Financial Statement Preparation: Frameworks, GAAP, AS 1 & Sole Proprietor Final Accounts: 25 flashcards
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1. Name the four frameworks of accounting.
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Conceptual, legal, institutional, and regulatory.
2. What does the conceptual framework define?
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The objective of financial statements, the qualitative characteristics of useful information, and the elements (assets, liabilities, equity, income, expenses).
3. What are the two fundamental qualitative characteristics of useful information?
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Relevance and faithful representation.
4. Define an asset under the conceptual framework.
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A resource controlled by the entity from which future economic benefits are expected.
5. Define a liability under the conceptual framework.
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A present obligation arising from past events.
6. Which Act prescribes Schedule III formats for companies?
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The Companies Act 2013.
7. Which Act governs profit-sharing and dissolution for partnerships?
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The Indian Partnership Act 1932.
8. What is GAAP?
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The composite of the four frameworks — the conventions, rules, and procedures that define accepted accounting practice at a given time.
9. Why do Accounting Standards exist?
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To ensure comparability, credibility, and consistency in financial statements.
10. When was the Accounting Standards Board (ASB) constituted and by whom?
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By the ICAI in 1977.
11. List the steps in the procedure for issuing an Accounting Standard.
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Identify the area → constitute a study group → prepare a preliminary draft → issue an exposure draft for public comment → finalise after considering comments → submit to the ICAI Council for approval.
12. What does AS 1 deal with?
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The disclosure of accounting policies.
13. What are the core requirements of AS 1?
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Disclose all significant accounting policies as part of the financial statements; apply them consistently; disclose any change in policy with its financial impact.
14. Describe the horizontal (T-form) format of the balance sheet.
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Assets on the left; liabilities plus capital on the right.
15. Describe the vertical format of the balance sheet.
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Assets, liabilities, and equity presented in a single column; prescribed by Schedule III for companies.
16. State the accounting equation that both formats must satisfy.
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$\text{Assets} = \text{Liabilities} + \text{Capital}$
17. List the advanced adjustments tested in sole proprietor final accounts.
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Outstanding expenses, prepaid expenses, accrued income, income received in advance, depreciation, bad debts, provision for doubtful debts, closing stock, and goods drawn by the proprietor.
18. What is the dual effect of every adjustment?
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One effect in the Profit & Loss Account and one effect in the Balance Sheet.
19. List the steps of the accounting cycle.
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Journal → ledger → trial balance → adjusting entries → adjusted trial balance → Trading and P&L Account → Balance Sheet.
20. What happens to an error made in the journal?
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It propagates through the entire accounting cycle to the final statements.
21. Why does a sole proprietor need to care about the four frameworks?
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The frameworks determine the credibility of statements presented to banks, buyers, and tax authorities; and they become binding if the business grows into a partnership or company.
22. Distinguish AS from Ind AS.
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AS are issued by the ICAI/ASB; Ind AS are converged with IFRS and apply to larger entities. They are different sets with different applicability.
23. Which framework is persuasive and which is binding?
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The conceptual framework is persuasive; legal requirements are binding.
24. How do the four frameworks become operational?
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Through the accounting cycle — from journal to final accounts.
25. Why is a sole proprietor's personal car not a business asset?
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It fails the control-and-benefit test for the entity under the conceptual framework.
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