Accounting Framework Become Difficult To Be Applied To Each Organization Accounting Essay

The US $ 4 billion group is led Chairmanship of Mr. Gautam Thappar. The group is one of India ‘s prima concern pudding stones with varied concern involvements including paper and mush, power transmittal and distribution equipment and services, nutrient processing, farm and forestry, chemicals, energy, substructure, information engineering ( IT ) and IT-enabled services. The group, before known as Thappar Group of Companies, Mr. Gautam Thappar rebranded it as Avantha and launched it worldwide on November 15th, 2007.

The group ‘s mission is to make a turnover of US $ 10 billion and market capitalisation of US $ 25 billion by 2013 through a focal point on profitableness.

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The group includes the undermentioned companies:

Ballarpur Industries Limited

Crompton Greavess

Global Green Company

Solaris ChemTech Industries Limited

Avantha Power & A ; Infrastructure Limited

Salient Business Solutions

Avantha Technologies Limited


Avantha Power & A ; Infrastructure limited is an constituted power coevals company with 191 MW of thermic power capacity and 2400 MW under assorted phases of execution. 165 Mw is confined in nature and is generated from the 4 entirely owned Captive power workss of the company in Ballarpur, Bhigwan, Sewa and Yamuna Nagar and 26.19 MW comes from Malanpur Power Plant, which is a gas-fired power works.

Two power workss of the company, Korba West and Jhabua Power are in the concluding phases of being operational and will add 600 MWs each at the terminal of the first phase and 600 MWs farther at the terminal of the concluding execution.

The basic intent of accounting is to guarantee that the financials that are prepared by the company give a ‘true and carnival ‘ image of the organisation. But the word ‘true and just ‘ brings in a batch of ambiguity along with. What one company lies down as its just patterns might be unethical for another organisation. Furthermore, each organisation is established with a different set of premises and these premises can non be equated to each other. It is because of these premises that the regulations provided under accounting model become hard to be applied to each organisation.

To take this job, whenever accounting is done for an organisation, it is assumed that the undermentioned things hold true for it. Until the undermentioned premises ( conventions of accounting ) clasp true, GAAP i.e. By and large Accepted Accounting Principles can non be applied to it.

Consistency Basis – The implicit in facet of Consistency Principle is that an accounting rule one time adopted should be followed systematically from one period to another. Although this rule prefers use of consistent accounting policies over a period it does non curtail the company from altering the policies. The rule says that in instance the company decides to alter any policy, there should be a complete revelation of the alteration and its effects on the fiscal statement points must be shown in the footers.

For eg: Let us say that Reliance Power has been following consecutive line method of depreciation for 6 old ages on a machinery worth Rs. 10,00,000 with an expected life of 10 old ages. The present value of the machinery is Rs. 4,00,000 and in the 7th twelvemonth the company decides to follow cut downing balance method at 20 % rate of depreciation. Due to this displacement, the depreciation for the 7th twelvemonth will be Rs. 80,000 while it would hold been Rs. 1,00,000 if consecutive line method would hold been followed.

Convention of Full Disclosure – This convention states that each and every piece of information associating to relevant facts should be disclosed by the company i.e. detailed information about the line points should be known by the parties utilizing fiscal statements. The word “ FULL ” includes two facets:

Adequate: This means sufficient information should be disclosed.

Carnival: All the users should be treated reasonably.

Uniting these two facets full revelation means that sufficient information should be given to all the users irrespective of what place they hold in the company.

For eg: If the net gross revenues of the company are Rs. 9,50,000, so the company should unwrap how the ‘net ‘ figure was reached after the working. Therefore, it should advert Gross Gross saless as Rs. 10,00,000 and Gross saless return as Rs. 50,000.

Principle of Materiality – Harmonizing to the rule of materiality, a piece of information is considered as stuff ( of import ) merely if the misstatement of it will act upon the determination of the investors. In other words, if information is omitted from the balance sheet and it does n’t impact any related party ‘s mentality of the company, so it is non material from accounting position point. The materiality of a fact depends on its nature and sum involved. The dealing of immaterial fact, as per this convention, should be done by clubbing all such minutess under one caput while the material minutess should be transferred to their several caputs.

For eg: If APIL buys a ashcan for $ 8 with an expected life of 8 old ages and it has to be depreciated over its life-time. In such a instance, the convention of materiality suggests that the full $ 8 should be recorded as disbursal in the twelvemonth in which it is purchased instead than bear downing $ 1 as depreciation every twelvemonth for 8 old ages.

Convention of Conservatism – This convention is based on the rule “ Anticipate no net incomes but provide for all possible losingss ” . The ground behind such an premise is to guarantee that the net incomes are non overstated because it might take to over distribution of dividends and that would intend distribution out of capital. On the one manus, the company can non province the net incomes on the footing of the expected market but on the other manus, the company has to do a proviso for awaited losingss.

For eg: The stock list should be valued at the market monetary value or the cost, whichever is lower because cost monetary value is the most conservative rating of the company and the company is expected to do the sale at least at this monetary value. Other illustrations are composing off intangible assets like good will and making a proviso for bad and dubious debts.

Once it is assured that the above mentioned conventions are followed by the organisation, the model has to be set up to guarantee that the accounting does non travel hay-wire i.e. to guarantee that the accounting records are unvarying and consistent. To do certain that the structured mode is followed for readying of fiscal statements, GAAP has laid down the undermentioned constructs.

Traveling Concern – An endeavor is normally seen as a GOING CONCERN i.e. non started with an purpose to close down in foreseeable hereafter. In simple footings, whenever an organisation is started, it is viewed as something that will go on for a sensible period of clip. A start up with the timeline decided in progress ( apart from certain exclusions where the clip is of the kernel and there is no point of go oning it beyond the stipulated clip ) defies the basic premise of accounting. This construct gives an confidence to the investors that they ‘ll acquire the returns for a longer period of clip as the house wo n’t be dissolved in the close hereafter.

Historical Cost Convention – The most widely used rule under GAAP is that of historical costing i.e. the plus is recorded at the cost at which it was required and non on the present market value. This leads to a disagreement in the balance sheet because the market value of assets is either depreciated or appreciated over a period of clip but the value in the fiscal statements is non this revised value, alternatively it is the value at the clip of geting. Therefore it must be realized that the assets can be disposed at a much higher or lower value than the one presented by the company. Another facet attached to this construct is that the cost recorded in the books of histories does non include merely the purchase monetary value but includes the cost of transit, cost of installing and assorted costs every bit good.

For eg: Let us say that APIL brought a piece of land for Rs. 50,00,000 in 2008 and recorded the same in the books of histories. Now, in 2011, the value appreciated to Rs. 80,00,000 and since the land is still an plus of APIL, it will be recorded in the books of histories but the value at which it will be recorded will be Rs. 50,00,000 and non the apprehended value.

Separate Entity – This convention holds a particular importance because it has to be kept in head at all times that the concern is different from its proprietors. In other words, the minutess of the proprietors are segregated from those of the concern and vice-versa. This is the ground that when an proprietor puts the money in the concern, that sum is treated as the liability of the concern and when he withdraws the money, that sum is non the disbursal of the concern but is treated as personal drawings. This convention ensures that the concern is non affected by the personal traffics of the proprietors. The histories that are prepared are therefore the histories of the concern and non that of those who own it. This is a really of import construct from the legal position every bit good to guarantee limited liability of the proprietors otherwise there would be a charge against all the personal assets of the proprietors in the instance of settlement.

For eg: Let us say that B owes Rs. 10,000 to its creditors but he is declared insolvent before doing the payment. In such a instance, the creditors of B can non action the concern for retrieving the money.

Money Measurement – This construct underlines the fact that merely the minutess that can be recorded in the pecuniary footings are really recorded in the books. In other words, the minutess that can non be quantified are non recorded. Monetary value is of the kernel in accounting. This construct is really of import because the records of the minutess are to be kept in the pecuniary footings and non in the physical footings. It helps in cut downing the ambiguity about what is to be recorded and what non. Although there are companies like Infosys that attach a value to each of their employees, views them as assets and references this in the one-year statement.

For eg: The accomplishments of an employee, quality of direction and trade name acknowledgment are some of the qualitative facets of concern that are ne’er found in the financials of the company although they play a critical function in success of the concern.

Accounting Period Concept – Harmonizing to this construct, the financials of the company are prepared for a peculiar period of clip i.e. the balance sheet and net income & A ; loss histories are prepared up to a peculiar day of the month and this period is known as Accounting Period. This period can be 1 month ( monthly ) , 3 month ( quarterly ) , 6 months ( semi-annually ) and 1 twelvemonth ( yearly ) but they are normally prepared for one twelvemonth.

Accrual Basis – The word ‘accrual ‘ means an sum of money that becomes due i.e. it is either to be received by the company or to be paid by the company. The company becomes the legal claimant of money when the company has earned it whether it has received it or non is a separate affair. In other words, the income and disbursal is recognized when the dealing is completed instead than when the money is received or paid severally. This is the ground that the recording of a dealing is done when the dealing occurs and non when it is completed. The ground behind this rule is that there is a difference between receivables and hard currency grosss and likewise there is a difference between disbursals and hard currency payments.

For eg: APIL purchases boiler deserving Rs. 10,00,000 on March 15th,2011 but the payment is non made boulder clay April 20th, 2011. In malice of dealing non being completed on March 15th, 2011, there will an addition in the liabilities ( Creditors ) and increase in the assets ( Fixed assets ) of APIL and the same will be recorded in the books.

Double Aspect – The cardinal logic in accounting is that every dealing has a double consequence i.e. for each penny that company earns there is some cost attached to it and vice-versa. It is this nature of the minutess that existences in the construct of ‘Dual Aspect ‘ . Therefore, while fixing the books of histories it should be ensured that the entry is made on both the sides. The cardinal equation of accounting besides stems from this construct:

Assetss = Liabilitiess + Capital

The above equation reflects the fact that all the proprietors and the foreigners have a claim on all the assets of the company.

For eg: If a company purchases machinery and its payment is made by check. In this instance, the company ‘s assets will lift as extra machinery is included but the bank history will come down by the sum equivalent to the sum paid for geting machinery. This decrease in the bank history and an addition in assets is a Double Aspect.

Realization – Harmonizing to this construct, the net incomes from any dealing should be included in the books of histories merely when they are realized i.e. merely when the company has a legal right to acquire them. Therefore, even when the hard currency has non been received, it can be put as gross revenues in the books of histories when the company gets the right to have the sum.

For eg: Tata Motors sells a auto worth Rs. 6,00,000 on 29th March, 2010 but receives the payment on 7th May, 2010. Assuming that the fiscal twelvemonth of the company is from April to March, the grosss for the FY 09-10 will be Rs. 6,00,000 as the sum became due in this period although it was received in the FY.

Matching Concept – This construct says that the grosss earned by the company and the disbursals that the company incurs to gain these grosss must be of the period under consideration. This is to do certain that the company does non demo hyperbolic net incomes by proroguing the disbursals to the following period and demoing the net incomes in this period.

For eg: A company makes a sale of Rs. 25000 on hard currency, pays Rs. 15000 for buying the semi-finished goods, Rs. 5000 as salary, Rs. 800 as committee and Rs. 1200 as transit charges. Now, after subtracting all the charges, the company should enter Rs. 3000 as net net income.

The above mentioned organic structures influence Indian GAAP. The two organic structures marked with ruddy and blue are the international organisations while the remainder are Indian organic structures that help in either formation or ordinance of Indian GAAP.


Different processs in different states – International Accounting Standards Council had issued a design for constructs and conventions under GAAP but the standard scene governments in each state add a ‘local ‘ spirit to these guidelines to come out with individualized constructs and conventions. These criterions were customized to guarantee that they work good with the local economic environment and legal model. This led to a major jobs for MNCs as the consolidation of fiscal statements became a really tough occupation as different minutess have different interventions in different states.

Off Balance Sheet Debt – There are many companies, many existent estate giants for illustration, create Particular Purpose Vehicles ( SPEs ) in order to maintain their balance sheets debt free. This helps in ‘portraying ‘ a financially stronger company although they might be debt laden. Under GAAP, there is no proviso for describing these SPEs. Once IFRS has been implemented, the coverage of SPEs will go compulsory and lead oning the investors and other related parties will be really hard.

Contingent Liabilities – With the inclusion of environmental describing going more rigorous, the weight of contingent liabilities has increased manifold in the fiscal statements. Events like environment conformity and judicial proceeding amendss might hold little costs for the company but involve a immense top cost if the same are non complied with. For illustration: If car industry has been ordered to do all the vehicles as per Bharat IV criterions, it might affect merely a twosome of little alterations to the engine but in instance Maruti Suzuki does non follow with these new ordinances it might hold to re name all its vehicles manufactured after a certain day of the month.

Contingent Assets – Most of the R & A ; D houses face the job of no net incomes and high costs for old ages before they realize windfall additions once the merchandise is successfully developed and launched in the market. GAAP does non supply any such proviso in which the expected hereafter additions can be brought down to the present value and the lopsided fiscal statements can be balanced to a certain extent. A house ‘s value consists of two parts:

1 ) Value of bing assets

2 ) Value of future chances

The job arises merely in the latter portion.

Intangible Assetss: The new age of concern has brought with itself a battalion of new traits attached to it. The importance of intangibles like trade name perceptual experience, corporate administration and ethical direction can non be ignored any longer but GAAP does non hold any proviso for any of these of import facets. Although GAAP provides for computation of good will but that is done of the historical value but true economic value is far more dynamic than the one evaluated under GAAP.


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