Accounting Inter Quick Referencer by ICAI

Referencer for Quick
Revision
Intermediate Course Paper-1:
Accounting
A compendium of subject-wise capsules published in the
monthly journal “The Chartered Accountant Student”
Board of Studies
(Academic)
ICAI
INDEX
Page Edition of Students’
Topics
No. Journal
1-3 October 2017 Introduction to Accounting Standards
Preparation of Financial Statements of
4-6 October 2017
Companies
7-8 October 2017 Cash Flow Statement
9 October 2017 Profit or Loss Pre and Post Incorporation
10-11 October 2017 Accounting for Bonus Issue and Right Issue
12-13 October 2017 Investment Accounts
Insurance Claims for Loss of Stock and Loss of
14-15 October 2017
Profit
16-19 October 2017 Hire Purchase and Instalment Sale Transactions
19-21 October 2017 Accounts from Incomplete Records
22-23 July 2019 AS 1
23-26 July 2019 AS 2
26-30 July 2019 AS 3
31-38 July 2019 AS 10
38-42 July 2019 AS 11
43-44 July 2019 AS 12
45-46 May 2020 AS 13
47-48 May 2020 AS 16
Framework for Preparation and Presentation of
49-51 May 2020, July 2020
Financial Statements
52-54 July 2020 Redemption of Preference Shares
55-57 July 2020 Redemption of Debentures
58-59 July 2020 Departmental Accounts
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 NFRA 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
The Chartered Accountant Student October 2017 07

1
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.
08 October 2017 The Chartered Accountant Student
2
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 NFRA 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
Implem
The Chartered Accountant Student October 2017
3
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
4
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.
5
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
Appropriation of a part of Profit
As per section 123 (1)of As required under law.

the Companies Act, 2013.
6
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

7
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
8
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) F

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

9
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
10
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

11
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)
12
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.

13
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
14
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

15
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.
16
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]
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
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 onhire 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 Dr. [Total interest] To H.P. Sales Account
When the down payment is received
Bank Account Dr.
When down payment is made
To Hire Purchaser Account
Hire Vendor Account Dr. When an instalment becomes due
To Bank Account Hire Purchaser Account Dr.
For Interest of the relevant period To Interest Account
When the amount of instalment is received
Interest Account 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

17
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
REPOSSESSD
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
18
ACCOUNTING
Differences Between Sales Under Hire Purchase And Instalment System
Basis of Distinction Hire Purchase Instalment System
Governing Act It is governed by Hire Purchase Act,1972. It is governed by the Sale of Goods Act, 1930.
Nature of Contract It is an agreement of hiring. It is an agreement of sale.
Passing of Title (ownership) The title to goods passes on last payment. The title to goods passes immediately as in the
case of usual sales.
Right to Return goods The hirer may return goods without further payment Unless seller defaults, goods are not returnable.
except for accrued instalments.
Seller’s right to repossess 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.
Right of Disposal 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.
Responsibility for Risk of Loss. 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.
Name of Parties involved The parties involved are called Hirer and Hire vendor. The parties involved are called buyer and seller.
Component other than cash price. 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

19
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.
20
ACCOUNTING
Techniques of Obtaining Complete Accounting Information
Preparation
Incomplete Completion Preparation of
books of of double Accounting of Trial Financial
accounts entry in all process Balance Statements
transactions
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

21
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 the
topic on Accounting Standards covered in Intermediate Paper 1 “Accounting”. The significant provisions of AS 1, AS 2, AS
3, AS 4, AS 5, AS 10, AS 11 and AS 12 have been gathered and presented through pictorial presentations in this capsule
which will help the students in grasping the intricate practical aspects of each Accounting Standard. 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 Board of Studies.
AS 1 “DISCLOSURE OF ACCOUNTING POLICIES”

Introduction
Considerations in selection of Accounting policies
AS 1 deals with the disclosure of significant accounting policies
followed in preparation and presentation of financial statements.
AS 1 covers Substance over

Prudence Form Materiality
Fundamental Accounting Accounting Policies

Assumptions In view of the The accounting Financial
uncertainty treatment and statements
attached to presentation should disclose
future events, in financial all “material”
These assumptions Accounting policies refer profits are not statements of items, i.e. items
underlie the preparation to the specific accounting
and presentation of principles and the methods anticipated transactions and the knowledge
financial statements. of applying those principles but recognised events should of which might
adopted by the enterprise only when be governed by influence the
in the preparation and realised though their substance decisions of
presentation of financial
statements. not necessarily and not merely the users of
in cash. by the legal the financial
form. statements.
Fundamental Accounting Assumptions Provision is made for all known liabilities and losses even though
the amount cannot be determined with certainty and represents
only a best estimate in the light of available information.
Going Concern Consistency Accrual
The enterprise Accounting Revenues Not required

is normally policies are and costs are If followed to be
viewed as a considered to accrued, that is, disclosed
going concern, be consistent recognised as
that is, as from one they are earned
continuing in period to or incurred
operation for another. and recorded Fundamental
the foreseeable in the financial Accounting
future. statements of Assumptions
the periods
to which they
relate.
If not Specific
followed disclosure
required
It is assumed that the enterprise has neither the intention nor in financial
the necessity of liquidation or of curtailing materially the scale statements.
of the operations.
06 July 2019 The Chartered Accountant Student
22
ACCOUNTING
Accountant has to make decisions from various permitted Disclosure of Accounting Policies
alternative methods for recording or disclosing various items in
the books of accounts for example: All significant accounting policies adopted in the preparation and
presentation of financial statements should be disclosed.
Items to be disclosed Method of disclosure or valuation
Inventories FIFO, Weighted Average etc.

Disclosure should form part of the financial statements.
Cash Flow Statement Direct Method, Indirect Method
Depreciation Straight Line Method, Reducing Disclosure of accounting policies or of changes therein cannot
remedy a wrong or inappropriate treatment of the item in the
Balance Method, Units of accounts.
Production Method etc.
This list is not exhaustive. Disclosure of Changes in Accounting Policies
Change in Accounting Policy
Considerations in Selection of Accounting
Policies
Having material effect in Having non-material effect in
True and fair view of the state current period current period but expected
of affairs of the enterprise as to have material effect in later
at the balance sheet date; periods
Amount Not
Selection of ascertained ascertained
Accounting Policies
must ensure Fact of such change to be
disclosed in current period.
Correct determination of Amount to be Fact to be
profit or loss for the period. disclosed disclosed
AS 2 “VALUATION OF INVENTORIES”
Introduction Definition of Inventories
AS 2 (Revised) ‘Valuation of Inventories’, provides complete
guidance for determining the value at which inventories, are
carried in the financial statements until related revenues are Inventories are assets
recognised. It also provides guidance on the cost formulas that
are used to assign costs to inventories and any write-down
thereof to net realisable value. Held for In the
sale in process of In the form of
the production
Scope of AS 2 ordinary for such
materials* or supplies*
to be consumed in
course sale
Applicability of AS 2 in accounting of business
for inventories other than
It includes It includes Production

Work in Work in Shares, goods Finished process
progress progress debentures and purchased goods or
arising under arising in other financial and held work in
construction the ordinary instruments for resale progress,
contracts, course of held as stock- produced,
including business in-trade; or
materials Rendering
directly of service of services
related service providers; and
contracts; supplies
awaiting
use in the
production
process
* Other than machinery
Producers’ inventories of livestock, agricultural and forest spares, servicing
products, and mineral oils, ores and gases to the extent that equipment and stand-
they are measured at net realisable value in accordance with by equipment meeting
well established practices in those industries. the definition of PPE
The Chartered Accountant Student July 2019 07

23
ACCOUNTING
Determination of Cost of Inventories
Costs of purchase Costs of conversion Other costs
Purchase price Direct labour Overheads Costs incurred

to bring the
inventories to
their present
location and
Duties and other taxes (non- Fixed production Variable production condition
recoverable from the taxing authorities) overheads (remains overheads (It vary
relatively constant directly, or nearly
regardless of the volume directly, with the
of production) volume of production)
Other expenditure directly attributable
to the acquisition
Trade discounts, rebates, duty

drawbacks and other similar items are
deducted in determining the costs of
purchase
Allocation of Cost to Joint Products and By-Products
When more than one product is produced in the process
Outcome - Joint products Outcome - Main product with a

By-product
When the cost of conversion When the cost of conversion When the by-product is When the by-product is
of each product is separately of each product is not immaterial material
identifiable separately identifiable
Cost of each product Allocation of cost is based on By-product is

is calculated on the relative sales value of each product measured at NRV and By-product is treated
basis of separate cost either at the stage in the production this value is deducted as joint product
incurred. process when the products become from the cost of the and accordingly, the
separately identifiable, or at the main product. accounting is done.
completion of production.
24
ACCOUNTING
Conversion Cost
Factory Overheads Direct labour Joint Cost
Fixed Variable Main/Joint*** By Products
At Normal At Actual At Actual Sale value at Sale value at NRV is deducted

Capacity* Production** Production Separation Completion from cost of main /
joint products
*When actual production is almost equal or lower than normal capacity.

** When actual production is higher than normal capacity.
*** Allocation at reasonable and consistent basis.
Costs excluded from • Abnormal amounts of wasted materials, labour, or other production costs;
the cost of inventories • Storage costs, unless the production process requires such storage;
and recognised as • Administrative overheads that do not contribute to bringing the inventories
expenses to their present location and condition;
• Selling and distribution costs.
Cost Formulas
Inventory Valuation
Technique
Inventory ordinarily Inventory not ordinarily

interchangeable interchangeable
Historical Cost Non Historical

Methods Cost Methods
Specific Identification Method
(applicable when individual items
FIFO can be clearly identified and specific
Retail Inventory / Standard Cost
Adjusted selling price costs are attributed)
Method
method
It takes into account normal

Weighted levels of consumption (and are
Average It is used when large reviewed regularly)
numbers of rapidly
changing items with
similar margins are Materials
involved
Supplies
Cost is determined by Labour

reducing sales value of efficiency
the inventory by the
appropriate percentage
gross margin Capacity
utilisation

25
ACCOUNTING
Disclosures
Information about the carrying amounts held in different
Measurement of Inventories
classification of inventories and the extent of changes in these assets
must be disclosed in financial statements.
Stock-in-trade
Raw Materials Finished Goods and (in respect of
Work in progress goods acquired
for trading),
Finished goods, Stores and spares,
At cost (if Lower of
finished goods
are sold at or Work in progress, Loose tools,
above cost),
otherwise at Cost Net Realisable Common
Value Classifications of
replacement cost Raw materials and inventories Others.
components,
The financial Accounting The total

Realisable Value less Selling Expenses less statements policies adopted carrying amount
estimated cost of completion should in measuring of inventories
disclose inventories, together with
including the its classification
cost formula appropriate to the
used. enterprise.
AS 3 “STATEMENT OF CASH FLOWS”

Introduction
AS 3 provides information about historical changes in cash and cash equivalents of an enterprise by mean of a cash flow statement
which classifies cash flows during an accounting period into operating, investing and financing activities.
Objectives of AS 3
To assess To require
Ability of the Needs of the entity Provision of

Timing and information about
entity to generate to utilise those cash certainty of
cash and cash flows. the historical changes
generation of cash in cash and cash
equivalents. flows. equivalents of an
entity.
26
ACCOUNTING
Presentation of a statement of cash flows
Report cash flows (inflows and outflows) during the period
Classified as
Operating activities Investing activities Financing activities Cash and cash equivalents
These are the principal Investing activities are the Financing activities are Cash Cash equivalents
revenue-producing acquisition and disposal of activities that result in
activities of the entity long-term assets and other changes in the size and are short-
other than investing or investments not included composition of the owner’s term, highly
financing activities It comprises
in cash equivalents capital and borrowings of cash on liquid
the entity hand & investments
demand
Reporting deposits
An entity shall report separately major classes with banks are readily
of gross cash receipts and gross cash payments convertible
arising from investing and financing activities to known
amounts of
Under direct Under indirect cash
method method
are subject
Profit or loss is adjusted for to an
Major classes insignificant
of gross cash • non-cash transactions
• any deferrals or accruals of past or future risk of
receipts and changes in
gross cash operating cash receipts or payments
• items of income or expense associated with value
payments are
disclosed investing or financing cash flows
are not for
investment
purposes
Entities are encouraged to follow the direct method. The
direct method provides information which may be useful has a short
in estimating future cash flows and which is not available Exception maturity of,
under the indirect method. say, 3 months
or less from
Investments in shares are excluded the date of
from cash equivalents acquisition
Cash flows arising from operating activities
Key indicator of the extent to which the operations Examples

of the entity have generated sufficient cash flows to
• repay loans
• maintain the operating capability of the entity
• pay dividends (a) Cash receipts from the sale of goods and the rendering of services
• make new investments without recourse to
external sources of financing (b) Cash receipts from royalties, fees, commissions and other revenue
(c) Cash payments to suppliers for goods and services
(d) Cash payments to and on behalf of employees
(e) Cash receipts and cash payments of an insurance entity for
premiums and claims, annuities and other policy benefits
(f ) Cash payments or refunds of income taxes unless they can be
specifically identified with financing and investing activities
(g) cash receipts and payments relating to futures contracts, forward
contracts, option contracts and swap contracts when the contracts
Generally, result from the are held for dealing or trading purposes.
transactions and other (h) Cash flows arising from the purchase and sale of dealing or trading
events that have role in securities
the determination of net (i) Cash advances and loans made by financial institutions since they
profit or loss relate to their main revenue-producing activity

27
ACCOUNTING
Cash flows arising from investing activities
Represent the extent to which expenditures

have been made for resources intended to Examples
generate future income and cash flows
(a) cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalised research and
development costs and self-constructed fixed assets;
(b) cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
(c) cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for
those instruments considered to be cash equivalents or those held for dealing or trading purposes);
(d) cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those
instruments considered to be cash equivalents and those held for dealing or trading purposes);
(e) cash advances and loans made to other parties (other than advances and loans made by a financial institution);
(f ) cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial
institution);
(g) cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held
for dealing or trading purposes, or the payments are classified as financing activities; and
(h) cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held
for dealing or trading purposes, or the receipts are classified as financing activities.
Note: When a contract is accounted for as a hedge of an identifiable position the cash flows of the contract are classified in the
same manner as the cash flows of the position being hedged.
Cash flows arising from financing activities
useful in Examples (a) cash proceeds from issuing shares

predicting or other equity instruments;
claims on (b) cash proceeds from issuing
future cash debentures, loans, notes, bonds,
flows by mortgages and other short-term
providers of
funds to the or long-term borrowings;
entity. (c) cash repayments of amounts
borrowed.
Reporting cash flows on a net basis
Entities other than financial institutions Financial institutions
Cash flows arising from operating, investing or financing activities Cash flows arising from each of the
following activities of a financial
institution may be reported on a net basis:
Cash receipts and payments on behalf Cash receipts and payments for items in (a) Cash receipts and payments for
of customers when the cash flows which the turnover is quick, the amounts the acceptance and repayment of
reflect the activities of the customer are large, and the maturities are short deposits with a fixed maturity date;
rather than those of the entity (b) The placement of deposits with
and withdrawal of deposits from
other financial institutions; and
Examples are: Examples are advances made for, and the (c) Cash advances and loans made
(a) The acceptance and repayment of repayment of: to customers and the repayment
demand deposits of a bank; (a) Principal amounts relating to credit of those advances and loans.
(b) Funds held for customers by an card customers;
investment entity; and (b) The purchase and sale of investments;
and
(c) Rents collected on behalf of,
(c) Other short-term borrowings, for
and paid over to, the owners of example, those which have a maturity
properties period of three months or less.
28
ACCOUNTING
Arising from Recorded in Exchange rate between the

Foreign an enterprise’s Foreign
transactions in a currency reporting currency and the
currency cash reporting foreign currency at the date of
flows foreign currency amount
currency the cash flow
• Cash flows denominated in a foreign currency are reported in a manner consistent with AS 11.
• Weighted average exchange rate for a period may be used for recording foreign currency transactions.
Important Points
1. Unrealised gains and losses arising from are not cash flows.
changes in foreign currency exchange rates
2. The effect of exchange rate changes on cash is reported in the statement of cash flows in order to reconcile cash and
and cash equivalents held or due in a foreign cash equivalents at the beginning and the end of the period.
currency is presented separately from cash flows from operating, investing and
financing activities and includes the differences, if any, had those cash
flows been reported at end of period exchange rates.
Interest and Dividends
Cash flows from interest and dividends received and paid shall
each be disclosed separately.
In case of financial institutions In the case of other entities
Interest paid Interest and dividends Interest paid Interest and dividends
received Dividends paid Dividends paid received
Classified as cash Classified as cash

flows arising from Classified as cash flows from financing activities flows from investing
operating activities activities
They are costs of obtaining financial resources
They are returns on investments.
Cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating
activities unless they can be specifically identified with financing and investing activities.
Acquisitions and Disposals of Subsidiaries and Other Business Units
Cash flows arising from
Acquisitions of subsidiaries or other businesses Disposal of subsidiaries or other businesses
Shall be classified as Shall be presented Shall disclose, in aggregate, during the period
investing activities separately
The cash flow effects of disposals are

not deducted from those of acquisions
The total purchase or disposal The portion of the purchase or disposal consideration
consideration discharged by means of cash and cash equivalents.

29
ACCOUNTING
Important points/disclosures
Investing and financing transactions that do shall be excluded from a statement of cash flows.
not require the use of cash or cash equivalents disclosed elsewhere in the financial statements in a way that provides all relevant
information.
Components of cash and cash equivalents disclose the components of cash and cash equivalents.
shall present a reconciliation of the amounts in its statement of cash flows with
the equivalent items reported in the balance sheet.
discloses the policy which entity adopts in determining the composition of cash
and cash equivalents.
Other disclosures disclose, together with a commentary by management, the amount of significant
cash and cash equivalent balances held by the enterprise that are not available
for use by it.
30
ACCOUNTING
AS 10 “PROPERTY, PLANT AND EQUIPMENT”
Introduction PPE are tangible items that:
The objective of this Standard is to prescribe accounting Use in Production or
treatment for Property, Plant and Equipment (PPE). Supply of Goods or
Services
Condition 1:
Held for
PPE For Rental to others
AS 10 (Revised)
(Tangible
Items)
Condition 2: For Administrative
Expected purposes
to be
Help the Users of Used for more than
Financial Statements to 12 months
understand
Intangible items are covered under AS 26.

“Administrative purposes”: The term ‘Administrative purposes’ has
Information about Changes in been used in wider sense to include all business purposes. Thus, PPE
Investment in PPE such Investment would include assets used for:
• Selling and distribution
• Finance and accounting
The principal issues in Accounting for PPE are: • Personnel and other functions of an Enterprise.
Determination Depreciation Items of PPE may also be acquired for safety or environmental
of their carrying charge reasons.
amounts The acquisition of such PPE, although not directly increasing the
future economic benefits of any particular existing item of PPE,
may be necessary for an enterprise to obtain the future economic
benefits from its other assets.
Impairment Such items of PPE qualify for recognition as assets because they
Recognition losses to be
of PPE enable an enterprise to derive future economic benefits from
recognised related assets in excess of what could be derived had those items
Principle Issues in relation to not been acquired.
in Accounting them.
of PPE
Other definitions
1. Biological Asset: Till the time, the Accounting Standard on
“Agriculture” is issued, accounting for livestock meeting the
Scope of Standard definition of PPE, will be covered as per AS 10 (Revised).
As a general principle, AS 10 (Revised) should be applied in AS 10 (Revised)
accounting for PPE. Except when another Accounting Standard does not apply if
requires or permits a different accounting treatment. definition of PPE
Living not met
AS 10 (Revised) Animal
Not Applicable to
Biological
Asset
AS 10 (Revised)
Wasting Assets including Plant applies to Bearer
Biological Assets* Plants
(other than Bearer Mineral rights, Expenditure
Plants) related to on the exploration for and
agricultural activity extraction of minerals, oil,
natural gas and similar non- 2. Bearer Plant: Is a plant that (satisfies all 3 conditions):
regenerative resources
Is used in the Of Agricultural
*AS 10 (Revised) applies to Bearer Plants but it does not apply to production or supply produce
the produce on Bearer Plants.
Clarifications: Is expected to bear For more than a

1. AS 10 (Revised) applies to PPE used to develop or maintain the produce period of 12 months
assets described above.
2. Investment property (defined in AS 13 (Revised)), should be Has a remote likelihood Except for incidental
accounted for only in accordance with the Cost model prescribed of being sold as scrap sales
in this standard. Agricultural produce
31
ACCOUNTING
Note: When bearer plants are no longer used to bear produce they When to apply the above criteria for Recognition?
might be cut down and sold as scrap. For example - use as firewood. An enterprise evaluates under this recognition principle all its costs
Such incidental scrap sales would not prevent the plant from on PPE at the time they are incurred.
satisfying the definition of a Bearer Plant. These costs include costs incurred:
To acquire or
Following are not Situation I
"Bearer Plants" construct an item
Initially
of PPE
Cost
Incurred
Plants cultivated Plants cultivated to Annual Crops Situation II To add to, replace
to be harvested Produce part of, or service
as Agricultural Agricultural Subsequently
produce produce it
and
Harvest and Treatment of Spare Parts, Stand by Equipment and Servicing
sell the plant Equipment
as Agricultural Case I If they meet the definition of PPE as per AS 10 (Revised):
produce
 Recognised as PPE as per AS 10 (Revised)
Case II If they do not meet the definition of PPE as per AS 10
(Revised):
 Such items are classified as Inventory as per AS 2 (Revised)
Trees which are
Trees grown for cultivated both Maize and Treatment of Subsequent Costs
use as lumber for their fruit and wheat Cost of day-to-day servicing
their lumber Costs of day-to-day servicing are primarily the costs of labour and
consumables, and may include the cost of small parts. The purpose
of such expenditures is often described as for the ‘Repairs and
Maintenance’ of the item of PPE.
Agricultural Produce is the harvested product of Biological An enterprise does not recognise in the carrying amount of an item
Assets of the enterprise. of PPE the costs of the day-to-day servicing of the item. Rather, these
3. Agricultural Activity: is the management by an Enterprise of: costs are recognised in the Statement of Profit and Loss as incurred.
• Biological transformation and Harvest of Biological Assets Replacement of Parts of PPE
Parts of some items of PPE may require replacement at regular
Agricultural Activity intervals.
An enterprise recognises in the carrying amount of an item of PPE
the cost of replacing part of such an item when that cost is incurred if
Management the recognition criteria are met.
Notes: The carrying amount of those parts that are replaced is

derecognised in accordance with the de-recognition provisions
Biological transformation and of this Standard.
harvest of Biological Assets
Regular Major Inspections - Accounting Treatment
When each major inspection is performed, its cost is recognised
in the carrying amount of the item of PPE as a replacement, if the
recognition criteria are satisfied.
For Sale For Conversion Into Additional Any remaining carrying amount of the cost of the previous inspection
into Agriculture Biological (as distinct from physical parts) is derecognised.
Produce Assets
Measurement of PPE
Recognition Criteria for PPE Cost Model
At
The cost of an item of PPE should be recognised as an asset if, and
Recognition
only if:
Measurement
(a) It is probable that future economic benefits associated with the Cost Model
item will flow to the enterprise, and
(b) The cost of the item can be measured reliably.
After Revaluation
Notes: Recognition Model
1. It may be appropriate to aggregate individually insignificant
items, such as moulds, tools and dies and to apply the criteria
to the aggregate value. Measurement at Recognition
2. An enterprise may decide to expense an item which could An item of PPE that qualifies for recognition as an asset should
otherwise have been included as PPE, because the amount of be measured at its cost.
the expenditure is not material. What are the elements of Cost?
Cost of an item of PPE comprises:
32
ACCOUNTING
Cost of an Item of PPE
Measurement of Cost
Cost of an item of PPE is the cash price equivalent at the
recognition date.
Includes Excludes
Cost of an item of PPE
Purchase Price
Costs of opening a new facility or
Any Directly business (Such as, Inauguration
Attributable Costs costs)
Costs of introducing a new PPE acquired in Exchange for a
product or service (including costs If payment is deferred
beyond normal credit Non-Monetary Asset or Assets
Decommissioning, of advertising and promotional or combination of Monetary and
Restoration and activities) terms
Non-monetary Assets
similar Liabilities Costs of conducting business in a
new location or with a new class of
customer (including costs of staff
training)
Administration and other general
overhead costs Total payment minus Cost of such an item of PPE is
Cash price equivalent measured at fair value unless
Recognition of costs in the carrying amount of an item of PPE
ceases when the item is in the location and condition necessary
for it to be capable of operating in the manner intended by
management.
is recognised unless such Exchange Fair value
The following costs are not included in the carrying amount of an as an interest is transaction of neither
item of PPE: interest capitalised lacks the asset(s)
1. Costs incurred while an item capable of operating in the manner expense over in commercial received nor
intended by management has yet to be brought into use or is the period of accordance substance; Or the asset(s)
operated at less than full capacity. credit with AS 16 given up
is reliably
2. Initial operating losses, such as those incurred while demand for measurable.
the output of an item builds up. And
3. Costs of relocating or reorganising part or all of the operations of
an enterprise.
Note:
Note: Some operations occur in connection with the construction
or development of an item of PPE, but are not necessary to bring 1. The acquired item(s) is/are measured in this manner even if an
the item to the location and condition necessary for it to be enterprise cannot immediately derecognise the asset given up.
capable of operating in the manner intended by management.
These incidental operations may occur before or during the 2. If the acquired item(s) is/are not measured at fair value, its/their
construction or development activities. cost is measured at the carrying amount of the asset(s) given up.
3. An enterprise determines whether an exchange transaction
Decommissioning, Restoration and similar Liabilities: has commercial substance by considering the extent to which
The cost of an item of PPE comprises initial estimate of the costs of its future cash flows are expected to change as a result of the
dismantling, removing the item and restoring the site on which it transaction. An exchange transaction has commercial substance
is located, referred to as ‘Decommissioning, Restoration and similar if:
Liabilities’, the obligation for which an enterprise incurs either
when the item is acquired or as a consequence of having used the (a) the configuration (risk, timing and amount) of the cash flows
item during a particular period for purposes other than to produce of the asset received differs from the configuration of the
inventories during that period. cash flows of the asset transferred; or
Exception: An enterprise applies AS 2 (Revised) “Valuation of (b) the enterprise-specific value of the portion of the operations
Inventories”, to the costs of obligations for dismantling, removing
and restoring the site on which an item is located that are incurred of the enterprise affected by the transaction changes as a
during a particular period as a consequence of having used the item result of the exchange;
to produce inventories during that period.
(c) and the difference in (a) or (b) is significant relative to the
Same as a the cost of fair value of the assets exchanged.
Cost of a Self-
constructed Asset constructing an similar asset PPE purchased for a Consolidated Price
for sale
Where several items of PPE are purchased for a consolidated price,
the consideration is apportioned to the various items on the basis of
Eliminate Include Not included their respective fair values at the date of acquisition.
PPE held by a lessee under a Finance Lease
Internal Borrowing Costs Abnormal amounts
profits as per AS 16 of wasted material, The cost of an item of PPE held by a lessee under a finance lease is
labour, or other determined in accordance with AS 19 (Leases).
resources
Government Grant related to PPE
Bearer plants are accounted for in the same way as self-constructed
items of PPE before they are in the location and condition necessary The carrying amount of an item of PPE may be reduced by
to be capable of operating in the manner intended by management. government grants in accordance with AS 12 (Accounting for
Government Grants).
33
ACCOUNTING
If there is no market-based evidence of fair value because of the
Measurement after Recognition specialised nature of the item of PPE and the item is rarely sold,
except as part of a continuing business, an enterprise may need
to estimate fair value using an income approach or a depreciated
replacement cost approach.
Cost model Revaluation Model Accounting Treatment of Revaluations
When an item of PPE is revalued, the carrying amount of that asset is
adjusted to the revalued amount.
PPE carried at a At the date of the revaluation, the asset is treated in one of the
PPE carried at following ways:
revalued amount.
Technique 1: Gross carrying amount is adjusted in a manner that is
consistent with the revaluation of the carrying amount of the asset.
Cost Less Any Whose fair value Gross carrying amount
Accumulated can be measured
Depreciation and reliably. • May be restated by reference to observable market data, or
Any Accumulated • May be restated proportionately to the change in the carrying
Impairment losses
amount.
Accumulated depreciation at the date of the revaluation is
Revaluation for entire class of PPE
• Adjusted to equal the difference between the gross carrying
If an item of PPE is revalued, the entire class of PPE to which that amount and the carrying amount of the asset after taking into
asset belongs should be revalued. account accumulated impairment losses
Reason:
Technique 2: Accumulated depreciation is eliminated against the
The items within a class of PPE are revalued simultaneously to avoid Gross Carrying amount of the asset
selective revaluation of assets and the reporting of amounts in the
Financial Statements that are a mixture of costs and values as at
different dates.
Revaluation - Increase or Decrease
Class of PPE is
A similar in operations of Revaluation

grouping nature and an enterprise.
of assets use
Increase Decrease
Frequency of Revaluations
Revaluations should be made with sufficient regularity to ensure Credited directly Charged to the
to owners’ interests Statement of profit
that the carrying amount does not differ materially from that which under the heading of and loss
would be determined using Fair value at the Balance Sheet date. Revaluation surplus
The frequency of revaluations depends upon the changes in fair
values of the items of PPE being revalued.
Exception: Exception:
When the fair value of a revalued asset differs materially from its When it is subsequently When it is subsequently
carrying amount, a further revaluation is required. Increased (Initially Decreased (Initially
Decreased) Increased)
Frequency of Revaluations
(Sufficient Regularity) Recognised in the Decrease should be debited
Statement of profit and loss directly to owners’ interests
to the extent that it reverses under the heading of
a revaluation decrease of Revaluation surplus to the
the same asset previously extent of any credit balance
Items of PPE Items of PPE with recognised in the Statement existing in the Revaluation
experience significant only insignificant of profit and loss. surplus in respect of that asset.
and volatile changes changes in Fair
in Fair value value
Treatment of Revaluation Surplus
The revaluation surplus included in owners’ interests in respect of
Annual revaluation Revalue the item only an item of PPE may be transferred to the Revenue Reserves when the
every 3 or 5 years asset is derecognised.
Case I : When whole surplus is transferred:
If the asset is:
Determination of Fair Value • Retired; Or
Fair value of items of PPE is usually determined from market-based • Disposed of.
evidence by appraisal that is normally undertaken by professionally Case II : Some of the surplus may be transferred as the asset is
qualified valuers. used by an enterprise:

34
ACCOUNTING
In such a case, the amount of the surplus transferred would be: It is depreciated in a manner that reflects the benefits to be
Depreciation (based on Revalued Carrying amount) – Depreciation derived from it.
(based on Original Cost) II. If the cost of land includes the costs of site dismantlement,
removal and restoration:
Transfers from Revaluation Surplus to the Revenue Reserves That portion of the land asset is depreciated over the period
are not made through the Statement of Profit and Loss. of benefits obtained by incurring those costs.
B. Buildings:
Buildings have a limited useful life and therefore are depreciable
Depreciation assets.
Component Method of Depreciation
Each part of an item of PPE with a cost that is significant in relation to
the total cost of the item should be depreciated separately.
An increase in the value of the land on which a building stands
A significant part of an item of PPE may have a useful life and a does not affect the determination of the depreciable amount of
depreciation method that are the same as the useful life and the the building.
depreciation method of another significant part of that same item.
Such parts may be grouped in determining the depreciation charge.
Depreciation charge for each period should be recognised in the
Statement of Profit and Loss unless it is included in the carrying Depreciation Method
amount of another asset. The depreciation method used should reflect the pattern in which the
Depreciable Amount and Depreciation Period future economic benefits of the asset are expected to be consumed by
Depreciable amount is: the enterprise.
Cost of an asset (or other amount substituted for cost i.e. revalued The method selected is applied consistently from period to period
amount) -Residual value unless:
• There is a change in the expected pattern of consumption of
The depreciable amount of an asset should be allocated on a those future economic benefits; Or
systematic basis over its useful life. • That the method is changed in accordance with the statute to
Review of Residual Value and Useful Life of an Asset best reflect the way the asset is consumed.
Residual value and the useful life of an asset should be reviewed
at least at each financial year-end and, if expectations differ from Methods of Depreciation
previous estimates, the change(s) should be accounted for as a
change in an accounting estimate in accordance with AS 5 ‘Net Profit
or Loss for the Period, Prior Period Items and Changes in Accounting
Policies’.
Commencement of period for charging Depreciation
Straight-line Diminishing Units of Production
Depreciation of an asset begins when it is available for use, i.e., when Method Balance Method Method
it is in the location and condition necessary for it to be capable of
operating in the manner intended by the management.
Cessation of Depreciation
Results in
I. Depreciation ceases to be charged when asset’s residual value a constant
exceeds its carrying amount Results in a Results in
charge over decreasing a charge
The residual value of an asset may increase to an amount equal the useful life charge over based on the
to or greater than its carrying amount. If it does, depreciation if the residual the useful life. expected use
value of the or output.
charge of the asset is zero unless and until its residual value asset does not
subsequently decreases to an amount below its carrying amount. change.
II. Depreciation of an asset ceases at the earlier of:
• The date that the asset is retired from active use and is held
for disposal, and
• The date that the asset is derecognised. Review of Depreciation Method
Therefore, depreciation does not cease when the asset becomes idle The depreciation method applied to an asset should be reviewed at
or is retired from active use (but not held for disposal) unless the asset least at each financial year-end and, if there has been a significant
is fully depreciated. However, under usage methods of depreciation, change in the expected pattern of consumption of the future
the depreciation charge can be zero while there is no production. economic benefits embodied in the asset, the method should be
changed to reflect the changed pattern.
Land and Buildings
Land and buildings are separable assets and are accounted for Such a change should be accounted for as a change in an
separately, even when they are acquired together. accounting estimate in accordance with AS 5.
A. Land: Land has an unlimited useful life and therefore is not
depreciated.
Exceptions: Quarries and sites used for landfill. Depreciation Method based on Revenue:
Depreciation on Land: A depreciation method that is based on revenue that is generated by
an activity that includes the use of an asset is not appropriate.
I. If land itself has a limited useful life:
35
ACCOUNTING
Changes in Existing Decommissioning, If the related asset is measured using the
Restoration and Other Liabilities Revaluation model
Changes in the liability alter the revaluation surplus or deficit
previously recognised on that asset, so that:
(i) Decrease in the liability credited directly to revaluation
Changes in surplus in the owners’ interest
Liabilities
Exception:
 It should be recognised in the Statement of Profit and Loss to
the extent that it reverses a revaluation deficit on the asset that
was previously recognised in the Statement of Profit and Loss.
Similar Price
factors The cost of PPE Adjustments
may undergo Note: In the event that a decrease in the liability exceeds the
changes carrying amount that would have been recognised had the
subsequent to asset been carried under the cost model, the excess should be
its acquisition or recognised immediately in the Statement of Profit and Loss.
construction on
account of:
(ii) Increase in the liability should be recognised in the
Statement of Profit and Loss
Changes in Exception:
initial estimates  It should be debited directly to Revaluation surplus in the
of amounts Changes in owners’ interest to the extent of any credit balance existing
provided for Duties
Dismantling, in the Revaluation surplus in respect of that asset
Removing,
Restoration, Caution:
and A change in the liability is an indication that the asset may
have to be revalued in order to ensure that the carrying
amount does not differ materially from that which would be
Accounting for the above changes: determined using fair value at the balance sheet date.
What happens if the related asset has reached the end of its
Related Asset is useful life?
measured using Cost
Model All subsequent changes in the liability should be recognised in the
Statement of Profit and Loss as they occur. This applies under both
the cost model and the revaluation model.
Accounitng
(Depends upon)
Situations and Its Accounting
Related Asset is
measured using
Revaluation Model
Impairments De- Compensation Cost of
of items of recognition from third items of PPE
If the related asset is measured using the Cost PPE of items of parties for restored,
items of PPE purchased or
model PPE retired
that were constructed
or disposed impaired, lost as
Changes in the Liability should be added to, or deducted from, of or given up replacements
the cost of the related asset in the current period
Note: Amount deducted from the cost of the asset should not
exceed its carrying amount. If a decrease in the liability exceeds Recognised Determined Is included in Is
the carrying amount of the asset, the excess should be recognised in accordance in determining determined
with AS 28 accordance profit or in
immediately in the Statement of Profit and Loss. with AS 10 loss when accordance
(Revised) it becomes with AS 10
receivable (Revised)
If the adjustment results in an addition to the cost of an asset
• Enterprise should consider whether this is an indication that the
new carrying amount of the asset may not be fully recoverable. Retirements
Items of PPE retired from active use and held for disposal should be
stated at the lower of:
Note: If it is such an indication, the enterprise should test the
• Carrying Amount, and
asset for impairment by estimating its recoverable amount, and • Net Realisable Value
should account for any impairment loss, in accordance with
applicable Accounting standards. Note: Any write-down in this regard should be recognised
immediately in the Statement of Profit and Loss.

36
ACCOUNTING
De-Recognition
In case the useful lives or the depreciation rates used are
different from those specified in the statute governing the
Derecognition of Carrying enterprise, it should make a specific mention of that fact;
amount PPE:
 The gross carrying amount and the accumulated depreciation
(aggregated with accumulated impairment losses) at the
When no future beginning and end of the period; and
On disposal economic benefits Accounting  A reconciliation of the carrying amount at the beginning and
are expected from Treatment end of the period showing:
its use or disposal (i) additions
(ii) assets retired from active use and held for disposal
(iii) acquisitions through business combinations
(iv) increases or decreases resulting from revaluations and
By sale Gain or loss arising from de- from impairment losses recognised or reversed directly
recognition of an item of PPE should in revaluation surplus
be included in the Statement of (v) impairment losses recognised in the statement of profit
Profit and Loss when the item is and loss
By entering derecognised unless AS 19 on Leases, (vi) impairment losses reversed in the statement of profit
into a finance requires otherwise on a sale and and loss
lease, or leaseback (AS 19 on Leases, applies to (vii) depreciation
disposal by a sale and leaseback.) (viii)net exchange differences arising on the translation of the
By donation, financial statements of a non-integral foreign operation
in accordance with AS 11
Gain or loss arising from (ix) other changes.
de-recognition of an item of PPE
= Net disposal proceeds (if any) - Additional Disclosures:

Carrying Amount of the item The financial statements should also disclose:
The existence and amounts of restrictions on title, and property, plant

and equipment pledged as security for liabilities;
Note: Gains should not be classified as revenue, as defined in AS
9 ‘Revenue Recognition’. The amount of expenditure recognised in the carrying amount of an
item of property, plant and equipment in the course of its construction;
Exception: The amount of assets retired from active use and held for disposal;
An enterprise that in the course of its ordinary activities, routinely
sells items of PPE that it had held for rental to others should transfer The amount of contractual commitments for the acquisition of
such assets to inventories at their carrying amount when they cease property, plant and equipment;
to be rented and become held for sale.
The proceeds from the sale of such assets should be recognised in
revenue in accordance with AS 9 on Revenue Recognition. If amount of contractual commitments is not disclosed separately
on the face of the statement of profit and loss, the amount of
Determining the date of disposal of an item: compensation from third parties for items of property, plant and
equipment that were impaired, lost or given up that is included in the
An enterprise applies the criteria in AS 9 for recognising revenue statement of profit and loss.
from the sale of goods.
Disclosures related to Revalued Assets:

Disclosure
If items of property, plant and equipment are stated at revalued
Disclosures amounts, the following should also be disclosed:
The effective date of the revaluation;
General Additional Disclosures related

to Revalued Assets Whether an independent valuer was involved;
The methods and significant assumptions applied in

General Disclosures: estimating fair values of the items;
(a) The measurement bases (i.e., cost model or revaluation
model) used for determining the gross carrying amount; The extent to which fair values of the items were determined
directly by reference to observable prices in an active market
or recent market transactions on arm’s length terms or were
estimated using other valuation techniques; and
(b) The depreciation methods used;
The revaluation surplus, indicating the change for the period

(c) The useful lives or the depreciation rates used. and any restrictions on the distribution of the balance to
shareholders.
37
ACCOUNTING
Transitional Provisions the requirements of this Standard, should be capitalised at their
respective carrying amounts.
Previously Recognised Revenue Expenditure
Where an entity has in past recognised an expenditure in the Note: The spare parts so capitalised should be depreciated over
Statement of Profit and Loss which is eligible to be included as a part their remaining useful lives prospectively as per the requirements
of the cost of a project for construction of PPE in accordance with the of this Standard.
requirements of this standard:
• It may do so retrospectively for such a project.
Revaluations
Note: The effect of such retrospective application, should be The requirements of AS 10 (Revised) regarding the revaluation
recognised net-of-tax in Revenue reserves. model should be applied prospectively.
In case, on the date of this Standard becoming mandatory, an
PPE acquired in Exchange of Assets enterprise does not adopt the revaluation model as its accounting
policy but the carrying amount of items of PPE reflects any
The requirements of AS 10 (Revised) regarding the initial previous revaluation it should adjust the amount outstanding in the
measurement of an item of PPE acquired in an exchange of assets Revaluation reserve against the carrying amount of that item.
transaction should be applied prospectively only to transactions
entered into after this Standard becomes mandatory.
Note: The carrying amount of that item should never be less
Spare parts
than residual value. Any excess of the amount outstanding
On the date of this Standard becoming mandatory, the spare as Revaluation reserve over the carrying amount of that item
parts, which hitherto were being treated as inventory under AS 2 should be adjusted in Revenue reserves.
(Revised), and are now required to be capitalised in accordance with
AS 11 “THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES”

Introduction
The standard deals with the issues involved in accounting for foreign currency transactions and foreign operations i.e., to decide which
exchange rate to use and how to recognise the financial effects of changes in exchange rates in the financial statements.
Important points/disclosures
AS 11
Applicable Not applicable for
(a) Specifying the currency in which an enterprise presents its financial statements. However, an
(a) In accounting enterprise normally uses the currency of the country in which it is domiciled. If it uses a different
for transactions in currency, the Standard requires disclosure of the reasons for using that currency. The Standard also
foreign currencies. requires disclosure of the reason for any change in the reporting currency.
(b) In translating (b) Presentation in a cash flow statement of cash flows arising from transactions in a foreign
the financial currency and the translation of cash flows of a foreign operation, which are addressed in AS 3
statements of ‘Cash flow statement’.
foreign operations.
(c) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as
an adjustment to interest costs.
(c) Accounting for
foreign currency
transactions in the
nature of forward (d) Restatement of an enterprise’s financial statements from its reporting currency into another currency
exchange contracts. for the convenience of users accustomed to that currency or for similar purposes.
Definitions of the Terms used in the Standard
A foreign currency
transaction is a Borrows or lends Otherwise acquires
transaction which is Buys or sells goods or Becomes a party to an or disposes of
services whose price funds when the unperformed forward
denominated in or amounts payable assets, or incurs or
requires settlement is denominated in a exchange contract or settles liabilities,
foreign currency or receivable are
in a foreign currency, denominated in a denominated in a
including transactions or foreign currency.
foreign currency or
arising when an
enterprise either:

38
ACCOUNTING
Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money.
Example, cash, receivables and payables.
Non-monetary items are assets and liabilities other than monetary items. Examples: fixed assets, inventories and investments in equity shares.
Foreign operation is a subsidiary, associate, joint venture or branch of the reporting enterprise, the activities of which are based or
(FO) conducted in a country other than the country of the reporting enterprise.
Integral foreign is a foreign operation, the activities of which are an integral part of those of the reporting enterprise.
operation (IFO)
A foreign operation that is integral to the operations of the reporting enterprise and carries on its business as if it
were an extension of the reporting enterprise's operations.
Non-integral foreign is a foreign operation that is not an integral foreign operation.
operation (NFO) ‘Net investment in a non-integral foreign operation’ is the reporting enterprise’s share in the net assets of that operation.
Forward exchange
contract an agreement to exchange different currencies at a forward rate.
Forward rate is specified exchange rate for exchange of two currencies at specified future date.
Foreign currency is a currency other than the reporting currency of an enterprise.
Initial Recognition
A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency
amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.
Reporting at each Balance Sheet Date •When the transaction is settled in a subsequent accounting
period, exchange difference recognised in each intervening
period up to the period of settlement is determined by the
Foreign currency
change in exchange rates during that period.
items • Alternatively, exchange differences arising on reporting of
long-term foreign currency monetary items at rates different from
those at which they were initially recorded during the period, or
reported in previous financial statements, insofar as they relate
to the acquisition of a depreciable capital asset, can be added to
Monetary Non-monetary or deducted from the cost of the asset and should be depreciated
over the balance life of the asset;
•In other cases, can be accumulated in the Foreign Currency
Reported Monetary Item Translation Difference (FCMITD) Account
using the and (amortised over the balance period of such long term
closing rate. assets or liability, by recognition as income or expense in each
of such periods)
Carried in Carried at •Such option is irrevocable and should be applied to all such
terms of fair value or Contingent foreign currency monetary items.
historical other similar liability
cost
denominated
valuation
denominated
denominated
in foreign
Classification of Foreign Operations as
in a foreign in a foreign currency Integral or Non-Integral
currency currency
The method used to translate the financial statements of
a foreign operation
Reported Reported
using the using the Disclosed depends on the way in which it is financed
exchange exchange by using the
rate at the rates that closing rate.
date of the existed and operates in relation to the reporting enterprise.
transaction. when the
values were
determined.
foreign operations are classified as either ‘integral foreign
operations’ or ‘non-integral foreign operations’.
Recognition of Exchange Differences
•Exchange differences arising on the settlement of monetary
Translation of Integral Foreign Operations (IFO)
items or on reporting an enterprise’s monetary items at rates The individual items in The cost and depreciation of
different from those at which they were initially recorded the financial statements tangible fixed assets is translated
during the period, or reported in previous financial statements, of the foreign operation using the exchange rate at the
should be recognized as income or as expenses in the period are translated as if all date of purchase of the asset or,
in which they arise. its transactions had if the asset is carried at fair value
been entered into by the or other similar valuation, using
•An exchange difference results when there is a change in reporting enterprise itself. the rate that existed on the date
the exchange rate between the transaction date and the date of the valuation.
of settlement of any monetary items arising from a foreign
currency transaction. The recoverable amount or
The cost of inventories is realisable value of an asset is
•When the transaction is settled within the same accounting translated at the exchange translated using the exchange
period as that in which it occurred, all the exchange difference rates that existed when rate that existed when the
is recognised in that period. those costs were incurred. recoverable amount or net
realisable value was determined.
39
ACCOUNTING
Translation of Non-Integral Foreign Operations (NFO)
The translation of the financial statements of a non-integral foreign operation is done using the following procedure:
Translation
Assets and Income and Resulting exchange Any goodwill or A contingent liability disclosed in
Liabilities Expense Items differences capital reserve the financial statements
at exchange rates should be accumulated

Closing rate at the dates of the in a foreign currency arising on the closing rate
transactions translation reserve acquisition
for its disclosure

Until the disposal in the financial
of the net closing rate. statements of
investment. the reporting
enterprise.
Procedure of Translation for Non-Integral Foreign Operations (NFO)
For practical reasons, a rate that approximates the actual exchange rates, for example an average rate for the period is often used to
translate income and expense items of a foreign operation.
Incorporation of the financial statements of a non-integral foreign operation in those of the reporting enterprise follows normal
consolidation procedures, such as the elimination of intra-group balances and intra-group transactions of a subsidiary.
When the financial statements of a non-integral foreign operation are drawn up to a different reporting date from that of
the reporting enterprise, the non-integral foreign operation often prepares, for purposes of incorporation in the financial
statements of the reporting enterprise, statements as at the same date as the reporting enterprise.
The exchange differences are not recognised as income or expenses for the period because the changes in the exchange rates have
little or no direct effect on the present and future cash flows from operations of either the non-integral foreign operation or the
reporting enterprise.
When a non-integral foreign operation is consolidated, but is not wholly owned, accumulated exchange differences arising
from translation and attributable to minority interests are allocated to, and reported as part of, the minority interest in the
consolidated balance sheet.
An enterprise may dispose of its interest in a non-integral foreign operation through sale, liquidation, repayment of share capital,
or abandomnent of all, or part ot: that operation. The payment of a dividend forms part of a disposal only when it constitutes a
return of the investment. Remittance from a non-integral foreign operation by way of repatriation of accumulated profits does not
form part of a disposal unless it constitutes return of the investment. In the case of a partial disposal, only the proportionate share
of the related accumulated exchange differences is included in the gain or loss. A write-down of the carrying amount of a non-
integral foreign operation does not constitute a partial disposal. Accordingly, no part of the deferred foreign exchange gain or loss
is recognised at the time of a write-down.

40
ACCOUNTING
Indications that a FO is a non-integral foreign operation rather than an integral foreign operation
Control RE may control the FOA of the FO are carried out with a significant degree of autonomy from those of the RE
Transactions With the RE are not a high proportion of the FOA
Finance FOA are financed mainly from its own operations or local borrowings rather than from RE
Costs of labour, material and other components of the FO’S products or services are primarily paid or
Cost settled in the local currency rather than in the RE currency
Indications
Sales FO's sales are mainly in currencies other than the RE currency
RE cash flows are insulated from the day-to-day activities of the FO rather than being directly affected
Cash Flows by the FOA
Sales prices for the FO’S products are not primarily responsive on a short-term basis to changes in
Sales prices exchange rates but are determined more by local competition or local government regulation.
Local sales There is an active local sales market for the FO’S products, although there also might be significant amounts
market of exports.
RE - Reporting Enterprise
FO- Foreign Operation
FOA - Foreign Operation Activities
Change in the Classification of a Foreign Operation
Reclassfication of
Foreign operation
Integral foreign Non- integral

operation to foreign
operation to
Non- integral Integral foreign

foreign operation operation
Translated amounts
Exchange for non-monetary Exchange
differences items at the date of differences
the change
Treated as the Which have been

Arising on the historical cost deferred are not
translation of for those items recognised as
non-monetary in the period income or expenses
assets at the of change and until the disposal of
date of the subsequent the operation
reclassification periods
accumulated in a
foreign currency
translation reserve
41
ACCOUNTING
Tax Effects of Exchange Differences
Accounted for in Gains and losses on foreign currency transactions and exchange differences arising on the translation of the
accordance with AS 22. financial statements of foreign operations may have associated tax effects.
Forward Exchange Contract

Forward exchange
contract or Another
financial instrument
Not intended for trading or Intended for trading or

speculation purposes speculation purposes
Cancellation
Premium or Exchange or renewal of Premium or Contract Value Gain or loss
discount differences contract discount
Marked to its
Amortised as Recognised in Ignored current market
expense or income the statement of Recognised.
value at each
over the life of the profit and loss balance sheet
contract in the reporting date
period in which
the exchange rates
change.
Recognised as
income or as
expense for the
period.
Disclosure
as a separate
Included in the net profit or loss for the period component of
shareholders’
Exchange funds, and a
differences Amount reconciliation of
Accumulated in foreign currency translation reserve
the amount of
such exchange
Reason for using a different currency (in which the differences at the
enterprise is domiciled) beginning and end
Reporting currency of the period.
Reason for any change in the reporting currency
Disclosure
Nature of the change in classification
Reason for the change

Change in the
classification of a
significant foreign Impact of the change in classification on shareholders'
operation funds; and
Impact on net profit or loss for each prior period

presented had the change in classification occurred at
the beginning of the earliest period presented.
Presentation of Foreign Currency Monetary Item Translation Difference Account (FCMITDA)

Debit or credit balance in FCMITDA should be shown on the “Equity and Liabilities” side of the balance sheet under the head
‘Reserves and Surplus’ as a separate line item.

42
ACCOUNTING
AS 12 “ACCOUNTING FOR GOVERNMENT GRANTS”
AS 12 Accounting Treatment of Government Grants
Deals with Two approaches

◊ Accounting for government grants such as subsidies,
◊ Cash incentives,
◊ Duty drawbacks, etc.
Does not deal with:

◊ The special problems arising in accounting for ‘Capital approach’ ‘Income approach’
government grants in financial statements reflecting
the effects of changing prices or in supplementary
information of a similar nature.
◊ Government assistance other than in the form of
government grants.
◊ Government participation in the ownership of the
enterprise
Grant is treated as part of Grant is taken to income
shareholders’ funds over one or more periods.
•Treatment of non- •Presentation of grants

monetary government related to specific fixed
grants; assets; Grants which have the Income approach may be
AS 12 describes characteristics similar to those of more appropriate in the
promoters’ contribution case of other grants.
should be treated as part of
•Revenue grants and those •Treatment for refund of shareholders’ funds.
in the nature of promoters’ government grants etc.
contribution;
Recognition of Government Grants
Meaning of Government Grants A government Enterprise will

grant is not comply with the Grant will be
recognised until conditions received.
en t there is reasonable attached to it; and
kin
d pa terp o an assurance that
s
or co t or rise
ash mp fu fo
in
c lia tur r
nc e
e Receipt of a grant is not of itself conclusive
evidence that the conditions attaching to the grant
have been or will befulfilled.
t
ver nce
wit dition
en
con
nm
a
hc
by ssist
ert s
A
ain
go
Non-Monetary Government Grants

Land or
other
resources,
They exclude those forms of government assistance
which cannot reasonably have a value placed upon Non-Monetary Account
them and transactions with government which cannot Government Concessional at their
Grants rates acquisition
be distinguished from the normal trading transactions cost.
of the enterprise.
Free of cost Recorded at

a nominal
value.
43
ACCOUNTING
Presentation of Grants
Presentation of Grants
Related to Specific Related to Revenue In nature of Promoters’

Fixed Assets Contribution
Method I : Method II: Grants related Where the government

to revenue are grants are of the nature of
sometimes promoters’ contribution,
The grant is shown as Grants related to depreciable presented as a i.e., they are given
a deduction from the assets are treated as deferred credit in the profit with reference to the
gross value of the asset income which is recognised in and loss statement, total investment in an
concerned in arriving the profit and loss statement on either separately undertaking or by way
at its book value. a systematic and rational basis or under a general of contribution towards
over the useful life of the asset. heading such as its total capital outlay
‘Other Income’. (for example, central
The grant is thus Alternatively, investment subsidy
recognised in the profit Grants related to non- they are deducted scheme) and no repayment
and loss statement depreciable assets are credited in reporting the is ordinarily expected
over the useful life of to capital reserve as there is related expense. in respect thereof, the
a depreciable asset usually no charge to income in grants are treated as
by way of a reduced respect of such assets. capital reserve which can
depreciation charge. be neither distributed as
dividend nor considered as
If a grant related to a non- deferred income.
Where the grant
equals the whole, or depreciable asset requires the
virtually the whole, of fulfilment of certain obligations,
the cost of the asset, the grant is credited to income
the asset is shown in over the same period over
the balance sheet at a which the cost of meeting such
nominal value. obligations is charged to income.
Refund of Government Grants

If certain conditions are not fulfilled grants become refundable and are treated as an extraordinary item.
Refund of Government Grant
Related to Revenue Related to a Specific fixed asset In the nature of promoters’

contribution
is applied first against any is recorded by increasing the book Refundable, in part or in full, to
unamortised deferred credit value of the asset or by reducing the government on non-fulfilment
remaining in respect of the grant the deferred income balance, of some specified conditions, the
as appropriate, by the amount relevant amount recoverable by the
To the extent that the amount refundable. government is
refundable exceeds any such deferred
credit, or where no deferred credit
exists, In the first alternative, i.e., where the
book value of the asset is increased,
depreciation on the revised book Reduced from the capital reserve.
the amount is charged immediately value is provided prospectively over
to profit and loss statement. the residual useful life of the asset.
Disclosure
The accounting policy adopted
for government grants,
including the methods of The nature and extent of government
presentation in the financial grants recognised in the financial
statements statements, including grants of
non-monetary assets given at a
concessional rate or free of cost.

44
INTERMEDIATE - ACCOUNTING STANDARDS AND FRAMEWORK
Capsule on Accounting Standards and Framework for Preparation
and Presentation of Financial Statements
It has always been the endeavour of Board of Studies to provide quality academic inputs to the students. Considering this
objective in mind, it has been decided to bring forth a crisp and concise capsule for the topic on Accounting Standards and
Framework covered in Intermediate Accounting Papers (Paper 1 “Accounting” and Paper 5 “Advanced Accounting”). The
significant provisions of AS 13, AS 16, AS 17, AS 22 and Framework on Preparation and Presentation of Financial Statements
have been gathered and presented through pictorial presentations in this capsule which will help the students in grasping the
intricate practical aspects of each Accounting Standard. The Capsules containing provisions of AS 1, AS 2, AS 3, AS 4, AS 5,
AS 7, AS 9, AS 10, AS 11, AS 12, AS 14, AS 18, AS 19, AS 20, AS 24, AS 26 and AS 29 have already been published and the students
are advised to access them at https://www.icai.org/post.html?post_id=16431. 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 Board of Studies.
AS 13 “Accounting for Investments”

AS 13 deals with accounting for investments in the financial Classification of Investments
statements of enterprises and related disclosure requirements.
Classification of Investments
Basis for recognition

of interest, dividends
and rentals earned on Operating or finance leases Current Long Term
investments which are Investments Investments
covered by AS 9
AS 13 does not
deal with Mutual funds, venture By nature readily realisable;
Investments on capital funds and/ Other than
retirement benefit or the related asset
intended to be held for not more a current
plans and life insurance management companies, banks than one year from the date on investment
enterprises and public financial institutions which such investment is made.
formed under a Central or State
Government Act or so declared
under the Companies Act, 2013
Type of Cost of
DEFINITION OF INVESTMENTS acquisition investments
Investments are assets
held by an enterprise
Cash price including charges such
In Cash/ bank
as brokerages, fees and duties
for earning for capital appreciation

income or for other benefits By Issue of
shares/ other Fair value of securities issued
securities
Dividends
In exchange Fair value of asset given up or
Assets held as Stock- for another fair value of investment acquired,
Interests asset whichever is more clearly evident
in-trade are not
‘Investments’.
Rentals
Accounting for
Interest accrued/Dividend declared
• Amount for which an asset could be exchanged
between a knowledgeable, willing buyer and a
knowledgeable, willing seller in an arm’s length
Fair value transaction. Pre-acquisition Post-acquisition
• Under appropriate circumstances, market value period period
or net realisable value provides an evidence of
fair value.
Deducted from cost Recognized as an

Market • Amount obtainable from the sale of an of investment income
value investment in an open market, net of expenses
necessarily to be incurred on or before disposal.
20 May 2020 The Chartered Accountant Student
45
Subscribed
Right shares Cost of shares added
to carrying amount If acquired on cum-right
basis & the market value of
investments immediately
after their becoming ex-
Not subscribed, but sold right is lower than the
Accounting for
Sale proceeds taken to cost for which they were
P&L A/c acquired, apply the sale
proceeds of rights to reduce
the carrying amount of
No amount is entered such investments to the
Bonus market value.
in the capital column of
investment account.
Carrying Amount of Investments
Carrying Amount
Current investments Long term investments
Lower of cost and fair value. Valuation carried Valuation
Any reduction to fair value on overall (or global) Determined on an

at cost. individual investment basis.
is debited to profit and loss basis is not considered
account, however, if fair value appropriate; prudent
of investment is increased method is to carry Where there is a decline, other than temporary,in the carrying
subsequently, the increase in investment individually. amounts of long term valued investments, the resultant reduction
value of current investment up to in the carrying amount is charged to the profit and loss statement.
the cost of investment is credited The reduction in carrying amount is reversed when there is a rise
to the profit and loss account (and in the value of the investment, or if the reasons for the reduction
excess portion, if any, is ignored). no longer exist.
Investment Properties Reclassification of InvestmentS
• An investment property is an investment in land or buildings Reclassification of Investments

that are not intended to be occupied substantially for use by, or
in the operations of, the investing enterprise. Current to Long-term Long-term to Current
• An investment property is accounted for in accordance with cost
model as prescribed in AS 10 (Revised), ‘Property, Plant and
Equipment’. Transfer at Lower of cost & fair Transfer at lower of cost & carrying
value at the date of transfer amount at the date of transfer
• The cost of any shares in a co-operative society or a company,
the holding of which is directly related to the right to hold the
Disclosure
investment property, is added to the carrying amount of the
investment property. Accounting policies followed for valuation of investments;
Amounts included in profit and loss statement for:

Disposal of Investments • Interest, dividends (showing separately dividends from subsidiary
companies), and rentals on investments showing separately such
income from long term and current investments.
• Gross income should be stated, the amount of income tax
Difference When part of deducted at source being included under Advance Taxes Paid.
between investment is • Profits and losses on disposal of current investments and changes
If investments held in carrying amount of such investments.
the carrying disposed,
as stock-in-trade, • Profits and losses on disposal of long term investments and
amount and carrying amount
cost of stocks changes in carrying amount of such investments.
the disposal is allocated to
disposed calculated
proceeds, net that part on
as per cost formula Significant restrictions on the right of ownership, realizability of
of expenses, the basis of
as per AS 2. investments or remittance of income and proceeds of disposal.
is recognised average carrying
in the P & L amount of total
Aggregate amount of quoted and unquoted investments, giving
statement. investment.
aggregate market value of quoted investments.
Other disclosures as specifically required by relevant statute

governing enterprise.
The Chartered Accountant Student May 2020 21

46
AS 16 “Borrowing Costs”
The objective of AS 16 is to account for borrowing costs. It Substantial period of time
does not deal with the actual or imputed cost of owners’ equity,
including preference share capital not classified as a liability.
Borrowing costs are interest and other costs incurred by an

enterprise in connection with the borrowing of funds.
Substantial
BORROWING COSTS MAY INCLUDE period of time
depends on
Borrowing Costs the facts and
circumstances of
each case
Interest & Amortisation Exchange

commitment of ancillary A period of
charge on costs Differences* twelve months
In
Borrowings relating to is considered as estimating
Borrowings substantial period the period,
Unless a of time time which
shorter or an asset takes
longer period technologically
Amortisation of Finance charges can be justified and commercially
Discount / Premium for assets acquired on the basis of to get it ready for
on Borrowings on Finance Lease the facts and its intended use
circumstances or sale should be
of the case. considered
*To the extent they are regarded as an adjustment
to interest cost
Exchange Differences on Foreign Currency
Borrowings
A Qualifying Asset
Exchange differences arising from foreign currency borrowing and
An asset when acquired for considered as borrowing costs are those exchange differences which
its intended use or sale. arise on the amount of principal of the foreign currency borrowings
to the extent of the difference between interest on local currency
borrowings and interest on foreign currency borrowings.
Necessarily takes a Amount of exchange difference not exceeding the difference between
substantial period of interest on local currency borrowings and interest on foreign
time to get ready for Is ready for use
currency borrowings is considered as borrowing cost to be accounted
its intended use or sale for under this Standard and the remaining exchange difference, if
any, is accounted for under AS 11, ‘The Effects of Changes in Foreign
Exchange Rates’.
Interest rate for the local currency borrowings is considered as

Qualifying asset Not qualifying asset that rate at which the enterprise would have raised the borrowings
locally had the enterprise not decided to raise the foreign currency
borrowings.
Other investment and those inventory that

are routinely manufactured or otherwise Borrowing Costs Eligible for Capitalisation
produced in large quantities on a repetitive Treatment of Borrowing Costs
basis over a short period of time
Borrowing Costs
Directly related* for:

Manufacturing Power Inventories Investment • acquisition
that require • construction
plants generation property • production of
facilities a substantial
period of
time to
bring them
Qualifying Assets Assets other than Qualifying assets
to a saleable
condition
Capitalized Revenue Expenditure
*or that could have been avoided if the expenditure on qualifying assets
had not been made.
47
Thus, borrowing costs are capitalised as part of the cost of a qualifying asset when it is probable that they will result in future economic benefits to the
enterprise and the costs can be measured reliably. Other borrowing costs are recognised as an expense in the period in which they are incurred.
Borrowings
Specific borrowings General borrowings
Borrowed Borrowing If funds No Direct Amount of borrowing The amount of

funds costs that temporarily relationship costs eligible for borrowing costs
specifically for directly invested . between capitalisation capitalised during a
the purpose relate to that particular determined by applying period should not exceed
of obtaining qualifying asset borrowings and a a capitalisation rate to the amount of borrowing
a particular can be readily Capitalised the expenditure on that costs incurred during
borrowing costs= qualifying asset
qualifying asset identified. asset. that period.
borrowing costs
less any income
earned on the The capitalisation rate should be the weighted average of the
temporary borrowing costs applicable to the borrowings of the enterprise that
investment of are outstanding during the period, other than borrowings made
those borrowings specifically for the purpose of obtaining a qualifying asset.
Excess of the Carrying Amount of the Suspension of Capitalisation

Qualifying Asset over Recoverable Amount
When the carrying amount or the expected ultimate cost of Capitalisation of
the qualifying asset borrowing costs
Exceeds its recoverable amount or net realisable value,

Suspended Not suspended
Carrying amount is written down or written off
in accordance with the requirements of other
Accounting Standards.
during extended during a period when a
periods in when substantial temporary
In certain circumstances, the amount of the write-down which active technical and delay is a
or write-off is written back in accordance with those other
Accounting Standards. development is administrative necessary part
interrupted. work is being of the process
carried out. of getting an
Commencement of Capitalisation asset ready for
its intended use
The capitalisation of borrowing costs as part of the cost of or sale.
a qualifying asset should commence when all the following
conditions are satisfied Cessation of Capitalisation
An asset is normally When the construction

Expenditure for Borrowing Activities that ready for its intended of a qualifying asset
Capitalisation of
the acquisition, costs are being are necessary borrowing costs use or sale when its is completed in parts
construction incurred. to prepare the should cease physical construction and a completed part is
or production asset for its when substantially or production is capable of being used
all the activities complete even though while construction
of a qualifying intended use routine administrative
necessary to continues for the other
asset is being or sale are in prepare the work might still parts, capitalisation
incurred: progress: qualifying asset for continue.
its intended use or of borrowing costs
If minor
sale are complete. in relation to a part
modifications, such
as the decoration of a should cease when
Expenditure on a qualifying asset includes only such expenditure substantially all the
that has resulted in payments of cash, transfers of other assets property to the user’s
specification, are all activities necessary to
or the assumption of interest-bearing liabilities. Expenditure is
reduced by any progress payments received and grants received that are outstanding, prepare that part for its
in connection with the asset. The average carrying amount of this indicates that intended use or sale are
the asset during a period, including borrowing costs previously substantially all the complete.
capitalised, is normally a reasonable approximation of the activities are complete.
expenditure to which the capitalisation rate is applied in that
period.
The activities necessary to prepare the asset for its intended use Disclosure
or sale encompass more than the physical construction of the The financial statements should disclose:
asset. They include technical and administrative work prior to the
commencement of physical construction. However, such activities
exclude the holding of an asset when no production or development The accounting
that changes the asset’s condition is taking place. For example, policy adopted for
borrowing costs incurred while land is under development are borrowing costs; The amount of
capitalised during the period in which activities related to the and borrowing costs
development are being undertaken. However, borrowing costs capitalised during
incurred while land acquired for building purposes is held without any the period.
associated development activity do not qualify for capitalisation.

48
FRAMEWORK FOR PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

The framework for preparation and presentation of financial statements (referred as Framework in this capsule) sets out the concepts
underlying the preparation and presentation of general-purpose financial statements (financial statements which are prepared for general
users) prepared by enterprises for external users. The framework explains components of financial statements, users of financial statements,
qualitative characteristics of financial statements and elements of financial statements. The framework also explains concepts of capital, capital
maintenance and determination of profit.*
Status and Scope

• Components of financial statements;
The principal • Objectives of financial statements; The framework applies to general-purpose financial statements
areas covered • Assumptions underlying financial statements; (hereafter referred to as ‘financial statements’ usually prepared
by the • Qualitative characteristics of financial annually) for external users, by all commercial, industrial and
framework are : statements;
business enterprises, whether in public or private sector. The
• Elements of financial statements;
• Criteria for recognition of elements of financial special purpose financial reports, for example computations
statements; prepared for tax purposes are outside the scope of the framework.
• Principles of measurement of financial elements; Nevertheless, the framework may be applied in preparation of such
• Concepts of Capital and Capital Maintenance. reports, to the extent not inconsistent with their requirements.
Nothing in the framework overrides any specific Accounting Standard. In case of conflict between an Accounting Standard and the
Framework, the requirements of the Accounting Standard will prevail over those of the Framework.
Components of Financial Statements

A complete set of financial statements normally consists of a Balance Sheet, a Statement of Profit and Loss and a Cash Flow Statement together
with notes, statements and other explanatory materials that form integral parts of the financial statements. All parts of financial statements
are interrelated because they reflect different aspects of same transactions or other events. Although each statement provides information that
is different from each other, none in isolation is likely to serve any single purpose nor can anyone provide all information needed by a user.
The major information contents of different components of financial statements are:
Statement of Profit Notes and other

Balance Sheet Cash Flow Statement
and Loss statements
shows the way an present supplementary

portrays value of economic presents the result of
enterprise has generated information explaining
resources controlled by an operations of an enterprise
cash and the way they different items of financial
enterprise. It also provides for an accounting
have been used in an statements. For example,
information about liquidity period, i.e., it depicts
accounting period and they may contain additional
and solvency of an enterprise the performance of an
helps in evaluating the information that is relevant
which is useful in predicting enterprise, in particular its
investing, financing to the needs of users about
the ability of the enterprise profitability.
and operating activities the items in the balance
to meet its financial
during the reporting sheet and statement of profit
commitments as they fall due.
period. and loss. per share, etc.
*The concepts of capital, capital maintenance and determination of profit will be discussed in next issue of Students' Journal.

49
Objectives and Users of Financial Statements
The objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that
is useful to a wide range of users. The framework identifies seven broad groups of users of financial statements.
Users of Financial Statements
Investors Employees Lenders Suppliers and Creditors Customers Govt. Public
Fundamental Accounting Assumptions

As per the framework, there are three fundamental accounting assumptions:
Fundamental Accounting Assumptions
Going concern Accrual Consistency
Financial statements are normally According to AS-1 Revenues and It is assumed that accounting policies are
prepared on the assumption that an costs are accrued, that is, recognised consistent from one period to another.
enterprise will continue in operation as they are earned or incurred (and The consistency improves comparability of
in the foreseeable future and neither not as money is received or paid) and financial statements through time. According
there is an intention, nor there is a recorded in the financial statements to Accounting Standards, an accounting
need to materially curtail the scale of of the periods to which they relate. policy can be changed if the change is required
operations. by statute or by an AS or for more appropriate
presentation of financial statements.
True and Fair View of Financial Statements In preparation of financial statements, all or any of the measurement
Financial statements are required to show a true and fair view of basis can be used in varying combinations to assign money values
the performance, financial position and cash flows of an enterprise. to financial items, subject to the requirement under the Accounting
The framework does not deal directly with this concept of true and Standards.
fair view, yet application of the principal qualitative characteristics
(understandability, relevance, reliability and comparability) and 1. Historical Cost: Historical cost means acquisition price.
appropriate accounting standards normally results in financial
statements portraying true and fair view of information about an
According to this, assets are recorded at an amount
enterprise. of cash or cash equivalent paid or the fair value of the
asset at the time of acquisition. Liabilities are recorded
Elements of Financial Statements
at the amount of proceeds received in exchange for the
The framework classifies items of financial statements in five broad obligation. In some circumstances a liability is recorded
groups depending on their economic characteristics.
at the amount of cash or cash equivalent expected to be
Elements of Financial Statements paid to satisfy it in the normal course of business.
2. Current Cost: Current cost gives an alternative

Asset Liability Equity Income Expenses measurement basis. Assets are carried out at the amount
of cash or cash equivalent that would have to be paid if
the same or an equivalent asset was acquired currently.
Measurement of Elements of Financial Liabilities are carried at the undiscounted amount of
Statements
cash or cash equivalents that would be required to settle
Measurement is the process of determining money value at which an the obligation currently.
element can be recognised in the balance sheet or statement of profit
and loss. The framework recognises four alternative measurement
bases for the purpose. 3. Realisable (Settlement) Value: For assets, this is the
amount of cash or cash equivalents currently realisable
Historical on sale of the asset in an orderly disposal. For liabilities,
Cost
this is the undiscounted amount of cash or cash
equivalents expected to be paid on settlement of liability
in the normal course of business.
Present Measurement Current
Value bases Cost 4. Present Value: Assets are carried at the present value
of the future net cash inflows that the item is expected
to generate in the normal course of business. Liabilities
are carried at the present value of the future net cash
Realisable
outflows that are expected to be required to settle the
Value
liabilities in the normal course of business.
50
accounting
accounting: A Capsule for Quick Recap
It has always been the endeavour of Board of Studies to provide quality academic inputs to the students. Considering this
objective in mind, it has been decided to bring forth a crisp and concise capsule for Paper 1 ‘Accounting’ at Intermediate level.
The topics of “Framework for Preparation and Presentation of Financial Statements” (in continuation of the matter given in
May, 2020 issue of Students’ Journal); “Redemption of Preference Shares and Debentures” and “Departmental Accounts”
have been covered in this Capsule. The significant points of these 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 Board of Studies.
chapter 2 FRAMEWORK FOR PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS
The principal areas covered by the framework, status and Financial capital Financial capital Physical capital
maintenance at maintenance at maintenance at
scope of Framework, components of financial statements, current purchasing
historical cost: current costs:
objectives and users of financial statements, fundamental power:
accounting assumptions, true and fair view of financial
statements and measurement of elements of financial Under this Under this Under this
convention, opening convention, opening convention, the
statements have already been discussed in the Capsule and closing equity at historical costs of
published in May, 2020 issue of Students' Journal. Continuing and closing
historical costs are opening and closing
assets are stated assets are restated
this, the concepts of capital maintenance and determination restated at closing
at respective prices using average at closing prices
of profit are being discussed below:
historical costs to price indices. A using specific price
ascertain opening positive retained indices applicable
Capital Maintenance and closing equity. profit by this method to each asset.
If retained profit means the business The liabilities are
has enough funds also restated at a
Capital refers to net is greater than or
to replace its assets value of economic
assets of a business. It equal to zero, the resources to be
The point is explained below at average closing
is important for any capital is said to sacrificed to settle
as: price. This may not
business to maintain be maintained at serve the purpose the obligation at
its net assets in • P = (CA – CL) – historical costs. closing date. The
because prices of all
such a way, as to (OA – OL) – C + D This means the assets do not change opening and closing
ensure continued • Where: Profit = P business will have at average rate in equity at closing
current costs are
operations, at least • Opening Assets = OA and enough funds to real situations.
For example, price obtained as an
at the same level, Opening Liabilities = OL replace its assets
excess of aggregate
year after year. at historical costs. of a machine can
• Closing Assets = CA and increase by 30%
of current cost
In other words, Closing Liabilities = CL This is quite right values of assets
while the average
dividends should as long as prices do over aggregate of
• Introduction of capital = C increase is 20%.
not exceed profit not rise. current cost values
and Drawings / Dividends = D of liabilities. A
after appropriate
provisions for • Retained Profit = P – D = (CA positive retained
– CL) – (OA – OL) – C profit by this
replacement of method ensures
assets consumed in retention of funds
operations. for replacement
of each asset at
respective closing
prices.
A business must ensure that Retained Profit (RP) is not negative,
i.e. closing equity should not be less than capital to be maintained,
which is sum of opening equity and capital introduced. The The selection of the appropriate concept of capital by
value of retained profit depends on the valuation of assets and an enterprise should be based on the needs of the users of its
liabilities. financial statements. Thus, a financial concept of capital should
The concept of capital maintenance is concerned with how an be adopted if the users of financial statements are primarily
enterprise defines the capital that it seeks to maintain. It provides concerned with the maintenance of nominal invested capital or
the linkage between the concepts of capital and the concepts of the purchasing power of invested capital. If, however, the main
profit because it provides the point of reference by which profit concern of users is with the operating capability of the enterprise,
is measured. It is a prerequisite for distinguishing between an a physical concept of capital should be used. The concept chosen
enterprise's return on capital and its return of capital; only inflows indicates the goal to be attained in determining profit, even
of assets in excess of amounts needed to maintain capital can be though there may be some measurement difficulties in making
regarded as profit and therefore as a return on capital. the concept operational. The selection of the measurement bases
In order to check maintenance of capital, i.e. whether or not and concept of capital maintenance will determine the accounting
retained profit is negative, we can use any of these bases: model used in the preparation of the financial statements.
51
accounting
CHAPTER 7 REDEMPTION OF PREFERENCE SHARES
Introduction (d) where any such shares are proposed to be redeemed
Redemption is the process of repaying an obligation, at out of the profits of the company, there shall, out of
prearranged amounts and timings. It is a contract giving the right profits which would otherwise have been available for
to redeem preference shares within or at the end of a given time dividends, be transferred to a reserve account to be
period at an agreed price. The redeemable shares are issued on called Capital Redemption Reserve Account, a sum equal
the terms that shareholders will at a future date be repaid the to the nominal amount of the shares redeemed; and the
amount which they invested in the company (along with frequent provisions of the Act relating to the reduction of the
payment of a specified amount as return on investment during share capital of a company shall, except as provided in
the tenure of the preference shares).
the Companies Act, apply as if the Capital Redemption
Purpose of Issuing Redeemable Reserve (CRR) Account were the paid-up share capital of
Preference Shares the company.
A company may issue redeemable preference shares because of
the following: The utilisation of CRR Account is further restricted to
issuance of fully paid-up bonus shares only.
1. A company may face difficulty in On the redemption of redeemable preference shares out of
raising share capital, if its shares are accumulated profits it will be necessary to transfer to the Capital
not traded on the stock exchange.
Potential investors, hesitant in putting Redemption Reserve Account an amount equal to the amount
money into shares that cannot easily be repaid on the redemption of preference shares on account of
sold, may be encouraged to invest if the face value less proceeds of a fresh issue of capital made for the
shares are redeemable by the company.
purpose of redemption.
Section 55 of the Companies Act, 2013, deals with provisions
2. The preference shares may be
relating to redemption of preference shares. It ensures that there
redeemed when there is a surplus of
capital and the surplus funds cannot be is no reduction in shareholders’ funds due to redemption and,
utilised in the business for profitable thus, the interest of outsiders is not affected. For this, it requires
use. In India, the issue and redemption
that either fresh issue of shares is made or distributable profits
of preference shares is governed by the
Companies Act, 2013. are retained and transferred to ‘Capital Redemption Reserve
Account’.
Provisions of the Companies Act Methods of Redemption of Fully Paid-Up

A company limited by shares, if so authorised by its Articles, may Shares
issue preference shares which at the option of the company, are
liable to be redeemed within a period, normally not exceeding 20
years from the date of their issue. It should be noted that: Methods of redemption of
redeemable preference shares
(a) no shares can be redeemed except out of profit of

the company which would otherwise be available for
dividend or out of proceeds of fresh issue of shares
made for the purpose of redemption;
(a) the proceeds (b) the
(b) no such shares can be redeemed unless they are fully capitalisation of (c) combination of (a)
of a fresh issue and (b).
paid; undistributed
of shares;
profits; or
(c) (i) in case of prescribed companies whose financial
statements comply with the accounting standards
prescribed for such class of companies under
Section 133 of the Companies Act, the premium, Redemption of Preference Shares by Fresh
if any, payable on redemption shall be provided Issue of Shares
for out of the profits of the company, before the
One of the methods for redemption of preference shares is to
shares are redeemed;
use the proceeds of a fresh issue of shares. A company can issue
in case of other companies (not falling under
(ii) new shares (equity share or preference share) and the proceeds
(i) above), the premium, if any payable on from such new shares can be used for redemption of preference
redemption shall be provided for out of the shares.
profits of the company or out of the company’s
securities premium account, before such shares
are redeemed.
52
accounting
The proceeds from issue of debentures cannot be utilised Advantages and Disadvantages of
for the purpose. Redemption of Preference Shares by Issue
of Fresh Equity Shares
(a) Towards issue of un-issued shares of
Redemption of
the company to be issued to members preference shares by
of the company as fully paid bonus issue of fresh equity
securities shares
(b) To write off preliminary expenses of

the company Advantages Disadvantages
Section 52 of
the Companies
Act, 2013
provides that (c) To write off the expenses of, or
the securities commission paid, or discount allowed No cash New equity Shareholders
premium on any of the securities or debentures outflow of shares may retain their
account may be of the company money – be issued at a equity
applied by the now or later. premium. interest.
company:
(d) To provide for premium on the
redemption of redeemable preference
shares or debentures of the company.
There will Share-holding
be dilution pattern in the
of future company is
(e) For the purchase of its own shares or earnings. changed.
other securities.
Calculation of Minimum Fresh Issue of
Note : If may be noted that certain class of Companies whose Shares to Provide Funds for Redemption
financial statements comply with the Accounting Standards as
prescribed under Section 133 of the Companies Act, 2013, can’t (1) Maximum amount of reserves and surplus available
apply the securities premium account for the purposes (b) and for redemption is ascertained taking into account
(d) mentioned above. Any other way, except the above prescribed the balances appearing in the balance sheet before
ways, in which securities premium account is utilised will be in redemption and the additional information provided
contravention of law. in the problem.
The proceeds of a fresh issue of shares will not include the
amount of securities premium for the purpose of redemption of
preference shares.
(2) Make adjustment for premium payable on redemption
Reasons for issue of New Equity Shares out of profits and then compute
Nominal value of
preference shares to be
A company may prefer issue of new equity Minimum Proceeds of redeemed – Maximum
shares for the following reasons: Fresh Issue of shares : amount of reserve and
surplus available for
redemption.
(a) When (b) When (c) When

the company the balance of the liquidity
has come to profit, which position of the (3) After computation of minimum proceeds, calculate
realise that the would otherwise company is not
capital is needed be available good enough. Minimum Number of Minimum proceeds
permanently for dividend, is Shares divided by face value of
one share
and it makes insufficient.
more sense to
issue Equity
Shares in place
of Redeemable (4) if minimum number of shares as per (3) above includes
Preference Shares a fraction, it must be approximated to the next higher
which carry a figure to ensure that provisions of Section 55 are not
violated.
fixed rate of
dividend.

53
accounting
Thus to calculate minimum number of fresh shares to be issued Redemption Of Fully Called But Partly Paid-
to provide funds, amount payable to preference shareholders is Up Preference Shares
compared with funds available for redemption and the balance of The problem of unpaid calls on fully called up shares may be studied
funds to be raised by fresh issue of shares are calculated. under following categories:
When Calls-In-Arrears is received by the Company
Undistributed Profits
If the amount of unpaid calls After receipt of calls
Another method for When shares are redeemed is received by the Company in arrears, the shares
redemption of preference by utilising distributable before redemption, the entry become fully paid up
shares, as per the Companies profit, an amount equal to the passed is as under: and, then, company
Act, is to use the distributable face value of shares redeemed Bank A/c Dr. can proceed with
profits in place of issuing new is transferred to Capital To Calls-in-Arrears A/c redemption in the
normal course.
shares. Redemption Reserve Account
by debiting the distributable
In Case of Forfeited Shares
profit.
If, on getting a proper notice from the company, the

shareholders fail to pay the unpaid calls, the Board of
Advantages and Disadvantages of Directors may decide to forfeit the shares and cancel these
Redemption of Preference Shares by shares instead of reissuing the forfeited shares because
Capitalisation of Undistributed Profits redemption of these shares is due immediately or in near
future. In this case, entry for forfeiture is passed as usual.
Advantages Disadvantage
No change in the
percentage of equity There may be a
reduction in liquidity.
Accounting Entries for Redemption of
share-holding of the
company;
Preference Shares
When preference shares are redeemed at par
Surplus funds can be
Redeemable Preference Share Capital Account Dr.
used.
To Preference Shareholders Account
Redemption of Preference Shares by When preference shares are redeemed at a premium

Combination of Fresh Issue and Redeemable Preference Share Capital Account Dr.
Capitalisation of Undistributed Profits Premium on Redemption of Preference Shares Account Dr.
A company can redeem the preference shares partly from the
proceeds from new issue and partly out of profits. To Preference Shareholders Account
When payment is made to preference shareholders
(i) Amount to be Transferred to Capital Redemption Reserve
Preference Shareholders Account Dr.
To Bank Account
Face value of shares redeemed *** For adjustment of premium on redemption
To Premium on Redemption of Preference Shares
Less: Proceeds from new issue *** Account
(Being the premium on redemption adjusted against Profit
and Loss Account)
(ii) Proceeds to be collected from New Issue For transferring nominal amount of shares redeemed to Capital
Redemption Reserve Account
General Reserve Account Dr.
Face value of shares redeemed ***
To Capital Redemption Reserve Account
Less: Profits available for distribution as dividend *** (Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)
Companies may have sufficient investments, which can be sold, in
the market to arrange funds for redemption of preference shares.
54
accounting
Chapter 8 REDEMPTION OF DEBENTURES
Introduction Provisions under the Companies Act, 2013

for issue of debentures
Chapter on “Redemption of Debentures” covers the meaning of
redemption of debentures along with related legal provisions.
The requirement of creation of Debenture Redemption Reserve,
Debenture Redemption Reserve Investments (i.e. making
investments for purpose of redemption of debentures) and
accounting treatment for redemption of debentures has been Where debentures are
discussed, in detail, in this chapter. A company No
may issue company issued by a company, the
A debenture is an instrument issued by a company under its specified companies need
seal, acknowledging a debt and contains provisions as regards debentures can
with an issue any to create a debenture
repayment of the principal and interest. Under Section 71 (1) of option to debentures redemption reserve
the Companies Act, 2013, a company may issue debentures with convert such which account out of the profits
an option to convert such debentures into shares, either wholly debentures carry any of the company available
or partly at the time of redemption. into shares, voting for payment of dividend
either wholly rights. and the amount credited
or partly at to such account should
the time of not be utilised by the
Secured Debentures redemption. company for any purpose
other than the redemption
Security of debentures.
Unsecured Debentures
Covertible Debentures Provided that the issue of debentures with an option to

convert such debentures into shares, wholly or partly,
Convertibility should be approved by a special resolution passed at a
Non-convertible duly convened general meeting.
Debentures
Types of Debentures are usually redeemable i.e. either redeemed in cash

Debentures Redeemable Debentures or convertible after a specified time period.
Permanence
Irredeembale Debentures Redeemable debentures
may be redeemed:
Registered Debentures • after a fixed number of years; or
Negotiability • any time after a certain number of years has elapsed since
Bearer Debentures their issue; or
• on giving a specified notice; or
First Mortgage • by annual drawing.
Debentures
Priority
A company may also purchase its debentures, as and when
Second Mortgage convenient, in the open market and when debentures are quoted
Debentures
at a discount on the Stock Exchange, it may be profitable for
the company to purchase and cancel them. As per Rule 18 (1)
of the Companies (Share Capital and Debentures) Rules, 2014, a
company shall not issue secured debentures, unless it complies
Methods of Redemption of Debentures with the following conditions, namely:
Redemption by paying off the debt on account of An issue of secured debentures may be made, provided the date
debentures issued can be done by one of these methods: of its redemption shall not exceed ten years from the date of issue:
Provided that the following classes of companies may issue secured

debentures for a period exceeding ten years but not exceeding thirty
Purchase of years,
By payment in By payment in Debentures in (i) Companies engaged in setting up of infrastructure projects;
lumpsum Instalments Open Market (ii) Infrastructure Finance Companies' as defined in clause (viia) of
sub-direction (1) of direction 2 of Non-Banking Financial (Non-
deposit Accepting or Holding) Companies Prudential Norms
(Reserve Bank) Directions, 2007;
At maturity or The payment of Debentures (iii) Infrastructure Debt Fund Non-Banking Financial Companies' as
at the expiry of a specified portion sometimes are defined in clause (b) of direction 3 of Infrastructure Debt Fund
specified period of debenture purchased in Non-Banking Financial Companies (Reserve Bank) Directions,
of debenture, the is made in open market, 2011;
payment of entire instalments by debiting (iv) Companies permitted by a Ministry or Department of the
debentures is made at specified own debentures Central Government or by Reserve Bank of India or by the
in one lot. intervals. account. National Housing Bank or by any other statutory authority to
issue debentures for a period exceeding ten years.

55
accounting
Such an issue of debentures shall be secured by the creation Requirement to Create Debenture
of a charge on the properties or assets of the company or its
subsidiaries or its holding company or its associates companies, Redemption Reserve
having a value which is sufficient for the due repayment of the Section 71 of the Companies Act 2013 covers the requirement of
amount of debentures and interest thereon. creating a debenture redemption reserve account. This states as
follows:
The company shall appoint a debenture trustee before the
issue of prospectus or letter of offer for subscription of its (1) Where a company issues debentures under this
debentures and not later than sixty days after the allotment of section, it should create a debenture redemption
the debentures, execute a debenture trust deed to protect the reserve account out of its profits which are available
interest of the debenture holders; and
for distribution of dividend every year until such
debentures are redeemed.
The security for the debentures by way of a charge or mortgage
shall be created in favour of the debenture trustee on-
(i) any specific movable property of the company or its (2) The amounts credited to the debenture redemption
holding company or subsidiaries or associate companies or reserve should not be utilised by the company for any
otherwise.
(ii) any specific immovable property wherever situate, or any purpose except for the purpose aforesaid.
interest therein:
Provided that in case of a non-banking financial company, the (3) The company should pay interest and redeem
charge or mortgage under sub-clause (i) may be created on any the debentures in accordance with the terms and
movable property.
conditions of their issue.
Note: Provided further that in case of any issue of debentures by a
Government company which is fully secured by the guarantee given
by the Central Government or one or more State Government or by (4) Where a company fails to redeem the debentures
both, the requirement for creation of charge under this sub-rule shall on the date of maturity or fails to pay the interest on
not apply.
Provided also that in case of any loan taken by a subsidiary debentures when they fall due, the Tribunal may, on
company from any bank or financial institution the charge or the application of any or all the holders of debentures
mortgage under this sub-rule may also be created on the properties or debenture trustee and, after hearing the parties
or assets of the holding company
concerned, direct, by order, the company to redeem
the debentures forthwith by the payment of principal
Debenture Redemption Reserve
and interest due thereon.
A company issuing debentures may Balance In Debenture Redemption

be required to create a debenture Reserve
redemption reserve account (DRR) out
of the profits available for distribution When the company is required to create DRR, the amount
of dividend and amounts credited to prescribed, is credited to the Debenture Redemption Reserve
such account cannot be utilised by
the company except for redemption account and debited to profit and loss account. That shows the
of debentures. Such an arrangement intention of the company to set aside sum of money to build up
would ensure that the company will have a fund for redeeming debentures. Immediately, the company
sufficient liquid funds for the redemption should also purchase outside investments. The entry for the
of debentures at the time they fall due for purpose naturally will be to debit Debenture Redemption Reserve
payment. Investments and credit Bank.
Adequacy of debenture redemption

An appropriate amount is transferred
from profits every year to Debenture
reserve
Redemption Reserve and its investment As per Rule 18 (7) of the
is termed as Debenture Redemption Companies (Share Capital
Reserve Investment (or Debenture and Debentures) Amendment • Debenture Redemption
Redemption Fund). In the last year Rules, 2019, the company shall Reserve shall be created
or at the time of redemption of comply with the requirements out of the profits of the
debentures, Debenture Redemption with regard to Debenture company available for
Reserve Investments are encashed and Redemption Reserve (DRR) payment of dividend;
the amount so obtained is used for the and investment or deposit of • the limits with respect
redemption of debentures. sum in respect of debentures to adequacy of DRR
maturing during the year and investment or
ending on the 31st day of March deposits, as the case
of next year in accordance with may be, shall be as per
the conditions. table below:
56
accounting
S. Debentures issued by Adequacy of Debenture The amount deposited or invested, as the case may be, above
No Redemption Reserve should not be utilised for any purpose other than for the
redemption of debentures maturing during the year referred
(DRR) to above.
1 All India Financial Institutions No DRR is required

(AIFIs) regulated by Reserve
Bank of India and Banking Provided that the amount remaining deposited or invested,
Companies for both public as well as the case may be, shall not at any time fall below 15% of the
amount of debentures maturing during the 31st day of March of
as privately placed debentures that year.
2 Other Financial Institutions (FIs) DRR will be as applicable
within the meaning of clause (72) to NBFCs registered
of section 2 of the Companies with RBI (as per (3)
Act, 2013 below) In case of partly convertible debentures, DRR shall be created in
respect of non-convertible portion of debentures issued.
3 For listed companies (other than AIFIs and Banking
Companies as specified in Sr. No. 1 above):
a All listed NBFCs (registered No DRR is required

with RBI under section 45-IA The amount credited to DRR shall not be utilised by the
company except for the purpose of redemption of debentures.
of the RBI Act,) and listed HFCs
(Housing Finance Companies
registered with National Housing
Bank) for both public as well as
privately placed debentures Journal Entries
The necessary journal entries passed in the books of a company
b. Other listed companies for both No DRR is required are given below:
public as well as privately placed
debentures 1. After allotment of debentures
(a) For setting aside the fixed amount of profit for redemption
4 For unlisted companies (other than AIFIs and Banking
Companies as specified in Sr. No. 1 above Profit and Loss A/c Dr.
To Debenture Redemption Reserve A/c
a All unlisted NBFCs (registered No DRR is required
with RBI under section 45-IA of (b) For investing the amount set aside for redemption
the RBI (Amendment) Act, 1997) Debenture Redemption Reserve Investment A/c Dr.
and unlisted HFCs (Housing To Bank A/c
Finance Companies registered
(c) For receipt of interest on Debenture Redemption Reserve
with National Housing Bank) for Investments (DRRI)
privately placed debentures
Bank A/c Dr.
b Other unlisted companies DRR shall be 10% of the To Interest on Debenture Redemption Reserve Investment A/c
value of the outstanding (d) For transfer of interest on Debenture Redemption Reserve
debentures issued Investments (DRRI)
Interest on Debenture Redemption Reserve Investment A/c Dr.
To Profit and loss A/c*
Investment of Debenture Redemption
Reserve (Drr) Amount * Considering the fact that interest is received each year through cash/
bank account.
As per Rule 18 (7) of the Companies (Share Capital and
Debentures) Amendment Rules, 2019, all listed NBFCs; all listed 2. At the time of redemption of debentures
HFCs; all other listed companies (other than AIFIs, Banking
Companies and Other FIs); and all unlisted companies which (a) For encashment of Debenture Redemption Reserve
are not NBFCs and HFCs shall on or before the 30th day of April Investments
in each year, in respect of debentures issued, deposit or invest, Bank A/c Dr.
as the case may be, a sum which should not be less than 15% of To Debenture Redemption Reserve Investment A/c
the amount of its debentures maturing during the year ending
(b) For amount due to debentureholders on redemption
on the 31st day of March of next year, in any one or more of the
following methods, namely: Debentures A/c Dr.
(a) in deposits with any scheduled bank, free from charge or To Debentureholders A/c
lien; (c) For payment to debentureholders
(b) in unencumbered securities of the Central Government or of Debentureholders A/c Dr.
any State Government;
To Bank A/c
(c) in unencumbered securities mentioned in clauses (a) to (d)
and (ee) of Section 20 of the Indian Trusts Act, 1882; (d) After redemption of debentures, Debenture Redemption
(d) in unencumbered bonds issued by any other company which Reserve A/c should be transferred to general reserve
is notified under clause (f ) of Section 20 of the Indian Trusts Debenture Redemption Reserve A/c Dr.
Act, 1882. To General Reserve

57
accounting
CHAPTER 12: Departmental Accounts
Introduction Basis of Allocation of Common
If a business consists of several independent activities, or is divided Expenditure among Different Departments
into several departments, for carrying on separate functions, its
management is usually interested in finding out the working
results of each department to ascertain their relative efficiencies. Basis of Allocation of Common
Expenditure among different
This can be made possible only if departmental accounts are Departments
prepared. Departmental accounts are of great help and assistance
to the managements as they provide necessary information for
controlling the business more intelligently and effectively
Expenses incurred Common expenses
Type of Departments specially for each allocated among the
department are charged to departments on suitable
the specific department. basis.
Dependent Independent
S. Expenses Basis of Allocation

Have inter-department Work independently, No
transfers have negligible transfers 1 Rent, rates and taxes, repairs Floor area occupied by
and maintenance, insurance of each department (if given)
building otherwise on time basis
Advantages of Departmental Accounting 2 Lighting and Heating expenses Consumption of energy by
(e.g., energy expenses) each department
Evaluation of performance: The 3 Selling expenses, e.g., discount, Sales of each department
performance of each department can be
evaluated separately on the basis of trading bad debts, selling commission,
results. An endeavour may be made to freight outward, travelling sales
push up the sales of that department which manager’s salary and other costs
is earning maximum profit. 4. Carriage inward/ Discount Purchases of each
received department
Growth potential of each department: 5. Wages/Salaries Time devoted by
The growth potential of a department as employees to each
The main compared to others can be evaluated.
advantages of department
departmental 6. Depreciation, insurance, repairs Value of assets of each
Justification of capital outlay: It helps the
accounting management to determine the justification and maintenance of capital assets department otherwise on
are: of capital outlay in each department. time basis
7. Administrative and other Time basis or equally
Judgement of efficiency: It helps to calculate expenses, e.g., salaries of among all departments
stock turnover ratio of each department managers, directors, common
separately, and thus the efficiency of each advertisement expenses, etc.
department can be revealed.
8. Labour welfare expenses Number of employees in
Planning and control: Availability of each department
separate cost and profit figures for each 9. PF/ESI contributions Wages and salaries of each
department facilitates better control. department
Thus effective planning and control can
be achieved on the basis of departmental Note: There are certain expenses and income, of financial nature,
accounting information. which cannot be apportioned on a suitable basis; therefore they are
recognised in the combined Profit and Loss Account, for example,
interest on loan, profit/loss on sale of investment, etc.
Methods of Departmental Accounting
Methods of keeping departmental
Inter-Departmental Transfers
accounts
Inter-department transfers
Accounts of all Separate set of books (forming part of closing inventory)
departments are kept in are kept for each
one book only department
Cost Market Price Cost plus agreed

This may be done by having A separate set of books may percentage of
columnar subsidiary books be kept for each department, profit
and a columnar ledger including complete stock
having information of each accounts of goods received No unrealised
department. from or transferred to other Profit exists
departments and also sales.
58
accounting
The situation of unrealised profit will arise only if the transfers Journal Entry
are made at market price which is more than cost or when the
goods are transferred at cost plus percentage of profit. At the end of the accounting • Profit and Loss
year, this journal entry will Account Dr.
be passed for elimination of To Stock Reserve
Stock Reserve unrealised profit (creation of • (Being a provision
stock reserve): made for unrealised
Unrealised profit included in unsold stock at the end profit included in
of accounting period is eliminated by creating an closing stock)
appropriate stock reserve by debiting the combined Profit
In the beginning of the • Stock Reserve Dr.
and Loss Account. The amount of stock reserve will be next accounting year, the To Profit and Loss
calculated as: aforesaid journal entry will Account
be reversed as : • (Being provision for
Transfer price of unsold stock ×Profit included in transfer price unrealised profit
reversed.)
Transfer price
59

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CHAPTER 1: INTRODUCTION TO ACCOUNTING STANDARDS

Concepts & Benefits Accounting Significance of

International Financial International

Issuance of Accounting Standards

Recognition Measurement Presentation

The Chartered Accountant Student October 2017 07

Accounting Standards Setting Process Significance of Global Standards

Constitution of study group

Finalisation of exposure draft (E.D.)

Effectively, there are now only 27 Accounting Standards.

08 October 2017 The Chartered Accountant Student

Ind AS Indian Accounting Standards - Benefits

Objectives and Concepts of Carve Outs

Sent to Formulation of Ind AS

Resulting into carve-outs Not resulting into carve-outs

Accounting for Transfer to Declaration

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

books of accounts, relevant books and financial statements

Preparation of Financial Statements Requisites of Financial Statements

10 October 2017 The Chartered Accountant Student

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

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

provisions and appropriations that must be

Declaration and Payment of Dividend

No Dividend can be declared except out of

Trading profits after Money provided (in pursuance

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

Total amount drawn from

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

After such withdrawal should

No company should declare dividend

As per section 123 (1)of As required under law.

12 October 2017 The Chartered Accountant Student

Definition of Cash Flow Statement

Cash flow statement is a summary of

Significance of Cash Flow Statement

Historical Short term highly liquid

Cash increase Cash decrease

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Classification of Cash Flow Activities

Classification of Cash Flow Activities

Investing activities Financing activities

Methods (Operating Cash flow)

Direct method Indirect method

Proforma of Cash Flow Statement prescribed by AS 3

Operating Activities: Operating Activities:

Net Cash Flow from Operating Activities xxx

14 October 2017 The Chartered Accountant Student

CHAPTER 5: PROFIT OR LOSS PRE AND POST INCORPORATION

Chapter Overview Methods for Computation

Apportionment of Close off old books and

Meaning of Profit or Loss prior to Incorporation Methods

Split up the profit Time basis (i)

Item Basis of Apportionment between Audit Fees Types of Audit

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

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

Expenses exclusively relating to (ii) F

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CHAPTER 6: ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE*

Section 63 allows companies to issue

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

Employees under a scheme Any persons, either for cash or

Right of renunciation refers to the right of the sharehold-