ACCOUNTING

Accounting - A Capsule for Quick Revision

Accounting constitutes a significant area of core competence for Chartered Accountancy students. The
significance of this subject can be judged from the fact that we have a paper on Accounting at every level of
CA course. Accounting papers at Intermediate level under Chartered Accountancy curriculum concentrate on
conceptual understanding of the crucial aspects of accounting and acquaint students with the basic concepts,
theories and accounting techniques followed by different entities. The objective of Paper 1 “Accounting” at
Intermediate level is to acquire the ability to apply specific accounting standards and legislations to different
transactions and events and in preparation and presentation of financial statements of various business entities.
It has always been the endeavour of Board of Studies to provide quality academic inputs to the students.
Keeping in mind this objective, it has been decided to bring forth a crisp and concise capsule for Intermediate
Paper 1 ‘Accounting’. Chapter overview has been provided to present a broad outline of the topic coverage in each
chapter. The significant points of the topics have been presented through pictorial presentations in this capsule
which will help the students in grasping the intricate practical aspects of each topic. This will facilitate the
students to recapitulate the whole concepts within minimum time and efforts in the later stages of preparation.
Although, the capsule has been prepared keeping in view the new and revised scheme of Education and Training
of ICAI, the students of earlier scheme may also be benefitted from it.
This capsule, though, facilitates the students in undergoing quick revision, under no circumstances, such
revisions can substitute the detailed study of the material provided by the BoS.

CHAPTER 1: INTRODUCTION TO ACCOUNTING STANDARDS

Chapter Overview

Concepts & Benefits Accounting Significance of

of Accounting Standards setting List of Accounting
Global Standards
Standards process Standards

International Financial International

Concept of Ind AS Convergence to Reporting Standards as Financial Reporting
Carve Outs IFRS in India global standards Standards (IFRS)

Issuance of Accounting Standards

Standardisation of
Accounting Standards are written alternative accounting
policy documents issued by treatments

Government
ICAI
e.g. (MCA) for corporate
for non corporate entities
entities in consultation
with NACAS Benefits
Comparability of Enhanced
of financial Accounting disclosures
statements Standards
Accounting Standards - Benefits

Recognition Measurement Presentation

of events and of of Disclosures
transactions transactions transactions
and events and events

 ACCOUNTING

Accounting Standards Setting Process Significance of Global Standards

Identification of area

Constitution of study group

Cross
border flow
Preparation of draft and its circulation Lower risk of money
of errors of Global listing
judgment in different
Ascertainment of views of different bodies on draft stock
markets

Finalisation of exposure draft (E.D.)

Reduced
Comments received on exposure draft (E.D.) operational Significance Comparability
challenges of Global of financial
Standards statements
Modification of the draft

Issuance of AS
Greater Elimination
transparency of costly
requirements
List of Accounting Standards Enhanced
1 Disclosure of Accounting Policies
accountability

2 Valuation of Inventories
3 Cash Flow Statement
4 Contingencies and Events Occurring after the Balance Sheet Date
5 Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies
International Financial Reporting
7 Construction Contracts Standards (IFRS)
9 Revenue Recognition
10 Property, Plant and Equipment
11 The Effects of Changes in Foreign Exchange Rates IFRS issued by Interpretations on IAS/IFRS
IASB issued by IFRS Interpretations
12 Accounting for Government Grants Committee
13 Accounting for Investments
14 Accounting for Amalgamations
15 Employee Benefits IAS issued Interpretations
16 Borrowing Costs by IASC and on IAS issued
adopted by IASB
17 Segment Reporting IFRS by SIC
18 Related Party Disclosures
19 Leases
20 Earnings Per Share
21 Consolidated Financial Statements
22 Accounting for Taxes on Income
23 Accounting for Investments in Associates in Consolidated
Financial Statements
24 Discontinuing Operations International Financial Reporting
25 Interim Financial Reporting
Standards (IFRSs) as Global Standards
26 Intangible Assets
Enhanced
27 Financial Reporting of Interests in Joint Ventures Principle transparency Emergence
IFRSs based set of and as Global
28 Impairment of Assets comparability of
standards Standards
29 Provisions, Contingent Liabilities and Contingent Assets financial
statements

Effectively, there are now only 27 Accounting Standards.

 ACCOUNTING
Convergence to IFRS in India

Deviation from
corresponding IFRS, if
Indian Accounting
Application of IFRS in required
Convergence Standards (Ind AS)
to IFRS; India considering legal
ICAI
not adoption and other conditions
prevailing in India Decision to have two
sets of Accounting Accounting Standards
standards (AS)

Ind AS Indian Accounting Standards - Benefits

Ind AS are IFRS converged standards issued by
the Central Government with certain carve outs. Globalization Transparency Comparability Enhanced
and of financial of financial Disclosure
Steps for notification Liberalization statements statements requirements

Objectives and Concepts of Carve Outs

Sent to Formulation of Ind AS

Central
Govt. for
Sent to NACAS Notification Departures
for deliberation

Resulting into carve-outs Not resulting into carve-outs

Formulation by
ASB of ICAI

Removal of options in
Deviation from the
accounting principles and
accounting principles
practices in Ind AS vis-a-
stated in IFRS
vis IFRS

Implementation of Ind AS
Voluntary w.e.f.
Corporate 1/4/15
entities

Mandatory w.e.f.
1/4/16

MCA NBFC
1/4/2018

Roadmap by
respective RBI Earlier adoption
Regulators Banking Co 1/4/2018 not allowed

Earlier Ind AS to be implemented from

IRDA Insurance Co. 1.4.2018. However after issuance of IFRS 17,
implementation of Ind AS will be from F.Y.
2020-21

ACCOUNTING
CHAPTER 4: FINANCIAL STATEMENTS OF COMPANIES
Unit 1: Preparation of Financial Statements of Companies
Unit Overview

Meaning of Company
and maintenance of Preparation of Requisites of financial Managerial remuneration
books of accounts financial statements statements of managers

Accounting for Transfer to Declaration

Dividend Divisible profits
Taxes on Income Reserves and payment of
Distribution Tax
dividend

Meaning of Company and Maintenance of Books of Accounts of a Company

As per Section 128 of the Companies Act, 2013
Company as per Section 2(20) of
Every company should prepare and keep
the Companies Act, 2013
at its registered office

books of accounts, relevant books and financial statements

Company Under any Different types on accrual basis and according to double entry system
incorporated previous company of companies as of accounting
under the law (e.g., the defined in the
Companies Act, Companies Act, Companies Act, for every financial year
2013 1956) 2013
giving a true and fair view of the state of the affairs.

Preparation of Financial Statements Requisites of Financial Statements

Schedule
III to the
Statement
Companies
of Profit and
Act, 2013
loss

Cash Flow
Balance Statement
sheet Accounting
Financial
Statements Statutory Financial Standards
as per Section requirements Statements notified by
2(40) MCA
Statement
of changes
in Equity (if
Notes applicable)
and other
statements Guidance
Notes

 ACCOUNTING
Managerial Remuneration Schedule V
Managerial
Remuneration (MR) Part I Part II Part III Part IV

Adequacy of profits
Lays down Deals with Specifies the Deals with
conditions to remuneration provisions Central
Calculated as Total MR* < 11% Total MR > 11% of be fulfilled payable to applicable Government’s
Profit % as per of the net profits the net profits as for the managerial to parts 1 power to
Sec. 198 as per Sec. 198 per Sec. 198 appointment person by and 2 of this relax any
of a companies schedule requirements
As per Schedule managing or having profits in this
with the whole-time and also by Schedule.
V and sections As per approval of
under the Section 197 director or companies
the Central a manager having no
Companies Act, Govt.
2013. without the profits or
approval of inadequate
the Central profits.
*Total managerial remuneration payable Subject to Govt.
includes payable to Directors + Managing Schedule V.
director + Whole-time director+ Manager

Remuneration Payable by Companies having no Profit or Inadequate Profit without Central

Government Approval
Where the effective capital is Limit of yearly remuneration payable should not exceed (Rupees)
(i) Negative or less than 5 crores 60 Lakh
(ii) 5 crores and above but less than 100 crores 84 Lakh
(iii) 100 crores and above but less than 250 crores 120 Lakh
(iv) 250 crores and above 120 lakh plus 0.01% of the effective capital in excess of ` 250 crore.

Distribution of
Divisible Profits divisible profit as per
number of shares
The availability of Divisible Profits (available held by share holder

A r m ea s
for distribution) depends on a number of

di ay e o
o rel

st n f
rib ot as
d

factors, e.g., their composition, the amount of

en

ut en set
id

io ta s
iv

provisions and appropriations that must be

n il
D

m a
ay
made out of them in priority, etc.

Declaration of a dividend presupposes that there is a trading profit or a surplus available for distribution,
arrived at after providing for depreciation on assets, not only for the year in which the profits were earned
but also for any arrears of depreciation of the past years. Board of Directors of a company may declare
interim dividend during any financial year out of the surplus in the profit and loss account and out of profits
of the financial year in which such interim dividend is sought to be declared.

Declaration and Payment of Dividend

No Dividend can be declared except out of

Trading profits after Money provided (in pursuance

providing for depreciation of guarantee) by

(a) Current (b) Previous financial Both (a) and Central State
financial year years (b) Government Government

Capital cannot be returned to the shareholders by way of dividend.

No dividend should be declared or paid by a company from its reserves other than free reserves.

 ACCOUNTING
Conditions as per Companies (Declaration and Payment of Dividend) Rules, 2014
Should not exceed Average This rule does not apply to a company,
Rate of Dividend rates of dividend in the 3 years which has not declared any dividend in
immediately preceding that year each of the three preceding financial year.

Total amount drawn from

accumulated profits should not as appearing in the latest audited Financial
Amount exceed 1/10 of Paid-up share capital Statements
+ free reserves

Drawn amount should first incurred in the FY in which dividend is

Utilization declared.
be used to set off the losses

After such withdrawal should

not fall below 15% of paid up as appearing in the latest audited
Balance of reserves Financial Statements
share capital

No company should declare dividend

unless carried over previous losses and
Loss or depreciation, whichever is less, in previous years is set off
depreciation not provided in previous year
against the profit of the company for the year for which dividend is
are set off against profit of the company of declared or paid.
the current year.

Transfer to Reserves Disclosure and Presentation of DDT in

Appropriation of a part of Profit
As per section 123 (1)of
the Companies Act, 2013.
Financial Statements
● Dividend on shares is shown as an appropriation of profit in
the ‘Notes to Accounts’ of the ‘Reserves and Surplus’ item of
the Balance sheet.
● DDT liability relates to distribution of profits as dividends
As required under law. which are disclosed as appropriation /allocation of profit
in the ‘Notes to Accounts’ of ‘Reserves and Surplus’, it is
appropriate that the liability in respect of DDT should also
be disclosed therein.

Dividend Distribution Tax (DDT)

AS 22 Accounting for Taxes on Income *
Meaning Income

Accounting income as per Taxable income as per

Leviable on books of accounts Income Tax Act
gross dividend /
income

DDT paid Differences between accounting income &

treated as the taxable income that originate in one period
final payment of Addition to the
tax on dividends. income-tax Are they capable of reversal in one or
more subsequent periods?

DDT
No Yes
DDT should be Chargeable in
payable even if respect of the
no income-tax is total income Permanent differences Timing differences
payable of a domestic
The rate is 15% company.
Results in a DTA or a
(excluding 12% No accounting
surcharge* + 3% DTL in B/S and
adjustments form part of the tax
secondary and
higher expenses in P& L A/c
education cess).
*Accounting for Taxes on Income is not covered in syllabus of Paper
1 under earlier scheme.
* In specified cases

 ACCOUNTING
Unit 2: Cash Flow Statement
Unit Overview Cash and Cash Equivalents for the Purpose
of Cash Flow Statement
‘Cash’ include: Cash, Bank balances
Meaning of Difference
Definition &
Cash & cash between Preparation
Significance
equivalents operating, of cash flow
of cash flow
and Cash investing and statement as
statement
flow financing per AS 3.
activities.

Definition of Cash Flow Statement

Cash flow statement is a summary of

+
cash receipts and cash payments for
accounting period.

and

Cash equivalents

Significance of Cash Flow Statement

Historical Short term highly liquid

Securities with
changes & Future investments that are
short maturity
requirement readily convertible
period of, say, three
of cash & cash into known amounts
months or less from
equivalents. of cash and subject to
Accuracy date of acquisition
Ability to an insignificant risk of
of past changes in value
assessments generate cash &
of future cash cash equivalents.
flows.
Cash flow
statement Meaning of term Cash Flow
depicts
Indicator
of amount, Operational Cash Flow
timing and efficiency
certainty of of different
future cash enterprises.
flows. Insolvency
and liquidity Inflow from Activities Outflow of Activities
position of an
enterprise.

Cash increase Cash decrease

 ACCOUNTING

Classification of Cash Flow Activities

Classification of Cash Flow Activities

Investing activities Financing activities

Operating activities
(acquisition and disposal of long-term (changes in the size and composition of
(principle revenue generating)
assets and other investments) the owner’s equity and borrowings)

Methods (Operating Cash flow)

Direct method Indirect method

Gross cash receipts and gross cash payments Net profit or loss is adjusted instead of
individual items of P & L A/c

Proforma of Cash Flow Statement prescribed by AS 3

Direct Method Indirect Method
Particulars Particulars

Operating Activities: Operating Activities:

Cash received from sale of goods xxx Closing balance of Profit & Loss Account xxx

Cash received from Trade receivables xxx Less: Opening balance of Profit & Loss Account xxx
Cash received from sale of services xxx xxx xxx
Less: Payment for Cash Purchases xxx Reversal of the effects of Profit & Loss Appropriation xxx
Account
Payment to Trade payables xxx
Net Profit after tax xxx
Payment for Operating Expenses xxx
Add: Provision for Income Tax xxx
e.g. power, rent, electricity

Payment for wages & salaries xxx Net Profit Before Tax and Extraordinary Items xxx

Payment for Income Tax xxx xxx Reversal of the effects of non-cash and non-operating items xxx

xxx Effects for changes in Working Capital except cash & xxx
cash equivalent
Adjustment for Extraordinary Items xxx
xxx
Net Cash Flow from Operating Activities xxx
Less : Payment of Income Tax xxx xxx

Net Cash Flow from Operating Activities xxx

 ACCOUNTING

CHAPTER 5: PROFIT OR LOSS PRE AND POST INCORPORATION

Chapter Overview Methods for Computation

Apportionment of Close off old books and

Meaning of profit items of incomes and open new books with the
or loss prior to Methods for expenses in pre and assets and liabilities as
incorporation computation post incorporation they existed at the date of
periods incorporation

Meaning of Profit or Loss prior to Incorporation Methods

for computation

Split up the profit Time basis (i)

referred as of the year in which
Pre-Incorporation Such profits or the business has
Profit or loss of Turnover basis (ii)
Profits or Losses losses are of been transferred,
a business
capital nature between ‘pre’ and
‘post’ incorporation Combination
Company came of both (i+ii)
periods
prior to the date into existence disclose them
separately

Apportionment of Items of Incomes and Expenses in Pre and Post Incorporation Periods

Item Basis of Apportionment between Audit Fees Types of Audit

pre and Post incorporation period

Gross Profit or Gross Loss Sales Ratio or Cost of goods (i)For Company’s Audit under Charge to Post-incorporation
sold Ratio or Time Ratio the Companies Act period

Variable expenses linked with (ii)For Tax Audit under the

On the basis of turnover in the
Turnover [e.g. Selling and Sales Ratio Income-tax Act, 1961
respective periods
distribution expenses, etc.]

Fixed Common charges [e.g., Interest on purchase

Salaries, Office etc.] Time Ratio consideration to vendor Time basis

Expenses exclusively relating to (i) For the period from the date
Charge to Pre-incorporation Charge to Pre-incorporation
pre-Incorporation period [e.g. of acquisition of, business to
period period
Interest on Vendor’s Capital] date of incorporation

Expenses exclusively relating to (ii) From the date of

Charge to Post-incorporation Charge to Post-incorporation
post-incorporation period [e.g. incorporation
period period
interest on debentures etc.]

ACCOUNTING

CHAPTER 6: ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE*

Chapter Overview

Accounting
Value of treatment
Right
Right Issue
& its Effects
Provisions of the
Companies Act,
2013
Definition of Bonus
Shares & its Effects

Authorised
by its articles

Partly paid-up
shares, if any Authorised
Definition of Bonus issue outstanding in the general
meeting of the
are made fully
paid-up company
Issue of shares Conditions
at no cost Based upon That the for issue of
to current the number shareholder bonus shares
shareholders in of shares already owns
a company Company not
Company not defaulted in
defaulted for payment of interest
payment of / principal of fixed
statutory dues of deposits/ debt
Provisions of the Companies Act the employees securities issued
by it

Section 63 allows companies to issue

fully paid-up bonus shares from

Free reserves
Effects of Bonus Issue
Securities premium
Increase in share capital
Capital redemption reserve Reduction in EPS and other
per share values
Favourable act considered by
markets
Adjustment in market price
Out of
Can’t be reserves in lieu of
Bonus shares Reduction in accumulated
issued created by dividend
profits
revaluation
of assets

*Right Issue is not covered in the syllabus of Paper 1 under the

earlier scheme.

 ACCOUNTING
Accounting Entries Effects of Right Issue
Upon the sanction of an issue of bonus shares Maintenance of existing
Dilution in the value of share.
shareholders’ proportional
● Debit Capital Redemption Reserve Account holding in company and retain
● Debit Securities Premium Account their financial and governance
rights
● Debit General Reserve Account
● Debit Profit & Loss Account Effects
● Credit Bonus to Shareholders Account. of Right
issue
Upon issue of bonus shares
Image enhancement Convenience in handling
● Debit Bonus to Shareholders Account issue
● Credit Share Capital Account.
Upon the sanction of bonus by converting partly paid shares
into fully paid shares
Conditions for right issue as per the
● Debit General Reserve Account Companies Act
● Debit Profit & Loss Account
● Credit Bonus to Shareholders Account.
On making the final call due After the expiry of
the time specified
● Debit Share Final Call Account Notice specifying Offer to include a in notice or on
● Credit Share Capital Account. the number of right exercisable receipt of earlier
shares offered and by the person intimation from
On adjustment of final call
limiting a time not concerned to person that he
● Debit Bonus to Shareholders Account being < 15 days and renounce the declines to accept the
● Credit Share Final Call Account. not > 30 days from shares offered to shares offered, BoD
the date of the offer him unless articles may dispose of them
provide otherwise in a manner which is
not disadvantageous
to shareholders and
Definition of Right Issue; Value of Right and company
Right of Renunciation
The existing shareholders have a right to subscribe to any
fresh issue of shares by the company in proportion to their
existing holding for shares.
Situations when Right shares are offered

Employees under a scheme Any persons, either for cash or

of ESOP for a consideration other than
Cum-right Ex-right
Value of cash, if the price of such shares is
value of Less value of determined by registered valuer
right = share share
Situations when shares can be offered,
without being offered to the existing
shareholders, provided the company
has passed a special resolution and
shares are offered to
When companies borrow money When loan has been obtained from
through debentures / loans and the government, and government
give their creditor an option to buy in public interest, directs the
[Cum-right (Existing equity shares of a company. debentures / loan to be converted
value of the Number into equity shares.
Ex-right existing shares Divided by
of shares +
value of the + (Rights shares Number of
shares = X Issue Price)] right shares)
Accounting treatment

Right of renunciation refers to the right of the sharehold-

Same as Bank A/c Equity share
er to surrender his right to buy the securities and transfer
ordinary debited capital A/c
such right to any other person. share credited

 ACCOUNTING

CHAPTER 9: INVESTMENT ACCOUNTS

Chapter Overview Categories of Investments

Categories of
Investment on the
Definition basis of Income

Cost &
Disposal Carrying
amount
Fixed income Variable income
bearing scrips bearing scrips

Investment
Accounts
Classification Accounting
Securities having Securities having
& for
fixed return of variable return of
Reclassification purchase
income income
and sale

Accounting
for Right
& Bonus e.g. Government
securities; debentures e.g. Equity shares
Shares
or bonds

Definition of Investments Cost of Investments

Investments are assets held
by an enterprise Type of acquisition Cost

for earning income for capital appreciation or Payment Cash price including charges such as
for other benefits in Cash/ bank brokerages, fees and duties

Dividend
By Issue of shares/ Fair value of securities issued
other securities
Assets held as Stock-in-
Interest trade are not ‘Investments’.
Fair value of asset given up or
In exchange for fair value of investment acquired,
another asset whichever is more clearly evident
Rentals

Classification and Carrying Amount of Investments

Current Investments
(readily realisable and intended Carried at lower of cost and
to be held for not more than fair value
Classification of one year)
Investments as per
AS 13

Long Term Investments Carried at cost

(other than Current)

 ACCOUNTING
Accounting in the Books at the Time of Accounting for Income on Investments
Purchase and Sale of Investments
Particulars Value in ‘capital’ column of Investment Accounting of
Account Interest accrued/Dividend Declared
Purchase Sale
Transaction Purchase price of Entire sale proceeds i.e.,
on ex-interest investment, i.e., no no impact of accrued
basis impact of interest interest (from the date Pre-acquisition period Post-acquisition period
accrued up to the date of last payment to the
of transaction date of sale)
Transaction Purchase price of Sale proceeds, net of
Deducted Recognized as
on cum- investment less accrued interest (from from cost of an income
interest basis accrued interest up to the date of last payment investment
the date of transaction to the date of sale)

Accounting for Right Shares and Bonus Reclassification of Investments

Shares
Accounting for
Reclassification
of Investments

Right shares Bonus

Long-term to Current to
Subscribed Not subscribed, No amount is Current Long-term
Cost of shares but sold entered in the
added to carrying Sale proceeds capital column of
amount taken to P&L A/c investment account.

Transfer at lower Transfer at Lower

If acquired on cum-right basis & the market value of of cost & carrying of cost & fair
amount at the date value on the date
investments immediately after their becoming ex-right of transfer
is lower than the cost for which they were acquired, the of transfer
sale proceeds of rights is applied to reduce the carrying
amount of such investments to the market value.

Disposal of Investments

Part of investment is Investments held as

Difference between the disposed: stock-in-trade:
carrying amount and
the disposal proceeds, Carrying amount is
net of expenses is allocated to that part Cost of stocks
recognised in the on the basis of average disposed = formula as
P & L statement. carrying amount of per AS 2.
total investment.

 ACCOUNTING

CHAPTER 10: INSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS OF PROFIT

Chapter Overview Claim for Loss of Stock

Amount of claim in case goods are
fully insured

Significance Meaning of Claim for loss Important

of insurance Fire of stock and terms
Loss of profit Total Loss Partial Loss
policy

Actual loss

Significance of Insurance Policy Amount of claim

in case of Under
insurance

Loss
Contract of
of stock indemnity
Total Loss Partial Loss
Insurance
claims
Restricted Without With Average
Loss of Loss due to the policy Average clause Clause
profit to fire, amount
flood, theft, Loss of stock x
earthquake Actual loss Or
Sum insured sum insured /
etc. Insurable amount
whichever is lower
(Total cost)

Important Points
Meaning of Fire
Spontaneous fomentation Stock records are  Value of the stock as at the date of the fire
or heating or any process maintained can be easily arrived.
involving application
Fire not occasioned of heat
or happening through Stock records are  Trading Account is prepared. After allowing
not available or are for the usual gross profit, closing stock
Earthquake, riot, civil destroyed by fire ascertained as balancing item.
commotion, war, etc.
 Trading Account preparation is difficult.
Books of account Information is obtained from the customers
Lightning
are destroyed and suppliers to ascertain the amount of sales
Fire

and purchases.
Boilers used for domestic
purposes only  Damaged stocks are subrogated to the
Insurance company insurance company. Subrogation is the right
makes payment of an insurer to legally pursue a third party
Any other boilers on the
Explosion not that caused an insurance loss to the insured.
premises
occasioned or
happening through
In a building, not being  Cost of such stock credited to the Trading
any gas works or gas Salvaged stock is Account and debited to a salvaged stock
for domestic purposes made saleable after account. The expenses on reconditioning
or used for lighting or it is reconditioned debited and sales credited to this account, final
heating balance being transferred to the P & L A/c

 ACCOUNTING

Loss of Stock Important Terms

Particulars Amount Claim for Loss The Loss of Profit Policy normally covers
of Profit the following items:
Value of stock on the date of fire xxx (1) Loss of net profit
Less:- Value of Salvaged stock xxx (2) Any increased cost of working

Amount of loss of stock xxx Gross Profit Net profit +Insured Standing charges
OR
Insured Standing charges – [Net Trading
Particulars Amount Loss (If any) X Insured Standing charges/
All standing charges of business]
Value of salvaged stock xxx

Add: Expenses on re-conditioning xxx Net Profit The net trading profit (exclusive of all
capital receipts and accretion and all
Less: Sales xxx outlay properly chargeable to capital)
resulting from the business of the Insured
Profit/(loss) xxx
at the premises after due provision has
been made for all standing and other
charges including depreciation.

Claim for Loss of Profit Insured Interest on Debentures, Mortgage Loans

Standing and Bank Overdrafts, Rent, Rates and
Loss of Profit (consequential loss) Policy Charges Taxes (other than taxes which form part
of net profit) Salaries of Permanent
Staff and Wages to Skilled Employees,
Boarding and Lodging of resident
Directors and/or Manager, Directors’
Fees, Unspecified Standing Charges.
Any increased cost of
Loss of net profit
working
Rate of Gross The rate of Gross Profit earned on
Profit turnover during the financial year
immediately before the date of damage.

Business is interrupted e.g., Renting of temporary Annual The turnover during the twelve months
due to damage of premises premises Turnover immediately before the damage.
(adjusted)
Standard The turnover during that period (in the
(i)Reduction in Turnover twelve months immediately before the
turnover, and date of damage) which corresponds with
loss of the Indemnity Period.
Insurance limited gross
for Loss of to profit due
Profit to Indemnity The period beginning with the occurrence
Period of the damage and ending not later than
(ii) Increase
in the cost of twelve months.
working

 ACCOUNTING

CHAPTER 11: HIRE PURCHASE AND INSTALMENT SALE TRANSACTIONS

Chapter Overview Important Terms Used in Hire Purchase

Arrangements and Instalment Payment System
Accounting for sales Distinction
between sales Hire Person who delivers the goods along with its possession
Meaning under Instalment Vendor to the hire purchaser under a hire purchase agreement.
payment system under Hire
purchase and
Instalment Hire Person who obtains the goods and rights to use the same
payment Purchaser from hire vendor under a hire purchase agreement.
system
Amount to be paid by the buyer on outright purchase in
Cash Price cash.
Repossession and
Important Recording the value of Initial payment made to the hire vendor by the hire
Down purchaser at the time of entering into a hire purchase
terms repossessed goods Payment agreement.

Amount which the hire purchaser has to pay after

Hire a regular interval upto certain period as per the
agreement to obtain the ownership of the asset
Purchase purchased (on payment of the last Instalment). It
Accounting for hire Instalment
Ascertainment comprises of principal amount and the interest on the
purchase transactions unpaid amount.
of Cash price in books of Hire
and Interest Purchaser and Hire
vendor Total sum payable by the hire purchaser to obtain the
Hire ownership of the asset purchased under hire purchase
purchase agreement. It comprises of cash price and interest on
price outstanding balances.
Sales under Hire Purchase and Instalment
Payment System If the hire purchaser fails to pay any of the instalments,
Repossession the hire vendor takes the asset back in its actual form.
Sales This act of recovery of possession of the asset is termed
as repossession.

Ascertainment of Cash Price

On full On Instalment
payment
(in Cash or Calculation of cash
Credit) price and Interest
Hire Instalment
Purchase

Without using annuity table With the help of annuity table

Transfer of
Ownership (Interest included in each (Cash price = Down
at the time of Agreement Agreement instalment is calculated from payment + Present value of
sale of Hiring of Sale
an appropriate formula) instalments)

Ownership Ownership Accounting for Hire Purchase Transactions

transfer on transfer on
payment payment
of first
Books of Hire Purchaser
of last
Instalment Instalment
Methods

Cash Price Method Interest Suspense Method

Parties Parties

At the time of transfer of

Full cash price of possession of asset, total interest
asset is debited to unaccrued is transferred to
Hire Hire Asset Account and interest suspense account.
Purchaser Vendor Buyer Seller
credited to Hire
Vendor Account At later years, as and when
interest becomes due, interest
account is debited and interest
suspense account is credited.

 ACCOUNTING
Journal Entries To Asset Account
Cash Price Method For closing interest and depreciation account
Profit and Loss Account Dr.
At the time of entering into the agreement
To Interest Account
Asset Account Dr. [Full cash price]
To Depreciation Account
To Hire Vendor Account
When down payment is made
Hire Vendor Account Dr. [Down payment] Books of Hire Vendor
To Cash/Bank Account
When an instalment becomes due
Interest Account Dr. [Interest on outstanding balance]
To Hire Vendor Account
Accounting for
When an instalment is paid Hire-Purchase
in the books
Hire Vendor Account Dr. [Amount of instalment] of Hire Vendor
(Seller)
To Bank Account
When depreciation is charged on the asset
Methods
Depreciation Account Dr. [Calculated on cash price]
To Asset Account
For closing interest and depreciation account Interest Suspense
Sales Method Method
Profit and Loss Account Dr.
To Interest Account
To Depreciation Account Hire purchase sale is Hire purchaser is
treated as a credit sale, debited with full cash
subject to payment in price and total interest
instalments included in the selling
price.
Interest Suspense Method
When the asset is acquired on hire purchase Journal Entries
Asset Account Dr. [Full cash price] Sales Method
To Hire Vendor Account When Goods are sold and delivered
For total interest payment Hire Purchaser Account Dr. [Full cash price]

H.P. Interest Suspense Account
To Hire Vendor Account
When down payment is made
Hire Vendor Account
To Bank Account
For Interest of the relevant period
Interest Account
Dr. [Total interest] To H.P. Sales Account
When the down payment is received
Bank Account Dr.
To Hire Purchaser Account
Dr. When an instalment becomes due
Hire Purchaser Account Dr.
To Interest Account
When the amount of instalment is received
Dr. [Interest of the relevant
period] Bank Account Dr.

To H.P. Interest Suspense Account To Hire Purchaser Account

For closing interest Account
When an instalment is paid
Interest Account Dr.
Hire Vendor Account Dr.
To Profit and Loss Account
To Bank Account For closing Hire Purchase Sales Account
When depreciation is charged on the asset H.P. Sales Account Dr.
Depreciation Account Dr. [Calculated on cash price] To Trading Account

 ACCOUNTING
Interest Suspense Method
When Goods are sold and delivered For interest of the relevant accounting period
Hire Purchaser Account Dr. [Full cash price Interest Suspense Account Dr.
+ total interest] To Interest Account
For closing interest Account
To H.P. Sales Account [Full cash price] Interest Account Dr.
To Interest Suspense Account [Total Interest] To Profit and Loss Account
When down payment/instalment is received For closing Hire Purchase Sales Account
H.P. Sales Account Dr.
Bank Account Dr.
To Trading Account
To Hire Purchaser Account

REPOSSESSION
I COULDN’T PAY
THE INSTALMENT THEY
REPOSSESSED
MY ASSET

Repossession

Books of Hire Purchaser Books of Hire vendor

Hire Vendor A/c Dr.

To Asset A/c Goods Repossessed A/c Dr.
To Hire Purchaser

Complete Partial Vendor may incur further

expenses and sell at profit or loss

Hire vendor repossesses Hire vendor repossesses part of

all the goods the goods & Balance of goods
remains with the purchaser.

Loss on surrender
If the repossessed value For remaining portion of asset
is < book value

Application of usual rate

of depreciation

Asset in books af W.D.V

Accounting Treatment of Sales Under Instalment Payment System

Books of buyer Books of Seller
Asset A/c Dr. Full cash price Purchaser Dr. Full Instalment price
Interest Suspense A/c Dr. Full Instalment price less cash price To Sales A/c cash price
To Vendor Full Instalment price To Interest Suspense A/c Full Instalment price less cash price


Differences Between Sales Under Hire Purchase And Instalment System
Basis of Distinction
Governing Act
Nature of Contract
Passing of Title (ownership)
Right to Return goods
Seller’s right to repossess
Right of Disposal
Responsibility for Risk of Loss.
Name of Parties involved
Component other than cash price.
ACCOUNTING
Hire Purchase Instalment System
It is governed by Hire Purchase Act,1972. It is governed by the Sale of Goods Act, 1930.
It is an agreement of hiring. It is an agreement of sale.
The title to goods passes on last payment. The title to goods passes immediately as in the
case of usual sales.
The hirer may return goods without further payment Unless seller defaults, goods are not returnable.
except for accrued instalments.
The seller may take possession of the goods if hirer The seller can sue for price if the buyer is in
is in default. default. He cannot take possession of the goods.
Hirer cannot hire out, sell, pledge or assign entitling The buyer may dispose of the goods and give
transferee to retain possession as against the hire vendor. good title to the purchaser.
The hirer is not responsible for risk of loss of goods The buyer is responsible for risk of loss of goods
if he has taken reasonable precaution because the because ownership has transferred.
ownership has not yet transferred.
The parties involved are called Hirer and Hire vendor. The parties involved are called buyer and seller.
Component other than Cash Price included in Component other than Cash Price included in
instalment is called Hire charges. Instalment is called Interest.

CHAPTER 14: ACCOUNTS FROM INCOMPLETE RECORDS

Chapter overview Features

Definition of Single Entry System and its features
Inaccurate,
unscientific and
Types of Single entry system unsystematic
Cash book
mixes up business No record of
Determination of profit by comparing capitals at different points
and personal real and personal
of time
transactions accounts
of the owners
Features of
Statement of Affairs and its comparison with Balance sheet Single Entry
System
Technique of obtaining complete information for
preparation of financial statements No uniformity in Record is kept for
maintaining the cash transactions
records
Estimate of
Definition of Single Entry System profits and financial
position based on
The term “Single Entry System” is popularly used to describe available
the problems of accounts from incomplete records. information

Types of Single Entry System

Types of single entry system
Ignores con-
Single Entry
cept of duality
System
Simple single Quasi single
Pure single entry
entry entry

» Followed by Personal accounts,

Only personal Personal accounts
Sole trading con- cash book and
accounts are and cash book are
cerns or Partner- subsidiary books
maintained maintained
ship firms are maintained

 ACCOUNTING
Ascertainment of Profit by Capital Comparison at Different Points of Time
Closing
Capital

Net Worth
method or Less
Statement
Profit/ Loss
of Affairs
Method. Opening
Capital

Particulars ` Design of statement of affairs

Capital at the end (a) ………. Statement of affairs as on...........
Add: Drawings …………. Liabilities ` Assets `
Capital (Bal. Fig.) xx Building xx
Less: Fresh capital introduced ………….
Loans, Bank overdraft xx Machinery xx
Capital at the beginning (b) ……….. Sundry creditors xx Furniture xx
Profit/Loss (a-b) …………. Bills payable xx Inventory xx
Outstanding expenses Sundry debtors xx
Bills receivable xx
Loans and advances xx
Preparation of Statement of Affairs Cash and bank xx
Prepaid expenses xx
xx xx

Bank pass
book for Distinction between Statement of Affairs
bank and Balance Sheet
balance
Basis Statement of affairs Balance sheet
It is prepared on the basis of It is based on
List of fixed
transactions partly recorded transactions recorded
assets for
statement of Personal Reliability on the basis of double entry strictly on the basis
Sources ledger for book keeping and partly on of double entry book
affairs utilized by debtors, the basis of single entry. keeping.
accountant creditors In this statement, capital is Capital is derived from
merely a balancing figure the capital account in
being excess of assets over the ledger and total of
Capital
capital. Hence assets need assets side will always
not be equal to liabilities. be equal to the total of
Cash book Inventory liabilities side.
for cash by actual Since this statement is All items are properly
balance counting, prepared on basis of recorded. It is easy to
valuation. incomplete records, it is locate missing items
Omission
difficult to locate assets and since the balance sheet
liabilities, if they are omitted will not agree.
from the books.
The valuation of assets is The valuation of assets

{
Sources utilized by Basis of generally done in an arbitrary is done on scientific
Collection of necessary Valuation manner; no method of basis. Method of
Accountant information about assets and
liabilities valuation is disclosed. valuation is disclosed.
The object of preparing this The object of preparing
statement in the calculation the balance sheet is to
Derivation of
opening and
closing capitals
{ Statement of Affairs
different points of time
at Objective of capital figures in beginning
and at end of accounting
period respectively.
ascertain the financial
position on a date.

 ACCOUNTING
Techniques of Obtaining Complete Accounting Information

Incomplete Completion Preparation Preparation

books of of double Accounting of Trial of
accounts entry in all process Balance Financial
transactions Statements

General
Techniques
Fresh
Investment
by
proprietors/
partners
Techniques Derivation of
of obtaining Information
complete from Cash
accounting Book
information
Distinction
between
Business
Expenses and
Drawings Analysis of
Sales Ledger,
Purchase Ledger
and Nominal
accounts

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