Three Areas in Which Different Accounting Policies are Adopted by Different Enterprises in India

Why am I writing above topic? - Importance of Above Topic

Above question came in 1994 June - UGC NET - Commerce examination for lectureship in India and this question is also important for CA students who are learning accounting standards of ICAI.

First Accounting standard has clearly mentioned six areas in which accounting policies are adopted by different enterprises in India. Out of six areas, we will explain three important areas with suitable examples. If there will be any change in following method of calculation, then it will be disclosed in clear word for taking transparency in financial statements.

1. Method of Depreciation

There are many methods of calculation of depreciation. Every method will change the net profit value and financial position of company. Different enterprises in India are using different method of calculation of depreciation. So, it is necessary to disclose if company changes method of depreciation. Accounting standard 6 also deals depreciation treatment.

For example

Problem: XYZ Company is using the straight line method for charging depreciation on fixed assets from six years. Recently,  accounting department of XYZ Company has decided to change it to written down method. Decide how it must be disclosed in profit and loss account. Also discuss, when such changes in method of depreciation can be adopted by an enterprise as per AS- 6

Solution: We just have to apply new method of depreciation and disclose it by writing footnote. And calculate net profit.

As per Para 21 of AS - 6, the depreciation method selected should be applied consistently from period to period. A change from one method of providing depreciation to another should be made only if the adoption of new method is required by statute or for compliance with an other accounting standard or if it is considered that change would result in a more appropriate preparation or presentation of financial statement of company.

2. Valuation of inventories


Inventories should be valued on cost or net realizable value whichever is lower. AS-2 provides the power to accountant to use any method of valuation of inventories in the end of period. Accountant can use FIFO, LIFO or any other method for showing closing stock of each item. But changing from FIFO to LIFO or one method to any other method, it should be disclosed by writing the footnote below the financial statement.

3. Conversion of Foreign currency items

Accounting standard 11 deals with the issue in accounting for foreign currency conversion and foreign branches, any changes of foreign currency should also disclose as per AS 1.

a) To Show the value of Forex gain or loss

For example, you have imported goods of $ 10000

On 1 jan 2010, at that time $ 1 = Rs. 45 and you have closed your account on 31st march 2010. At that time, $ 1 reached Rs 47. It means at the end you had loss of Rs. 2 of every dollar payment but you did not paid. Its accounting will be following way

(i) Pass the purchase entry at the time of purchasing with Rs. 45 x $ 10000 =
Rs. 450000
(ii) Forex loss of Rs. 2 X 10000 = Rs. 20000 will be debited to Profit and loss account for 2009 - 2010
(iii) Creditor will be shown with Rs 47 X $ 10000 = Rs. 470000 at the end of 31st march 2010

If Value of $ 1 will rise more on 15th April 2010 and it will be Rs. 50  when creditor of USA will be paid. At that, we will show forex loss of Rs. 3 per dollar in profit and loss account for the year 2010 - 2011.