Bos 48087 A

Referencer for Quick
Revision
Intermediate Course Group-I
A compendium of subject-wise capsules published in the
monthly journal “The Chartered Accountant Student”
Board of Studies
(Academic)
ICAI
INDEX
Edition of
Paper Page
Subject Students’ Topics
No. No.
Journal
Introduction to Accounting
1-3 October 2017
Standards
October 2017 Preparation of Financial
4-6
Statements of Companies
7-8 October 2017 Cash Flow Statement
October 2017 Profit or Loss Pre and Post
9
Incorporation
October 2017 Accounting for Bonus Issue
10-11
and Right Issue
12-13 October 2017 Investment Accounts
October 2017 Insurance Claims for Loss of
14-15
Stock and Loss of Profit
October 2017 Hire Purchase and Instalment
16-19
Sale Transactions
October 2017 Accounts from Incomplete
19-21
1 Accounting 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
May 2020, July
49-51 and Presentation of Financial
2020
Statements
Redemption of Preference
52-54 July 2020
Shares
55-57 July 2020 Redemption of Debentures
58-59 July 2020 Departmental Accounts
2 Corporate Companies Act, 2013

and Other 60-61 September 2019 Preliminary
Laws 62-65 September 2019 Incorporation of Companies
65-68 September 2019 Prospectus
68 September 2019 Share Capital and Debentures
68-69 September 2019 Registration of Charges
69-72 September 2019 Meetings of the Company
73-74 October 2019 Dividend
74-76 October 2019 Accounts of Companies
77-78 October 2019 Audit and Auditors
79-82 November 2019 List of Penalties
Introduction to Cost and

83-87 September 2017
Management Accounting
88-90 September 2017 Material Cost
91-95 April 2021 Employee (Labour) Cost
96-98 September 2017 Overheads
99-
Cost and April 2021 Cost Sheet
102
3 Management 103-
September 2017
Process and Operation
Accounting 105 Costing
105-
September 2017 Standard Costing
107
108-
September 2017 Marginal Costing
110
110- Budget and Budgetary
September 2017
113 Control
Advance Tax, Tax Deduction

114-
April 2020 at Source and Introduction to
120
Income-tax Tax Collection at Source
4A
Law 120-
Provisions for Filing Return
April 2020 of Income and Self-
121
Assessment
122- GST in India – An

February 2021
124 Introduction
125-
February 2021 Supply under GST
128
Indirect Levy and Collection of CGST/
4B 128 February 2021
Taxes IGST
129-
August 2021 E-Invoicing
132
132-
August 2021 QRMP Scheme
135
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) From 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
nm e
wit dition
en
go stanc
con
hc
si
ver
ert s
As
ain
by
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
is considered as In
Borrowings relating to 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.
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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
(ii)
in case of other companies (not falling under 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.
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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.

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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.
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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:
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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
COMPANY LAW
Corporate and Other Laws: A Capsule for Quick Recap (The Companies Act, 2013)
At the Intermediate level, the Company Law portion of the subject “Corporate and Other Laws” largely involves
knowledge and comprehension, analysis and application of provisions of the Companies Act, 2013 to solve simple
situation based and application-oriented issues. The subject is very dynamic on account of the large number of
amendments/ circulars/ notification as issued by the Ministry of Corporate Affairs.
Significant provisions from Section 1 to Section 122 of the Companies Act, 2013 are covered here. Remaining sections
(123 to 148) will be covered in the forthcoming issue of Students’ Journal. You are advised to read and understand the
July, 2017 edition of the Study Material and relevant RTP for a thorough understanding of the relevant provisions of
Companies Act, 2013, to hone your application skills. This capsule on Intermediate Paper 2: Corporate and Other Laws
is intended to assist you in the process of revision of concepts discussed in the Study Material.
2. On the basis of members

Title
Companies Act, 2013 One Person company (OPC) [Section 2(62)]
• Only one person as member.
Extent • Minimum paid up capital – no limit prescribed
Whole of India • The MOA shall indicate the name of the other person
(nominee), who shall, in the event of the subscriber’s
Commencement death or his incapacity to contract, become the member
Section 1 came into force at once and the remaining provisions of the company
on different dates through Notifications. • The member of OPC may at any time change the name
of nominee by giving notice to the company and the
Application company shall intimate the same to the Registrar
1. Companies • No person shall be eligible to incorporate more than one
2. Insurance companies
3. Banking companies OPC
4. Companies producing /supplying electricity • No minor shall become member of the OPC
5. Company regulated by special Act
6. Entities as notified by Central Government • Such Company cannot be incorporated or converted into
a company under section 8 of the Act. Though it may be
A BRIEF INTRODUCTION ABOUT COMPANY AND ITS TYPES converted to private or public companies in certain cases
• Such Company cannot carry out NBFC activities
What is a Company: Company means a company including investment in securities of any body corporate
incorporated under this Act or under any previous Company • Here, the member can be the sole member and director
Law [Section 2(20)].
A company is an incorporated association, which is an
Private Company [Section 2(68)]
artificial person created by law, having a separate entity, with
• No minimum paid-up capital requirement
a perpetual succession.
• Minimum number of members – 2 (except if private
company is an OPC, where it will be 1)
TYPES OF COMPANIES • Maximum number of members – 200, excluding present
employee-cum-members and erstwhile employee-cum-
1. On the basis of liability
members
Company Limited by shares [Section 2(22)] • Right to transfer shares restricted
• Liability of the members of a company is limited by its • Prohibition on invitation to subscribe to securities of the
Memorandum of Association (MOA) to the amount (if company
any) unpaid on the shares held by them • Small company is a private company
• OPC can be formed only as a private company
Company Limited by Guarantee [Section 2(21)]
• Liability of its members is limited by the memorandum to Public Company [Section 2(71)]
such amount as the members may respectively undertake • Is not a private company (Articles do not have the
to contribute to the assets of the company in the event of restricting clauses).
its being wound up • Shares freely transferable
• Members cannot be called upon to contribute beyond
• No minimum paid up capital requirement
that stipulated sum
• Minimum number of members – 7
Unlimited Company [Section 2(92)] • Maximum numbers of members – No limit
• No limit on the liability of members • Subsidiary of a public company is deemed to be a public
• The liability ceases when he ceases to be a member company
08 September 2019 The Chartered Accountant Student
60
COMPANY LAW
3. On the basis of control
Small Company [Section 2(85)]
Holding and Subsidiary company • A private company
Holding company [Section 2(46)]: Holding company, in • Paid up capital – not more than Rs50 lakhs or such higher
relation to one or more other companies, means a company of amount as may be prescribed which shall not be more
which such companies are subsidiary companies. than 10 crore rupees; and
Turnover (as per P&L A/cc of immediate preceding FY) –
Subsidiary company [Section 2(87)]: means a company in not more than R 2 crores or such higher amount as may
which the holding company— be prescribed which shall not be more than 100 crore
• controls the composition of the Board of Directors; or rupees.
• exercises or controls more than one-half of the total share • Should not be – Section 8 company
capital either at its own or together with one or more of – Holding or a Subsidiary company
its subsidiary companies. – a company or body corporate governed
However, prescribed class or classes of holding companies by any special Act
shall not have layers of subsidiaries beyond such numbers as
may be prescribed. Foreign company [Section 2(42)]
Any company or body corporate incorporated outside India
Associate Company [Section 2(6)] which—
In relation to another company, means a company in which • has a place of business in India whether by itself or
that other company has a significant influence, but which through an agent, physically or through electronic mode;
is not a subsidiary company of the company having such and
influence and includes a joint venture company. • conducts any business activity in India in any other
manner
“Significant influence” means control of at least 20% of
total voting power, or control of or participation in business Formation of companies with charitable objects etc.
decisions under an agreement. [Section 8]
• Formed for the promotion of commerce, art, science,
"Joint venture" means a joint arrangement whereby the religion, charity, protection of environment, sports, etc.
parties that have joint control of the arrangement have rights • Uses its profits for the promotion of the objective for
to the net assets of the arrangement. which formed
“Total voting power”, in relation to any matter, means the total • Does not declare dividend to members
number of votes which may be cast in regard to that matter on • Operates under a special licence from Central
a poll at a meeting of a company if all the members thereof or Government
their proxies having a right to vote on that matter are present • Need not use the word Ltd./ Pvt. Ltd. in its name and
at the meeting and cast their votes. adopt a more suitable name such as club, chambers of
commerce etc.
• Enjoy same privileges and obligations as of a limited
4. On the basis of access to capital company
Listed company [Section 2(52)] • Licence revoked if conditions contravened
Which has any of its securities listed on any recognised stock • Can call its general meeting by giving a clear 14 days
exchange notice instead of 21 days
• Requirement of minimum number of directors,
Unlisted company - company other than listed company
independent directors etc. does not apply
5. Other companies
Government company (GC) [Section 2(45)]

The Central Government (CG), or
At least 51% of
Any State Govt./s (SG), or
the paid up share
capital is held by- Partly by CG and partly by one or
more SG
Includes a company which is a subsidiary company of such

Government company.
The Chartered Accountant Student September 2019 09

61
COMPANY LAW
INCORPORATION OF COMPANIES
I. MEMORANDUM OF ASSOCIATION (MOA)
Name with which Alteration: Special Resolution (SR) +

NAME CLAUSE Co. is registered Approval of CG
New certificate of Incorporation will be
issued
DOMICILE Specifies the state
CLAUSE where Registered Office
is situated Alteration: CG approval necessary when
change from one state to another,
Registrar will issue fresh certificate of
Contains object for which incorporation indicating the alteration
Co. is formed
Enables shareholders, Alteration: SR through postal ballot is to

creditors & others
OBJECT dealing with Co. to be passed + Publish in Newspaper+ Give
CLAUSE know the scope of work exit opportunity to dissenting shareholders
Co. can undertake (in case of Co. which raised money through
prospectus+ money is un-utilised)
MOA Any Act beyond specified
in Object Clause is Ultra
Vires, hence Void
Co. limited by Share:

Liability of members is
LIABILITY limited up to unpaid amt
CLAUSE/ of shares
CAPITAL
CLAUSE
Co. limited by
guarantee: Specifies
the amt each member
undertake to contribute Alteration: In case of Co. limited by
guarantee and not having share capital,
intending to give any person a right to
Co. having share capital: participate in divisible profits otherwise than
Amt of share capital
with which Co. is to be as member, shall be void
registered,
No. of shares each
subscriber to MOA
intends to take
OPC: Name of person

who in the event of
death of subscriber, shall
become the member of
the Co.
Sec 7(1)(a) specifies that

SUBSCRIPTION MOA & AOA duly signed
CLAUSE by all subscribers to the
MOA, be filed with the
Registrar
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COMPANY LAW
II. ARTICLES OF ASSOCIATION (AOA) IV. COMPANY TO MAINTAIN MINIMUM NUMBER OF

MEMBERS [Section 3A]
Contain the regulations for the
AOA management of Co. No. of members has reduced
below 7 (Public Co.)/ 2 (Private
Co.)
ALTERATION OF AOA
(i) Alteration is effected by SR

Yes No
(ii) Alteration of AOA may include the Conversion of Pvt
Co. to Public Co. and Vice versa. However, when Public Co.
is converted into Pvt. Co., approval of CG is necessary.
Co. carried on Co. increased
(iii) Alteration of AOA+ Approval of CG (if any) to be filed business with the no. of No Further
such reduced members within Action
with ROC within 15 days number for 6 months period
more than 6
(iv) Alterations once registered will be valid as if it were months
originally contained in AOA
every person who is a No Further Action

III. STEPS FOR INCORPORATION OF COMPANY member of the Co. during
these 6 and 6+ months and
knows that Co. is carrying
on business with than 7/2
Reservation of name by filing e-application members, shall be severally
1 liable for payment of whole
debts of the Co. contracted
Drafting & signing of MOA & AOA and its submission after 6 months, and may be
severally sued therefore
2 to ROC. These documents have to be e- filed and
e- stamped
Consent of persons nominated as directors to act as V. COMMENCEMENT OF BUSINESS ETC [Section 10 A]
3 directors to be submittted electronically
Co. incorporated after the commencement of the Companies
(Amendment) Act, 2019 + having a share capital shall not
Submission of 'statutory declaration of compliance' and commence any business or exercise any borrowing powers
4 unless—
other declarations
5 Pay fees
1. Declaration is filed by director
Obtain certificate of incorporation digitally signed by

6 ROC • within 180 days of the date of incorporation with the
Registrar
• that every subscriber to the memorandum has paid the
7 File declaration about address of Registered office value of the shares agreed to be taken by him on the date
of making of such declaration
2. The Co. has filed with the Registrar a verification of its

Note: New requirement of submitting declaration that ‘all subscribers registered office
have paid the value of shares agreed to be taken by him’ and
‘verification of Registered office has been filed’ has beeen inserted
vide section 10A. This requirement is needed to be complied with 3. If no declaration has been filed with the Registrar within
before the commencement of business. a period of said 180 days and the Registrar has reasonable
cause to believe that the Co. is not carrying on any business
or operations,
• Registrar may, initiate action for the removal of the name

of Co. from the register of companies under Chapter
XVIII.

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COMPANY LAW
VI. REGISTERED OFFICE (RO) OF COMPANY [Section 12] 2.
1. Change in Place of
Registered office
Need for RO
• It is a physical office, capable of receiving &

acknowledging all communication and notices. Within a Within a From One State
• Domicile & nationality of Co. is determined by the state State to Another
Within
place of RO (from (From (Change in
a city
one one Place Clause
city to ROC to Section
Time Limit another) another) 13(4),(5),(6)
• A Co. within 30 days of its incorporation and at all

times thereafter, have RO
Board Special Special Special
Resolution Resolution Resolution Resolution
Verification of RO
• Within 30 days of incorporation furnish to ROC

verification of RO Permission Approval
Notice to Notice to
of of Central
ROC ROC Regional
Labeling of company: Every company shall— (30 days) (30 days) Government
Director
• Paint/ affix its name, address of RO on the outside of

every office / place of business, in a conspicuous position, 30/60/30 60/30
in legible letters, and if the characters employed are not RD/Co./ CG/CO.
those of the language/s in general use in that locality, ROC
then also in the characters of that language/s.
• have its name engraved in legible characters on its seal, if
any; Conclusive Fresh
• get its name, address of RO and the CIN along with Ph Evidence Certificate of
no., fax no., if any, e-mail and website addresses, if any, Incorporation
printed in all its business letters, billheads, letter papers
and in all its notices and other official publications; and
• have its name printed on hundies, promissory notes, bills
VII. SUBSIDIARY COMPANY NOT TO HOLD SHARES IN
of exchange and other prescribed documents
ITS HOLDING COMPANY [Section 19]
1.
Name change by the company during the last two years
No company shall, No holding company

• Co. shall paint or affix or print, along with its name, the hold any shares in its shall allot or transfer
former name or names so changed during the last two holding company its shares to any of its
years. subsidiary companies
In case of OPC
• The words ‘‘One Person Company’’ shall be mentioned either by itself or Such allotment or
in brackets below the name of such company, wherever transfer of shares
its name is printed, affixed or engraved. to its subsidiary
company shall be
void
through its
nominees
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COMPANY LAW
2. Exceptions to point (1) VIII. AUTHENTICATION OF DOCUMENTS,
PROCEEDINGS AND CONTRACTS [Section 21]
where the subsidiary company holds such shares as
the legal representative of a deceased member of the
holding company; or As per Sec.2(51)-Key
Authentication of managerial personnel, in
relation to a company, means—
documents, proceedings (i) the CEO or the MD or the
and contracts manager;
(ii) the company secretary;
where the subsidiary company holds such shares as a As per Sec.21 these may (iii) the whole-time director;
trustee; or (iv) the CFO;
be signed by any "key (v) such other officer, not
managerial personnel" more than one level below
or an officer or employee the directors who is in
of the company duly whole-time employment,
designated as key
where the subsidiary company is a shareholder even authorised by the Board in managerial personnel by
before it became a subsidiary company of the holding this behalf. the Board; and
(vi) such other officer as may
company: be prescribed;
ISSUE OF SECURITIES
I.
Prospectus/ Public Offer Initial Public Offer (IPO)

Public Co.
Issue of securities
Private Placement Further Public Offer (FPO)
Right Issue Offer for Sale of Securities

(OFS)
Bonus Issue
Private Placement
Private Co. Right Issue
Bonus Issue
II. PROSPECTUS
(1) WHAT IS PROSPECTUS?
Document described or issued as a prospectus
Includes red herring prospectus

for subscription of any
securities of body corporate Prospectus
Includes shelf prospectus

Includes notice, circular,
advertisement or other document
inviting offers from the public

65
COMPANY LAW
2. CONTENTS OF PROSPECTUS [Section 26]
CONTENTS OF PROSPECTUS
DATED EXPERT REPORT COVER PAGE OF PROSPECTUS

(Date of Publication) (to be given only when expert is:)
Signed by: (1) Not engaged/ interested in State that the copy has been
Directors/ Proposed Director/ formation/ promotion of Co. delivered to ROC for filing
Attorney of director
(2) Expert has not withdrawn Required documents are

the consent attached to such copy
Financial Info
(as specified by SEBI and CG) delivered to ROC
(3)Experts gives the consent

in writing
Declaration
(1) Regarding compliance of
Companies Act, 2013
(2) Nothing in prospectus is
contrary to CA, 2013, SEBI
Act, 1992 & SCRA, 1956.
3) PROCESS FOR VARIATION IN TERMS OF CONTRACT OF PROSPECTUS [Section 27]
Publish in newspaper (including justification for

SR + such variation) + Give Exit offer to Dissenting shareholders
(4) PENALTY FOR CONTRAVENTION OF SECTION 26 (5) SHELF PROSPECTUS, RED HERRING PROSPECTUS
AND ABRIDGED PROSPECTUS
Contravention of Section 26
SHELF PROSPECTUS
prospectus in respect of which the securities
or class of securities are issued for subscription
in one or more issues over a certain period
Any person knowingly a without the issue of a further prospectus
Company party to issue of prospectus
RED HERRING PROSPECTUS

Fine Fine (R50,000 - prospectus which does not include complete
(R50,000 - R3 lacs), or particulars of the quantum or price of the
R3 lacs) securities included therein.
Imprisonment
(up to 3 years), or
ABRIDGED PROSPECTUS
a memorandum containing such salient
features of a prospectus
Both fine and as may be specified by the SEBI by making
imprisonment regulations in this behalf.
66
COMPANY LAW
III. ALLOTMENT OF SECURITIES [Section 39] V. PRIVATE PLACEMENT
(1)
Allotment of securities
What is this Private Placement?
Minimum application application money
amount money has been shall not be less
subscribed, and paid and received than 5% or such
by the company other %age/ amt as
specified by SEBI.
Minimum amount not subscribed and application money

not received
within 30 days from date of Such other period as (2)
issue of prospectus, or specified by SEBI Private Placement
A private placement is a way of raising capital that involves the

sale of securities to a relatively small number of select investors.
amount received shall be returned within 15 days from the
closure of issue
A private placement is different from a public issue in which
securities are made available for sale on the open market to
any type of investor.
Where company makes an allotment of securities
shall file a return of allotment with the Registrar PRIVATE PLACEMENT [Section 42]
• any offer or invitation to subscribe or issue of securities
• to a select group of persons by a company (other than by way
of public offer)
In case of default
• through private placement offer-cum-application
Company shall pay `1 lac whichever is less To whom can the private placement be made?
penalty of `1,000 for each
day during which such • only to a select group of persons
default continues, or • identified by the Board ("identified persons")
Maximum No. of persons to whom offer can be made
IV. LIABILITY IN CASE OF MIS- STATEMENTS IN • not more than 200 in the aggregate in a financial year
PROSPECTUS
Exclusions from the list of 200 members
• Loss or damage is an essential condition
• qualified institutional buyers, or
Civil Liability • Civil Procedure Code, 1908 applicable • employees of the company under a scheme of employees stock
• Offence against the counterparty option [Sec 62(1)(b)]
Application for Private Placement
• Mens rea (guilty mind) is an essential condition
Criminal • Criminal Procedure Code, 1973 applicable • Identified person may subscribe to the private placement issue
Liability shall apply in the private placement
• Offence is regarded committed against the state • application issued to such person along with subscription
money paid either by cheque or demand draft or other
banking channel and not by cash
Liability for Misstatement Utilisation of Money received in private placement
• Co. shall not utilise monies raised through private placement
Criminal Liability Civil Liability unless allotment is made and the return of allotment is filed
with the Registrar
Every person who Company, director, Proposed
authorised prospectus director, Promoter, Expert, Return of allotment
one who authorised
• Co. shall file with the Registrar a return of allotment within 15
days from the date of the allotment
Punishable U/s 447 Pay compensation to Investors
Co. shall issue private placement offer cum application letter
only after the relevant special resolution or Board resolution
Defenses Defenses has been filed in the Registry
• Private companies shall file with the Registry copy of the Board
Reasonable Withdrew Believed Issued resolution or special resolution with respect to approval under
Immaterial ground to consent to on Consent without his 179(3)(c)
believe be director u/s 26(5) Knowledge,
Public Any private placement issue not made in compliance of the
Notice provisions shall be deemed to be a public offer
67
COMPANY LAW
(3) III. TYPES OF DEBENTURES
ALLOTMENT OF SECURITIES UNDER PRIVATE
PLACEMENT
Type of Debentures
within 60 days from the date of receipt of the application money
If Co. does not allot within 60 days On the basis of On the basis of
convertibility On the basis of
security redeemability
to shares
shall repay the application money to the subscribers within
fifteen days from the expiry of sixty days
Convertible
(mandatorily
If Co. does not repay within prescribed period Secured Redeemable
or optionally;
partially or fully)
Co. liable to repay that money with interest at the rate of
12% per annum from the expiry of the sixtieth day Non-
Un-secured convertible Irredeemable
SHARE CAPITAL AND DEBENTURES
I. TYPES OF SHARE CAPITAL REGISTRATION OF CHARGES
With voting rights I. DEFINITION OF CHARGE [Section 2(16)]

Equity
share
capital With differential
Kinds rights as to dividend,
of share voting or otherwise Interest or Lien
capital
w.r.t. payment Created on
Carries of dividend and As security
Preference property or
preferential repayment of and includes Charge
share capital assets
right capital at time of mortgage
winding up Of a Co. or
any of its
II. TYPES OF PREFERENCE SHARES undertakings
or both
Type of Prefernce
Shares II. NOTICE OF CHARGE
Date of
Notice of
From Registration
Charge
of Charge
On the
On the basis On the
basis of
of Dividend basis of
Convertibility
payout Redeemability III. PROCESS OF REGISTRATION OF CHARGE
to shares
(1)
Charge Created before 02-11-2018
Cumulative Convertible
(mandatorily Redeemable
or optionally;
partially or fully) Register charge within 30 days of creation
Non-
cumulative If not registered in 30 days
Register within 300 days of creation on

Non-convertible Irredeemable
Participatory payment of additional fees
If not registered in 300 days
Register within six months from 02-11-2018

Non-participatory
with additional fees. Different fees for different
classes of companies.
68
COMPANY LAW
III. PROCESS OF REGISTRATION OF CHARGE II.
(2)
TYPES OF REGISTERS
Charge Created on or after 02-11-2018
Within 30 days
Register of Register of Register of
Members Register of Significant any other
Register Charge debentures
(Both Equity Beneficial security
& Pref.) holders Owners holders
If not registered in 30 days
Register in next 30 days (i.e. within 60 days Contains each

from creation) with additional fees class of Equity/
Pref. shares held
If not registered in next 30 days by each member
residing in India
Register within a further period of sixty days or Outside India
with advalorem fees
If articles permit to keep

register outside India:
IV. SATISFACTION OF CHARGE “Foreign Register” may
be maintained containing
the memo & particulars
Company shall give of members, debenture
intimation to the holders, other security
Registrar within 30 holders or beneficial
days of the payment Specified IFSC Public/ owners residing outside
or satisfaction. If Private Co. (within 300 India.
not intimated, the days of the payment or
Registrar may allow satisfaction)
giving of intimation III. ANNUAL RETURN
within 300 days on
payment of prescribed (1) PARTICULARS TO BE CONTAINED IN THE ANNUAL
additional fees. RETURN AS THEY STOOD ON CLOSE OF FINANCIAL
Satisfaction of Charge
YEAR
Exception: No notice, 1. Company's registered office, principal business activities,

Registrar on receipt of in case the intimation particulars of its holding, subsidiary and associate companies
intimation, send show to the Registrar is in the
cause notice to holder 2. Its shares, debentures and other securities and shareholding
specified form and signed pattern
of charge within 14 days by the holder of charge.
3. Its indebtedness
4. Its members and debenture-holders along with the changes
If any cause is shown, the Registrar shall record a note therein since the close of the PFY
in the register of charges and shall inform the company.
5. Its promoters, directors, key managerial personnel along
with changes therein since the close of the PFY
6. Meetings of members or a class thereof, Board and its

various committees along with attendance details
MEETINGS OF THE COMPANY
7. Remuneration of directors and key managerial personnel
In case of Private Company - “aggregate amount of
I. remuneration drawn by directors;”.
General Meetings
8. Penalty or punishment imposed on the company, its
directors or officers and details of compounding of offences
and appeals made against such penalty or punishment
Annual General Meeting Extra Ordinary General 9. Matters relating to certification of compliances, disclosures
(AGM) Meeting (EGM)
10. Details in respect of shares held by or on behalf of the
Foreign Institutional Investors including their names,
addresses, countries of incorporation, registration and % of
shareholding held by them.

69
COMPANY LAW
(2) SIGNING OF ANNUAL RETURN
OPC, Small CS, or where there

Company, Pvt. Conditions (when If more than
is no CS, by the 1/10th of total
Co. (if such keeping Register Approval by SR
director of the no. of members
Pvt. Co. is a & AR at any other
company entered in register
SIGNING OF Start - up) place in India)
reside there
ANNUAL
RETURN director and CS;
Other and in case, there
Companies is no CS, by a CS V. INSPECTION
in practice
Persons Who Can Inspect Register & Their Indices &
Annual Return (During Business Hours)
Without payment of With payment of fees

fees
CERTIFICATION
OF ANNUAL
RETURN Debenture Other Beneficial Any
Member Security other
holder Owner
holder person
VI. MEETINGS OF MEMBERS
in case of listed (1) AGM

Co. or a Co.
having paid-up Question Answer
certified by a share capital of Maximum time duration 15 months + 3 months (for
CS in practice ` 10 crore or between two AGMs special reasons)
more; or a
turnover of ` 50 Date of AGM Any day except National
crore or more Holiday
(2)
FILING OF ANNUAL RETURN WHEN IS AGM HELD?
(1)
First AGM Subsequent AGM

Copy of annual from the date
return shall be within 60 days on which
filed with the Within 9 months from Within 6 months
AGM is held date of closing of 1st from date of closing
RoC
Financial Year of Financial Year
Registrar may, for special reason

(2) extend time by a period not exceeding
3 months
• within 60 days from the date on which
When no AGM AGM should have been held,
is held in any
year • along with the reasons for not holding (3)
the AGM RO
In case of such other place within the city,
Govt Co. town or village in which the RO
IV. PLACE OF KEEPING OF REGISTERS AND ANNUAL
of the Co. is situate or such other
RETURNS place as the CG may approve
Question Answer PLACE
OF AGM RO
What is the Place of keeping of Registered Office (RO) some other place within the
Registers and Annual Returns? city, town or village in which
the RO of the Co. is situate
Can the Registers and Annual Yes In any
Returns be kept at any other place Other Co. AGM of an unlisted Co. may
be held at any place in India if
in India? consent is given in writing or
by electronic mode by all the
members in advance
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COMPANY LAW
(4) CALLING OF EGM (3) MEETINGS HELD AT SHORTER NOTICE- Less than 21
clear days’
The Board shall call
EGM on requisition Meeting can be called at shorter notice (if
made by consent, in writing or by electronic mode,
is accorded thereto-)
Such Number of members

Shareholders holding having not less than 1/10th
not less than 1/10th of total voting power of all
of paid up capital (in In case of AGM In case of any other GM
members (in case of Co.
case of co. having sh. NOT having sh. cap.)
cap.)
by not less
Co. having Co. NOT
(5) PERIOD OF HOLDING EGM than 95% of
SHARE having SHARE
the members
CAPITAL CAPITAL
meeting may entitled to vote
If board within proceed to be called thereat
21 days from call EGM on & held by
the date of a day not later requisitionists
receipt of than 45 days themselves
Requisition of receipt of within 3 members having
does not requisition months from at least 95% such members having
the date of part of the paid- 95% of the total
requisition up share capital voting power
of the company exercisable at
(6) PLACE OF HOLDING EGM as gives a right that meeting
to vote at the
EGM of the company, other than of the wholly owned meeting
subsidiary of a Co. incorporated outside India, shall be held
at a place within India
VIII. TYPES OF BUSINESS TRANSACTED IN AGM
VII. NOTICE OF MEETING
(1) ORDINARY SPECIAL
(1) BUSINESS BUSINESS
Members
Legal 4 Business At AGM, all other
representative (As given in next businesses except
of the deceased diagram) the ones stated as
member ordinary business
are special business
Notice
should be
Every
served to
Director (2)
1. Consideration
Assignee of of financial
insolvent statement and
member the reports of the
Board of Directors
and auditors
Auditor of the
company
4. Appointment
of, and ORDINARY 2.Declaration
fixing of the BUSINESS of any dividend
remuneration
(2) LENGTH OF SERVING OF NOTICE- 21 clear days’ of the auditors
Excluded: date on
which notice is 21 days Excluded: date of 3. Appointment
served meeting of Directors in
place of those
retiring
As per Rule 35 of Companies (Incorporation) Rules, 2014,
in case of notice of a meeting (when delivery is by post), such
service shall be deemed to have been effected at the expiration of
48 hours after the letter containing the same is posted.
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COMPANY LAW
IX. QUORUM FOR MEETINGS XII. TYPES OF RESOLUTION
PUBLIC COMPANY (1)

RESOLUTIONS
NO. OF
QUORUM
MEMBERS
Number of
5 members personally present ORDINARY SPECIAL
members ≤ 1000
RESOLUTION RESOLUTION
- passed by simple - passed by three times
1000 < Number of majority, i.e. more majority, i.e. 75%
15 members personally present than 50%
members ≤ 5000
Number of members
30 members personally present (2) CHARACTERISTICS OF SPECIAL RESOLUTION
> 5000
PRIVATE COMPANY 1. Specified Majority - 75%
2. Resolution shall be set out in the notice

QUORUM 2 members personally present
3. Notice must state that resolution is
to be passed as a special resolution and
omission, would invalidate the resolution.
X. PROXIES 4. Proper notice of 21 days is given for
holding the meeting
PROXIES: Any member of a Co. entitled to attend and vote at a
meeting of the Co. shall be entitled to appoint another person as 5. Explanatory Statement should be annexed to
a proxy to attend and vote at the meeting on his behalf. the notice for conducting special business
a proxy shall not have the right to speak at such meeting and shall XIII. MINUTES
not be entitled to vote except on a poll.
Minutes of the proceedings of meeting shall be kept within 30 days
of the conclusion of every such meeting concerned or passing of
A person appointed as proxy shall act on behalf of such member resolution by postal ballot in books.
or number of members not exceeding fifty and holding in
aggregate not more than 10 per cent of the total share capital of The minute book shall be consecutively numbered.
the company carrying voting rights
The minutes of each meeting shall contain a fair and correct
a proxy received 48 hours before the meeting will be valid even if summary of the proceedings that took place at the concerned
the articles provide for a longer period. meeting.
All appointments made at any of the meetings aforesaid shall be

The instrument appointing a proxy shall be in writing included in the minutes of the meeting.
In the case of a Board Meeting or a meeting of a committee of the

XI. VOTING Board, the minutes shall also contain –
Voting by show
• The names of the directors present at the meeting; and in the case
of hands of each resolution passed at the meeting, the names of the directors,
if any, dissenting from, or not concurring with the resolution.
Voting by Any of the following matter shall not be included in the minutes of
electronic the meeting, which in the opinion of the Chairman of the meeting –
means
• Is or could reasonably be regarded as defamatory of any person; or
Voting • Is irrelevant or immaterial to the proceedings; or
• Is detrimental to the interests of the company
Voting by
Poll The matter to be included or excluded in the minutes of the
meetings shall be at the absolute discretion of the Chairman of the
meeting.
Voting by Postal The minutes kept in accordance with the provisions shall serve as
Ballot the evidence of the proceedings therein.
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COMPANY LAW
Intermediate (New Course) Paper 2 - Corporate and Other Laws: A Capsule for Quick
Recap (The Companies Act, 2013)
This Capsule on ‘Company Law’ in the October 2019 issue of Students’ Journal is in continuation of the September 2019 issue.
It covers the remaining sections of the Companies Act, 2013 (relevant at the Intermediate Level) i.e. significant provisions from
section 123 to section 148. You are advised to read both the capsules together. Further, students are also advised to read the July,
2017 edition of the Study Material and relevant RTP for a thorough understanding of the relevant provisions of Companies Act,
2013, to hone your application skills. The capsules on Intermediate Paper 2: Corporate and Other Laws are intended to assist you
in the process of revision of concepts discussed in the relevant publications.
DIVIDEND
I. DIVIDEND PAYABLE ON DIFFERENT TYPES OF SHARES
Cumulative dividend accumulates
Preference Shares unless it is paid in full
Preference Shares
Non-cumulative no arrears of
Shares Preference Shares dividend in future
Equity Shares Dividend dependent on dividend policy and the availability of

profits after satisfying the rights of preference shareholders.
Section 2(35) of the Companies Act, 2013, states that “dividend” includes any interim dividend
III. RULES TO BE FOLLOWED WHILE DECLARING
II. DECLARATION OF DIVIDEND
DIVIDEND OUT OF RESERVES
1.
1. Rate of Dividend ≤ (RD1 +RD2 + RD3)/ 3
DIVIDEND CAN BE DECLARED OUT OF Where, RD1, RD2, RD3 are rates at which dividend was
declared by it in the 3 years immediately preceding that year.
However, this rule will not apply if a company has not declared
Current year Out of the profits of Money provided any dividend in each of the 3 preceding financial years.
profits after the company for any by the Central 2.
depreciation previous financial Government or a 1/10 of (Paid up share
year or years arrived State Government Total amount that capital + Free reserves)
at after providing for the payment of can be drawn from
for depreciation in dividend by the Co. [as per latest audited
accumulated profits Financial statement]
accordance with in pursuance of a
Schedule III and guarantee given by
remaining undistributed that Government 3. Drawn amount be first utilised to set off losses incurred in FY
in which dividend is declared
4.
Or Both Balance of Reserve 15% of Paid up capital
(after drawal of Amt) [as per latest audited
Financial statement]
2. TRANSFER TO RESERVE
IV. PAYMENT OF DIVIDEND
Before declaration of dividend, transfer such % of
its profit for that year, as it may consider Payment of dividend
appropriate (i.e. left at the discretion of the Co.)
Payable in Payable to Nidhi Co.

3. DEPOSITING AMOUNT OF DIVIDEND
cash the any dividend

registered payable in cash
Amount of dividend including interim dividend shall may be paid by
be deposited in a scheduled bank in a separate shareholder
of the share, crediting the same
bank account within 5 days from the date of cheque to the account of
declaration of such dividend or
the member, if the
dividend is not
Exception: Government Co. in which entire paid up warrant to his claimed within 30
capital is held by CG/ SG/ or combination of CG & SG order, or days from the date
of declaration of
any electronic to his the dividend.
mode banker

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COMPANY LAW
V. UNPAID DIVIDEND ACCOUNT (UPA) 2. EXCEPTIONS UNDER WHICH NO OFFENCE SHALL
BE DEEMED TO HAVE BEEN COMMITTED
Dividend could not be paid
Declared Dividend by reason of operation of those directions
30 Days any law; cannot be
complied
Dividend Not Paid/ Claimed Shareholder gave with and the
directions regarding same has been
7 Days payment of dividend, AND communicated
to him;
Deposit the unpaid/ Exception Dispute regarding right
If not done Pay Interest @ 12%
unclaimed dividend amount under 127 to receive dividend;
p.a. (from the date
in Scheduled Bank (Called of default)
Unpaid Dividend Account) Dividend has been lawfully
90 Days adjusted against any sum
due from shareholder to
Co.; or
Prepare Statement (Name, Last known
address, Unpaid dividend amount) for any other reason,
the failure to pay/ post
dividend/ warrant within
prescribed time, was not
Put on due to any default on the
part of the company.
Website of Website approved
Company by Govt. for this
purpose ACCOUNTS OF COMPANIES
I. FINANCIAL STATEMENT (FS)

After the expiry of 7 Years Financial Statement is defined under Section 2 (40), to
include –
Transfer to IEPF (Unpaid/ 1. Statement of
Unclaimed dividend + interest) Cash flow change in equity,
Statement if applicable
Any person claiming for the amount transferred in UPA may

apply to Co. for the payment of money claimed any explanatory
Profit and Loss notes annexed to
account or or forming part of
Income and financial statements
VI. PUNISHMENT FOR FAILURE TO DISTRIBUTE Expenditure
DIVIDENDS account
In case of OPC,
Financial Small Co., Dormant
1. Declared Dividend Co. and Pvt Co.
Balance Sheet Statement
(Start UP): May not
include Cash Flow
Dividend not paid/Warrant not Posted statement
(within 30 days from the date of declaration) 2. Financial statement shall:
Give True & Fair view of state of affairs of the Co.

Consequences
Comply with AS
Be in form as provided for different classes of Co.s in Schedule III

Every Director (If
knowingly a party to Company 3.
default) At each AGM, the Board of Directors (BOD) shall lay the FS
for the FY
• If the Co. has subsidiary or associate companies, Consolidated

Financial Statement [CFS] (in same form and manner as of the
Fine ≤ R1,000 per Simple Interest
Imprisonment ≤ 2 Co.) is also to be laid before AGM
day (during which @18% per annum
years default continues) 4.
If FS do not comply with AS, deviation from AS along with reasons
for such deviation and financial effects, need to be disclosed in FS.
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COMPANY LAW
5. III. VOLUNTARY REVISION OF FINANCIAL
STATEMENTS OR BOARD’S REPORT
Company shall prepare
If it appears to the Directors of the Co.
Books of Books and Financial FS and Board report not in compliance

accounts papers statement with Sections 129 &134
Keep at its registered office/any other place in

India as the Board of Directors (BOD) may decide Prepare
revised FS
After approval and Copy of order
order of tribunal of revised FS &
Open for inspection by Report to be filed
directors (on an application
made by Co.) Revise report with Regsitrar
(any 3 P.F.Y)
Preserved for 8 years
Failure in compliance IV. CONTENTS OF BOARD REPORT
Board of Directors Report

Imprisonment (up to 1 yr) Fine (IR 50,000 - 5 lacs)
Following information
the web address, if any, where
annual return has been
Both placed No. of meetings of Board
Directors’ responsibility Details of fraud reported by

II. RE-OPENING OF ACCOUNTS ON COURT’S OR Report auditors
TRIBUNAL’S ORDER
Application to be made by: Companies policy on

Declaration by ID’s directors' appointment
and remuneration
Central Govt. SEBI Any other

person Comments by board on remarks Particulars of loans,
made by Auditor and CS guarantees or investments
Income Tax authorities Statutory regulatory body

Particulars of contracts or State of Company affairs
arrangements with Related
Parties
Application made to Court/ Tribunal
Amounts of carrying Material change affecting
reserves or paid by way of on financial position
Court/Tribunal passes an order to the effect that dividend
Conservation of energy, Development and

Affairs of company were technology absorption, implementation of Risk
Earlier accounts prepared foreign exchange management
in fraudulent manner mis-managed related to
accounts
Notice to be served to applicants CSR policy and initiatives Other matters as prescribed
Take Representation into consideration, if any

Listed /other public companies (paid up share capital of 25
cr or more) shall contain statement indicating the manner in
Pass order to revise/ recast the accounts which formal annual evaluation of the performance of the
Board, its Committees and of individual directors has been
made.
Such revised/ recast accounts shall be final

75
COMPANY LAW
V. ENTITLEMENT TO RECEIVE FINANCIAL VII. FINANCIAL STATEMENT TO BE FILED WITH
STATEMENT [Section 136] REGISTRAR
1. AGM
Copies of audited FS +CFS+ Audit Report+ other document
Not held
Sent to Held [137(1)] [137(2)]
Trustee for [Copy of FS + CFS + Prescribed documents

Every member Other persons other documents to be + Statement of Facts &
debenture holder
presented]: Prescribed Reasons for not holding
documents AGM
At least 21* days

Adopted Un- adopted
before GM File with ROC
in AGM/
Adjourned
2. * CIRCUMSTANCES WHEN A PERIOD AGM
OF LESS THAN 21 DAYS BE DEEMED
TO HAVE BEEN DULY SENT IF IT IS SO Filed with Filed within 30 Within 30 days
AGREED BY MEMBERS— registrar days of AGM. of the last date
within 30 Registrar before which the
days of the takes them as AGM should
In the case of Co. having share date of AGM Provisional in have been held
Co. having no share capital their records
capital
At least 95% of the paid-up share Further adopted in

At least 95% of the total voting Adjourned AGM -
capital of the company as gives a power exercisable at the meeting
right to vote at the meeting filed with Registrar
within 30 days of the
said meeting
3. IN CASE OF LISTED COMPANIES
The above steps shall have deemed to be complied, if the copies VIII. INTERNAL AUDIT
of documents are made available for inspection at RO during
COMPANIES REQUIRED TO CONDUCT INTERNAL
Working Hours for a period of 21 days before the meeting
AUDIT
+ Paid up share capital (R50 cr or more
Companies which require internal
during P.F.Y)
Statement containing salient features of documents is sent to: Listed co.
Turnover R200 cr or more during P.F.Y
Member Trustee for debenture holders Outstanding loan/borrowing from banks or

Unlisted PFI exceeding R100 cr or more at any time
public co. during P.F.Y
audit
At Least 21 days before GM Outstanding deposits R25 cr or more at

any time during P.F.Y
VI. MANNER OF CIRCULATION OF FINANCIAL Turnover (R200 Cr or more during

P.F.Y)
STATEMENTS
Private Co. Outstanding loans/ borrowings from
Circulation of Financial statement banks or PFI exceeding R100 crores at
any time during P.F.Y
Here P.F.Y means 'Preceding Financial Year'
Listed companies Public co. (Net worth > R1 crore
and Turn Over > R10 crores) WHO CAN BE AN INTERNAL AUDITOR
By Electronic mode By Dispatch of physical copies

as specified in Sec 20 Other
professional Chartered
as decided by Accountants
When Shareholding To Other shareholders All Other Board
in dematerialized who do not have Cases
form dematerialized shares
& but have consented in Cost
Email ID is writing for receiving by
registered with Accountants
electronic mode
Depository
76
COMPANY LAW
AUDIT AND AUDITORS * Government company or any other company owned or
controlled, directly or indirectly, by the Central Government, or by
I. APPOINTMENT OF FIRST AUDITOR any State Government, or Governments, or partly by the Central
Government and partly by one or more State Governments.
First Auditor
III. CASUAL VACANCY OF AUDITOR
In case of Government Co.* In any Other Co.
C & AG shall appoint Co. whose A/ccs are

auditor BOD shall appoint auditor subject to audit by
Other Co.
auditor appointed by
CAG
Within 60 days from date Within 30 days of
of Registration of Co. Registration of Co.
Filling the casual
To be filled by CAG
If C & AG does not appoint vacancy by Board
If BOD does not appoint within 30 days
1st Auditor in said 60 days within 30 days
auditor
If vacancy is caused
BOD shall appoint auditor BOD shall inform members If CAG does not fill by Resignation-
regarding such failure vacancy in 30 days: appointment by
To be filled by BOD Board shall also be
Within next 30 days within 30 days
Member shall appoint auditor approved by company
at GM convened
within 3 months of
If BOD does not appoint
recommendation of
auditor in 30 these days
Within 90 days at EGM Board
BOD shall inform the Co. The Auditor so

Tenure - till the conclusion of appointed shall
Now, Co. shall appoint 1st 1st AGM hold office until the
auditor conclusion of next
AGM.
Within 60 days at EGM
IV. RE- APPOINTMENT OF RETIRING AUDITOR

Tenure- Till the conclusion of
1st AGM
* Government company or any other company owned or he is not disqualified for re-
controlled, directly or indirectly, by the Central Government, or by
A retiring auditor may be re-appointed at
appointment;
any State Government, or Governments, or partly by the Central
Government and partly by one or more State Governments.
II. APPOINTMENT OF SUBSEQUENT AUDITOR
he has not given Co. notice in writing
an AGM if—
Subsequent Auditor
of his unwillingness to be re-appointed;
and
In case of Government Co.* In Other Companies
Appointed by C & AG Appointed by Co. in AGM a SR has not been passed at that
meeting appointing some other
For a Financial Year auditor or providing expressly that he
Tenure:- Auditor shall hold shall not be re-appointed
office from the conclusion
Within 180 days from of that meeting till the
Commencement of Financial conclusion of its 6th AGM.
Year
Where at any AGM, no auditor is appointed or
re-appointed, the existing auditor shall continue to be
Tenure:- Till the conclusion the auditor of the company
of AGM.

77
COMPANY LAW
V. ROTATION OF AUDITORS VII. RESIGNATION BY AUDITOR
Resignation
Rotation of Auditors (in listed by auditor of
companies or #specified class of Government with
Form within 30 Company,
companies) company or days of
company ADT-3 Registrar &
resignation CAG
controlled by CG
or SG
Individual as Auditor Audit firm as auditor Resignation by Form within 30 with

auditor of Other ADT-3 days of Company
Co. resignation and
Registrar
Maximum time: One Maximum time: Two

term of 5 Consecutive terms of 5 Consecutive VIII. PUNISHMENT UNDER SECTION 147
years years
1. IN CASE OF COMPANY AND OFFICER OF COMPANY
Cooling period :- 5 years R25,000 to 5

In case of Co.
Lac
Contravention Fine: R10,000 to

of sec 139 to 1 Lac
Further, as on the date of appointment no audit firm which has 146
common partner/s to the other audit firms whose tenure has Imprisonment:
In case of
expired in a company immediately preceding the Financial Year, Every Other May extend to
shall be appointed as auditor of the same Co. for a period of 5 years. Officer 1 year
Or Both
• unlisted public companies having paid
up share capital of rupees 10 crore or
more
2. IN CASE OF AUDITOR
• Pvt Ltd. companies having paid up share
Companies
#Specified
Class of
capital of rupees 50 crore or more

• companies having paid up share capital Contravention by Auditor of sec 139,
of below threshold limit mentioned 143 to 145
in above two bullet points, but having
public borrowings from financial
institutions, banks or public deposits
of rupees 50 crores or more. If default is Not
Wilful If default is Wilful
VI. STEPS FOR REMOVAL OF AUDITOR
A Special Notice is received for Removal of auditor

Fine: R25,000 Fine: R50,000 Imprisonment: Auditor shall
A board meeting will be held to 5 Lac, or to 25 lakh or May extend to also be liable
four times the 8 times the 1 Year to:
(To decide about removal and then authorising the filing of
remuneration remuneration
application to CG) of the auditor, of the auditor,
whichever is whichever is
Application to CG (To be made in ADT-2), within 30 days of less less Refund the
Board meeting remuneration
Approval of CG received
Pay for the damages
to the Co., statutory
After approval from CG, Special Notice to be sent for AGM bodies, authorities or to
members or creditors
Auditor shall be given a reasonable opportunity of being heard of the company for loss
arising out of incorrect
statements in Audit
Auditor removal can be done only through Special Resolution Report
Auditor will be removed
78
COMPANY LAW
The ‘List of Penalties under the Companies Act, 2013’ in the November 2019 issue of Students’ Journal is in continuation of the
Capsule on ‘Company Law’ in the September 2019 and October 2019 issue. It covers a compilation of penalties of significant
provisions from section 1 to section 148. You are advised to read the three issues together. Further, students are also advised
to read the July, 2017 edition of the Study Material and relevant RTP for a thorough understanding of the relevant provisions
of Companies Act, 2013, to hone your application skills. The capsules on Intermediate Paper 2: Corporate and Other Laws are
intended to assist you in the process of revision of concepts discussed in the relevant publications.
LIST OF PENALTIES UNDER THE COMPANIES ACT, 2013

Section Particular Penalty
Section 4: If Co. name is reserved by giving incorrect C, OID
Memorandum information: Reserved Name: Cancelled
If the Co. has not been incorporated Person who made application: Fine R Max 1 Lac
If Co. has been incorporated Name: Change name within 3 months (by passing OR), or
ROC may strike off name from Register of Companies, or
ROC may make a petition for winding up of Co.
Section 10 A: Co. commenced business or exercise C, OID
Commencement of any borrowing powers, without filing C: R 50,000
business etc. required declaration within 180 days or OID: R 1,000 / day during which such default continues but not
failed to file with the Registrar a verification of exceeding an amount of R 1 Lac
its registered office
Section 15: Alteration If alteration made in the MOA or AOA of a C, OID
of MOA and AOA to be company is not noted in every copy of the MOA R 1,000 for every copy of the MOA or AOA issued without
noted in every copy or AOA. alteration
Section 16- Company makes default in registration of name C: R 1,000 for every day during which the default
Rectification of name as (which in the opinion of CG is identical to OID: R 5,000 to 1 Lac
of company the name of company already registered.)
Section 17- Copies If on request of member, Co. has not provided C, OID (for each default)
of memorandum, them a copy (within 7 days) of R 1,000 for each day during which such default continues or
articles, etc., to be • MOA R 1 Lac, whichever Less
given to members • AOA
• Every agreement and resolution referred
in Sec 117(1)
Section 26- Matters to If a prospectus is issued in contravention of C, Every other person who is knowingly a party to default
be stated in prospectus provisions of Sec 26 C: R 50,000 to 3 Lac
Other person who is knowingly a party to default-
Imprisonment: Max 3 Years or,
Fine: R 50,000 to 3 Lac, or both
Section 39 – Allotment If the Co. has not returned the application C, OID (for each default)
of securities by money received (when minimum subscription R 1,000 for each day during which such default continues or
company is not received) R 1 Lac, whichever Less.
If a company having a share capital has not filed
return of allotment with Registrar.
Section 40- Securities If a company is making public offer and it fails C, OID
to be dealt with in to inform to one or more stock exchange and/ C: R 5 Lac to 50 Lac
stock exchanges or fails to follow other related provisions of OID: Fine: R 50,000 to 3 Lac
Sec 40 Imprisonment: May Extend to 1 Year, Or Both
Section 42- Offer If a company makes an offer or accepts monies C, promoters and directors
or invitation for in contravention of Sec 42 Penalty: May extend to amt raised through the private placement
subscription of or 2 crore rupees, whichever is lower,
securities on private and the company shall also refund all monies with interest as
placement specified in Sec 42(6) to subscribers within a period of 30 days
of the order imposing the penalty
Section 53 - If a Co. does not comply with Sec 53 i.e. issues C, OID
Prohibition on issue of shares at discount [except as provided in Sec 54 Fine: May extend to an amount equal to the amount raised
shares at discount or Sec 53 (2A)] through the issue of shares at a discount or five lakh rupees,
whichever is less
+
Co. also liable to refund all monies received with interest at the
rate of 12% p.a. from the date of issue of such shares
Section 56 -Transfer If a Company make any default in the provisions C, OID
and transmission of of transfer of securities C: R 25,000 to 5 Lac
securities OID: R 10,000 to 1 Lac
Default is made by depository or depository Liable under Sec 447
participant with an intention to defraud
Section 57 If a person deceitfully personates as owner of Such Person
-Punishment for any security or interest etc. in a Company. Fine: R 1 Lac to 5 Lac
personation of AND
shareholder Imprisonment: 1 Year to 3 years
26 November 2019 The Chartered Accountant Student
79
COMPANY LAW
Section 58- Refusal Contravention of the order of the Tribunal for Any Person
of Registration and registration or refusal of registration of shares Imprisonment: 1 Year to 3 Years and
Appeal Against Refusal Fine: R 1 Lac to 5 Lac
Section 59- If a Company fails to comply with the orders of C, OID
Rectification of tribunal regarding rectification of registers of C: R 1 Lac to 5 Lac
register of members members. OID: R 1 Lac to 3 Lac
Imprisonment: May extend to 1 Year,
Or Both
Section 64- Notice to If a Company fails to file notice to Registrar C, OID
be given to Registrar after alteration of Share Capital. Fine which may extend to R 1,000 / day during which such
for alteration of share default continues, or R 5 Lac whichever is less.
capital
Section 67- Contravention of the provisions of sec 67 C, OID
Restrictions on C: R 1 Lac to 25 Lac
Purchase by Company OID: Fine: R 1 Lac to 25 Lac
or Giving of Loans by Imprisonment: May extend to 3 years
it for Purchase of its
Shares
Section 68- Power of If a Co. does not follow the provisions of buy C, OID
company to purchase back of Securities as provided in Sec 68 or any C: R 1 Lac to 3 Lac
its own securities regulation made by SEBI OID: Fine: R 1 Lac to 3 Lac
Imprisonment: May extend to 3 years
Or both
Section 71- Debentures If default is committed in complying with the OID
order of the Tribunal under section 71 Fine: R 2 Lac to 5 Lac
Imprisonment: May extend to 3 years
Or both
Section 74- Repayment If Company fails to repay deposit or interest C, OID
of deposits, etc., thereof, within the time specified or such C: R 1 Crore to 10 crores
accepted before further time as allowed by Tribunal OID: Fine: R 25 Lac to 2 Crores
commencement of this Imprisonment: May extend to 7 years
Act Or both
The Co. is also liable to pay the amount of deposit or part
thereof and the interest due
Section 76 A- Punishment for Contravention of Sec 73 or C: In addition to payment of the amount of deposit or part
Punishment for Sec 76 thereof and the interest due, be punishable with fine ranging
Contravention of from R 1 crore rupees or twice the amount of deposit accepted
Section 73 or Section by the company, whichever is lower but which may extend to
76 R 10 crore
OID: Imprisonment which may extend to 7 years and with fine
which shall not be less than R 25 Lac but which may extend to
R 2 crore
Also, if it is proved that the OID, has contravened such provisions

knowingly or wilfully with the intention to deceive Co. or its
shareholders or depositors or creditors or tax authorities, he
shall be liable for action under section 447
Section 86- If a Company contravenes the provisions of C, OID
Punishment for registration of Charge C: R 1 Lac to 10 Lac
OID: Fine: R 25,000 to 1 Lac
contravention
Imprisonment: May extend to 6 months
Or both
If any person wilfully furnishes any false or He shall be liable for action under Sec 447
incorrect information or knowingly suppresses
any material information, required for
registration u/s 77
Section 88- Register of If a Company fails to maintain register of C, OID
members, etc members, debenture holders, other security Fine: R 50,000 to 3 Lac
holders or other provisions of Sec 88 Where default is a continuing one: Fine which may extend to
R 1,000/ day, after the first during which the failure continues
Section 91- Power If the register of members/ debenture- C, OID
to close register holders/ other security holders is closed Fine: R 5,000 for every day subject to a maximum of R 1 Lac
of members or without giving notice as provided in sec
debentureholders or 91(1), or after giving shorter notice, or for a
other security- holders continuous or an aggregate period in excess
of the limits specified in sec 91(1)
The Chartered Accountant Student November 2019 27

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COMPANY LAW
Section 92- Annual If a Company fails to file copy of Annual Return C, OID
Return within prescribed time. Fine: R 50,000 and in case of continuing failure, with further
penalty of R 100/ day during which such failure continues,
subject to a maximum of R 5 Lac
If a CS in practice certifies the AR otherwise CS
than in conformity with the requirements of Fine: R 50,000 to R 5 Lac
Sec 92
Section 94- Place of Refusal for inspection or making of any extract C, OID (for each default)
keeping and inspection or copy R 1,000/ day during which the default/ refusal continues, subject
of Registers, Returns, to maximum of R 1 Lac
etc
Section 99- If Company defaults in holding meeting in C, OID
Punishment for default accordance with Sections 96, 97 and 98 or the Fine: May extend to R 1 Lac
in complying with directions of Tribunal In the case of a continuing default: With a further fine which
provisions of sections may extend to R 5,000/ day during which default continues
96 to 98
Section 102- Statement If default is made in complying with the Every promoter, director, manager or other KMP of the
to be annexed to notice provision of Sec 102 company who is in default: Penalty- R 50,000 or 5 times the
amount of benefit accruing to the promoter, director, manager
or other key managerial personnel or any of his relatives,
whichever is higher.
Section 105- Proxies When an officer (Co. having Share capital or OID
where Articles allow voting by proxy) fails to R 5,000
mention in the notice regarding the facility of
proxy
Section 111- Violation of provisions in regard to circulation C, OID
Circulation of of members’ resolution. R 25,000
members’ resolution
Section 117- Co. fails to file the resolution or the agreement C, OID
Resolutions and in prescribed time C: R 1 Lac and in case of continuing failure, with further penalty
agreements to be filed of R 500/ day after the first during which such failure continues,
subject to a max of R 25 Lac
OID including liquidator of the company, if any: R 50,000
and in case of continuing failure, with further penalty of R 500/
day after the first during which such failure continues, subject
to a maximum of R 5 Lac
Section 118- Minutes Co. is not complying with the provisions of C, OID
of proceedings of Sec 118. C: R 25,000
general meeting, OID: R 5,000
meeting of Board
of Directors and If a person tempers with the minutes of Fine: R 25,000 to 1 Lac
other meeting and proceedings of meeting Imprisonment: Up to 2 years
resolutions passed by
postal ballot
Section 119- Co. refuses for inspection or to take copy of C, OID
Inspection of minute- minutes of general meeting. C: R 25,000
books of General OID: R 5,000 for each such default or refusal
Meeting
Section 121- Report Co. fails to file the report on AGM with ROC C, OID
on Annual General within 30 days of conclusion of AGM C: R 1 Lac and in case of continuing failure, with further penalty
meeting of R 500/ day after the first during which such failure continues,
subject to a maximum of R 5 Lac.
OID: R 25,000 and in case of continuing failure, with further
penalty of R 500/ day after the first during which such failure
continues, subject to a maximum of R 1 Lac.
Section 124- Unpaid Co. fails to comply with requirement of Sec 124 C, OID
Dividend Account C: R 5 Lac to 25 Lac
OID: R 1 Lac to 5 Lac
Section 127- - See Chart in October 2019 issue of The Chartered Accountant
Punishment for failure Student journal
to distribute dividends
Section 128- Books If the persons charged by BOD (MD, WTD in Such designated persons
of account, etc., to be charge of finance, CFO or any other person of a Fine: R 50,000 to 5 Lac
kept by company company charged by the Board with the duty of Imprisonment: May extend to 1 year
complying with the provisions of this section) Or both
with the duty of maintaining accounts of the
Co. contravenes the relevant provisions
28 November 2019 The Chartered Accountant Student
81
COMPANY LAW
Section 129- Financial Co. contravenes the provisions of Sec 129 MD, WTD in charge of finance, the CFO or any other person
statements charged by the Board with the duty of complying with the
requirements of this section and in the absence of any of the
officers mentioned above , all the directors shall be punishable.
Fine: R 50,000 to 5 Lac
Imprisonment: May extend to 1 year
Or both
Section 134- Financial If Company violates the provisions of Sec 134 C, OID
Statement, Board’s C: R 50,000 to 25 Lac
report, etc OID: Fine: R 50,000 to 5 Lac
Imprisonment: Upto 3 Years
Or Both
Section 136- Right Co. fails to send copy of FS, including CFS, if C, OID
of member to copies any, auditor’s report and every other document C: R 25,000
of audited financial required to be attached to FS, which are to be OID: R 5,000
statement laid before at GM, to member/ trustee/ other
entitled person, within the prescribed time or
other provisions of Sec 136
Section 137- Copy of Co. fails to file the copy of the FS with the C, Other designated Officers
financial statement to Registrar C: R 1,000/ day during which the failure continues but which shall
be filed with Registrar not be more than R 10 Lac.
MD and CFO, if any, and, in the absence of the MD and the
CFO, any other director who is charged by the Board with the
responsibility of complying with the provisions of this section,
and, in the absence of any such director, all the directors of the
company, shall be liable to a penalty of R 1 Lac and in case of
continuing failure, with further penalty of R 100/ day after the
first during which such failure continues, subject to a max of
R 5 Lac.
Section 140- Removal, Auditor does not file with ROC or C&AG (as Auditor
Resignation of Auditor the case may be), a statement indicating the Fine: R 50,000 or an amt equal to remuneration of auditor,
and Giving of Special reasons and other facts as may be relevant with whichever is less.
Notice regard to his resignation In case of continuing failure, further penalty of R 500/ day after
the first during which such default continues, subject to max
of R 5 Lac
Section 143- Powers Auditor, fails to report the matter to CG, Audit Auditor, cost accountant or company secretary in practice
and Duties of Committee or BOD (depending on the amount Fine: R 1 Lac to 25 Lac
Auditors and Auditing involved) regarding a fraud which is being or
Standards has been committed in the company by its
officers or employees (for which he has reason
to believe)
Section 147- See Chart in October 2019 issue of The Chartered Accountant
Punishment for Student journal
Contravention
Section 148- Central Default in complying with the provisions of C, OID, Cost Auditor
Government to Specify Sec 148 C & OID: As per Sec 147
Audit of Items of Cost Cost Auditor in default: in the manner as provided in sub-
in Respect of Certain sections (2) to (4) of Sec 147
Companies
Section 447- Fraud/ wrongful gain/ wrongful loss Any person who is found to be guilty of fraud
Punishment for Fraud (i) Involving an amount of at least R 10 Lac or 1% of the
turnover of the company, whichever is lower
Fine: At least amount involved in the fraud, which may
extend to 3 times the amount involved in the fraud, and
Imprisonment: 6 months to 10 years
Also, if fraud in question involves public interest, the term
of imprisonment shall not be less than 3 years.
(ii) Where fraud involves an amount less than R 10 Lac or 1%
of the turnover of the company, whichever is lower, and
does not involve public interest,
Fine: May extend to R 50 Lac
Imprisonment: May extend to 5 years, or both
Here in the table:

C stands for Company
OID stands for Officer in Default
The Chartered Accountant Student November 2019 29

82
COST AND MANAGEMENT ACCOUNTING
Cost and Management Accounting - A Capsule for Quick Revision
In contemporary business environment, existence of an entity depends on the way it tackles the challenges
posed by the competitive market conditions. Cost leadership being one of the competitive strategies, gives
an added advantage to the entity. Cost being an important aspect for survival and growth in business,
requires a mandatory awareness about the cost control and cost reduction. Fourth industrial revolution,
also known as Industry 4.0, puts more emphasis on the digitization of information for effective decision-
making, which enables an entity in keeping ahead in competition. Cost and Management accounting, a
discipline of accounting, capacitates an entity in taking timely decisions by provisions of cost, profitability
and other relevant information.
Chartered Accountants, as a global business solution provider, play an important role in business, have
an onus by helping an entity to achieve its long-term objectives. In this direction, Cost and Management
Accounting helps Chartered Accountants in taking timely and informed business decisions. In view of
nobility of the objective to provide quality academic inputs to the students of CA course, the Board of
Studies (BoS) of ICAI has decided to bring forth a capsule module of Cost and Management Accounting.
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.
In the beginning, a chapter overview has been provided to present a holistic viewpoint on the topic’s coverage.
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.
Remember, “The expert in anything was once a beginner”. Now, let us begin.
Introduction to Cost and Management Accounting

Chapter Overview
Objectives of Cost Scope of Cost Role & Functions of Users of Cost

and Management and Management Cost and Management and Management
Accounting Accounting Accounting Accounting
Cost Relationship of Cost and

Cost Responsibility Cost
Accounting Management Accounting with
Classification Centres Object
using IT other accounting disciplines
Meaning of Terms used in Cost and Management Accounting

First of all, let us discuss the meaning of various terminologies used in Cost and Management Accounting to have
a clear understanding about the subject.
Cost Cost Management Cost

Cost Costing Accounting Accountancy Accounting Management
Cost It is an
The amount Costing is Accountancy has Management application of
of expenditure defined as the been defined as accounting is management
It is the the application accounting
incurred on or technique and the application
process of of costing and concepts,
attributable to a process of of the principles
accounting for cost accounting methods of
specified article, ascertaining of accounting
cost. principles, collections,
product or costs. and financial
activity. methods and management. analysis and
techniques. presentation of
data.

83
Objectives of Cost Accounting
There are many objectives of cost accounting. The main objectives are explained as below. We also need to keep
our focus on understanding the difference between Cost Control and Cost Reduction.
Ascertainment of Cost: The main objective of cost and management accounting is accumulation
and ascertainment of cost. Costs are accumulated, assigned and ascertained for each cost object.
Objectives of Cost Accounting
Determination of Selling Price and Profitability: The cost and management accounting system
helps in determination of selling price and thus profitability of a cost object.
Cost Control: Maintaining discipline in expenditure is one of the main objectives of a good cost and
management accounting system. It ensures that expenditures are in consonance with predetermined
set standard and any variation from these set standards is noted and reported on continuous basis.
Cost Reduction: It may be defined “as the achievement of real and permanent reduction in the
unit cost of goods manufactured or services rendered without impairing their suitability for the use
intended or diminution in the quality of the product.”
Assisting management in decision making: Cost and Management accounting by providing

relevant information, assist management in planning, implementing, measuring, controlling and
evaluation of various activities.
Scope of Cost Accounting Role and Functions of Cost and

We also need to know various scopes of cost accounting. Management Accounting
Cost ascertainment and the process of cost accounting
are the major scopes. The other scopes are presented. Role of a Cost and Functions of Cost and
Management Accounting Management Accounting
system System
Provide relevant Collection and

information to management accumulation of cost for
for decision making each element of cost
Cost Analysis
Assigning costs to cost
Assist management for objects to ascertain cost.
planning, measurement,
Sets budget and standards
evaluation and controlling of
for a particular period
business activities or activity beforehand
Statutory and these are compared
Cost
Compliances Scope with the assigned and
Comparisons
of Cost Help in allocation of cost ascertained cost.
Accounting
to products and inventories
for both external and Provision of relevant
internal users. information to the
management for decision
making.
Cost Cost
Control To gather data like time
Reports taken, wastages, process
idleness etc., analyse the
data, prepare reports and
take necessary actions
84
Users of Cost and Management Accounting Relationship of Cost Accounting,
Cost and Management Accounting information
Management Accounting, Financial
which are generated or collected are used by various
Accounting and Financial Management
stakeholders. The users of the information can be There is a close relationship between various disciplines
broadly categorized as below: like Cost Accounting, Management Accounting,
Financial Accounting and Financial Management.
Sometimes these disciplines are interrelated and
Internal External dependent on each other also.
Users Users
Managers Regulatory
Management Cost
Authorities
Accounting Accounting
Operational Auditors
level staffs
Financial
Accounting
Employees Shareholders
Creditors and Financial Management

Lenders
Essentials of a good Cost Accounting System

The essential features which a cost accounting system should possess are depicted as below:
Informative and Accurate and Uniformity and Integrated and Flexible and Trust on the
simple authentic consistency inclusive adaptive system
Cost Accounting using Information Cost Objects

Technology It is very important to understand the meaning of
With the use of information technology, the cost cost object, cost unit and cost driver. Their meaning
accounting system gets integrated and automated. The alongwith examples are illustrated below.
basic features are depicted as below:
Cost Object: Cost object is anything for which
a separate measurement of cost is required. Cost
object may be a product (book), a service (airline),
a project, a customer, a brand category etc.
Enterprise Resource Internet (including intranet
Planning (ERP) and extranet)
Cost Accounting
using IT Cost Units: It is a unit of Cost Drivers: A Cost driver
product, service or time (or is a factor or variable which
combination of these) in effect level of cost. Example
relation to which costs may for a purchase department is
Paperless Environment Just-in-Time (JIT)
be ascertained or expressed. number of purchase orders.
Example for power industry is
kilo Watt hour (kWh).

85
Responsibility Centres
To have a better control over the organisation, management delegates its responsibilities and authorities to various
departments or persons, which are known as responsibility centres. There are four types of responsibility centres
as discussed below:
Responsibility Centres
Cost Centres: Revenue Centres: Profit Centres: Investment Centres:

The responsibility centre Which are accountable for Which have both Which are not only
which is held accountable generation of revenue for responsibility of generation responsible for profitability
for incurrence of costs the entity. Example- Sales of revenue and incurrence but also has the authority
which are under its control. Department. of expenditures. Example- to make capital investment
Decentralised branches of decisions. Example-
an organisation. Maharatna, Navratna and
Miniratna.
Standard Cost Centre: Discretionary Cost

Cost Centre where output Centre:
is measurable and input The cost centre whose
required for the output can output cannot be measured
be specified. in financial terms.
&ODVVLÀFDWLRQRI&RVW
Classification of cost basically means grouping of cost according to their common features. The important ways of
classification of cost are illustrated as below:
Classification of Cost
By Nature By Variability By By Costs for

or Element By Functions By Normality Managerial
or Behaviour Controllability
Decision Making
(i) By Nature or Element

ELEMENTS OF COST
Material Cost Labour Cost Other Expenses
Direct Indirect Direct Indirect Direct Indirect

Material Cost Material Cost Labour Cost Labour Cost Expenses Expenses
Overheads
Production Administration Selling and Distribution

Overheads Overheads Overheads
86
(ii) By Functions (iv) By Controllability
Direct Materials
Direct Employees Controllable Costs: Cost that can be controlled
Prime Cost
(Labours)
Direct Expenses Uncontrollable Costs: Costs which cannot be influenced
Indirect Factory Overheads or controlled
Material Factory Cost or Works Cost
Administration
Indirect Overheads Cost of Goods Sold
Labour (v) By Normality
Selling and Distribution
Indirect Overheads
Expenses Cost of Sales
Normal Cost - It is the cost which is normally incurred
(iii) By Variability or Behaviour

Abnormal Cost - It is the cost which is not normally incurred
Fixed Cost Variable Cost Semi-variable Cost
(vi) By Cost for Managerial Decision Making
(j) Out-of- It is that portion of total cost, which involves

(a) Pre A cost which is computed in advance before pocket Cost cash outflow
determined production or operations start
Cost
Those costs, which continue to be incurred

(k) Shut down even when a plant is temporarily shut-down
A pre-determined cost, which is calculated
(b) Standard Costs e.g. rent, rates, depreciation, etc
from managements ‘expected standard of
Cost efficient operation’ and the relevant necessary
expenditure
Historical costs incurred in the past are
(l) Sunk Costs known as sunk costs. They play no role in
The amount at any given volume of output decision making in the current period.
(c) Marginal by which aggregate costs are changed if the
Cost volume of output is increased or decreased by
one unit
(m) Absolute These costs refer to the cost of any product,
Cost process or unit in its totality.
The expected cost of manufacture, or
(d) Estimated acquisition, often in terms of a unit of product
Cost computed on the basis of information
available in advance of actual production or Such costs are not tied to a clear cause
purchase (n) Discretionary
and effect relationship between inputs and
Costs
outputs.
It represents the change (increase or decrease)
(e) Differential
in total cost (variable as well as fixed) due to
Cost
change in activity level, technology, process or
method of production, etc. These are the costs, which are not assigned
(o) Period Costs to the products but are charged as expenses
against the revenue of the period in which
they are incurred.
(f) Imputed These costs are notional costs which do not
Costs involve any cash outlay
These are costs that result specifically from
(p) Engineered a clear cause and effect relationship between
Costs inputs and outputs.
(g) Capitalised These are costs which are initially recorded as
Costs assets and subsequently treated as expenses.
These costs are also known as out of pocket
(q) Explicit costs and refer to costs involving immediate
These are the costs which are associated with payment of cash. Salaries, wages, postage and
(h) Product the purchase and sale of goods (in the case of Costs
Costs telegram, printing and stationery, interest on
merchandise inventory). loan etc.
This cost refers to the value of sacrifice (r) Implicit

(i) Opportunity made or benefit of opportunity foregone in These costs do not involve any immediate
Cost Costs cash payment.
accepting an alternative course of action

87
Material Cost
Chapter Overview How Material is Procured?
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Valuation of Material
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How Inventory is Controlled?
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88
(a) Inventory Control- By Setting Quantitative
Levels
Re-order Stock Level When to Order

(v) Average Inventory Level:
Average Stock Level = Minimum Stock Level
+ 1/2 Re-order Quantity
Re-order Quantiy/ EOQ How Much to Order Or
Average Stock Level =
Maximum Stock Level Upto How much to stock Maximum Stock Level + Minimum Stock Level
2
Minimum Stock Level Atleast How much to keep (b) On the basis of Relative Classification
Average Stock Level Stock normally kept ABC Analysis On the basis of value and
frequency of inventory
Danger Stock Level Kept for emergency requirement

Fast, Slow and Non On the basis of inventory
Moving (FSN) turnover
Buffer Stock To meet sudden demand
Vital, Essential and On the basis of importance of

Desirable (VED) inventory
(i) Re-order Stock Level (ROL): Maximum
Consumption × Maximum Re-order Period
Or, ROL = Minimum Stock Level + (Average Rate of High, Medium and Low On the basis of price of an item
Consumption × Average Re-order period) (HML) of inventory
(ii) Re-Order Quantity/ Economic Order Quantity

(EOQ): (c) Using Ratio Analysis
(i) Input Output Ratio: Input-output ratio is the ratio
of the quantity of input of material to production and
2x Annual Requirement (A) x Cost per order (O) the standard material content of the actual output.
EOQ =
Carrying Cost per unit per annum (C)
(ii) Inventory Turnover Ratio:
Inventory Turnover Ratio =
Just in Time (JIT) Inventory Management Cost of materials consumed during the period
JIT is a system of inventory management with
Cost of average stock held during the period
an approach to have a zero inventories in stores.
According to this approach material should only be (d) Physical Control
purchased when it is actually required for production. (i) Two Bin System: Two Bin System is supplemental
Production Material Order Supplier
to the record of respective quantities on the bin
Demand starts to Requirement for raw sent the card and the stores ledger card.
for final process the is sent to materials material
product demad for Purchase sent to for
product department supplier production
(ii) Establishment of system of budgets: Based on this,
inventories requirement budget can be prepared.
Such a budget will discourage the unnecessary
investment in inventories.
(iii) Minimum Stock Level:
Minimum Stock Level = Re-order Stock Level - (iii) Perpetual inventory records and continuous
(Average Consumption Rate × Average Re-order stock verification :
Period) Perpetual inventory represents a system of records
maintained by the stores department in the form of
(iv) Maximum Stock Level: Bin cards and Stores ledger.
Maximum Stock Level = Re-order Level + Re-
order Quantity - (Minimum Consumption Rate × (iv) Continuous Stock Verification:
Minimum Re-order Period) The system of continuous stock-taking consists of
physical verification of items of inventory.

89
Valuation of Material Issue
Cost Price Methods Average Price Methods Market Price Methods Notional Price Methods
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(v) Treatment of Obsolescence:

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UVSOFEPVUBTHPPEVOJUTCZUIFBQQMJDBUJPOPG
BEEJUJPOBMMBCPVSPSPUIFSTFSWJDFT MPTTBOEJNNFEJBUFTUFQTTIPVMECFUBLFOUPEJTQPTFJU
Pĉ BU UIF CFTU BWBJMBCMF QSJDF ͳF MPTT BSJTJOH PVU PG
PCTPMFUFNBUFSJBMTPOBCOPSNBMMPTTEPFTOPUGPSNQBSU
Obsolescence: *U JT UIF MPTT JO UIF JOUSJOTJD
WBMVFPGBOBTTFUEVFUPJUTTVQFSTFTTJPO PGUIFDPTUPGNBOVGBDUVSF
90
CMA
ca intermediate - PAPER 3 - COST AND MANAGEMENT ACCOUNTING
In today’s business world, Chartered Accountants are very much part of the decision-making team of any organisation.
They are rigorously involved in decision-making process with the help of Cost and Management Accounting tools.
While being associated with an industry, a Chartered Accountant may also be involved in monitoring, measuring,
compensating appropriately to the employees (labour) to achieve economy in cost as well as retain best talent,
efficiency in performance and effectiveness in desired output, side by side ascertaining cost for a cost object through
elementwise collection of cost, accumulation of the costs into a cost sheet. While this edition of Cost & Management
Accounting (CMA) Capsule discusses the topic ‘Employee (Labour) Cost’ covering Wages and Incentive Payment
system to employees, its absorption; efficiency rating procedures; treatment of overtime, idle time; Employee Turnover
along with topic ‘Cost Sheet’ covering its classification, format and advantages, students are advised to thoroughly go
through the same to meticulously understand the concepts before attempting questions.
EMPLOYEE (LABOUR) COST

Points of Discussion Classification of Employee cost:
Meaning of Wage and

Absorption of Direct
Employee Incentives employee cost
Wages Indirect
(Labour) Cost Payment System employee cost
Efficiency
Control of
Employee Cost
Overtime Rating Direct employee cost Indirect employee cost
Procedures
1. Cost of employees, directly 1. Cost of employees who are
engaged in the production not directly engaged in the
process. production process.
Attendance Employee
& Payroll Idle Time (Labour) 2. Easily identifiable and 2. Apportioned on some
Procedures Turnover allocable to cost unit. appropriate basis.
3. Varies with the volume 3. May not vary with the
of production and has volume of production.
Meaning of Employee (Labour) Cost positive relationship with
the volume.
• Benefits paid or payable to the employees

EMPLOYEE of an entity, whether permanent, Employee Cost Control
(LABOUR) or temporary for the services rendered
COST by them.
• Includes payments made in cash or kind. - To control over the cost incurred on
employees.
EMPLOYEE - To keep the wages per unit of output
(LABOUR) as low as possible.
COST
CONTROL - To give the employees an appropriate
compensation and encourage
Wages and
efficiency.
salary
Factors for the Control of Employee Cost:

Other benefits
(leave with pay, Control over time-
Allowances and Assessment of
free or subsidised keeping and time-
incentives manpower requirements.
food, leave travel booking.
concession etc.)
Employee cost
includes Control over idle time
Time and Motion Study.
and overtime.
Control over employee Wage and Incentive

Employer’s turnover. systems.
contribution to PF Payment for
and other welfare overtimes
funds;
Job Evaluation and
Employee productivity.
Merit Rating.
20 April 2021 The Chartered Accountant Student
91
CMA
Time-keeping: A record of total time spent by • Attendance and Time details:
the employees in a factory.
Detailed sheet of number of days or hours worked
Step-1 by each employee as reflected by the time keeping
methods are sent to the payroll department.
(i) For the preparation of payrolls.
(ii) For calculating overtime.
(iii) For ascertaining employee cost.
Objectives of
Time Keeping: (iv) For controlling employee cost. • List of employees and other details:
(v) For ascertaining idle time. List of employees on roll and the rate at which
(vi) For disciplinary purposes. Step-2 they will be paid is sent by the personnel/ HR
(vii) For overhead distribution. department.
Methods of Time-keeping
• Computation of wages and other incentives:
Methods of Time-keeping Payroll department prepares pay slip and forward
Step-3 the same to the cost/ accounting department.
Mechanical/ Automated
Manual Methods Methods
• Payment to the employees:
Attendance Punch Card After all deductions (like PF, ESI, TDS), wages/
Step-4 salary is paid to the employees.
Register method Attendance
Metal Disc/ Token Biometric

method Attendance system
• Deposit of all statutory liabilities:
All statutory deduction are paid to the respective
Time-Booking: A method wherein each activity of Step-5
an employee is recorded. statutory bodies & funds.
(i) To compute the cost of the job

or activity. Idle Time
Objectives of (ii) To measure efficiency.
Time Booking: (iii) To analyse the variance in The time during which no production is carried-out because
time with respect to the the worker remains idle but are paid.
standard time.
For the collection of all such data, a separate record, Normal idle
generally known as Time (or Job) card, is kept. time Abnormal
idle time
Payroll Procedures of Employees

Time -keeping Personnel/ HR Normal Idle Time: Time which cannot be avoided or
Department Department reduced in the normal course of business.
• Time lost between factory gate and the place of

1. Time and
Attendance
2. Employee
Payroll work,
Details
Department • Interval between one job and another,

Causes:
• Setting up time for the machine,
3. Wage and • Normal rest time, break for lunch etc.
Salary sheet
• Treated as a part of cost of production.

5. Deposit of deductions
and contributions Treatment • In the case of direct workers an allowance for
Cost/ Accounting normal idle time is considered while setting of
of Normal
Department standard hours or standard rate.
Idle Time
• In case of indirect workers, normal idle time is
4. Payment after deductions considered for the computation of overhead rate.
and contributions
Abnormal Idle Time: Apart from normal idle time, there

Employees Statutory Bodies may be factors which give rise to abnormal idle time.
The Chartered Accountant Student April 2021 21

92
CMA
• Lack of coordination, Systems of Wage Payment and Incentives
• Power failure, Breakdown of machines,
Causes: • Non-availability of raw materials, System of Wages Payment
• Strikes, lockouts, poor supervision, fire, flood
etc.
Time Output Combination Premium Group Incentives
based based of time and Bonus bonus for indirect
output based method scheme workers
Causes further
analysed into
Time based (Time Rate System):

Workers are paid on time basis i.e. hour, day, week, or month.
Controllable Uncontrollable
abnormal idle time abnormal idle time
Wages = Time Worked (Hours/ Days/ Months) × Rate for the time
Time which could have Time lost which

been put to productive management does not Output Based (Piece Rate System):
use had the management have any control e.g.,
been more alert and breakdown of machines, Each operation, job or unit of production is termed a piece.
efficient. flood etc. A rate of payment, is fixed for each piece.
The wages of the worker depend upon his output and rate of
each unit of output.
• Not included in production cost.
• Shown as a separate item in the Costing Profit Wages = Number of units produced × Rate per unit
and Loss Account.
Treatment
of Abnormal • For each category i.e. controllable and
uncontrollable idle time, the break-up of cost due
Idle time
to various factors should be separately shown.
• Management should aim at eliminating
Premium Bonus Method:
controllable idle time.
The worker is guaranteed his daily wages, if output is below
and up to standard.
In case the task is completed in less than the standard time,
Overtime the saved time is shared between the employees and the
employer.
Overtime: Work done beyond normal working hours.
Overtime Payment = Wages paid for overtime at normal rate +

Premium (extra) payment for overtime work • A standard time is fixed for each job or
process
• Worker gets his time rate even if he
HALSEY exceeds the standard time limit, since
Overtime PREMIUM his day rate is guaranteed.
Extra amount so paid over the normal rate PLAN
premium: • If job done in less than the standard
time, bonus equal to 50 percent of the
wages of time saved is paid.
Causes Treatment
Urgency of work. Charged to job directly. Wages = Time taken × Time rate + 50% of time saved × Time rate
To make up shortfall in Treated as overhead cost of

production due to some the particular cost centre
unexpected development. which works overtime. ADVANTAGES of DISADVANTAGES of
HALSEY PREMIUM PLAN HALSEY PREMIUM PLAN
If overtime is worked in a • Time rate is guaranteed. • Incentive is not so strong
To make up shortfall in department due to the fault • Opportunity for increasing as with piece rate system.
production due to some of another department, then
fault of management. premium should be charged earnings by increasing • Harder the worker works,
to the latter department. production. the lesser he gets per piece.
• System is equitable in as • Sharing principle may not
much as the employer gets a be liked by employees.
Overtime worked on account direct return for his efforts
To take advantage of an of abnormal conditions
expanding market or of such as flood, etc., should in improving production
rising demand. be charged to Costing P/L methods.
Account.
93
CMA
Factors for increasing Employee productivity:
• Standard time allowance is fixed for
performance of a job.
ROWAN Employing who possess right type of skill.
• Bonus is paid if time is saved.
PREMIUM • Bonus is that proportion of the time
PLAN wages as time saved bears to the Placing the right type of person to the right job.
standard time.
Training young and old workers by providing

Time Saved right types of opportunities.
Time taken × Rate per hour + × Time taken × Rate per hour
Time Allowed
Taking appropriate measures to avoid the situation of

excess or shortage of employees.
ADVANTAGES of DISADVANTAGES of
ROWAN PREMIUM PLAN ROWAN PREMIUM PLAN
Carrying out work study for fixation of wages.
• A worker can never double • System is a bit complicated.
his earnings even if there • Incentive is weak at a high
is bad rate setting. production level where the
• Suitable for encouraging time saved is more than
moderately efficient 50% of the time allowed.
workers.
Employee (Labour) Turnover
• Sharing principle is not
• Sharing principle appeals generally welcomed by
to the employer as being employees. Rate of change in the composition of employee
EMPLOYEE
equitable. force during a specified period measured
TURNOVER
against a suitable index.
Absorption of Wages
Methods to calculate Employee Turnover
Elements of Wages
Monetary payment Non-monetary benefits Replacement Method Separation Flux Method

• Basic wages, • Medical facilities; This considers actual Method This considers
• Dearness allowance, • Educational and training replacement of This considers both the number
facilities; employees irrespective total number of replacements
• Overtime wages, of number of of employees as well as the
• Production bonus, • Recreational and sports persons leaving the separated number of
• Employer’s contribution to facilities; organisation separations
PF, ESI and other funds, • Housing and social
• Leave pay, etc. welfare; and Number of employees Replaced
• Cost of subsidised canteen Replacement method =
during the period
× 100
and co-operative societies, Average number of employees during the
period on roll
etc.
Number of employees Seperated during the period

Separation method = Average number of employees during the period on roll
× 100
Efficiency Rating Procedures
Number of employees Seperated +

If the time taken by a worker on a job ≤ the standard time, Number of employees Replaced during the period
then he is rated efficient. Flux method = Average number Of employees during the period on roll
× 100
Or
No. of Separations+No.of Accessions (i.e. No.of Replacements+
No.of New Joinings)
Time allowed as per standard × 100
Efficiency in % = × 100 Average no.of employees during the period on roll
Time Taken
Need for Efficiency rating: Newly recruited employees are also responsible for changes
in the composition or work force, some management
accountants feel to take new recruitment for calculating
employee turnover. The total number of workers joining,
Payment including replacements, is called accessions.
Firm has a Helps
following management
system of direct
relationship for preparing
payment by manpower
results with the requirements
output

94
CMA
Causes of Employee Turnover:
Change of jobs for betterment
Premature retirement
Personal
Causes Domestic problems/ Family
responsibilities
Discontent over the jobs and
working environment
Seasonal nature of the business

Causes of Employee Turnover
Shortage of raw material, power,

slack market for the product etc.
Unavoidable
Change in plant location
Causes
Disability
Disciplinary measures
Dissatisfaction with job,

remuneration, hours of work,
working conditions, etc.
Strained relationship with
management
Avoidable Lack of training facilities and
Causes promotional avenues
Lack of recreational and
medical facilities
Low wages and allowances
Effects of Employee Turnover:

Even flow of production is disturbed
Efficiency of new workers is low
Increased cost of training
New workers cause increased breakage of tools
Cost of recruitment
Cost of Employees Turnover:
Cost of Employees Turnover
Preventive Costs Replacement Costs

Costs incurred to prevent Costs which arise due to
employee turnover or keep employee turnover
it as lowest as possible
Cost of medical Cost of

benefit recruitment
Cost on employees’ Training and

welfare like induction
pension etc.
Abnormal
Cost on other breakage and scrap
benefits with an
objective to retain Extra wages and
employees overheads due to
the inefficiency of
new workers
95
Overheads
Chapter Overview Steps for Distribution of Overheads
OVERHEADS Estimation of Overheads
Selling and Allocation of Overheads: Apportionment of

Production Administrative Distribution Overheads: Allotment
Overheads Overheads Direct assignment of cost
Overheads to a cost object which can of proportions of items
be traced directly of cost to cost centres or
departments on some basis.
Accounting and Control of Overheads

Production Production Service Service
Department-I Department-II Department-I Department-II
Concepts
Distribution of Overhead related with
Overheads Rates Capacity Re-apportionment of Overheads: The process of assigning
service department overheads to production departments
is called reassignment or re-apportionment. Methods of re-
apportionment are:
&ODVVLÀFDWLRQRI2YHUKHDGV (i) Direct re-distribution method
Overheads are the expenditure which can not be (ii) Step method of secondary distribution or non-reciprocal
identified with a particular cost unit. Overheads can be method
classified as under. (iii) Reciprocal Service method.
By Function By Nature By Element By Control
t'BDUPSZPS t'JYFE t*OEJSFDU t$POUSPMMBCMF Total Overheads: The sum of allocated, apportioned and re-
Manufacturing Overhead materials costs apportioned overhead is called total overheads for a cost object.
or Production t7BSJBCMF t*OEJSFDU t6ODPOUSPMMBCMF
Overhead Overhead employee cost costs
t0ĊDFBOE t4FNJ7BSJBCMF t*OEJSFDU Absorption of Overheads: Total overheads calculated as above
Administrative Overheads expenses is distributed over the actual quantity of goods produced. The
Overheads distribution of total estimated overheads to units of production
t4FMMJOHBOE is called absorption of overheads.
Distribution
Overheads
Methods for Re-apportionment of
Overheads
)XQFWLRQDO&ODVVLÀFDWLRQRI2YHUKHDGV
One of the most important ways of classifying overheads The re-apportionment of service department expenses
is as per their function. As per this classification over the production departments may be carried out by
overheads are classified as under. using any one of the following methods:
Indirect cost incurred for manufacturing or Methods for
Factory or production activity in a factory. Manufacturing
Manufacturing Re-apportionment
overhead includes all expenditures incurred
or Production from the procurement of materials to the
Overhead completion of finished product.
Expenditures incurred on all activities relating

to general management and administration Direct Step method or Reciprocal
of an organisation. It includes formulating re-distribution non-reciprocal Service
Office and the policy, directing the organisation and method method. method.
Administrative controlling the operations of an undertaking
Overheads which is not related directly to production,
selling, distribution, research or development
activity or function.
(i) Selling overhead: expenses related to sale of

Simultaneous Trial and Repeated
Selling and products and include all indirect expenses in
Equation error distribution
Distribution sales management for the organisation.
method method method
Overheads (ii) Distribution overhead: cost incurred on
making product available for sale in the market.

96
Methods of Absorbing Overheads to various Products or Jobs

Several methods are commonly employed either individually or jointly for computing the appropriate overhead
rate. The more common of these are:
Percentage of Percentage of Percentage of direct Labour hour Machine hour Rate per unit of
direct materials prime cost labour cost rate rate Output
Machine hour rate Treatment of Under-absorption and Over-

absorption of overheads in Cost Accounting
Machine hour rate implies, cost of running a machine
for an hour to produce goods.
Is there any under/
The steps involved in determining of Machine hour over absorption of
rate is as follows: overheads?
Step1: Calculate total of overheads apportioned to a production

department. Yes
Step 2: Apportion further these overheads to machines or group

of machines in the department. Amount of under/ Yes
over absorption is
small
Step 3: Allocate machine specific costs (directly identifiable with
the machine)
No
Costing
P&L A/c
Step 4: Estimate total productive hours for the machine
Due to wrong
estimation Yes
Step 5: Aggregate overheads as apportioned in step-2 and and abnormal
allocated in step-3 and divide it by Estimated total productive reasons
hours
No
The resultant figure is machine hour rate
Calculate Supplementary Rate and Charge to Cost of Sales
A/c, Finished Goods A/c and W-I-P A/c
Types of Overhead Rates Concepts related with Capacity

Installed/ The maximum capacity of producing goods
Normal Rate: This rate is calculated by dividing Rated or providing services. It is also known as
the actual overheads by actual base. It is also capacity theoretical capacity.
known as actual rate.
Practical It is defined as actually utilised capacity of a

Pre-determined Overhead Rate: This rate capacity plant. It is also known as operating capacity.
is determined in advance by estimating the
amount of the overhead for the period in
which it is to be used.
The volume of production or services
Normal achieved or achievable on an average over a
capacity period under normal circumstances taking
Blanket Overhead Rate: Blanket overhead into account the reduction in capacity
rate refers to the computation of one single resulting from planned maintenance.
overhead rate for the whole factory.
Actual Capacity actually achieved during a given
capacity period.
Departmental Overhead Rate: It refers to the
computation of one single overhead rate for a
particular production unit or department. Idle It is that part of the capacity of a plant,
capacity machine or equipment which cannot be
effectively utilised in production.
97
Treatment of Certain Items in Cost Accounting
Interest and financing It includes any payment in nature of interest for use of non- equity funds and incidental cost that an entity
charges incurs in arranging those funds. Interest and financing charges shall be presented in the cost statement as a
separate item of cost of sales.
Cost of primary packing necessary for protecting the product or for convenient handling, should become a
Packing expenses part of cost of production. The cost of packing to facilitate the transportation of the product from the factory
to the customer should become a part of the distribution cost.
These indirect benefits stand to improve the morale, loyalty and stability of employees towards the
Fringe benefits organisation. If the amount of fringe benefit is considerably large, it may be recovered as direct charge by
means of a supplementary wage or labour rate; otherwise these may be collected as part of production
overheads.
If research is conducted in the methods of production, the research expenses should be charged to the
production overhead; while the expenditure becomes a part of the administration overhead if research relates
Research and to administration. Similarly, market research expenses are charged to the selling and distribution overhead.
Development
Expenses Development costs incurred in connection with a particular product should be charged directly to that
product. Such expenses are usually treated as “deferred revenue expenses,” and recovered as a cost per unit of
the product when production is fully established.

98
COST SHEET
Points of Discussion
Head of
Functional
Costs in Cost
Classification
Sheet
Advantages
Format of
of
Cost Sheet
Cost Sheet
Functional Classification of Elements of Cost

Direct Material Cost
Direct Employee (labour) Cost
Direct Expenses
Production/ Manufacturing Overheads
Administration Overheads
Selling Overheads
Distribution Overheads
Research and Development costs etc.
Cost Heads in a Cost Sheet

Prime Cost
Cost of Production
Cost of Goods Sold
Cost of Sales
99
CMA
Prime Cost:
Direct Direct Direct Prime

material costs employee costs expenses Cost
Prime Cost xxxx

Add: Factory Overheads# xxx
Gross Works Costs xxxx
Cost of material
Direct Material Cost
Add: Opening stock of Work-in-process xxx

Freight inwards Less: Closing stock of Work-in-process (xxx)
Cost of direct
material Insurance
Factory or Works Costs xxxx
consumed* e.g. Add: Quality Control Cost xxx
Trade discounts or rebates
Add: Research & Development cost (Process related) xxx
(to be deducted)
Add: Administrative Overheads related with xxx
Duties & Taxes (if ITC is not production
available/ availed).
Less: Credit for recoveries (miscellaneous income) (xxx)
Wages and salary Add: Packing Cost (Primary packing) xxx
Direct Employee Cost
Cost of Production xxxx

Payments to Allowances and incentives
the employees
engaged in the Payment for overtime
#
Factory Overheads (Works / production / manufacturing
overheads) includes-
production
of goods and Bonus/ ex-gratia
provision of
services e.g. Employer’s contribution to
Consumable Lease rent of
PF, ESI & funds Depreciation
stores and spares production assets
Other benefits (medical, leave
with pay, LTC).
Power & fuel Repair and Indirect

maintenance employees cost Drawing and
Expenses other Royalty paid of plant and related with Designing
Direct Expenses
than direct machinery, production department cost

material cost Hire charges factory building activities
and direct
employee cost Fee for technical assistance
e.g. Insurance of plant Service
Amortised cost of moulds, and machinery, Amortised cost department cost
patterns, patents factory building, of jigs, fixtures, such as Tool Room,
stock of raw tooling Engineering &
Other expenses directly related material & WIP Maintenance,
with the production of goods. Pollution Control
*
Cost of Goods Sold:
Opening Closing Direct Cost of Cost of

Addition/ Opening Closing
Stock of stock of materials Cost of Cost of
Purchases stock of stock of
Material Material consumed Production Goods Sold
finished finished
goods goods
Cost of Production: Cost of Sales:

Cost of Goods Sold xxxx
Factory Add: Administrative Overheads (General) xxx
Prime related Cost of Add: Selling Overheads xxx
cost costs and Production
overheads Add: Packing Cost (secondary) xxx
Add: Distribution Overheads xxx
Cost of Sales xxxx

100
CMA
Examples:
Administrative Selling Packing Cost Distribution
Overheads (General) Overheads (secondary) Overheads
Depreciation and Salary and wages Packing material Salary and wages of
maintenance of, office related with sales that enables to employees engaged in
building, furniture etc. department store, transport, and distribution of goods
make the product
marketable.
Salary of administrative Rent, depreciation, Transportation and
employees, maintenance related insurance costs related
accountants, etc. with sales department with distribution
Rent, rates & taxes Advertisement, Depreciation, hire

maintenance of website charges, maintenance
for online sales, market and other operating costs
research etc. related with distribution.
Insurance, lighting,
office expenses
Indirect materials-
printing and stationery,
office supplies etc.
Legal charges, audit fees,

meeting expenses etc.
Cost Sheet- Specimen Format

Particulars Total Cost (R) Cost per unit (R)
1. Direct materials consumed:
Opening Stock of Raw Material xxx
Add: Additions/ Purchases xxx
Less: Closing stock of Raw Material (xxx)
xxx xxx
2. Direct employee (labour) cost xxx
3. Direct expenses xxx
4. Prime Cost (1+2+3) xxx xxx
5. Add: Works/ Factory Overheads xxx
6. Gross Works Cost (4+5) xxx
7. Add: Opening Work in Process xxx
8. Less: Closing Work in Process (xxx)
9. Works/ Factory Cost (6+7-8) xxx xxx
10. Add: Quality Control Cost xxx
11. Add: Research and Development Cost xxx
12. Add: Administrative Overheads (relating to production activity) xxx
13. Less: Credit for Recoveries/Scrap/By-Products/ misc. income (xxx)
14. Add: Packing cost (primary) xxx
15. Cost of Production (9+10+11+12-13+14) xxx xxx
16. Add: Opening stock of finished goods xxx
17. Less: Closing stock of finished goods (xxx)
18. Cost of Goods Sold (15+16-17) xxx xxx
19. Add: Administrative Overheads (General) xxx
20. Add: Marketing Overheads :
Selling Overheads xxx
Distribution Overheads xxx
21. Cost of Sales (18+19+20) xxx xxx
101
CMA
Treatment of various items of cost in Cost Sheet:
Advantages of Cost Sheet
• Any abnormal cost, where it is material and
Provides the total cost figure as well as cost per
Abnormal quantifiable, shall not form part of cost of
costs unit of production.
production or acquisition or supply of goods
or provision of service.
Helps in cost comparison.
Subsidy/ • Reduced from the cost objects to which such
Grant/
Incentives amount pertains.
Facilitates preparation of cost estimates
required for submitting tenders.
Penalty, fine,
damages, and • Does not form part of cost.
demurrage Provides sufficient help in arriving at the
figure of selling price.
Interest and • Not included in cost of production.

other finance • Shall be presented in the cost statement as a Facilitates cost control by disclosing
costs separate item of cost of sales. operational efficiency.

102
Process and Operation Costing

Chapter Overview Meaning of Process Costing
Process Costing is a method of costing used in
industries where the material has to pass through two
or more processes for being converted into a final
Meaning
product. It is defined as “a method of Cost Accounting
whereby costs are charged to processes or operations
and averaged over units produced”.
Costing
Procedure
Normal
This can be understood with the help of the following
diagram:
Process & Operation Costing
Treatment of
Process loss/ gain Raw Process Process Process Finished
Abnormal Material -I -II -III Goods
Costing Procedure in Process Costing

Process Costing
Methods Materials: Each process for which the materials are used, are
debited with the cost of materials consumed on the basis of the
information received from the Cost Accounting department.
Valuation of WIP
Equivalent Units
Employee Cost (Labour) - Each process account should
Inter-process be debited with the labour cost or wages paid to labour for
Profit carrying out the processing activities. Sometimes the wages
paid are apportioned over the different processes after selecting
appropriate basis.
Operation Costing
Direct expenses - Each process account should be debited with
direct expenses like depreciation, repairs, maintenance, insur-
ance etc. associated with it.
Production Overheads- These expenses cannot be allocated to a

process. The suitable way out to recover them is to apportion them
over different processes by using suitable basis.

103
Steps in Process Costing Treatment of Normal, Abnormal Loss and
Abnormal Gain
Step-1: Analyse the Physical Flow of Production Units Normal Process Abnormal Abnormal Process
Loss Process Loss Gain/ Yield
Step-2: Calculate Equivalent Units for each Cost Elements t ͳF DPTU PG tͳF DPTU PG tͳFQSPDFTTBDDPVOU
normal process an abnormal under which
loss in practice process loss unit
is equal to the abnormal gain
is absorbed
cost of a good arises is debited
Step-3: Determine Total Cost for each Cost Element by good units VOJU ͳF UPUBM
produced under with the abnormal
cost of abnormal
UIFQSPDFTTͳF process loss is gain and credited
amount realised credited to the to abnormal gain
Step-4: Compute Cost Per Equivalent Unit for each Cost Element by the sale of process account
from which it account which
normal process
loss units should arises. will be closed by
be credited to t5PUBM DPTU transferring to the
of abnormal
Step-5: Assign Total Costs to Units Completed and Ending WIP the process Costing Profit and
process loss
account. is debited to Loss account.
costing profit
and loss account.
Valuation of Work-in-process
ͳFWBMVBUJPOPGXPSLJOQSPDFTTQSFTFOUTBHPPEEFBMPGEJĊDVMUZCFDBVTFJUIBTVOJUTVOEFSEJĉFSFOUTUBHFTPG
completion from those in which work has just begun to those which are only a step short of completion.
(i) Equivalent Units
Equivalent units or equivalent production units, means converting the incomplete production units into
their equivalent completed units. Under each process, an estimate is made of the percentage completion of
XPSLJOQSPDFTTXJUISFHBSEUPEJĉFSFOUFMFNFOUTPGDPTUT WJ[ NBUFSJBM MBCPVSBOEPWFSIFBET
ͳFGPSNVMBGPSDPNQVUJOHFRVJWBMFOUDPNQMFUFEVOJUTJT
Equivalent completed units = Actual number of units in Percentage of

X
the process of manufacture Work completed
Input Details Units Output Units Equivalent Units

Particulars
Material Labour Overhead
% Units % Units % Units
a b c= a×b d e=a×d f g=a×f
Opening xxx Opening W-I-P* xxx xxx xxx xxx xxx xxx xxx
W-I-P
Unit xxx Finished xxx xxx xxx xxx xxx xxx xxx
Introduced output**
Normal loss*** xxx - - - - - -
Abnormal loss/ xxx xxx xxx xxx xxx xxx xxx

Gain****
Total Closing W-I-P xxx xxx xxx xxx xxx xxx xxx
xxx Total xxx xxx xxx xxx
* Equivalent units for Opening W-I-P is calculated only under FIFO method. Under the Average method, it is not shown separately.
**Under the FIFO method, Finished Output = Units completed and transferred to next process less Opening WIP. Under Average
method, Finished Output = Units completed and transferred.
***For normal loss, no equivalent unit is calculated.
****Abnormal Gain/ Yield is treated as 100% complete in respect of all cost elements irrespective of percentage of completion.
104
(ii) Methods for valuation of work-in-process
First-in-first-out (FIFO) method Weighted Average (Average) Method
Under this method the units completed and transferred include Under this method, the cost of opening work-in-process and cost
completed units of opening work-in-process and subsequently of the current period are aggregated and the aggregate cost is
introduced units. Proportionate cost to complete the opening divided by output in terms of completed units.
work-in-process and that to process the completely processed
units during the period are derived separately.
,QWHU3URFHVV3URÀW Operation Costing

In some process industries the output of one process is This product costing system is used when an entity produces
transferred to the next process not at cost but at market more than one variant of final product using different
value or cost plus a percentage of profit. The difference materials but with similar conversion activities. Which
between cost and the transfer price is known as inter- means conversion activities are similar for all the product
process profits. variants but materials differ significantly. Operation
Costing method is also known as Hybrid product costing
system as materials costs are accumulated by job order or
batch wise but conversion costs i.e. labour and overheads
costs are accumulated by department, and process costing
methods are used to assign these costs to products.
Standard Costing
Chapter Overview Types of standards
There are various types of standard which are illustrated
Meaning of below:
Advantages Standard cost
and Standard
and Criticism
Costing Types of Ideal Standards: The
of Standard Standards level of performance
Costing
attainable when
prices for material
and labour are most
favourable, when Normal Standards:
Computation Standard
The Process the highest output These are standards
of Standard is achieved with the that may be achieved
of Variance Costing Costing
best equipment and under normal
layout and when the operating conditions.
maximum efficiency
in utilisation of
Setting-up of resources results in
Classification of
Standard Cost maximum output
Variances
Types of with minimum cost.
Standards
Basic or Bogey Current Standards:

Standards: These These standards reflect
What is a Standard or Standard Cost? standards are used the management’s
Standard cost is defined in the CIMA Official Terminology only when they are anticipation of what
as “‘the planned unit cost of the product, component likely to remain actual costs will be for
or service produced in a period. The standard cost may constant or unaltered the current period.
be determined on a number of bases. The main use of over a long period.
standard costs is in performance measurement, control,
stock valuation and in the establishment of selling prices.”
105
Process followed in Standard Costing
Setting of Ascertainment of Comparison of Investigate the Disposition of

Standards actual costs actual cost with reasons for variances
standard cost variances
Variances at a Glance
Total Cost Variance
Material Cost Variance Labour Cost Variance Overhead Cost Variance
Usage Idle Time Efficiency Variable Overheads Fixed Overhead

Price Variance Variance Rate Variance Variance Variance Variance Variance
Expenditure
Mix Variance Mix Variance Expenditure Volume
Variance Variance Variance
Efficiency Efficiency
Yield Variance Yield Variance Variance Variance
Capacity
Variance
Calendar
Variance
Variance Analysis
(i) Material Cost Variance
Material Cost Variance
[Standard Cost – Actual Cost]
(The difference between the Standard Material Cost of the actual production volume and the Actual Cost of Material)
[(SQ × SP) – (AQ × AP)]
Material Price Variance Material Usage Variance

[Standard Cost of Actual Quantity – Actual Cost] [Standard Cost of Standard Quantity for Actual Production –
Standard Cost of Actual Quantity]
(The difference between the Standard Price and Actual Price for
the Actual Quantity Purchased) (The difference between the Standard Quantity specified for actual
production and the Actual Quantity used, at Standard Price)
[(SP – AP) × AQ] [(SQ – AQ) × SP]
Or Or
[(SP × AQ) – (AP × AQ)] [(SQ × SP) – (AQ × SP)]
Material Mix Variance Material Yield Variance

[Standard Cost of Actual Quantity in Standard Proportion – [Standard Cost of Standard Quantity for Actual Production –
Standard Cost of Actual Quantity] Standard Cost of Actual Quantity in Standard Proportion]
(The difference between the Actual Quantity in standard (The difference between the Standard Quantity specified for
proportion and Actual Quantity in actual proportion, at Standard actual production and Actual Quantity in standard proportion, at
Price) Standard Purchase Price)
[(RSQ – AQ) × SP] [(SQ – RSQ) × SP]
Or Or
[(RSQ × SP) – (AQ × SP)] [(SQ × SP) – (RSQ × SP)]
106
(ii) Labour Cost Variances
Labour Cost Variance
[Standard Cost – Actual Cost]
(The difference between the Standard Labour Cost and the Actual Labour Cost incurred for the production achieved)
[(SH × SR) – (AH* × AR)]
Labour Rate Variance Labour Idle Time Variance Labour Efficiency Variance
[Standard Cost of Actual Time – Actual Cost] [Standard Rate per Hour x Actual Idle Hours] [Standard Cost of Standard Time for Actual
(The difference between the Standard Rate (The difference between the Actual Production – Standard Cost of Actual Time]
per hour and Actual Rate per hour for the Hours paid and Actual Hours worked at (The difference between the Standard Hours
Actual Hours paid) Standard Rate) specified for actual production and Actual
Hours worked at Standard Rate)
[(SR – AR) × AH*] Or [(AH* – AH#) × SR] Or [(SH – AH#) × SR] Or
[(SR × AH*) – (AR × AH*)] [(AH* × SR) – (AH# × SR)] [(SH × SR) – (AH# × SR)]
Labour Mix Variance Or Gang Variance Labour Yield Variance Or Sub-Efficiency Variance
[Standard Cost of Actual Time Worked in Standard [Standard Cost of Standard Time for Actual Production
Proportion – Standard Cost of Actual Time Worked] – Standard Cost of Actual Time Worked in Standard
(The difference between the Actual Hours worked in Proportion]
standard proportion and Actual Hours worked in actual (The difference between the Standard Hours specified
proportion, at Standard Rate) for actual production and Actual Hours worked in
standard proportion, at Standard Rate)
[(RSH – AH#) × SR] Or (SH – RSH) × SR Or
[(RSH × SR) – (AH# × SR)] (SH × SR) – (RSH × SR)
(iii) Variable Overhead Variances

Variable Overhead Cost Variance
(Standard Variable Overheads for Production – Actual Variable Overheads)
Variable Overhead Expenditure Variable Overhead Efficiency Variance

(Spending) Variance
(Standard Variable Overheads for Actual Hours#) (Standard Variable Overheads for Production)
Less Less
(Actual Variable Overheads) (Standard Variable Overheads for Actual Hours#)
[(SR – AR) × AH#] [(SH – AH#) × SR]
Or Or
[(SR × AH#) – (AR × AH#)] [(SH × SR) – (AH# × SR)]
(iv) Fixed Overhead Variances

Fixed Overhead Cost Variance
(Absorbed Fixed Overheads) Less (Actual Fixed Overheads)
Fixed Overhead Expenditure Variance Fixed Overhead Volume Variance

(Budgeted Fixed Overheads) (Absorbed Fixed Overheads)
Less Less
(Actual Fixed Overheads) (Budgeted Fixed Overheads)
Or Or
(BH × SR) – (AH × AR) (SH × SR) – (BH × SR)
Fixed Overhead Capacity Variance Fixed Overhead Calendar Variance Fixed Overhead Efficiency Variance
SR (AH – BH) Std. Fixed Overhead rate per day (Actual no. SR (AH – SH)
Or of Working days – Budgeted Working days) Or
(AH × SR) – (BH × SR) (AH × SR) – (SH × SR)
AH* - Actual Hours paid
AH# - Actual Hours worked
107
Marginal Costing
Chapter Overview Characteristics of Marginal Costing
Meaning of All elements of cost are classified into fixed and variable
Marginal Cost components. Semi-variable costs are also analyzed into fixed
and Marginal and variable elements.
Costing
The marginal or variable costs (as direct material, direct

Characteristics Break-even
Characteristics of Marginal Costing

labour and variable factory overheads) are treated as the cost
of Marginal Analysis of product
Marginal Costing
Costing
Under marginal costing, the value of finished goods and
Cost-Volume- Margin of Safety work–in–progress is also comprised only of marginal costs.
Profit (CVP) Variable selling and distribution overheads are excluded for
Analysis valuing these inventories.
Angle
of Incidence Fixed costs are treated as period costs and are charged to profit
Short-term
and loss account for the period for which they are incurred
Decision making
Contribution
Prices are determined with reference to marginal costs and
Ratio
contribution margin
Profitability of departments and products is determined with

reference to their contribution margin
Meaning of Terms
In order to understand the concept of marginal costing,
let us first define various terminology associated with &RPSXWDWLRQRI&RQWULEXWLRQDQG3URÀW
marginal costing. under Marginal Costing
For the determination of cost of a product/ service under
marginal costing, costs are classified under variable and
Marginal Differential fixed. All the variable costs are part of product and fixed
Marginal Cost Direct Costing
Costing Cost costs are charged against contribution margin.
Cost and Profit Statement under Marginal Costing

Marginal It is a costing Direct costing Differential
cost as system where and Marginal cost is Amount Amount
understood products or Costing difference (Rs) (Rs)
in economics services and is used between the Revenue xxx
is the inventories synonymously costs of two Product Cost:
incremental are valued at at various different - Direct Materials xxx
cost of variable costs places and it production - Direct employee (labour) xxx
production only. is so also. levels. - Direct expenses xxx
which arises - Variable manufacturing overheads xxx
due to
Product (Inventoriable) Costs xxx (xxx)
one-unit
Product Contribution Margin xxx
increase
- Variable Administration overheads xxx
in the
- Variable Selling & Distribution overheads xxx (xxx)
production
Contribution Margin xxx
quantity.
Period Cost:
Fixed Manufacturing expenses xxx
Fixed non-manufacturing expenses xxx (xxx)
Profit/ (loss) xxx
108
Advantages of Marginal Costing %UHDN(YHQ$QDO\VLV

There are many advantages of marginal costing, some Break-even analysis is a generally used method to study
of them are discussed below. the CVP analysis. This technique can be explained in
two ways.
(i) In narrow sense it is concerned with computing the
Simplified break-even point.
Pricing
Policy
(ii) In broad sense this technique is used to determine
Short term Proper
profit
the possible profit/loss at any given level of
recovery of
planning production or sales.
Overheads
= Fixed Cost /
Break-even Point Contribution per unit
Advantages
Helps in of Marginal Shows
Decision Costing Realistic
Making
Break even
Profit = Cash Fixed Cost /
Cash Break-even
point Contribution per unit
More How
control over much to
expenditure produce
The contribution is
Multi-Product calculated by taking
Break-even Analysis weights (sales quantity/
value) for the products
&RVW9ROXPH3URÀW&93$QDO\VLV Angle of Incidence

It is a managerial tool showing the relationship between This angle is formed by the intersection of sales line and
various ingredients of profit planning viz., cost, selling total cost line at the break-even point. This angle shows
price and volume of activity. the rate at which profit is earned once the break-even
point is reached. The wider the angle the greater is the rate
Marginal Cost Equation of earning profits. A large angle of incidence with a high
Marginal Cost Equation = S -V = C = F ± P margin of safety indicates extremely favourable position
Marginal Cost Statement 0DUJLQRI6DIHW\

This is the difference between the expected level of sales
(r) and break even sales (no profit, no loss). The larger is
Sales (S) xxxx the margin of safety higher is the profit and vice versa.
Less: Variable Cost (V) xxxx
Variations of Basic Marginal Cost Equation and
Contribution (C) xxxx other formulae
Less: Fixed Cost (F) xxxx
Profit/ Loss (P) xxxx i. Sales – Variable cost = Fixed cost + Profit / Loss
By multiplying and dividing L.H.S. by S

3URÀW9ROXPH5DWLRRU39UDWLR ii. S (S – V)
=F+P
This ratio shows the proportion of sales required to S
cover fixed cost and profit. P/V ratio is calculated as S- V
below: iii. S x P/V Ratio = F + P or Contribution (P / V Ratio = X 100)
S
Contribution ( ... at BEP Profit is zero )
(a)=
P/V Ratio ×100 iv. BES x P/V Ratio = F
Sales v.
Fixed cost
BES =
(b) When two years’ data is given, P/V Ratio P/V Ratio
vi.
Change in contribution/ Profit Fixed cost
×100
P/V Ratio =
BES
Change in sales vii S × P/V Ratio = Contribution (Refer to iii)

109
viii. xiv.
Contribution Contribution
P/V Ratio = X 100
Sale Profitability =
Key factor
ix. (BES + MS) × P/V Ratio = Contribution (Total sales = BES + MS)
xv. Profit
Margin of Safety = Total Sales – BES or
x. (BES × P/V Ratio) + (MS × P/V Ratio) = F + P P/V Ratio
By deducting (BES × P/V Ratio) from L.H.S. and F from R.H.S. xvi. BES = Total Sales – MS
in (x) above, we get:
xvii.
xi. M.S. × P/V Ratio = P Margin of Safety Ratio = Total sales – BES
Total Sales
xii.
Change in profit
P/V Ratio = X 100
Change in sales
xiii.
Change in contribution
P/V Ratio = X 100
Change in sales
Budget & Budgetary Control

Chapter Overview 'HÀQLWLRQDQG7HUPLQRORJ\
Let us first define various important terminologies
Essentials of used in budget and budgetary control.
Budget
Budget Budgeting Budgetary control

Objectives of Capacity-wise
Budgeting
Budget & Budgetary Control
Quantitative Coordinating The establishment

expression of a the combined of budgets
Types of plan for a defined intelligence of an relating to the
Budgets Functions-wise period of time entire organisation responsibilities
into a plan of of executives
action based on of a policy and
past performance the continuous
Zero-based
Budgeting (ZBB) comparison of the
Period-wise
actual with the
budgeted results,
either to secure by
Performance individual action
Budgeting
Master Budget the objective of
the policy or to
provide a basis for
Budget Ratio its revision
Essentials of Budget
Essential elements of budget are illustrated below:
Essential elements of a budget
Organisational Setting of clear Budgets are Budgets are Budgets should be Budgetary
structure must objectives and prepared for updated for the quantifiable and master performance
be clearly reasonable the future events that were budget should be broken needs to be linked
defined targets periods based on not kept into down into various effectively to the
expected course the mind while functional budgets. reward system
of actions establishing Budgets should be
budgets monitored periodically
110
Characteristics of Budget Objectives of Budgeting

Main characteristics of budget are as below: The objective of budgeting begins with planning and
ends with controlling. Once the planning is done, they
can be used for directing and controlling operations so
It is concerned that the stated targets in planning are achieved.
for a definite
future period
Budget is usually
prepared in the light It is a written Planning
of past experiences document
Characteristics
of Budget
Budget helps
in planning, It is a detailed
plan of all Dir
coordination and
the economic Co ectin
control g ord g a
activities of a llin ina nd
o tin
Budget is a business ntr g
means to achieve Co
business and it
is not an end in
itself
Advantages of Budgetary Control System

There are many advantages of budgetary control system, and some of the them are illustrated below:
Control on Finding Effective Revision of Implementation Cost

Efficiency utilisation of of Standard Credit Rating
expenditure deviations plans Consciousness
resources Costing system
&ODVVLÀFDWLRQRI%XGJHW
BUDGET
Capacity wise Functions wise Master Budget Period wise
Sales budget Long-term

Fixed Budget Production budget Budgets
Plant utilisation budget
Direct-material usage budget
Flexible Direct-material purchase budget Short-term
Budget Direct-labour (personnel) budget Budgets
Factory overhead budget
Production cost budget
Current
Ending-inventory budget Budgets
Cost of goods-sold budget
Selling and distribution cost budget
Administration expenses budget
Research and development cost budget
Capital expenditure budget
Cash budget
111
'HÀQLWLRQRIGLIIHUHQWW\SHVRI%XGJHW
Functional Budgets Budgets which relate to the individual functions in an organisation are known as Functional Budgets. For
example, purchase budget; sales budget; production budget; plant-utilisation budget and cash budget.
Master Budget It is a consolidated summary of the various functional budgets. It serves as the basis upon which budgeted
P & L A/c and forecasted Balance Sheet are built up.
Long-term Budgets The budgets which are prepared for periods longer than a year are called long-term budgets. Such budgets
are helpful in business forecasting and forward planning. Capital expenditure budget and Research and
Development budget are examples of long-term budgets.
Short-term Budgets Budgets which are prepared for periods less than a year are known as short-term budgets. Cash budget is
an example of short-term budget. Such types of budgets are prepared in cases where a specific action has
to be immediately taken to bring any variation under control, as in cash budgets.
Basic Budgets A budget which remains unaltered over a long period of time is called basic budget.
Current Budgets A budget which is established for use over a short period of time and is related to the current conditions
is called current budget.
Fixed Budget According to CIMA official terminology, “a fixed budget, is a budget designed to remain unchanged
irrespective of the level of activity actually attained”.
Flexible Budget According to CIMA official terminology, “a flexible budget is defined as a budget which, by recognizing
the difference between fixed, semi-variable and variable costs is designed to change in relation to the level
of activity attained.”
'LIIHUHQFHVEHWZHHQ)L[HG%XGJHWDQG)OH[LEOH%XGJHW
Sl. no. Fixed Budget Flexible Budget
1. It does not change with actual volume of activity achieved. Thus it is It can be re-casted on the basis of activity level to be
known as rigid or inflexible budget achieved. Thus it is not rigid.
2. It operates on one level of activity and under one set of conditions. It It consists of various budgets for different levels of
assumes that there will be no change in the prevailing conditions, which activity.
is unrealistic.
3. Here as all costs like - fixed, variable and semi-variable are related to only Here, analysis of variance provides useful information
one level of activity, so variance analysis does not give useful information. as each cost is analysed according to its behaviour.
4. If the budgeted and actual activity levels differ significantly, then the Flexible budgeting at different levels of activity
aspects like cost ascertainment and price fixation do not give a correct facilitates the ascertainment of cost, fixation of
picture. selling price and tendering of quotations.
5. Comparison of actual performance with budgeted targets will be It provides a meaningful basis of comparison of the
meaningless specially when there is a difference between the two actual performance with the budgeted targets.
activity levels.
=HUR%DVHG%XGJHWLQJ=%% 3HUIRUPDQFH%XGJHWLQJ

It is defined as ‘a method of budgeting which requires A performance budget is one which presents the
each cost element to be specifically justified, although purposes and objectives for which funds are required,
the activities to which the budget relates are being the costs of the programmes proposed for achieving
undertaken for the first time, without approval, the those objectives, and quantitative data measuring the
budget allowance is zero’. accomplishments and work performed under each
programme.
Stages in Zero-based budgeting
Steps in Performance Budgeting
Identification and description of Decision packages
Establishing Evolving suitable

Bring the norms, yardsticks,
a meaningful system of
Evaluation of Decision packages functional work units of
accounting performance
programme and financial
and activity and units costs,
management wherever possible
classification in accord
Ranking (Prioritisation) of the Decision packages of under each
with this programme and
government classification
operations activity for their
reporting and
Allocation of resources evaluation
112
Budget Ratio
Budget ratios provide information about the performance level, i.e., the extent of deviation of actual performance
from the budgeted performance and whether the actual performance is favourable or unfavourable.
The following ratios are usually used by the management to measure development from budget
Efficiency Ratio Standard Capacity Employed Ratio
This ratio may be defined as standard hours equivalent of work
produced expressed as a percentage of the actual hours spent in This ratio indicates the extent to which facilities were actually
producing the work. utilized during the budget period.
Level of Activity Ratio Capacity Usage Ratio

This may be defined as the number of standard hours equivalent This is the relationship between the budgeted number of working
to work produced expressed as a percentage of the budget of hours and the maximum possible number of working hours in a
standard hours. budget period.
Calendar Ratio
This ratio may be defined as the relationship between the number
of working days in a period and the number of working days as in
the relative budget period.
Budget Ratios:
S tandard Hours Budgeted Hours

(i) Efficiency Ratio = u 100 (iv) Standard Capacity = u 100
Actual Hours Usage Ratio Max. possible hours in the budgeted period
S tandard Hours (v) Actual Capacity Actual Hours worked

(ii) Activity Ratio = u 100 Usage Ratio = u 100
Budgeted Hours Max. possible working hours in a period
Available working days

u 100 (vi) Actual Usage of Actual working Hours
(iii) Calendar Ratio =
Budgeted working days Budgeted Capacity Ratio = u 100
Budgeted Hours

113
INCOME TAX LAW
CA INTERMEDIATE - PAPER 4A - INCOME-TAX LAW
This Capsule on Income-tax law attempts to give an overview of the provisions relating to advance tax, tax
deduction at source and tax collection at source and provisions relating to filing of return of income and self-
assessment, as amended by the Finance Act, 2020 and Taxation and Other Laws (Relaxation and Amendment of
Certain Provisions) Act, 2020, to the extent included in the syllabus of Intermediate (New) Paper 4A: Income-
tax Law and relevant for May, 2021 and November, 2021 examinations. These provisions are contained in
Chapters 9 and 10 of Module 3 of the October, 2020 edition of the Study Material of Intermediate (New) Paper
4A Income-tax Law. The capsule is relevant for IIPCC (Old) Paper 4A: Income-tax also, with the exception of
the portions relating to tax collection at source and self-assessment.
CHAPTER 9: ADVANCE TAX, TDS AND INTRODUCTION TO TCS

I. TAX DEDUCTION AT SOURCE
Section Nature of Threshold Limit for Payer Payee Rate of TDS Time of
payment deduction of tax at deduction
source
192 Salary Basic exemption limit Any person responsible for paying any Individual Average rate At the time
(R 2,50,000/R 3,00,000, income chargeable under the head (Employee) of income-tax of payment
as the case may be). “Salaries computed on (payt)
This is taken care of the basis of the
in computation of the rates in force
average rate of income- (or)
tax. the rates
specified
in section
115BAC, if
intimated by
the employee
192A Premature Payt or aggregate payt Trustees of the EPF Scheme or any Individual 10% [In case At the time of
withdrawal from ≥ R 50,000 authorised person under the Scheme (Employee) of failure payt
EPF to furnish
PAN, TDS@
Maximum
Marginal
Rate]
193 Interest on > R 10,000 in a F.Y., in Any person responsible for paying any Any 10% (7.5% At the time of
Securities case of interest on 8% income by way of interest on securities resident for the credit of such
Savings (Taxable) Bonds, period from income to
2003/7.75% Savings 14.5.2020 to the a/c of the
(Taxable) Bonds, 2018. 31.3.2021) payee or at the
> R 5,000 in a F.Y., time of payt,
in case of interest on whichever is
debentures issued by earlier.
a Co. in which the
public are substantially
interested, paid or
credited to a resident
individual or HUF by an
A/c payee cheque.
> No threshold specified
in any other case.
194 Dividend > R 5,000 in a F.Y., in The Principal Officer of a domestic Resident 10% (7.5% Before making
(including case of dividend paid or company shareholder for the any payt by
dividends on credited to an individual period from any mode in
preference shareholder by any mode 14.5.2020 to respect of
shares) other than cash 31.3.2021) any dividend
> No threshold in other or before
cases making any
distribution
or payt of
dividend.
The Chartered Accountant Student March 2021 21

114
INCOME TAX LAW
source
194A Interest other > R 40,000 in a F.Y., in case Any person (other than an individual Any 10% (7.5% At the time of
than interest on of interest credited or paid or HUF whose total sales, gross Resident for the credit of such
securities by – receipts or turnover ≤ R 1 crore period from income to
(i) a banking company; in case of business or R 50 lakhs 14.5.2020 to the a/c of the
(ii) a co-operative society in case of profession during the 31.3.2021) payee or at the
engaged in banking immediately preceding F.Y.) time of payt,
business; and responsible for paying interest other whichever is
(iii) a post office on any than interest on securities. earlier.
deposit under a
notified Scheme.
In all the above cases, if
payee is a resident senior
citizen, tax deduction limit is
> R 50,000.
> R 5,000 in a F.Y., in
other cases.
194B Winnings from > R 10,000 The person responsible for paying Any Person 30% At the time of
any lottery, income by way of such winnings payt
crossword puzzle
or card game or
other game of
any sort
194BB Winnings from > R 10,000 Book Maker or a person holding Any Person 30% At the time of
horse race licence for horse racing or for payt
arranging for wagering or betting in
any race course.
194C Payts to Single sum credited or Central/State Govt., Local authority, Any Resident 1% (0.75%*) of At the time
Contractors paid > R 30,000 Central/State/Provincial Corpn., contractor sum paid or of credit of
(or) company, firm, trust, registered society, for carrying credited, if the such sum to
The aggregate of sums co-operative society, university estd out any work payee is an the a/c of the
credited or paid to a under Central/State/Provincial Act, (including Individual or contractor
contractor during the declared university under the UGC supply of HUF or at the
F.Y. > R 1,00,000 Act, Govt. of Foreign State or a foreign labour) 2% (1.5%*) of time of payt,
enterprise, Individual/HUF whose total sum paid or whichever is
Individual/HUF need sales, gross receipts or turnover exceeds credited, if the earlier.
not deduct tax where R 1 crore in case of business or R 50 payee is any
sum is credited or paid lakhs in case of profession during the other person.
exclusively for personal immediately preceding F.Y. * The rates of
purposes 0.75% and
1.5% are for
the period from
14.5.2020 to
31.3.2021
194D Insurance > R 15,000 in a F.Y. Any person responsible for paying Any 5% (3.75% At the time of
Commission any income by way of remuneration Resident for the credit of such
or reward for soliciting or procuring period from income to the
insurance business 14.5.2020 to a/c of the payee
31.3.2021) or at the time of
payt, whichever
is earlier.
194DA Any sum under ≥ R 1,00,000 Any person responsible for paying any Any resident 5% of the amt At the time of
a Life Insurance (aggregate amt of payt to sum under a LIP, including the sum of income payt
Policy a payee in a F.Y.) allocated by way of bonus comprised
(3.75% for the
period from
14.5.2020 to
31.3.2021)
194E Payment to - Any person responsible for making NR sports- 20.8% At the time of
non-resident the payt man or enter- (including credit of such
(NR) sportsmen tainer who is health and income to the
or sports not a citizen education cess account of the
associations of of India or @ 4%) payee or at the
income referred NR sports time of payt,
to in section association or whichever is
115BBA institution earlier.
22 March 2021 The Chartered Accountant Student
115
INCOME TAX LAW
source
194EE Payment of ≥ R 2,500 in a F.Y. Any person responsible for paying Individual or 10% (7.5% At the time of
deposit under HUF for payt to payt
NSS residents for
the period from
14.5.2020 to
31.3.2021)
194G Commission on > R 15,000 in a F.Y. Any person responsible for paying Any person 5% (3.75% At the time of
sale of lottery any income by way of commission, stocking, for payt to credit of such
tickets remuneration or prize on lottery distributing, residents income to the
tickets purchasing for the a/c of the payee
or selling period from or at the time of
lottery 14.5.2020 to payt, whichever
tickets 31.3.2021) is earlier.
194H Commission or > R 15,000 in a F.Y. Any person (other than an individual Any resident 5% (3.75% At the time of
brokerage or HUF whose total sales, gross for the credit of such
receipts or turnover ≤ R 1 crore in period from income to the
case of business or R 50 lakhs in case 14.5.2020 to a/c of the payee
of profession during the immediately 31.3.2021) or at the time of
preceding F.Y.) responsible for paying payt, whichever
commission or brokerage. is earlier.
194-I Rent > R 2,40,000 in a F.Y. Any person (other than an individual Any resident For P & M or At the time of
or HUF whose total sales, gross equipment - credit of such
receipts or turnover ≤ R 1 crore in 2% (1.5%*) income to
case of business or R 50 lakhs in case For land or the a/c of the
of profession during the immediately building, land payee or at the
preceding F.Y.) responsible for paying appurtenant time of payt,
rent. to a building, whichever is
furniture or earlier.
fittings -10%
(7.5%*)
Note - The
rates of 1.5%
and 7.5%
are for the
period from
14.5.2020 to
31.3.2021
194-IA Payment ≥ R 50 lakh Any person, being a transferee Resident 1% (0.75% At the time
on transfer (Consideration for (other than a person referred to transferor for the of credit of
of certain transfer) in section 194LA responsible for period from such sum to
immovable paying compensation for compulsory 14.5.2020 to the a/c of the
property other acquisition of immovable property 31.3.2021) transferor or
than agricultural other than rural agricultural land) at the time of
land payt, whichever
is earlier.
194-IB Payment of > R 50, 000 for a month Individual/HUF (other than Any 5% (3.75% At the time
rent by certain or part of a month Individual/HUF whose total sales, Resident for the of credit of
individuals or gross receipts or turnover ≤ R 1 period from rent, for the
HUF crore in case of business or R 50 14.5.2020 to last month of
lakhs in case of profession during 31.3.2021) the P.Y. or the
the immediately preceding F.Y.) last month
responsible for paying rent. of tenancy, if
the property
is vacated
during the
year, as the
case may be,
to the a/c of
the payee or
at the time
of payt,
whichever is
earlier

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INCOME TAX LAW
source
194-IC Payment under No threshold limit. Any person responsible for paying any Any 10% (7.5% At the time of
specified sum by way of consideration (consdn), Resident for the credit of such
agreement not being considn in kind, under a period from income to
(agmt)referred to registered agmt, wherein L or B or 14.5.2020 to the a/c of the
in section 45(5A) both are handed over by the owner for 31.3.2021) payee or at the
developmt of real estate project, for time of payt,
a consdn, being a share in L or B or whichever is
both in such project, with payt of part earlier.
consdn in cash.
194J Fees for > R 30,000 in a F.Y., for Any person, other than an individual Any 2% (1.5%*) - At the time
professional each category of income. or HUF; Resident Payee engaged of credit of
services or (However, this limit However, in case of FPS or FTS paid only in the such sum to
technical does not apply in case of or credited, an individual/HUF, whose business of the A/c of the
services (FPS/ payt made to director of total sales, gross receipts or turnover operation of payee or at the
FTS)/ Royalty/ a company). > R 1 crore in case of business or R 50 call centre. time of payt,
Non-compete lakhs in case of profession during the 2% (1.5%*)- In whichever is
fees/ Director’s immediately preceding F.Y., is liable to case of FTS earlier.
remuneration deduct tax u/s 194J, except where FPS or royalty,
is credited or paid exclusively for his where such
personal purposes. royalty is in
the nature of
consideration
for sale,
distribution
or exhibition
of cinemato-
graphic films
10% (7.5%*) -
Other payts
Note – The
rates would be
1.5%, 1.5% and
7.5% for the
period from
14.5.2020 to
31.3.2021
194K Income on units > R 5,000 in a F.Y. Any person responsible for paying any Any 10% (7.5% At the time
other than in the income in respect of units of a mutual Resident during the of credit of
nature of capital fund/Administrator of the specified period from such sum to
gains undertaking/specified company 14.5.2020 to the a/c of the
31.3.2021) payee or at the
time of payt,
whichever is
earlier.
194LA Compensation > R 2,50,000 in a F.Y. Any person responsible for paying any Any 10% (7.5% At the time of
on acquisition sum in the nature of compensation Resident during the payt
of certain or enhanced compensation on period from
immovable compulsory acquisition of immovable 14.5.2020 to
property other property 31.3.2021)
than agricultural
land
194M - Payments to > R50,00,000 in a F.Y. Individual or HUF other than those Any 5% (3.75% At the time
Contractors who are required to deduct tax at Resident during the of credit of
- Commission source u/s 194C or 194H or 194J period from such sum to
or brokerage 14.5.2020 to the a/c of the
- Fees for 31.3.2021) payee or at the
professional time of payt,
services whichever is
earlier.
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INCOME TAX LAW
source
194N Cash > R 1 crore - a banking company or any bank or Any person @2% of such At the time of
withdrawals banking institution sum payt of such
-a co-operative society engaged In case the sum
in carrying on the business of recipient has
banking or not filed ROI
- a post office for all the 3
who is responsible for paying any immediately
sum, being the amt or the aggregate preceding
of amts, as the case may be, in cash P.Y.s, for which
exceeding R 1 crore during the time limit u/s
P.Y., to any person from one or more 139(1) has
accounts maintained by the recipient expired, such
sum shall be the
amt or agg. of
amts, in cash
> R20 lakh
during the P.Y.
TDS
- @2% of
the sum,
where cash
withdrawal
> R20 lakhs
but ≤ R1 crore
- @5% of sum,
where cash
withdrawal
exceeds R1
crore
194-O > R 5 lakhs, being gross E-commerce operator, who facilitates E-commerce 1% (0.75% for At the time
(w.e.f. amt of sales or service or sale of goods or provision of services participant the period upto of credit of
1st Oct, both in a financial year to of an e-commerce participant through 31.3.2021) such sum to
2020) an e-commerce participant, digital or electronic facility or platform of gross amt the a/c of the
being individual or HUF of sale or payee or at the
and such e-commerce service or time of payt,
participant has furnished both [In case whichever is
PAN or Aadhar number to of failure to earlier.
the e-commerce operator furnish PAN,
> No threshold in other Maximum
cases TDS@5%]
Notes –
(1) Section 206AA requires furnishing of PAN by the deductee to the deductor, failing which the deductor has to deduct tax at the higher of
the following rates, namely, -
(i) at the rate specified in the relevant provision of the Income-tax Act, 1961; or
(ii) at the rate or rates in force; or
(iii) at the rate of 20% and in case of section 194-O, 5%.
(2) The threshold limit given in column (3) of the table is with respect to each payee.
II. ADVANCE PAYMENT OF TAX

Liability for payment of advance tax [Sections 207 & 208]
• Tax shall be payable in advance during any F.Y. in respect of the total income (TI) of the assessee which would be chargeable to
tax for the A.Y. immediately following that F.Y.
• Advance tax is payable during a F.Y. in every case where the amt of such tax payable by the assessee during the year
is R10,000 or more.
• However, an individual resident in India of the age of 60 years or more at any time during the P.Y., who does not have any
income chargeable under PGBP, is not liable to pay advance tax.
Instalments of advance tax and due dates [Section 211]
Advance tax payment schedule for corporates and non-corporates (other than an assessee computing profits on presumptive
basis u/s 44AD or section 44ADA) – Four instalments
Due date of instalment Amount payable
On or before 15th June Not less than 15% of advance tax liability.
On or before 15th September Not less than 45% of advance tax liability (-) amt paid in earlier instalment.
On or before 15th December Not less than 75% of advance tax liability (-) amt paid in earlier instalment or instalments.
On or before 15th March The whole amt of advance tax liability (-) amt paid in earlier instalment or instalments.

118
INCOME TAX LAW
Advance tax payment by assessees computing profits on presumptive basis u/s 44AD(1) or 44ADA(1)
An eligible assessee, opting for computation of profits or gains of business or profession on presumptive basis in respect of eligible
business referred to in section 44AD(1) or in respect of eligible profession referred to in section 44ADA(1), shall be required to pay
advance tax of the whole amt on or before March 15 of the F.Y.
However, any amt paid by way of advance tax on or before March 31 shall also be treated as advance tax paid during the F.Y. ending
on that day.
Interest for defaults in payment of advance tax [Section 234B]
(1) Interest u/s 234B is attracted for non-payment of advance tax or payt of advance tax of an amt less than 90% of
assessed tax.
(2) The interest liability would be 1% per month or part of the month from 1st April following the F.Y. upto the date of
determination of TI u/s 143(1) and where regular assessment is made, upto the date of such regular assessment.
(3) Such interest is calculated on the amt of difference between the assessed tax and the advance tax paid.
(4) “Assessed tax” means the tax on TI determined u/s 143(1)/under regular assessment, as the case may be, less TDS &
TCS, any relief of tax allowed u/s 89, any tax credit allowed to be set off in accordance with the provisions of section
115JD.
(5) Where self-assessment tax is paid by the assessee u/s 140A or otherwise, interest shall be calculated upto the date of payt of
such tax and reduced by the interest, if any, paid u/s 140A towards the interest chargeable under this section.
Interest for deferment of advance tax [Section 234C]
(a) Manner of computation of interest u/s 234C for deferment of advance tax by corporate and non-corporate assessees:
In case an assessee, other than an assessee who declares profits and gains in accordance with the provisions of section
44AD(1) or section 44ADA(1), who is liable to pay advance tax u/s 208 has failed to pay such tax or the advance tax paid by
such assessee on its current income on or before the dates specified in column (1) below is less than the specified percentage
[given in column (2) below] of tax due on returned income, then simple interest@1% per month for the period specified in
column (4) on the amt of shortfall, as per column (3) is leviable u/s 234C.
Specified date (1) Specified % (2) Shortfall in advance tax (3) Period (4)
15th June 15% 15% of tax due on returned income (-) advance tax paid up to 15th June 3 months
15th September 45% 45% of tax due on returned income (-) advance tax paid up to 15th September 3 months
15 December
th
75% 75% of tax due on returned income (-) advance tax paid up to 15th December 3 months
15th March 100% 100% of tax due on returned income (-) advance tax paid up to 15th March 1 month
Note – However, if the advance tax paid by the assessee on the current income, on or before 15th June or 15th September,
is not less than 12% or 36% of the tax due on the returned income, respectively, then, the assessee shall not be liable to pay
any interest on the amt of the shortfall on those dates.
Tax due on returned income = Tax chargeable on TI declared in the return of income – TDS – TCS - any relief of tax allowed
u/s 89 - any tax credit allowed to be set off in accordance with section 115JD
(b) Computation of interest u/s 234C in case of an assessee who declares profits and gains in accordance with the provisions
of section 44AD(1) or 44ADA(1):
In case an assessee who declares profits and gains in accordance with the provisions of section 44AD(1) or 44ADA(1), who is
liable to pay advance tax u/s 208 has –
- failed to pay such tax or
- the advance tax paid by the assessee on its current income on or before March 15 is less than the tax due on the returned
income,
then, the assessee shall be liable to pay simple interest at the rate of 1% on the amt of the shortfall from the tax due on the
returned income.
(c) Non-applicability of interest u/s 234C in certain cases:
Interest u/s 234C shall not be leviable in respect of any shortfall in payt of tax due on returned income, where such shortfall is on
account of under-estimate or failure to estimate –
(i) the amount of capital gains;
(ii) income of nature referred to in section 2(24)(ix) i.e., winnings from lotteries, crossword puzzles etc.;
(iii) income under the head “PGBP” in cases where the income accrues or arises under the said head for the first time.
However, the assessee should have paid the whole of the amt of tax payable in respect of such income referred to in (i), (ii) and (iii),
as the case may be, had such income been a part of the TI, as part of the remaining instalments of advance tax which are due or
where no such instalments are due, by March 31 of the F.Y.
Tax Collection at source [Section 206C]
(a) Sellers of certain goods are required to collect tax from the buyers at the specified rates. The specified percentage for collection of tax
at source is as follows:
Percentage
Nature of Goods From 1.4.2020 From 14.5.2020 to
to 13.5.2020 31.3.2021
(i) Alcoholic liquor for human consumption 1% 1%
(ii) Tendu leaves 5% 3.75%
(iii) Timber obtained under a forest lease 2.5% 1.875%
(iv) Timber obtained by any mode other than (iii) 2.5% 1.875%
(v) Any other forest produce not being timber or tendu leaves 2.5% 1.875%
(vi) Scrap 1% 0.75%
(vii) Minerals, being coal or lignite or iron ore 1% 0.75%
However, no collection of tax shall be made in the case of a resident buyer, if such buyer furnishes a declaration in writing in duplicate
to the effect that goods are to be utilised for the purpose of manufacturing, processing or producing articles or things or for the
purposes of generation of power and not for trading purposes
119
INCOME TAX LAW
(b) Every person who grants a lease or a licence or enters into a contract or otherwise transfers any right or interest in any
- parking lot or
- toll plaza or
- a mine or a quarry
to another person (other than a public sector company) for the use of such parking lot or toll plaza or mine or quarry for the
purposes of business. The tax shall be collected as provided, from the licensee or lessee of any such licence, contract or lease of
the specified nature, at the rate of 2% (1.5% during the period between 14.5.2020 to 31.3.2021), at the time of debiting of the amt
payable by the licensee or lessee to his account or at the time of receipt of such amt from the licensee or lessee in cash or by the issue
of a cheque or draft or by any other mode, whichever is earlier
(c) Every person, being a seller, who receives any amt as consideration for sale of a motor vehicle of the value exceeding R10 lakhs,
shall, at the time of receipt of such amt, collect tax from the buyer@1% (0.75% during the period between 14.5.2020 to 31.3.2021)
of the sale consideration.
(d) Every person,
- being an authorised dealer, who receives amt under the Liberalised Remittance Scheme of the RBI for overseas remittance
from a buyer, being a person remitting such amt out of India,
- being seller of an overseas tour programme package who receives any amt from the buyer who purchases the package
has to collect tax at the rate of 5% of such amt at the time of debiting of the amt payable by the buyer or at the time of receipt of such
amt from the said buyer by any mode, whichever is earlier.
Rate of TCS in case of collection by an authorised dealer
S. No. Amt and purpose of remittance Rate of TCS
(i) (a) Where the amt is remitted for a purpose other than purchase of Nil
overseas tour program package; and (No tax to be collected at source)
(b) the amt or aggregate of the amts being remitted by a buyer is less than
R 7 lakhs in a F.Y.
(ii) (a) Where the amt is remitted for a purpose other than purchase of overseas 5% of the amt or agg. of
tour program package; and amts > R 7 lakh
(b) the amt or aggregate of the amts in excess of R 7 lakhs is remitted by the
buyer in a F.Y.
(iii) (a) where the amt being remitted out is a loan obtained from any financial 0.5% of the amt or agg. of
institution, for the purpose of pursuing any education; and amts > R 7 lakh
(b) the amt or aggregate of the amts in excess of R 7 lakhs is remitted by the
buyer in a F.Y.
Cases where no tax is to be collected
(i) No TCS by the authorised dealer on an amt in respect of which the sum has been collected by the seller
(ii) No TCS, if the buyer is liable to deduct tax at source under any other provision of the Act and has deducted such tax
(iii) No TCS, if the buyer is the Central Govt, a State Govt, an embassy, a High Commission, a legation, a commission, a
consulate, the trade representation of a foreign State, a local authority or any other person notified by the Central Govt,
subject to fulfillment of conditions stipulated thereunder
(e) Every person, being a seller, who receives any amt as consideration for sale of goods of the value exceeding R50 lakhs in a P.Y.,
other than exported goods or goods covered in (a)/(c)/(d)], is required to collect tax at source, at the time of receipt of such amt,
@0.1% (0.075% during the period between 14.5.2020 to 31.3.2021) of the sale consideration exceeding R50 lakhs.
However, tax is not required to be collected if the buyer is liable to deduct tax at source under any other provision of the Act on the
goods purchased by him from the seller and has deducted such tax.
In case of non-furnishing of PAN or Aadhar number by the buyer to the seller, tax is required to be collected at the higher of –
(i) twice the rate specified in this sub-section; and
(ii) 1%.
CHAPTER 10: PROVISIONS FOR FILING RETURN OF INCOME AND SELF ASSESSMENT
Section Particulars
139(1) Assessees required to file return of income compulsorily
(i) Companies and firms (whether having profit or loss or nil income);
(ii) a person, being a resident other than not ordinarily resident, having any asset (including any financial interest in
any entity) located outside India held as a beneficial owner or beneficiary or who has a signing authority in any
account located outside India, whether or not having income chargeable to tax;
(iii) Individuals, HUF, AOPs or BOIs and artificial juridical persons whose total income before giving effect to the
provisions of Chapter VI-A and sections 54, 54B, 54D, 54EC or 54F exceeds the basic exemption limit.
(iv) Any person who during the P.Y. –
- has deposited more than R 1 crore in one or more current accounts maintained with a banking company or a
co-operative bank
- has incurred expenditure of more than R 2 lakh for himself or any other person for travel to a foreign country;
- has incurred expenditure of more than R 1 lakh towards consumption of electricity
- fulfils such other conditions as may be prescribed
Due date of filing return of income
31st October of the A.Y., in case the assessee is:
(i) a company;
(ii) a person (other than company) whose accounts are required to be audited; or
(iii) a partner of a firm whose accounts are required to be audited.
31st July of the A.Y., in case of any other assessee (other than assessees who are required to furnish report u/s 92E, for whom
the due date is 30th November of the A.Y.).

120
INCOME TAX LAW
234A Interest for default in furnishing return of income
Interest u/s 234A is payable where an assessee furnishes the return of income after the due date or does not
furnish the return of income.
Assessee shall be liable to pay simple interest@1% per month or part of the month for the period commencing
from the date immediately following the due date and ending on the following dates –
Circumstances Ending on the following dates
Where the return is furnished after due date the date of furnishing of the return
Where no return is furnished the date of completion of assessment
However, where the assessee has paid taxes in full on or before the due date, interest u/s 234A is not leviable.
234F Fee for default in furnishing return of income
Where a person who is required to furnish a return of income u/s 139, fails to do so within the prescribed time limit
u/s 139(1), he shall pay, by way of fee, a sum of –
(i) R 5,000, if the return is furnished on or before 31st December of the A.Y.;
(ii) R 10,000 in any other case
However, if the total income of the person ≤ R 5 lakhs, the fees payable shall not exceed R 1,000
139(3) Return of loss
An assessee can carry forward or set off his/its losses provided he/it has filed his/its return u/s 139(3), within the
due date specified u/s 139(1).
Exceptions
Loss from house property and unabsorbed depreciation can be carried forward for set-off even though return has
not been filed before the due date.
139(4) Belated Return
A return of income for any P.Y., which has not been furnished within the time allowed u/s 139(1), may be furnished
at any time before the:
(i) end of the relevant A.Y.; or
(ii) completion of the assessment,
whichever is earlier.
139(5) Revised Return
If any omission or any wrong statement is discovered in a return furnished u/s 139(1) or belated return u/s
139(4), a revised return may be furnished by the assessee at any time before the:
(i) end of the relevant A.Y.; or
(ii) completion of assessment,
whichever is earlier.
Thus, belated return can also be revised.
139A Permanent Account Number (PAN)
Quoting of PAN is mandatory in all documents pertaining to the following prescribed transactions :
(a) in all returns to, or correspondence with, any income-tax authority;
(b) in all challans for the payt of any sum due under the Act;
(c) in all documents pertaining to such transactions en¬tered into by him, as may be prescribed by the CBDT in the
interests of revenue. For example, sale or purchase of a motor vehicle, payt in cash of an amt exceeding R 50,000
to a hotel against a bill or bills at any one time, etc.
Inter-changeability of PAN with the Aadhaar number
Every person who is required to furnish or intimate or quote his PAN may furnish or intimate or quote his Aadhar
Number in lieu of the PAN w.e.f. 1.9.2019 if he
- has not been allotted a PAN but possesses the Aadhar number
- has been allotted a PAN and has intimated his Aadhar number to prescribed authority in accordance with the
requirement contained in section 139AA(2).
139AA Quoting of Aadhar Number
To be quoted by every person in the application for allotment of PAN and in Return of Income
If a person does not have Aadhar Number, the Enrolment ID of Aadhar application form issued to him at the time
of enrolment shall be quoted.
Every person who has been allotted PAN and who is eligible to obtain Aadhar Number, shall intimate his Aadhar
Number to the prescribed authority on or before 31.03.2021.
140A Self-Assessment
Where any tax is payable on the basis of any return required to be furnished u/s 139, after taking into account –
(i) the amt of tax, already paid,
(ii) the tax deducted or collected at source
(iii) any relief of tax claimed u/s 89
(iv) any tax credit claimed to be s/o as per section 115JD; and
(v) any tax and interest payable as per section 191(2)
the assessee shall be liable to pay such tax together with interest and fee pay¬able under any provision of this Act for
any delay in furnishing the return or any default or delay in payt of advance tax before furnishing the return.
Where the amt paid by the assessee u/s 140A(1) falls short of the aggregate of the tax, interest and fee as aforesaid,
the amt so paid shall first be adjusted towards the fee payable and thereafter, towards interest and the balance shall
be adjusted towards the tax payable.
121
indirect taxes
CA INTERMEDIATE - Paper 4B - goods and services tax: a capsule for quick recap
The subject-wise capsules published in the Students’ Journal every month are one among the many initiatives of Board
of Studies which aim at providing quality academic inputs to students of Chartered Accountancy Course. The Capsule is
an educational aid that assists students in quick revision of select topics of a subject. This Capsule covers the topics “GST
in India-an introduction”, “Supply under GST” and “Levy and collection of CGST and IGST” of Paper 4B Indirect Taxes
of Intermediate Course (Old as well as New).
The Capsule is based on the GST law as amended by the significant notifications/ circulars issued till October 31, 2020
and is thus, relevant for students appearing in May, 2021 examination. This Capsule should not be taken as a substitute
for the detailed study of these topics. Students are advised to refer to the October, 2020 Edition of the Study Material for
comprehensive study and revision.
GST IN INDIA-AN INTRODUCTION

TAX Goods and
Services Tax
Major direct and

indirect taxes
Indirect taxes
DIRECT TAX INDIRECT TAX Customs Duty

• The person paying the • The person paying the tax to the
tax to the Government Government collects the same
directly bears the from the ultimate consumer. Direct taxes Income tax
incidence of the tax. Thus, incidence of the tax is
• Progressive in nature shifted to another person.
- High rate of taxes • Regressive in nature - All the Taxes Subsumed in Gst
for people having consumers equally bear the Central Taxes State Taxes
higher ability to pay. burden, irrespective of their
ability to pay.  Central Excise Duty and 
State surcharges and
Additional Excise Duties cesses in so far as they
 Service Tax relate to supply of goods
 Excise Duty under and services
Burden of tax Burden of tax Medicinal and Toilet  Entertainment Tax
borne by the shifted to the other Preparation Act (except those levied by
person himself. person.  CVD and Special CVD local bodies)
 Central Sales Tax  Tax on lottery, betting and
 Central surcharges and gambling
Cesses in so far as they  Entry Tax (All Forms) and
relate to supply of goods Purchase Tax
and services  VAT/ Sales tax
 Luxury Tax
 Taxes on advertisements
GST
DIRECT TAX INDIRECT TAX
Multiple State Taxes Single Tax - GST

Central Taxes
Multiple State Tax Single Tax Administration
Tax Administrations
Administrations Uniform law
CEx/ST Act & Rules Multiple Acts and Rules
Computerised uniform
Procedures Multiple Procedures procedures
Pre-GST Indirect Tax structure in India

Entry Tax
and Octroi GST
Customs Excise
Duty Duty Entertainment Tax
Electricity Duty
Central Luxury Tax

Levies SGST/
VAT CGST IGST
UTGST
Central Service State
Sales Tax Tax Levies
GST Structure in India
22 February 2021 The Chartered Accountant Student
122
indirect taxes
Genesis Of GST In India
In the year 2000, the then

Prime Minister introduced The Constitution
the concept of GST and set up (122nd Amendment)
a committee to design a GST Bill was introduced in Aug
model for the country. 2006 the Lok Sabha. 2016
2000 Announcement by Union 2014 The Constitution

Finance Minister, during the (101st Amendment)
budget of 2006-07 that GST Act was enacted.
would be introduced from
April 1, 2010.
GST Council recommends

GST Council
re co m m e n d s April CGST, SGST, IGST,
UTGST and Compensation
Sept
all the rules. 2017 Cess Bill. 2016
May CGST, IGST, UTGST March First GST Council

2017 and Compensation
Cess Acts passed.
2017 Meeting
SGST Act passed by

All States except
J & K passed
July 1, J&K; CGST and IGST
Ordinances promulgated
their SGST Act 2017 to extend GST to J&K.
Journey
continues
June 30, GST launched July 8,
2017 2017
Within GST or outside GST? Concept of GST

Manufacturer Distributor Retailer Consumer
Alcohol for human Power to tax remains (R) (R) (R) (R)
consumption. with the State. Cost: 1,00,000 Cost: 1,00,000 Cost: 1,11,200 Cost:
GST @ 18%= Profit: 11,200 Profit: 24,640 1,60,291.2
18,000 Sale Price: Sale Price: (1,35,840 +
1,11,200 1,35,840 24,451.20)
Five petroleum GST Council to GST @ 18% GST@ 18%
products – crude oil, decide the date from 20,016 24,451.20
diesel, petrol, natural which GST will be
Input Tax Input Tax Input Tax Input Tax
gas and ATF. applicable.
Credit= NIL Credit= 18,000 Credit= 20,016 Credit= NIL
Paid to Paid to Paid to Tax Borne by
Government Government Government the Consumer
Entertainment tax Power to tax remains GST = 18,000 GST = 2,016 GST= 4,435.20 18,000 + 2,016
levied by local bodies. with the local bodies. (Output tax – (Output tax – + 4,435.20 =
Input tax) Input tax) 24,451.20
Value Value Value Value

Tobacco Within the purview Addition= Addition= Addition= Addition= NIL
of GST. Power to levy 1,00,000 11,200 24,640
excise duties, also GST @ 18%= GST @ 18%= GST @ 18%=
retained. 18,000 2,016 4,435.20
The Chartered Accountant Student February 2021 23

123
indirect taxes
CGST/ SGST/ UTGST/ IGST
CGST
IGST +
SGST
State 1
IG
ST
Foreign Territory
IGS
T CGST
IGST +
CGST SGST
+
UTGST State 2
Union Territory
without legislature
Benefits Of GST
To boost
investments
and
To create a To boost exports.
unified To generate
‘Make in India’
common national more employment
campaign and India
market. by increased
as a ‘Manufacturing
economic
hub. Reduction
Seamless flow activity.
of tax credit from in multiplicity
manufacturer/ supplier of taxes now
to user/ retailer to leviable on goods and
eliminate cascading Benefits services leading to
of taxes. to Economy simplification.
More efficient Common Simpler

neutralisation of procedures for Harmonisation
Advantages Simplified tax regime
GST
taxes to make registration, duty of laws, procedures
our exports more for Trade Tax with fewer
payment, return exemptions. and rates of tax
competitive filing and refund and Industry Structure across the
internationally. of taxes. country.
Benefit of
Common system
exemption/ Tax Compliance of classification of
compounding scheme
Easy goods and services to
for a large segment of
small scale suppliers ensure certainty
to make their products in tax
cheaper. ‘Doing administration.
Greater use Business’
Compliance
of IT will reduce eased as multiple
Automated burden to come
human interface records to be
procedures for down with one
between tax maintained for
processes like pan-India tax
payer and tax various taxes.
registration, returns, replacing multiple
administration.
tax payments, taxes.
refunds and credit
verification.
124
indirect taxes
SUPPLY UNDER GST
Money of goods and

in the course or
furtherance of services
business
Anything
which is
neither Securities
Goods goods nor for consideration
Supply
services Parameters
Not Supply
of supply
Services
Supply should be
CONCEPT OF SUPPLY- SECTION 7 OF THE CGST ACT
Supply includes for in the course

sale, transfer, consideration or furtherance
barter, exchange, of business
licence, rental,
lease and
disposal.
Definition of Goods and Services Definition of Business

Goods Services (a) any trade, commerce, manufacture, profession, vocation,
adventure, wager or any other similar activity, whether or
not it is for a pecuniary benefit;
means means
(b) any activity or transaction in connection with or incidental
or ancillary to (a) above;
Every kind of movable property Anything other than goods (c) any activity or transaction in the nature of (a) above,
whether or not there is volume, frequency, continuity or
regularity of such transaction;
(d) supply or acquisition of goods including capital assets and
services in connection with commencement or closure of
business;
excludes (e) provision by a club, association, society, or any such body
(for a subscription or any other consideration) of the
facilities or benefits to its members, as the case may be;
(f) admission, for a consideration, of persons to any premises;
and
Money and securities (g) services supplied by a person as the holder of an office
which has been accepted by him in the course or
includes includes furtherance of his trade, profession or vocation;
(h) activities of a race club including by way of totalisator or
a license to book maker or activities of a licensed book
(i) actionable claim Activities relating to: maker in such club
(ii) growing crops, grass (i) Use of money or
and things attached to/ (ii) Conversion of money by (i) any activity or transaction undertaken by the Central
forming part of the land cash/by any other mode, Government, a State Government or any local authority
which are agreed to be from one form/ currency/ in which they are engaged as public authorities
severed before supply denomination, to another,
or under a contract of for which a separate
supply. consideration is charged.

125
indirect taxes
Definition of Consideration
Supply for consideration in course or
CONSIDERATION furtherance of business [Section 7(1)(a)]
Importation of services for consideration

includes whether or not in course or furtherance
Payment in money or Monetary value of any act of business [Section 7(1)(b)]
otherwise for the supply or forbearance for the supply
Supply
By recipient or any Supply without consideration [Section
other person 7(1)(c) + Schedule I]
Deposit to be
considered as payment Non-supplies [Section 7(2)
excludes
Excluding subsidy + Schedule III]
given by Central/
ONLY State Governments Activities to be treated as supply of goods or supply of
services [Section 7(1A) + Schedule II]
When the supplier
applies such deposit
as consideration for
the said supply Supply without consideration - Deemed
Supply [Section 7(1)(c) read with
Importation of services for consideration Schedule I]
whether or not in course or furtherance of
business [Section 7(1)(b)] Business Assets
Input Tax Credit
availed
Deemed
Supply
Permanently
transferred/disposed
Consideration
Importation of
Supply Importation of services without consideration

services
Related
persons
Deemed Supply
in course or
furtherance
of business Person out of
supplies Person in India
India
services
Supply between related persons or distinct
persons In course or furtherance of business
Related/Distinct Related/Distinct
Person 1 Person 2
Supply of goods or services Related persons
Deemed Supply
in course or furtherance of business Persons including legal person are deemed as related persons if
Employer Employee Such persons are officers/ directors of one another’s
Gifts ≤ R50,000 business.
in a FY
Such persons are legally recognised partners.
No supply
Such persons are employer and employee.
Supply between principal and agent A third person controls/ owns/ holds (directly/
indirectly) ≥ 25% voting stock/ shares of both of them.
Deemed Supply One of them controls (directly/ indirectly) the other.
A third person controls (directly/ indirectly) both of them.

Principal Agent
supplies goods
Such persons together control (directly/ indirectly) a
supplies goods on behalf of third person.
principal and issues invoice to
customer in his own name
Such persons are members of the same family.
Buyer One of them is the sole agent/ sole distributor/ sole

concessionaire of the other.
126
indirect taxes
Activities or transactions to be treated as Supply of goods or Supply of services [Section
7(1A) read with Schedule II]
S. Activity/ Type Supply
No. Transaction of goods/
services
1. Transfer (i) Title in goods Goods
(ii) Title in goods under an agreement that property shall pass at a future date.
Right/ undivided share in goods without transfer of title in them. Services
2. Land and Lease, tenancy, easement, licence to occupy land. Services
Building Lease/ letting out of building including a commercial/ industrial/ residential complex for business/
commerce, wholly/ partly.
3. Treatment or Applied to another person’s goods Services
Process
4. Transfer of Goods forming part of business assets are transferred/ disposed off by/ under directions of person Goods
Business Assets carrying on business so as no longer to form part of those assets.
Goods held/ used for business are put to private use or are made available to any person for use for any Services
purpose other than business, by/ under directions of person carrying on the business.
Goods forming part of assets of any business carried on by a person who ceases to be a taxable person, Goods
shall be deemed to be supplied by him, in the course or furtherance of his business, immediately before
he ceases to be a taxable person.
Exceptions:
• Business transferred as a going concern.
• Business carried on by a personal representative who is deemed to be a taxable person.
5. Renting of immovable property. Services
Construction of complex, building, civil structure, etc.
Temporary transfer or permitting use or enjoyment of any intellectual property right
Development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of IT software.
Agreeing to obligation to refrain from an act, or to tolerate an act or situation, or to do an act.
Transfer of right to use any goods for any purpose.
6. Following composite supplies:- Services
• Works contract services.
• Supply of goods, being food or any other article for human consumption or any drink.
7. Supply of goods by an unincorporated association or body of persons to a member thereof for cash, deferred payment or Goods
other valuable consideration.
Non-supplies under GST [Section 7(2)(a) Steps to determine whether an activity

read with Schedule III] undertaken is Supply or not
S. Activities or transactions which shall be treated neither Is the activity a supply including supply of goods/ No
No. as a supply of goods nor a supply of services services such as sale, transfer, barter, exchange,
licence, rental, lease or disposal?
Services by an employee to the employer in the course of
1.
or in relation to his employment. Yes
Services by any court or Tribunal established under any
2.
law for the time being in force. Is it for a No Is it an activity specified No
consideration? under Schedule I?
(a) Functions performed by the Members of Parliament,
Members of State Legislature, Members of Panchayats,
Members of Municipalities and Members of other local Yes
Yes
authorities; Is it in course or No
(b) Duties performed by any person who holds any post in furtherance of business?
pursuance of the provisions of the Constitution in that
3.
capacity; or Yes
Is it in Is it
(c) Duties performed by any person as a Chairperson or
course or No import of No
a Member or a Director in a body established by the
furtherance service?
Central Government or a State Government or local
of business?
authority and who is not deemed as an employee before
the commencement of this clause. Yes
Yes
Services of funeral, burial, crematorium or mortuary
4.
including transportation of the deceased. Is it an activity
specified in Activity
Sale of land and, subject to paragraph 5(b) of Schedule II, Schedule III No Activity is is NOT
5.
sale of building. or section 7(2) Supply Supply
Actionable claims, other than lottery, betting and (b)?
6.
gambling.
Yes

127
indirect taxes
Composite and mixed supplies
Composite Supply Mixed Supply
• Consist of two or more supplies • Consist of two or more supplies for a

• Naturally bundled single price
• In conjunction with each other • Not naturally bundled
• One of which is principal supply • Though can be supplied independently,
• Tax liability shall be rate of principal still supplied together
supply • Tax liability shall be the rate applicable to
• Example: Charger supplied alongwith the supply that attracts highest rate of tax
mobile phones. • Example: A gift pack comprising of
choclates, candies, sweets and balloons.
LEVY AND COLLECTION OF CGST/IGST
Particulars CGST IGST
Intra-State supplies of goods or services or Inter-State supplies of goods or

Levied on
both services or both
Collected and paid by Taxable person
Supply outside purview

Alcoholic liquor for human consumption
of GST
Value for levy Transaction value under section 15 of the CGST Act
Rates as notified by Government. IGST rate= CGST rate + SGST rate

Rates
Maximum rate of CGST can be 20%. Maximum rate of IGST can be 40%.
 petroleum crude
Supplies on which tax  high speed diesel
would be levied w.e.f. a  motor spirit (commonly known as petrol)
notified date  natural gas and
 aviation turbine fuel
 Supply of goods or services or both, notified by the Government.

Tax payable under
 Supply of specified categories of goods or services or both by an unregistered
reverse charge
supplier to specified class of registered persons.
Tax payable by the The Government may notify specific categories of services the tax on supplies of
electronic commerce which shall be paid by electronic commerce operator (ECO) as if such services are
operator supplied through it.
128
INDIRECT TAXES
CA INTERMEDIATE - PAPER 4B - INDIRECT TAXES
The subject-wise capsules published in the Students’ Journal every month are one among the many initiatives of Board of
Studies which aim at providing quality academic inputs to students of Chartered Accountancy Course. The Capsule is an
educational aid that assists students in quick revision of select topics of a subject. This Capsule covers the topics “E-invoicing”
and “QRMP Scheme” of Paper 4B Indirect Taxes of Intermediate Course (Old as well as New).
The Capsule is based on the GST law as amended by the significant notifications/circulars issued till 30th April, 2021 and is
thus, relevant for students appearing in November, 2021 examination. This Capsule should not be taken as a substitute for
the detailed study of these topics. Students are advised to refer to the October 2020 Edition of Study Material along with
Statutory Update for November 2021 examination for comprehensive study and revision.
E-INVOICING
Class of persons mandatorily required to Invoice Registration Portal [IRP]
issue e-invoice [Notified Taxpayers]
All registered For

businesses uploading/
website reporting of
invoices
with an aggregate
turnover (based Required to issue by notified
on PAN) greater E-invoice persons
than R50 crore
in any preceding
Invoice Reference Number [IRN]
financial year from
2017-18 onwards
Unique
reference
number
generated
and
returned
by IRP on
successful
registration
of e-invoice
Important terms GST

invoice will
E-invoice schema be valid
only with a
valid IRN
Uniform standard format
applicable for all businesses

across the country Form GST INV-1
containing mandatory specified fields to

be reported in electronic format to IRP
The Chartered Accountant Student August 2021 23

129
INDIRECT TAXES
Advantages of e-invoicing No requirement of issuing invoice copies in
triplicate/duplicate
Auto-reporting of invoices into GST return
Auto-generation of e-way bill Where e-invoicing

is applicable No need of issuing
invoice copies in
Substantial reduction in transcription errors triplicate/duplicate
Early payment
Exemption from e-invoicing

Cost reduction
Improved efficiency of business Special Economic Zone units
Reduction of tax evasion Insurer/banking company/financial institution

including NBFC
Elimination of fake invoices
GTA supplying services in relation to
transportation of goods by road in a goods
carriage
Situations in which e-invoices are applicable Supplier of passenger transportation service
Supply of goods and/or services to a Person supplying services by way of admission to

registered person by notified person Applicable exhibition of cinematograph films in multiplex screens
[B2B supplies]
Overall work flow of e-invoice

Exports by notified persons Applicable Taxpayers (suppliers) create
GST invoices on their own
Taxpayers upload the
Accounting/Billing/ERP
e-invoice schema to
systems as per
IRP
e-invoice schema
[Form GST INV-01]
B2C supplies by notified persons Not applicable
Invoices issued by Input Service IRP digitally signs

Not applicable the e-invoice and IRP generates IRN
Distributor
add QR code
Supplies made by notified person,

tax on which is payable under Applicable
reverse charge under section 9(3)
Supplier shares the
IRP returns e- invoice
e-invoice with receiver
to supplier
(along with QR code)
Where specified category of supplies
are received by notified person from
unregistered persons [attracting Not applicable
reverse charge under section 9(4)] or
through import of services
Import of goods (Bills of Entry) Not applicable
24 August 2021 The Chartered Accountant Student
130
INDIRECT TAXES
Interaction between the business (supplier) and the Invoice Registration Portal (IRP)
A. Seller-IRP Flow of Activities

Seller Invoice Registration Portal (IRP)
B2B APIs /Direct Interaction on IRP

2 3
Note: Uploads the JSON of e-invoice to the IRP JSON pushed to IRP 4
Seller to have • Generates IRN
JSON prep utility • Does de-duplication
from Excel, Word, 1 IRP to have facility to- check with GST system
• Accept JSON through APIs • Signs JSON with digital
ERP Accounting
Prepares e-invoice as per schema • Accept JSON-direct upload signature of IRP
software, mobile
app, etc. having mandatory (GSTIN, Invoice No., • Adds QR code to JSON
Date, Value, etc.) and optional fields
5
Receives the digitally signed Returns digitally signed
JSON of e-invoice that JSON to seller with the 6a
contains the QR code QR code included in it
• Sends authenticated payload
to GST system
• Sends to e-way bill system
Seller’s GSTR -1 gets updated with
liability entered in the invoice
Interaction between the IRP and the GST/E-Way Bill Systems and the buyer
B. IRP-GST System Flow of Activities

Invoice Registration Portal (IRP) GST System Buyer
GST Invoice Registry

B2B APIs/Direct Interaction on IRP
1
2 3
4
JSON pushed to IRP Buyer can use the QR
• Generates IRN
code to verify the invoice
• Does de-duplication check with
GST System
IRP to have facility to- • Signs JSON with digital
• Accept JSON through APIs signature of IRP
• Accept-JSON direct upload 4a
• Adds QR code to JSON
• Invoice information stored in
GST invoice registry Buyer can view the ITC related
• De-duplication checked to the invoice in his GSTR-2A
5
Returns digitally
signed JSON to 6a 6b
seller with the QR code • Sends authenticated • GST System now has a
included in it unique invoice with a unique 6c
payload to GST system
• Sends to e-way bill number E-Way bill system will
system • GSTR-1 of seller updated create the e-way bill
• GSTR-2A of buyer updated

131
INDIRECT TAXES
Generation of e-way bill/populating relevant Cancellation of reported invoice
parts of GST return through e-invoicing data
by reporting
IRP sends e-invoice Cancellation allowed by IRN on
data along with IRN of reported seller IRP within
invoice specified time.
GST System E-way bill system

Amendment of reported invoice
Auto-populate Auto-populate data Parameters e.g. Possible only on

data into GSTR-1 into GSTR-2A of ‘Transporter ID’ and GST portal
of supplier respective receiver ‘Vehicle Number’,
etc. reported in Amendment of e-invoice
e-invoice schema already uploaded on IRP
facilitate the
Not possible
generation of
through the IRP
e-way bill
QRMP Scheme
Overview of QRMP Scheme QRMP scheme is GSTIN wise
Optional
return filing Opting of QRMP
Scheme is GSTIN wise Distinct persons can avail
scheme QRMP scheme option for
one or more GSTINs.
Quarterly
Return
Monthly payment of tax

Monthly
payment Tax due in each of the first 2 months
of the quarter
To be paid by depositing in pre filled

• Taxpayers having aggregate turnover of up to Rs. Form GST PMT-06
Eligibility
5 crore in the preceding financial year
Payment to be made by 25th of the
succeeding month
• Taxpayer must have furnished the last return, as
Criteria
due on the date of exercising such option
Options for making monthly payment of tax

• Taxpayers can opt in for any quarter from 1st day
Exercising of 2nd month of preceding quarter to the last day
option of the first month of the quarter for which the Fixed sum
option is being exercised method
Options for making

• Taxpayers are not required to exercise their monthly payment of tax
Validity of option every quarter. Where such option has been
option once exercised once, they shall continue to furnish the Self assessment
exercised return as per the selected option for future tax method
periods, unless they revise the said option.
132
INDIRECT TAXES
Fixed Sum Method Furnishing details of outward supply under
QRMP
35% of the tax
paid in cash in
the return for the Filing of GSTR-1 Quarterly basis
preceding quarter
Pay tax due in where the return
each of the first was furnished
two months of quarterly
the quarter
Optional facility to upload
invoice details using IFF** between 1st day of
Fixed sum upto Rs. 50 lakh in each succeeding month till 13th
method month (for 1st and 2nd day of the succeeding month
Tax liability paid in month of the quarter)
cash in the return
Deposit in for the last month
PMT-06 by of the immediately
25th day of preceding quarter
the month where the return Invoices pertaining to last
succeeding was furnished to be uploaded in GSTR-1 only
month of a quarter
such month monthly
Monthly tax payment through this method would not be available

to those registered persons who have not furnished the return for
a complete tax period preceding such month. Invoice uploaded to be reflected in Form GSTR-
using IFF** 2A and GSTR-2B of recipient
Self Assessment Method
Self assessment Details of invoice furnished not required to be

method using IFF in first 2 months furnished again in GSTR-1
Taxpayers can pay tax by

considering tax liability in Form
GST PMT-06 instead furnish the details of
on inward and outward a registered person may
supplies and ITC available outward supplies made during
choose not to use IFF
a quarter in Form GSTR-1 only
Invoice Furnishing Facility (IFF)
**IFF [Invoice Form GSTR-2A

Furnishing facility]
Form GSTR-2A
For taxpayers filing Invoices to be furnished System generated read only statement
quarterly return from 1st day to 13th day
of the succeeding month
Of inward supplies
For a recipient
for 1st month of for 2nd month up to a cumulative
the quarter of the quarter value of Rs. 50 lakh in
each of the months Updated on a real time basis

133
INDIRECT TAXES
Form GSTR-2B Due date for filing GSTR-3B return
Form GSTR-2B
Taxpayer
opting for
An auto-drafted read only statement QRMP scheme
Contains the details of ITC
Made available to the registered person (recipient)

Quarterly
for every month GSTR-3B
A static statement and is available only once a

month on or before 22nd on or before 24th
of the month of the month
succeeding the succeeding the
Manner of availment of statement in Form quarter for which quarter for which
GSTR-2B for every month to the registered return is furnished return is furnished
person
Due dates for taxpayers opting for QRMP
Statement in Form Scheme
GSTR-2B
Class of registered persons Due date

for the 1 and 2
st nd
in the 3 month of
rd Registered persons whose principal place of 22nd day of the
month of a quarter the quarter business is in the States of :- month succeeding
Chhattisgarh, Madhya Pradesh, Gujarat, such quarter.
Maharashtra, Karnataka, Goa, Kerala, Tamil
a day after the due date a day after the due date Nadu, Telangana, Andhra Pradesh, Union
of furnishing of details of furnishing of details territories of Daman & Diu & Dadra & Nagar
of outward supplies for of outward supplies for Haveli, Puducherry, Andaman and Nicobar
the said month the said month Islands or Lakshadweep.
Registered persons whose principal place of 24th day of the
business is in the States of :- month succeeding
Himachal Pradesh, Punjab, Uttarakhand, such quarter.
in the IFF by in Form GSTR-1 whichever Haryana, Rajasthan, Uttar Pradesh, Bihar,
a registered by a registered is later
Sikkim, Arunachal Pradesh, Nagaland,
person opting person other than
for QRMP, or opting for QRMP Manipur, Mizoram, Tripura, Meghalaya,
Assam, West Bengal, Jharkhand or Odisha,
the Union territories of Jammu and Kashmir,
Ladakh, Chandigarh or Delhi.
in Form GSTR-1 by
a registered person
opting for QRMP Due date for filing GSTR-3B return
Other
Quarterly filing of form GSTR-3B Taxpayers
Filing of • Quarterly GSTR-3B on or before 22nd or 24th of

GSTR-3B the month succeeding the quarter.
Monthly
GSTR-3B
Offsetting of • Amount deposited in the first 2 months can be
liability debited only for offsetting the liability.
on or before 20th of the

Cancellation • GSTR-3B to be filed even if cancellation of month succeeding the
of registration was done during any of the first two quarter for which return
registration months of the quarter. is furnished
134
INDIRECT TAXES
Benefits of QRMP Scheme Applicability of Interest
For Fixed Sum method taxpayers
Significant reduction of compliance
burden of tax payer
Where auto-
calculated fixed • No interest would be applicable even if
sum amount (as the liability for the said month was found
Only 4 GSTR-3B returns to be filed
Benefits of QRMP Scheme
discussed above) higher

by taxpayer instead of 12 GSTR-3B for first 2 months • If GSTR-3B of the quarter is filed by the
returns in a year of the quarter is due date by discharging the entire liability
paid by due date
Only 4 GSTR-1 returns required

to be filed
Where tax payer
makes monthly
Payment of taxes on monthly basis payment beyond • Interest is payable at the applicable rate
due date
Furnishing of invoice details in IFF
Where Form
GSTR-3B is • Interest payable as per provisions of
furnished beyond section 50 of the CGST Act, 2017 for the
due date tax liability net of ITC
Eligibility of QRMP Scheme
Threshold limit of
aggregate turnover up to Rs. 5 crore For Self-assessment method taxpayers
in the preceding FY
Interest payable as per provisions of section 50 of the CGST Act
Manner of Details furnished in returns for tax periods

computing aggregate for tax or any part thereof (net of ITC) which remains unpaid/
turnover in the preceding FY are taken into account paid beyond the due date
for the first 2 months of the quarter

If aggregate turnover exceeds Rs. 5 crore
Non-eligiblity of during any quarter in the current FY, they
scheme shall not be eligible for scheme from next
quarter
Applicability of late fees

Opting out of the QRMP Scheme
Delay in furnishing of
• Aggregate turnover has exceeded Rs. 5 crore in quarterly return/details of Late fee is applicable
the financial year outward supply
Taxpayers
opting out of
the QRMP
Scheme
• Available from 1st day of 2nd month of

preceding quarter to the last day of the first Delay in payment of tax in
month of the quarter No late fee is applicable
Availability of first two months of quarter
facility of opting
out of QRMP
Scheme for a
quarter

135

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Referencer for Quick

2 Corporate Companies Act, 2013

Introduction to Cost and

Advance Tax, Tax Deduction

122- GST in India – An

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

The Chartered Accountant Student October 2017 13

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) From the date of

Expenses exclusively relating to (ii) From the date of