or net realizable value which is lower .

2nd Every company is free to use FIFO, LIFO or weighted average method for proper calculation of the value of inventories.

3rd Cost of inventories
= cost of raw material + cost of direct labour + cost of direct expenses

4th
Companies are also free to use standard cost method or retail cost method for calculating the value of inventories.

5th Inventories does not encompass the value of tools which is used for repair of machinery


3. Accounting Standard 3 ( AS 3)

(Cash flow statement)


Accounting standard three which is revised in 1997 states that cash flow statement is a necessary statement under this standard for banks , financial institute or any institute whose annual turnover is more than Rs. 50 crores or any institute who has borrowed money more than Rs. 10 crores . This standard does not provide the Proforma of cash flow statement but deeply explain the two way of making this statement .

Ist Way Direct method

Under this method, cash flow statement is made by inflow and outflow of cash in operating , investing and financial activities .

2nd way indirect method

It is different from direct method. Under this method cash from operating activities is calculated on the basis of net profit after different adjustments of non cash and non operating items like depreciation , interest , dividend paid and also adjusting net changes in working capital . All other part of cash flow from investing and financial activities are as same as direct method.

related see : Proforma of Cash flow statement

4. Accounting standard 4 (AS 4)

(Contingencies and events occurring after the balance sheet date)


Accounting standard four provides the rules of accounting treatment of losses due to contingencies and event happening after balance sheet date but before approving of balance sheet by board of directors.

Any contingencies like loss by fire or liabilities due to employee’s accident should be provided in financial statement after these contingencies losses are confirmed.
Impairment losses of assets is also covered under AS 4
Any losses due to happening of any event is also shown in financial statement before approving financial statement