Category: Bangalore University B.com Notes

Practically speaking, in order to avoid the variance which may arise between the accounting principles and accounting practice and also to find a uniformity among diversity among the various underlying principles of accounting. We emphasise the Accounting Standards framed by the IASC or IAS (Indian Accounting Standard, based on IASC) for maintaining accounting practice in our country.

However, the reasons for setting the Standards are:

(a) Comparison between two firms is possible if both of them maintain the same principle, otherwise proper comparison is not possible. For example, if Firm A follows the FIFO method of valuation of stock whereas Firm B follows the LIFO method for valuing stock, the comparison between the two firms becomes useless. The same is possible only when both of them follow identical method of valuing closing stock.

(b) The firms are not allowed to maintain and present their accounts according to their own will or choice or cannot prepare report of financial statements for various interested groups. The same is possible only when there is some fixed standard for setting practice.

(c) The Accounting Standards recognise the principle of equity applicable for different users of accounting information, viz. creditors, investors, shareholders etc. Thus the purpose of setting Accounting Standards is nothing but to find a uniformity in accounting practice while formulating financial reports and make consistency and proper comparison of data which are contained in financial statements for the users of accounting information. Practically, Accounting standards have been presented in order to maintain fairness, consistency and transparency in accounting practice which will satisfy the users of accounting.

Objectives and Features of Accounting Standards:

(i) To formulate and publish in the public interest Accounting Standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observation.

(ii) To work for the improvement and harmonisation of regulation of Accounting Standards and procedures relating to the presentation of financial statements.

In regard to the objective (i) stated above, i.e. worldwide acceptance and operation, the statement of). L. Kirkparick, Chairman of the Board of IASC, delivered to the members of the Institute of Chartered Accountants, Ireland, is quite significant. According to him: “When we sit round the IASC Board table and in the steering committee which creates the standard, we do so in our capacity as experts in Accounting and certainly not as auditors. It is irrelevant whether we are practitioners or not.” Therefore, the Standards which are set/issued by ISAC are meant for universal acceptance.

Development of Accounting Standards:

A. International Accounting Standards (IAS):

International Accounting Standard Committee (IASC):

It came into being on 29th June 1973 when 16 accounting bodies (Viz. The Institute of Chartered Accountants from 10 nations i.e., USA, Canada, UK and Ireland, Australia, France, Germany, Japan, Mexico and Netherlands) signed the constitution for its formation. Its headquarters is situated at London. The Objectives of IAS is to develop accounting standards which are to be observed in the presentation of audited financial statements and to promote their worldwide acceptance.

Moreover, its other responsibility is to keep member bodies informed of the latest development and standards by issuing exposure drafts form time to time. Needless to mention that the Institute of Chartered Accountants of India and the Institute of Cost and Works Accountants of India are Members of the International Accounting Standards Committee.

The objectives of IASC, which are set out in its revised agreement and constitution (Nov. 1982), are:

(i) To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observation, and

(ii) To work for the improvement and harmonisation of regulating accounting standards and procedures relating to the presentation of financial statements.

Moreover, The International Federation of Accountants (IFAC)—which was held at the IX International Congress of Accountants in October 1977 had been set up in order to harmonies accounting, auditing and reporting practices in an area which will see growing interdependence of the commercial and industrial systems of the world.

In order to formalize their relationship, International Accounting Standards Committee (IASC) and International Federation of Accountants (IFAC) constituted a working group which has, in the meantime) issued a statement of ‘Mutual Commitments’. Practically, this statement, inter alia, accepts IASC as the sole body responsible for issuing pronouncements on international accounting standards. The Council of IFAC has approved it on May 1981.

At regional level, ‘International Cooperation in Accountancy’ was actually the theme of the Confederation of Asian and Pacific Accountants (CAPA) conference held in 1979 in recognition of the universality of accounting and the consolidation of efforts of accounting organisations throughout the world. Similarly, the Financial Accounting Standards Board (FASB) of USA has recently issued a number of Statements on conceptual framework for financial accounting and reporting in order to develop the respective standards.

Till 1st January 2004, International Accounting Standards have been issued by IASC. Some standards have been withdrawn and some were revised.

The standards are:

IAS 1: Presentation of Financial Statements

IAS 2: Valuation and Presentation of Inventories

IAS 7: Cash Flow Statement

IAS 8: Net Profit or Loss for the Period― Fundamental Errors and Changes in Accounting Policies

IAS 10: Events occurring after Balance Sheet Date

IAS 11: Accounting for Construction Contracts

IAS 12: Accounting for Taxes on Income

IAS 14: Reporting Financial Information by Segments

IAS 15: Information reflecting the effects of Changing Prices

IAS 16: Accounting for Property, Plant and Equipment

IAS 17: Accounting for Leases

IAS 18: Revenue Recognition

IAS 19: Accounting for Retirement Benefits of Employees in the Financial Statements of Employers

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance

IAS 21: Accounting for Effects of Changes in Foreign Exchange Rates

IAS 22: Accounting for Business Combinations

IAS 23: Capitalizations of Borrowing Costs

IAS 24: Disclosure of Related Party Transactions

IAS 26: Accounting and Reporting by Retirement Benefits Plans

IAS 27: Consolidated Financial Statements and Accounting for Investments

IAS 28: Accounting for Investments in Associates

IAS 29: Financial Reporting by Hyperinflationary Economics

IAS 30: Disclosure of Financial Statement and Banks and Similar Financial Institutions

IAS 31: Financial Reporting of Interests in Joint Ventures

IAS 32: Financial Instruments—Disclosure and Presentations

IAS 33: Earning per Share

IAS 34: Accounting for Interim Financials Reporting

IAS 35: Discontinuing Operations

IAS 36: Impairment of Assets

IAS 37: Provisions, Contingent Liabilities and Contingent Assets

IAS 38: Intangible Assets

IAS 39: Financial Investments—Recognition and Measurement

IAS 40: Investment Property

IAS 41: Accounting for Agriculture.

The normal process of purchasing, storing, control and issue of materials consists of the following documents:

Document 1. Bill of Materials:

Bill of Materials is a comprehensive list of materials, with specifications, material codes and quantity of each material required for a particular job, process or production unit. It will also include the details of substitute materials. It is prepared by the engineering or planning department for submission of quotation and after the receipt of work order. It is a method of documenting materials required for execution of the specified job work.

Bill of Material acts as an authorization to the Stores Department in procuring the materials and the concerned department in material requisition from the stores. It is an advance intimation to the concerned departments of the job, work order to be completed.

It is circulated to:

(a) Purchase Department,

(b) Stores Department,

(c) Cost Accounts Department, and

(d) Product Department.

Advantages:

(a) It acts as a guide in planning the execution of job, process or product units by documenting all materials required for that specified work.

(b) It is a base for action to be initiated by the Stores Department in placing the purchase requisition with the purchase department.

(c) The information mentioned in the bill of materials act as a standard with which any deviation can be detected and remedial measures are taken if deviations take places.

(d) It is a good control measure on material cost.

(e) The material cost to be charged to a particular unit, job or process can easily be determined beforehand.

(f) It helps in submission of tenders and quotations.

(g) It is a planning exercise for the proposed production or work.

(h) It serves as an advance intimation to stores department about the raw material requirement.

Document 2. Purchase Requisition:

CIMA defines Purchase Requisition as “an internal instruction to a buying office to purchase goods or services. It states their quantity and description and elicits a purchase order”.

The manager in-charge of Purchase Department should obtain requisition from the Stores in- charge, departmental head or similar person requiring goods before placing orders on suppliers. If the present stock run down to the reorder level, then the stores department send a Purchase Requisition to Purchase Department, authorizing the department to order further stock.

Document 3. Purchase Order:

If the Purchase Requisition received by the Purchasing Department is in order then it will call for tenders or quotations from the suppliers of materials. It will send enquiries to prospective suppliers giving details of requirement and requesting details of available materials, prices, terms and delivery etc. Quotations will then be compared and will place order with those suppliers who will provide the necessary goods at competitive prices.

The number of copies of routing of Purchase Orders depends on the procedure followed in the organization. Normally, the copies of the purchase orders will be sent to the Supplier, Department originating Purchase Requisition, Inspection Department, and Accounting Department.

Document 4. Material Inspection Note:

When materials are delivered, a supplier’s carrier will usually provide a document called ‘delivery note’ or ‘delivery advice’ to confirm the details of materials delivered. When materials are unloaded, the warehouse staff check the material unloaded with the delivery note. Then the warehouse staff prepares a Materials Receipt Note, a copy of which is given to the supplier’s carrier as a proof of delivery.

After receiving the materials the Inspection Department thoroughly inspects whether the quality of material is in accordance with the purchase order and the quality of material received and it prepares a note called ‘material inspection note’, copies of which are sent to the supplier and stores department.

Document 5. Goods Received Note (GRN):

Once the inspection is completed, GRN is prepared by the stores department, and copies of GRN is sent to the purchasing department, costing department, accounts department and production department, which initiated purchase requisition.

After receipt of GRN from the Stores Department and invoice from the supplier, the accounts department will check with the purchase order and take necessary steps for making payment to the supplier.

Document 6. Stores Requisition Note:

It is also called ‘materials requisition note’. When Production or other departments requires material from the stores it raises a requisition, which is an order on the stores for the material required for execution of the work order. This note is signed by the department in-charge of the concerned department. It is documents which authorize the issue of a specified quantity of materials.

It will include the cost centre or job number for which the requisition is being made, a specimen stores requisition note.

Any person who requires materials from the stores must submit stores requisition note. The store keeper should only issue materials from stores against such a properly authorized requisition and this will be entered in the bin card and stores ledger. A copy of the requisition will be sent to the costing department for recording the cost or value of materials issued to the cost centre or job.

Document 7. Material Transfer Note:

If materials are transferred from one department or job to another within the organization, then material transfer note should be raised. It is a record of the transfer of materials between stores, cost centres or cost units showing all data for making necessary accounting entries.

Document 8. Material Return Note:

If materials received from the stores are not of suitable quality or if there is surplus material remaining with the department, they are returned to stores with a note called ‘material return note’ evidencing return of material from department to stores.

Document 9. Bin Card:

A ‘bin card’ indicates the level of each particular item of stock at any point of time. It is attached to the concerned bin, rack or place where the raw material is stored. It records all the receipts of a particular item of materials and its issues. It gives all the basic information relating to physical movements. It is a record of receipts, issues and balance of the quantity of an item of stock handled by a store.

Document 10. Stores Ledger:

Stores department will maintain a record called ‘stores ledger’ in which a separate folio is kept for each individual item of stock. It records not only the quantity details of stock movements but also record the rates and values of stock movements.

With the information available in the stores ledger, it is easier to ascertain the value of any stock item at any point of time. The minimum, maximum and reorder levels of stock are also mentioned for taking action to replenish the stock position.

Store Keeping

After materials purchased have been received and checked, the next step in the process of material control is the storing of materials or store keeping.

A storehouse is a building provided for preserving materials, stores and finished goods. The in-charge of store is called storekeeper or stores manager. The organisation of the stores department depends upon the size and layout of the factory, nature of the materials stored and frequency of purchases and issue of materials.

According to Alford and Beatty “storekeeping is that aspect of material control concerned with the physical storage of goods.” In other words, storekeeping relates to art of preserving raw materials, work-in-progress and finished goods in the stores.

Objectives of storekeeping:

• To prevent overstocking and understocking of materials.
• To ensure uninterrupted supply of materials and stores without delay to various production and service departments of the organisation.
• To protect materials from pilferage, theft fire and other risks.
• To ensure proper and continuous control over materials.
• To minimise the storage costs.
• To ensure most effective utilisation of available storage space and workers engaged in the process of storekeeping.

Functions of Store Keeping

The principal functions of store-keeping to be performed by the Stores Department in an organization, are as follows:

• Receiving purchased stores from the Receiving Department and verifying that every lot of stores is supported by an indent, a purchase order and an inspection note.
• Issuing purchase requisitions as and when material is required.
• Preparing ‘Goods Received Note’ in accordance with the different stores lots received.
• Placing and arranging stores received at proper and appropriate places and adhering to the golden principle of store keeping i.e., ‘A place for everything in its place. ‘
• Minimizing the storage, handling and maintaining costs by preserving and handling the materials in the most economical and efficient manner.
• Ensuring that all the Goods Received Notes are regularly posted to the Bin Card.
• Issuing stores to various departments of the business and ensuring that all issues are properly authenticated and accounted for.
• Ensuring the adherence to the proper issuing procedure and system followed in the organization.
• Taking a periodical review of inventory by initiating various inventory control systems viz., perpetual inventory control system and ABC system of inventory control.
• Disclosing fullest and up-to-date information about the availability of stores whenever required, by maintaining proper stores records with the help of Bin Cards and Stores Ledger.
• Ensuring proper safety of materials against theft, pilferage and fire, etc.
• Supervising and co-ordinating the duties of different types of staff working under the headship of the store-keeper.
• Preventing entry of unauthorized persons in the stores.
• Maintaining proper stock-levels fixed in respect of every item of stores and replenishing them as and when necessary.

Location of Stores

‘Location’ means the site for the store. The location of the stores should be carefully planned. An important factor to be considered when establishing a store set up is the question of locating it in the most appropriate place. The stores must be set up at a convenient and safe place, near to Receiving Department, easily accessible from all parts of the factory and by means of transport and free from the risk of fire, theft, etc. The general principle in determining the location of stores is to minimize the total kg. km. cost of transportation of materials.

Factors determining the location of stores

• Nature of the Materials: The nature of the materials to be stored also affects the location of the store. Material that is not damaged by weather can be stored out of doors in a shed. But materials such as cement, plaster, etc., must not only be protected from the weather but must also be stored in a dry place.
• Minimization of Material Handling Efforts: Minimisation of material handling efforts implies location of raw material store near the production shops and location of finished goods store and packing materials store near the assembly shop. The stores should be easily accessible by means of transport.
• Quantity, Weight, etc., of the Materials: The quantity of each of the goods to be stored must be taken into account for determining the location. When the quantities are known, adequate provision may be made for immediate and future storage needs.
• Free from Risk of Loss: Store must be set up at a safe place which is free from the risk of loss due to fire, theft, moisture, etc.
• Flow of Materials: Location of store should be convenient which allows for steady and regular flow of store items without any obstruction.
• Flexibility: The location of store must be such which provides for its future expansion.

Time keeping

1. Preparation of Pay Rolls in case of time-paid workers.
2. Meeting the statutory requirements.
3. Ensuring discipline in attendance.
4. Recording of each worker’s time ‘in’ and ‘out’ of the factory making distinction between normal time, overtime, late attendance and early leaving.
5. for overhead distribution when overheads are absorbed on the basis of labour hours.

Time Recording for Piece Workers:

Recording of time in case of piece workers is necessary due to the following reasons:

1. Workers should come and leave the factory in time, as there cannot be a uniform flow of production if workers come late or leave early. Time cards should be maintained for piece workers to ensure discipline otherwise workers who are paid by time are likely to be dissatisfied.
2. Time cards are to be maintained for piece workers if they are guaranteed a minimum payment for the time spent by them irrespective of their output.
3. Time recoding is essential if apportionment of overheads is made on the basis of labour hours.
4. Time recording is essential because it facilitates the calculation of overtime wages, dearness allowance leave with pay and production bonus.
5. Time recording facilitates the fixation of differential piece rates.
6. Time recording is necessary when statistical records of time may be required for research or complying with legal requirements.

Essentials of a good Time-keeping System

1. Good time keeping system prevents ‘proxy’ for one another among workers
2. Time-keeping has to be done for even piece workers to maintain uniformity, regularity and continuous flow of production.
3. Both the arrival and exit of workers is to be recorded so that total time spent by workers is available for wage calculations.
4. Mechanised methods of time keeping are to be used to avoid disputes.
5. Late arrival time and early departure time are to be recorded to maintain discipline.
6. The time recording should be simple, quick and smooth.
7. Time recording is to be supervised by a responsible officer to eliminate irregularities.

Methods of time keeping

1. Time Recording Clocks or Clock Cards: This is mechanized method of time recording. Each worker punches the card given to him when he comes in and goes out. The time and date is automatically recorded in the card. Each week a new card is prepared and given to the worker so that weekly calculation of wages will be possible.
2. Disc Method: This is one of the older methods of recording time. A disc, which bears the identification number of each worker, is given to each one. When the worker comes in, he picks up his disc from the tray kept near the gate of the factory and drops in the box or hooks it on a board against his number. Same procedure is followed at the time of leaving the factory. The box is removed at starting time, and the time keeper becomes aware of late arrivals by requiring the workers concerned to report him before starting. The time keeper will record in an Attendance Register any late arrivals and workers leaving early. He will also enter about the absentees in the register on daily basis.
3. Attendance Records: This is the simplest and the oldest method of marking attendance of workers. In this method, every worker signs in an attendance register against his name. Leaves taken by workers as well as late reporting is marked on the attendance register itself.

Time booking

Time booking signifies the time spent by a worker on each job, process or operation. It is more important in case of direct workers as compared to indirect workers.

Objectives of Time-Booking:

(i) To calculate the labour cost of jobs done;

(ii) To apportion overheads against jobs;

(iii) To evaluate performance of labour and to make comparison of actual labour time with budgeted time;

(iv) To ascertain idle time for the purpose of control;

(v) To determine overhead rates for absorbing overhead expenses under labour hour and machine hour methods; and

(vi) To calculate bonus and wages provided the system of payment of wages depends on the time taken.

Methods of Time-Booking:

(i) Daily time sheets:

It gives in detail the activities of the worker and the time spent in each job. One sheet is allotted to each worker and a daily record is made therein. It is suitable for small organisation where the number of employee and job is small.

(ii) Weekly Time Sheets:

Each worker is given a time sheet wherein jobs done in a week are recorded. It is quite similar to Daily Time Sheet. It reflects a consolidation of the total hours worked during a particular week. This method is useful where there are few jobs in a work.

(iii) Job Cards or Job Tickets:

A separate job card for each job or operation is prepared. This card is allotted to each worker whenever a worker takes up a particular job. In this card the worker enters the time of commencement of a job as well as time of finishing the job. The entries in the job card may be made with the help of machines like time-recording clock.

Treatment of idle time:

Idle time means the amount of time the workers remain idle in a normal working day. The idle time is usually caused by a sudden fault in machine or equipment, power failure, lack of orders for the product, inefficient work scheduling, defective materials and shortage of raw materials etc. The cost associated with idle time is treated as indirect labor cost and should, therefore, be included in manufacturing overhead cost. For example, the normal weekly working hours of a worker are 48 and he is paid @ $8 per hour. If he remains idle for 6 hours due to power failure, then the cost of 42 hours would be treated as direct labor cost and the cost of 6 hours (idle time) would be treated as indirect labor cost and included in manufacturing overhead cost.

Treatment of overtime premium:

Overtime premium is the amount that is paid, for the overtime worked,  in excess of the normal wage rate. Like idle time, overtime premium is also treated as indirect labor cost and  included in manufacturing overhead cost. For example, a worker normally works for 48 hours per week @ $8 per hour. In a particular week, if he works for 52 hours and company pays him $12 for every hour worked in excess of 48 hours, the allocation of the labor cost of the worker would be made as follows:

The amount of $16 is overtime premium and is a part of manufacturing overhead cost.

Treatment of labor fringe benefits:

Fringe benefits are benefits that employers provide to employees in addition to normal salaries or wages. Examples of fringe benefits are hospitalization, insurance programs, retirement plans, paid holidays and stock options etc. Most of the companies treat labor fringe benefits as indirect labor and, therefore, include them in manufacturing overhead costs.

A few firms treat direct labor related fringe benefits as addition to direct labor cost which is considered a more superior practice.

The above information has been summarized below: