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1.32 Theoretical Framework Principles and Practices of Accounting Paper 1
Example:
1. Provision for bad debts is created when debtors become doubtful.
2. Estimated useful life of an asset is required for depreciation that needs to be charged
every year.
Estimates are revised as a result of subsequent developments when new information
and/or more experience is obtained. For example, doubtful debts provision made in the
year 2019-20 was 4.5% based on circumstances at that point of time. However, there
has been significant increase in collection of receivables, that the current situations
suggest that such estimate needs revision and should be made at 3.5%.This change is
recorded as reversal of provision.
1.20 Accounting Standards
The main purpose of Accounting Standard Board (ASB) is to ensure that useful financial
information on performance of the company is available to the users of financial statements
on timely basis. To facilitate the same, Accounting Standards (AS) were issued to ensure
transparency, consistency, comparability, adequacy and reliability of financial reporting.
The Accounting Standards deal with —
recognition of events and transactions (whether such event or transaction should be
recognised in the FS). For example, contingent liability may not be recognised where-
as a provision is recognised in the FS.
measurement of these transactions and events (at what value such transactions will
be recorded). For example, inventory is measured at lower of cost or NRV.
presentation of these transactions and events in a way that readers can understand
it and derive meaningful information from it. For example, presentation of assets and
liabilities as “Current and Non-Current” so that users understand the liquidity posi-
tion of the business.
the disclosure requirements which should be there to enable the public at large and
the stakeholders (especially potential investors) to take informed business decisions
based on what is reflected in the financial statements. For example, useful life of the
asset is to be disclosed as a part of notes to accounts.
1.20.1 Objectives of AS
To improve the reliance placed on FS by eliminating non-comparability.
To establish standard accounting policies, valuation norms and disclosure requirements.
1.20.2 Benefits of AS
The adoption and application of AS ensure —
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