New Accounting system / Value system accounting Origins of Accounting Principles

Introduction to Accounting System

Accounting is the language of business. It records, classifies, summarizes and interprets financial transactions of an organization. In banking and financial institutions, accounting plays a very important role because banks deal with public money, deposits, loans, investments and various financial instruments.

Over time, accounting has evolved from simple record keeping to a scientific and principle-based system. This evolution led to the development of the New Accounting System and Value System Accounting, which focus not only on recording transactions but also on presenting a true and fair view of financial position.

Part A: New Accounting System / Value System Accounting

Meaning of New Accounting System

The New Accounting System refers to the modern approach of accounting which emphasizes:

  • Transparency
  • Accuracy
  • Fair valuation of assets and liabilities
  • Compliance with accounting standards
  • Use of technology (Core Banking, ERP systems)
  • Disclosure-based reporting

In banks, the new accounting system is mainly based on:

  • Accrual system of accounting
  • Prudential norms of RBI
  • Indian Accounting Standards (Ind AS)
  • Fair value measurement

Traditional Accounting vs New Accounting System

Traditional System

Earlier accounting system was mainly:

  • Based on historical cost
  • Focused on recording transactions only
  • Less disclosure
  • Manual bookkeeping

New Accounting System

Modern accounting system includes:

  • Accrual basis (income & expenses recorded when earned/incurred)
  • Fair value accounting
  • Provisioning norms
  • Risk-based classification
  • Digital and automated systems
  • Greater disclosure and transparency

In banking exams, it is important to understand that the new accounting system ensures a “True and Fair View” of financial statements.

Value System Accounting

Meaning

Value System Accounting means accounting based on correct valuation of assets and liabilities instead of only recording them at historical cost.

It focuses on:

  • Real economic value
  • Market-based valuation
  • Risk assessment
  • Provisioning for expected losses

This concept is very important in banking because:

  • Loans may become NPA
  • Investments fluctuate in market
  • Assets may lose value

Hence, banks cannot rely only on historical cost.

Key Features of Value System Accounting

Fair Value Concept

Fair value means the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction.

For example:

  • Government securities are marked to market (MTM)
  • Investments are valued at current market price

This ensures realistic financial reporting.

Prudence Principle (Conservatism)

Under value system accounting:

  • Expected losses are recognized immediately
  • Expected gains are not recognized until realized

Example in banking:

  • Provision for NPAs
  • Provision for doubtful debts

This protects depositors’ interest.

Provisioning Norms

Banks must create provisions for:

  • Substandard assets
  • Doubtful assets
  • Loss assets

As per Reserve Bank of India guidelines, provisioning depends on asset classification.

Income Recognition Norms

Income on NPAs is not recognized on accrual basis. It is recognized only when actually received (cash basis).

Accrual System vs Cash System

Cash System

  • Income recorded when received
  • Expense recorded when paid

Accrual System

  • Income recorded when earned
  • Expense recorded when incurred

Banks follow accrual system except for NPAs.

Role of Accounting Standards

Modern accounting is guided by standards issued by:

  • Institute of Chartered Accountants of India
  • Ministry of Corporate Affairs
  • RBI (for banks)

Indian Accounting Standards (Ind AS) are largely based on International Financial Reporting Standards (IFRS).

Importance in Banking Sector

In banking sector, new accounting system helps in:

  • Correct profit calculation
  • Proper NPA reporting
  • Capital adequacy calculation
  • Risk management
  • Compliance with Basel norms

It ensures stability of financial system.

Part B: Origins of Accounting Principles

Historical Development of Accounting

Accounting has a long history.

Ancient Period

  • Evidence found in Mesopotamia (around 3000 BC)
  • Basic record keeping of trade transactions

Double Entry System

Modern accounting began with the double entry system.

The credit for systematic accounting is given to:

  • Luca Pacioli

In 1494, he published a book describing double entry bookkeeping system. This became the foundation of modern accounting.

Need for Accounting Principles

As business expanded:

  • Different companies followed different methods
  • No uniformity
  • Financial statements were not comparable

Therefore, there was a need to develop common rules known as Accounting Principles.

These principles ensure:

  • Uniformity
  • Consistency
  • Comparability
  • Reliability

Development of Accounting Principles

Accounting principles developed gradually from:

  • Business practices
  • Customs
  • Judicial decisions
  • Professional bodies
  • Government regulations

They are not natural laws but are man-made rules based on experience and practicality.

Basic Accounting Concepts (Origins of Principles)

The accounting principles originated from certain fundamental concepts:

Business Entity Concept

Business is separate from its owner.

In banking:

  • Bank is separate from shareholders.

Going Concern Concept

Business will continue for foreseeable future.

This concept allows:

  • Depreciation calculation
  • Asset valuation

Money Measurement Concept

Only monetary transactions are recorded.

For example:

  • Employee skill cannot be recorded
  • But salary paid is recorded

Historical Cost Concept

Assets are recorded at original cost.

However, modern value system modifies this concept by introducing fair value.

Dual Aspect Concept

Every transaction has two aspects:

  • Debit
  • Credit

This is the basis of double entry system.

Matching Concept

Expenses are matched with related income.

Example:

  • Interest expense matched with interest income

Revenue Recognition Principle

Revenue is recognized when earned, not when cash received (accrual basis).

Prudence Principle

Anticipate no profit, provide for all possible losses.

Very important in banking accounting.

Consistency Principle

Same accounting method should be followed year after year.

Materiality Concept

Only significant information should be disclosed.

Accounting Conventions

Apart from principles, accounting is also guided by conventions:

  • Conservatism
  • Full Disclosure
  • Consistency
  • Materiality

These developed from common practices over time.

Role of Regulatory Authorities

In India, accounting principles are influenced by:

  • Reserve Bank of India (for banks)
  • Institute of Chartered Accountants of India
  • Companies Act
  • SEBI (for listed companies)

Banks must follow:

  • Banking Regulation Act
  • RBI guidelines
  • Prudential norms

Shift from Historical Cost to Fair Value

Earlier accounting focused on:

  • Historical cost

Modern system emphasizes:

  • Fair value
  • Impairment testing
  • Expected credit loss (ECL model under Ind AS 109)

Conclusion

The New Accounting System and Value System Accounting represent the evolution of accounting from simple record-keeping to a structured, principle-based, and transparent financial reporting system. In banking, this system ensures:

  • True and fair presentation
  • Risk recognition
  • Proper asset classification
  • Protection of depositors

The origins of accounting principles lie in historical business practices, especially the double-entry system introduced by Luca Pacioli. Over time, these principles were formalized by professional and regulatory bodies to ensure uniformity and reliability in financial reporting.