Four Frameworks of Accounting and Forms of Organization: formula sheet

Key formulas

Going concern

Business continues → fixed assets are shown at cost less depreciation, not at break-up value

If closure is expected, the going concern idea no longer applies.

Accrual

Income = when earned; Expense = when incurred (cash timing is ignored)

Outstanding expenses and accrued income arise from this.

Matching

Profit = Revenue of the period − Expenses incurred to earn that revenue

Needs accrual first. Prepaid items are carried forward and outstanding items are added.

Conservatism

Provide for all expected losses; ignore expected gains

Example: stock valued at cost or net realisable value, whichever is lower.

Dual aspect

Assets = Liabilities + Capital

Every transaction affects two accounts with equal debit and credit.

Business entity

Owner's personal expenses paid out of business funds → Drawings, not business expense

Capital introduced is an amount the business owes to the owner, shown as Capital (owner's equity), separate from outside liabilities in Assets = Liabilities + Capital.

Who frames standards

ICAI (ASB) formulates and recommends → NFRA examines and recommends to Central Government → Central Government notifies (Section 133, Companies Act, 2013)

For companies, standards have legal force only after Government notification.

Ind AS meaning

Ind AS = IFRS converged for Indian conditions

Convergence is not word-for-word adoption of IFRS.

Ind AS applicability (companies)

Listed or about-to-be-listed companies (other than SME exchange companies), and unlisted companies with net worth ≥ ₹250 crore → Ind AS (mandatory)

Holding, subsidiary, joint venture and associate companies of such companies also follow Ind AS. Companies listed or in the process of listing on SME exchanges are exempt. Companies not covered follow AS.

Ind AS voluntary adoption

Companies not covered by the mandatory rule may opt for Ind AS

Once a company opts in, it must continue to follow Ind AS and cannot go back to AS.

Core objectives

Uniformity + Comparability + Reliability + Disclosure

Use these four words to answer any objectives or benefits question.

Accounting equation (position)

Assets = Liabilities + Equity

Equity is the residual: Equity = Assets − Liabilities.

Elements of financial position

Assets, Liabilities, Equity

These appear in the balance sheet.

Elements of performance

Income and Expenses

These appear in the statement of profit and loss. Profit = Income − Expenses.

Main qualitative characteristics (older framework)

Understandability, Relevance, Reliability, Comparability

Remember as URRC. Newer framework: relevance and faithful representation are fundamental.

Components of relevance

Predictive value, Confirmatory value, Materiality

Materiality depends on the size of the item and its effect on decisions.

Components of reliability

Faithful representation, Substance over form, Neutrality, Prudence, Completeness

Prudence allows caution under uncertainty. It does not allow hidden reserves or deliberate understatement.

Law for companies

Companies → Companies Act, 2013

Requires books of account and financial statements. Listed companies also follow SEBI rules.

Law for partnership firms

Partnership firm → Indian Partnership Act, 1932

The Act gives every partner the right to inspect and copy the firm's books. How accounts are kept is largely decided by agreement of the partners, and tax laws impose record-keeping requirements.

Law for LLPs

LLP → Limited Liability Partnership Act, 2008

LLP is a separate legal entity with limited liability of partners.

Role of ICAI

ICAI (Accounting Standards Board) → Formulates accounting standards; issues auditing standards

NFRA recommends standards and the Central Government (MCA) notifies them for companies under Section 133 of the Companies Act, 2013.

Role of ICMAI

ICMAI → Cost accounting standards and cost records guidance

Professional body for cost and management accountants.

Role of SEBI

SEBI → Disclosure by listed companies and investor protection

Applies to securities market and listed entities only.

Three layers (memory aid)

Law + Standards + Regulators

This is the page's own memory aid, not an official classification. Use it to sort any option in an MCQ.

Sole proprietorship

1 owner; unlimited liability; no separate legal entity

Easiest to form and close. Owner takes all profit and all risk.

Partnership

Minimum 2 partners; maximum 50 partners; unlimited liability; no separate legal entity

Governed by the Indian Partnership Act, 1932. Profit sharing is equal if no agreement exists. The maximum of 50 partners comes from Section 464 of the Companies Act, 2013 read with the Companies (Miscellaneous) Rules, 2014.

LLP

Minimum 2 partners; limited liability; separate legal entity; perpetual succession

Registered under the LLP Act, 2008. Needs at least two designated partners.

Private company

Minimum 2 members; maximum 200 members; limited liability; share transfer restricted

Cannot invite the public for shares. Minimum two directors. The limit of 200 members excludes members who are present or past employees, and joint holders of shares are counted as one member (Section 2(68)).

Public company

Minimum 7 members; no maximum limit; free transfer of shares

Can invite public to subscribe. Minimum three directors.

One person company (OPC)

1 member; limited liability; separate legal entity

A form of private company for a single owner.

Co-operative society

One member, one vote; service motive; separate legal entity

A registered co-operative society is a separate legal entity under the Co-operative Societies Acts. Members' liability is usually limited.

Quick revision

• Going concern assumes the business will continue for the foreseeable future.
• Accrual means income and expenses are recorded when they arise, not when cash moves.
• Matching links expenses of a period to the revenue they helped earn.
• Prudence means do not overstate profit or assets; provide for likely losses but not for unearned gains.
• Consistency means using the same accounting policies from period to period.
• Business entity concept treats the owner and the business as separate for accounting.
• Money measurement records only transactions that can be expressed in money.
• Fundamental qualitative characteristics are relevance and faithful representation.
• Enhancing characteristics include comparability, verifiability, timeliness and understandability.
• A sole proprietor has unlimited liability and no separate legal identity.
• A company is a separate legal entity with limited liability for its shareholders.
• Match each form of business to its liability, ownership and legal status before the exam.

Common mistakes

• Treating accrual and cash basis as the same Fix: Remember that accrual records when income is earned or expense is incurred, whatever the cash timing.
• Mixing matching with accrual Fix: Accrual says when to recognise. Matching says set expenses against the related revenue of the same period.
• Saying Ind AS is the same as IFRS Fix: Ind AS is converged with IFRS and carries some changes for India. It is not an identical copy.
• Thinking ICAI notifies standards with legal force by itself Fix: For companies, ICAI formulates and recommends, NFRA examines and recommends to the Central Government, and the Government notifies them.
• Confusing relevance with reliability. Fix: Relevance is about usefulness for decisions. Reliability is about being free from error and bias.
• Treating capital introduced by the owner as income. Fix: Income excludes contributions from owners. Owner capital increases equity directly.
• Saying SEBI governs all companies. Fix: SEBI regulates the securities market and listed entities. All companies are governed by the Companies Act, 2013.
• Mixing up the Partnership Act and the LLP Act. Fix: A firm under the 1932 Act is not a separate legal entity. An LLP under the 2008 Act is. Link the year and the entity status.
• Saying a partnership firm is a separate legal entity from its partners. Fix: Remember: ordinary partnership has no separate entity and unlimited liability. An LLP has partners and is also a separate legal entity, unlike an ordinary partnership.
• Writing that a sole proprietor has limited liability because the business is a separate accounting entity. Fix: Separate entity is an accounting idea only. In law, the proprietor and the business are the same person.

Exam tips

• Learn one trigger word for each concept and convention. Most MCQs can be solved by that alone.
• Watch for pairs that are often confused: accrual versus matching, consistency versus conservatism, going concern versus accounting period.
• If a question asks for a concept versus a convention, remember that concepts are basic assumptions and conventions are practices that guide judgement.
• Do a simple calculation when needed, such as prepaid share or lower of cost and net realisable value, then name the concept.
• There is no negative marking, so attempt every question and eliminate wrong options first.
• Memorise the chain: ICAI formulates and recommends, NFRA examines and recommends, Government notifies. Options often swap these roles.
• Learn the ₹250 crore net worth threshold for unlisted companies in applicability questions.
• Remember that SME exchange companies are exempt from mandatory Ind AS.