Accounting Standards in India - Simple explanation ( AS 5 to AS 8 ) Part second

>> May 28, 2009


5. Accounting standard 5 ( AS 5)

Profit or loss for the period prior of changing accounting policies:-




ICAI’s this standard explains two simple rules

1. All ordinary and extraordinary item relating to the financial statement should be disclosed if it effects on profit or loss period before changing of accounting policies.

2. If accounting policies are changed. Then it is the duty of enterprise to disclose all important items relating to income and expenditures, so that profit or losses before the period and after period of changes of accounting policies can easily compare with other enterprises business.



6. Accounting standard 6 (AS 6 )

Accounting of Depreciation


Accounting standard 6 explains rules and regulations regarding charging of depreciation on any fixed asset . These rules can be explained in following way.

1. Depreciation must be charged on fixed assets which is used in business for more than one year .

2. Depreciation should charge with consisted method of charging depreciation. Two famous method of charging depreciation are straight line and reducing balance method.

3. Rate of depreciation should be according to company law 1956 and if it is not written in it then companies are free to charge depreciation with appropriate rate of depreciation.

4. Any company can also change the method of charging depreciation. But its effect in the form of deficiency or surplus also should show in profit and loss account of business .

5. Deficiency due to changing the method of depreciation will be debited in profit and loss account and surplus due to changing the method of depreciation will be credited in profit and loss account of business.


7. Accounting standard 7 ( AS 7 )

Accounting of construction contracts




Construction contracts are those contracts relating to build of dam, building, pipelines, ships and other fixed assets. The nature of business is different from business of general manufacturing. Because time of completing contract is more than the time of accounting period. So, ICAI makes some rules and regulation that should be adopt in the business relating to construction.

1. Construction Company should identify all their resources of revenue. It may be fixed at the time of contract or it may be cost plus profit basis. So, it is necessary to make contract account statement in which all revenue of construction business must be shown.

2. Costs of contract comprise all raw material labour and other expenses which incurred for completing of contact. These costs should also calculate and deduct from revenue for calculating net earning from each contract.



8. Accounting standard 8 (AS 8)

(Accounting for research and development)




Research and development is important department of any company. AS 8 cares its accounting treatment and related to calculate its proper cost and charging on profit and loss account.

Ist part

Calculate the cost of research and development with following formula


= Cost of raw material used in research and development + Cost of wages and salaries of employees working in this department +depreciation of assets used in this department + amortization cost of patents and licenses + other related cost


2nd part

This part is related to charge the written off proportion to profit and loss account. For this company’s accountant should see what will company gets future benefits and how many years will company get these profits. On this estimation, company will charge written off cost to debit side of profit and loss account and rest amount of deferred expenditure of research and development will be shown in balance sheet’s asset side under miscellaneous expenditures .
related : Accounting Standards in India – Simple Explanation - Part one (AS 1 to AS 4 )





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1 comments:

Anonymous,  June 1, 2009 at 2:56 AM  

Nice Article Man...Keep it up...

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