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PRACTICAL IMPLICATION OF ACCOUNTING



CONCEPT VS CONVENTION

The term ‘concept’ is defined as the basic assumptions or conditions upon which the accounting is based.

The term ‘convention’ consists of those customs or traditions which act as a guide to the accountants for the preparation of financial statements.

ON VIEWING THIS BELOW FINANCIAL STATEMENT OF TATA MOTORS- LTD WE WILL DO PRACTICAL IMPLICATION OF ACCOUNTING CONCEPTS & CONVENTIONS.

MOTORS LIMITED

View: Annual Data | Quarterly Data

All numbers in thousands

PERIOD ENDING

31-Mar-07

31-Mar-06

31-Mar-05

Total Revenue

7,692,000 

5,409,500 

4,548,100 

Cost of Revenue

6,112,500 

4,256,300 

3,597,100 

 

Gross Profit

1,579,500 

1,153,200 

951,000 

 
 

Operating Expenses

 

Research Development

139,600 

104,800 

58,100 

 

Selling General and Administrative

826,600 

597,800 

462,100 

 

Non Recurring

– 

– 

– 

 

Others

– 

– 

– 

   
 

Total Operating Expenses

– 

– 

– 

 
   
   

Operating Income or Loss

613,300 

450,600 

430,800 

 
   
 

Income from Continuing Operations

 
 

Total Other Income/Expenses Net

124,700 

93,500 

59,300 

 
 

Earnings Before Interest And Taxes

738,000 

544,100 

490,100 

 
 

Interest Expense

125,600 

83,600 

68,600 

 
 

Income Before Tax

612,400 

460,500 

421,500 

 
 

Income Tax Expense

188,200 

126,300 

116,900 

 
 

Minority Interest

(16,700)

(7,400)

(8,400)

 
   
 

Net Income From Continuing Ops

420,300 

337,400 

304,000 

 
   
 

Non-recurring Events

 
 

Discontinued Operations

– 

– 

– 

 
 

Extraordinary Items

– 

– 

– 

 
 

Effect Of Accounting Changes

– 

– 

– 

 
 

Other Items

– 

– 

– 

 
   
   

Net Income

420,300 

337,400 

304,000 

 

Preferred Stock And Other Adjustments

– 

– 

– 

 
   

Net Income Applicable To Common Shares

$420,300 

$337,400 

$304,000 

 
   

MOTORS LTD

Balance sheet

(Rs crore)

 

Mar ‘ 08

Mar ‘ 07

Mar ‘ 06

Mar ‘ 05

Mar ‘ 04

Sources of funds

Owner’s fund

Equity share capital

385.54

385.41

382.87

361.79

353.00

Share application money

3.83

Preference share capital

Reserves & surplus

7,428.45

6,458.39

5,127.81

3,749.60

3,236.77

Loan funds

Secured loans

2,461.99

2,022.04

822.76

489.81

942.65

Unsecured loans

3,818.53

1,987.10

2,114.08

2,005.61

317.12

Total

14,094.51

10,852.94

8,447.52

6,606.81

4,853.37

Uses of funds

Fixed assets

Gross block

10,830.83

8,775.80

7,971.55

6,611.95

5,985.40

Less : revaluation reserve

25.51

25.95

26.39

Less : accumulated depreciation

5,443.52

4,894.54

4,401.51

3,454.28

3,023.69

Net block

5,361.80

3,855.31

3,543.65

3,157.67

2,961.71

Capital work-in-progress

5,064.96

2,513.32

951.19

538.84

286.09

Investments

4,910.27

2,477.00

2,015.15

2,912.06

3,056.77

Net current assets

Current assets, loans & advances

10,781.23

10,318.42

9,812.06

7,248.88

3,835.78

Less : current liabilities & provisions

12,029.80

8,321.20

7,888.65

7,268.80

5,309.17

Total net current assets

-1,248.57

1,997.22

1,923.41

-19.92

-1,473.39

Miscellaneous expenses not written

6.05

10.09

14.12

18.16

22.19

Total

14,094.51

10,852.94

8,447.52

6,606.81

4,853.37

Notes:

Book value of unquoted investments

4,145.82

2,117.86

1,648.57

2,480.15

2,778.87

Market value of quoted investments

2,530.55

1,323.08

1,550.00

1,260.05

732.76

Contingent liabilities

5,590.83

5,196.07

2,185.63

1,450.32

896.07

Number of equity shares outstanding (Lakhs)

3855.04

3853.74

3828.34

3617.52

3529.58

CONCEPTS

1.BUSINESS ENTITY CONCEPT

Business entity means a unit of organized business activity . In accounting a business is treated as separate entity . Example : a bank , a firm etc are all business entities . This concept distinguishes the affairs of the business from the personal affairs of the proprietor. In other words , a business organization is considered to be separate and distinct from owners , creditors , and others who control the business

2.MONEY MEASUREMENT CONCEPT

The basic concept in accounting is money. Accounting deals with the monetary expression of economic events . Since money is the medium of exchange and the standard of economic value , it is used as the common denominator to express the heterogeneous items in a meaningful manner . In other words, only those transactions and events are to be recorded in the books which can be expressed in terms of money. For example : In balance sheet of Tata Motors ltd , only monetary items are recorded though any problem or any dispute may had occurred in between the employees which had effected the production of company but it is not recorded in financial statement .

3.GOING CONCERN CONCEPT

Accounting assumes that an entity is a ‘going concern’. It means that enterprise will continue to operate for indefinitely long period in future and will not dissolved in the immediate future .The valuation of assets of a business entity depends on this assumption. For example: According to the profile of TATA MOTORS LTD , on its website : tatamotors.com , it was established in 1945 and its presence indeed cuts across the length and breadth of India. It means that it is continuing from long period and it is assumed that it will also continue for long period in future.

4.COST CONCEPT

Cost is defined as the expenditure incurred for acquiring an asset or service . The cost principle states that the assets and services are recorded at their purchase cost and the accounting record should be based on cost rather than on current market value . It states that an asset is worth the price paid for or cost incurred to acquire it. Thus they are recorded at their original purchase price. For example: TATA MOTORS purchased a land paying Rs 6000000 . The land would be recorded in the accounting books of the business at the amount of Rs 6000000 even if the real worth of land may be more or less.

5.REALISATION CONCEPT

According to realisation principle , any change in value of an asset should only be recognized at the time the firm realised or disposes of the assets because there is no certainty of income until a sale has been made. Hence, increase in the value of the asset should not be taken into account unless it is realised. For example : TATA Purchases a land in Bengal for the construction of office building on April 1,1990 paying Rs 50000. Its current market value is Rs 300000 . Realisation concept tells us to show the land at Rs 50000 in the books of accounts ignoring Rs 250000 value increase as it is yet to be realised .

6.ACCOUNTING PERIOD CONCEPT

According to this concept accounting measures activities for a specified period of time called accounting period .Generally , one year period is taken for measuring the performance of a business. The users of accounting information need periodically reporting of the health and performance of an organization. Accounting year may be financial year, calendar year or natural year. For example: TATA MOTORS LTD has

made its balance sheet periodically i.e. for year 2004 ,2005,2006,2007,2008.

7.MATCHING CONCEPT

This concept provides the guidelines as to how the expenses be matched with revenues to find out profit or losses. In order to determine the results of business operations during a particular accounting period , the expenses must be matched with revenues earned through the sales of goods or services during the period. For example: In Income statement of TATA we can match Total revenue and Cost of revenue . And by matching both we are getting gross profit i.e. 1579500 for 2006-07

8.DUAL ASPECT CONCEPT

According to this concept of accounting , every transaction or event has two aspects: (i) receiving aspect (ii) giving aspect. In other words, every receiver is a giver and every giver is a receiver. Therefore two accounts are to be opened in the books of accounts , one for receiving the benefit and other for giving the benefit. Thus there will be a double entry for every transaction. This principle also gives rise to fundamental accounting equation :

ASSETS = LIABILITIES + CAPITAL

CONVENTIONS

1.CONSISTENCY CONCEPT

There are, in practice , several ways of treating an event in accounting . The consistency concept requires that once the enterprise has decide on one method , it will treat all subsequent events of the same character in the same manner unless it has a sound reason to change the method of treatment. For example if an organisations valuing its goods by a particular method in one year , it is expected to value its goods in the subsequent years also in the same method unless there is a strong reason to change the same.

2.CONSERVATION CONCEPT

This principle states that the accountant should not recognize any profit or gains till realized , but should provide for all possible losses. It takes into consideration all probable losses but ignores all expected profits. It is simply method of dealing with uncertainty about future cash flows.

For example: making provision for doubtful debts in anticipation of bad debt, Valuing stock at the end accounting period at cost price or market price whichever is less.

3.OBJECTIVE EVIDENCE CONCEPT

According to this principle, the accounting transaction should be supported by objective evidences . These objective evidences are business documents which can be verified and which are free from personal bias. This principle helps to minimize the possibility of errors and frauds.

Examples of objective evidence are vouchers , invoices , challans ,cash memos, bank statements and other important documents.

4.MATERIALITY CONCEPT

Materiality concept holds that events of relatively small importance need not be given a detailed or theoretically correct treatment . because the cost of recording and reporting such events will not be justified by the usefulness of the information derived

For example: In profit and loss account , small items of express which are not material , are not shown separately. They are combined and shown under ‘Miscellaneous expenses’.

5.FULL DISCLOSURE CONCEPT

According to this principle , all significant information relating to the economic affairs of the business organization should be reported fully on the financial statements . All accounting statements should be honest and full disclosure of all significant information should be made on the accounting statements . These information help the interested parties to take their decisions.

THESE ARE THE MAIN CONCEPTS AND CONVENTIONS USED IN ACCOUNTING.

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