Category A & B & C (Accounting)

CA INTERMEDIATE
ACCOUNTING
PART - A
CA INTERMEDAITE
ACCOUNTING
INDEX
Update : 31.07.2021
PART A
Chapter 3
Unit II OVERVIEW OF ACCOUNTING 3.9– 3.58 50

STANDARDS
Chapter 5 PROFIT OR LOSS PRE AND POST 5.1 - 5.7 7
INCORPORATION
Chapter 6 ACCOUNTING FOR BONUS ISSUE 6.1 - 6.4 4

AND RIGHT ISSUE
Chapter 7 REDEMPTION OF PREFERENCE 7.1 - 7.3 3

SHARES
Chapter 8 REDEMPTION OF DEBENTURES 8.1 - 8.6 6
Chapter 9 INVESTMENT ACCOUNTS 9.1 – 9.18 18
Chapter 10 INSURANCE CLAIMS FOR LOSS OF 10.1 – 10.22 22

STOCK AND LOSS OF PROFITSS
OVERVIEW OF ACCOUNTING STANDARDS Unit - 2 | 3.9
CHAPTER 3 (UNIT – 2)
OVERVIEW OF ACCOUNTING STANDARDS
AS 1 DISCLOSURE OF ACCOUNTING POLICIES
1. MEANING OF ACCOUNTING POLICIES
 Accounting policies are:
(i) Principles and
(ii) Methods of applying those principles
 Which are adopted while preparing financial statement.
2. AREA OF ACCOUNTING
No Option Different Options are Available
1. Valuation of Stock
2. Valuation of Goodwill
3. Valuation of Investment
4. Treatment of Government grant
5. Treatment of retirement benefits
6. Treatment of Long term service contract
7. Conversion of Foreign Country Transaction
8. Treatment of life time membership fee etc.
9. Method of cash flow statement etc.
3. FACTORS EFFECTING SELECTION OF ACCOUNTING POLICY (MPS)

MATERIALITY PRUDENCE SUBSTANCE
OVER FORM
(i) Disclose material information  Record estimated losses but Preference of
separately and no need to disclose not record estimated income reality of
immaterial information separately. until it become virtually transaction over
certain. legal from
(ii) That information of which existence  The exercise of prudence in
or non existence will effect decision of selection of accounting policies
user will be considered as material ensure that:
information.
(iii) It vary from business to business (i) Profits are not overstated
(iv) Depends on nature and size of (ii) Losses are not understand
business and information.
(v) As per companies act any item having (iii) Assets are not overstated
value more than 1% of revenue or 1 and
lakh whichever is higher always
considered material information
(vi) It results saving of time of user and (iv) Liabilities are not
direct focus on important item understand
(vii) List of shareholders holding shares
more than 5% need to be disclosed
separately
VIDYA SAGAR CAREER INSTITUTE LIMITED

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4. MANNER OF DISCLOSURE

All significant accounting policies adopted in the preparation and presentation of
financial statements should be disclosed.

The disclosure of the significant accounting policies as such should form part of the
financial statements and the significant accounting policies should normally be
disclosed in one place.
5. CHANGE IN ACCOUNTING POLICIES
Selected Policy Need to follow consistently
Change in accounting policies
Only When Disclosures for changes in accounting

policies
1. Required by AS 1. Reason of change

2. Statutory requirement 2. Effect on current period and future
3. Meaning full and better period
presentation 3. Fact of immeasurability
Note
The following are not changes in accounting policies:
a) The adoption of an accounting policy for events or transactions that differ in substance from
previously occurring events or transactions, e.g., introduction of a formal retirement gratuity
scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement;
b) The adoption of a new accounting policy for events or transactions which did not occur
previously or that were immaterial.
6. FUNDAMENTAL ACCOUNTING ASSUMPTION [CAG]
CONSISTENCY ACCRUAL GOING CONCERN
If followed than no disclosure is required If not followed than disclosure is required

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AS 2 VALUATION OF INVENTORIES (REVISED)

1. MEANING OF STOCK
It is part of asset is to be held for:
a. Sale in ordinary course of business (finished goods)
b. To be further produced (WIP)
c. To be consumed in production (RM)
d. Including maintenance supplies and consumables other than machinery spares, servicing
equipment and standby equipment meeting the definition of Property, plant and equipment.
Note: 1 Following are excluded from the scope of AS 2 (Revised)
a. Work in progress arising under construction contracts, i.e. cost of part construction, including
directly related service contracts, being covered under AS 7, Accounting for Construction
Contracts; Inventory held for use in construction, e.g. cement lying at the site should however be
covered by AS 2 (Revised).
b. Work in progress arising in the ordinary course of business of service providers i.e. cost of
providing a part of service.
c. Shares, debentures and other financial instruments held as stock-in-trade. It should be noted that
these are excluded from the scope of AS 13 (Revised) as well. The current Indian practice is
however to value them at lower of cost and fair value.
d. Producers' inventories of livestock, agricultural and forest products, and mineral oils, ores and
gases to the extent that they are measured at net realisable value in accordance with well
established practices in those industries
2. VALUATION OF FINISHED GOODS AND WORK IN PROGRESS
Cost or NRV Whichever in lower
3. NRV =
Estimated selling price xxx
Less: Expenses to be incurred on sale (xxx)
Estimated cost of completion (xxx)
NRV xxx

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4. COST OF FINISHED GOODS
Purchase Cost Conversion Cost Any other cost to bring

inventory in present
location and condition
Purchase Price XXX
(+)Tax & Duties (non-refundable) XXX
(+) Other Exp. on purchase XXX Labour Overhead
(–) Discount/rebate/ subsidy XXX
Purchase Cost XXX
Fixed Overhead Variable Overhead
Actual production × Fixed overhead recovery rate
Taken on the basis of overhead recovery rate

which is to be calculated in following manner
If actual production is up to normal capacity If actual production is more than normal

than on the basis of normal capacity capacity than on the basis of actual capacity
Fixed overhead recovery rate Fixed overhead recovery rate

𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑
= =
𝑁𝑜𝑟𝑚𝑎𝑙 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝐴𝑐𝑡𝑢𝑎𝑙 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦

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Note 2 Other Costs

(a) These may be included in cost of inventory provided they are incurred to bring the inventory to
their present location and condition. Cost of design, for example, for a custom made unit may be
taken as part of inventory cost.
(b) Interest and other borrowing costs are usually considered as not relating to bringing the
inventories to their present location and condition. These costs are therefore not usually included
in cost of inventory. Interests and other borrowing costs however are taken as part of inventory
costs, where the inventory necessarily takes substantial period of time for getting ready for
intended sale. Example of such inventory is wine.
(c) The standard is silent on treatment of amortisation of intangibles for ascertaining inventory costs.
It nevertheless appears that amortisation of intangibles related to production, e.g. patents right of
production or copyright for a publisher should be taken as part of inventory costs.
(d) Exchange differences are not taken in inventory costs.
Note 3
 If there is loss in transit then purchase cost per unit is calculated on the basis of normal receipt
and accordingly abnormal loss or gain in transit is to be transferred to P&L A/c
 If there is loss in production then final cost of finish goods per unit is calculated on the basis of
normal output.
5. METHOD OF COST OR NRV WHICHEVER IS LOWER

IN CASE OF MULTIPLE STOCK
Groping Method Individual Item wise basis Method
6. EXCLUSION FROM COST —

(a) Administration Overhead
(b) Selling and Distribution Overhead
(c) Storage Cost (if not required)
(d) Abnormal wastage or loss
(e) Borrowing cost unless permitted by AS-16
7. COST FORMULA—
(a) FIFO Method
(b) Specific identification method
(c) Standard retail price method
(d) Weighted average cost method

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8. VALUATION OF RAW MATERIAL (RM)
Case 1 Case 2
In NRV of finished goods is more In NRV of finished goods is less

than or equal to total cost of than total cost of finished goods.
finished goods
Raw material is to be valued as Raw material is to be valued at

per cost of Raw Material and in replacement cost and cost of raw
this case, Replacement of Raw material is to be ignored.
Material is to be ignored.
Note 4: Replacement Cost of Raw material means current cost of Raw material.
9. COST OF JOINT AND BY PRODUCT
 Allocate cost of joint product on separation stage by rational and consistent basis.
 By product is to be valued at his NRV
 NRV of by product is to be deducted from cost of main product in order to calculate cost of
main product
10. DISCLOSURES
The financial statements should disclose:
(a) The accounting policies adopted in measuring inventories, including the cost formula used; and
(b) The total carrying amount of inventories together with a classification appropriate to the
enterprise.
(c) Information about the carrying amounts held in different classifications of inventories and the
extent of the changes in these assets is useful to financial statement users. Common classifications
of inventories are:
i. raw materials and components,
ii. work in progress,
iii. finished goods,
iv. Stock-in-trade (in respect of goods acquired for trading),
v. stores and spares,
vi. loose tools, and
vii. Others (specify nature).

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AS 3 CASH FLOW STATEMENT

1. OBJECTIVE:
 Cash flow Statement (CFS) is an additional information provided to the users of accounts in the
form of an statement, which reflects the various sources from where cash was generated (inflow
of cash) by an enterprise during the relevant accounting year and how these inflows were utilised
(outflow of cash) by the enterprise.
 This helps the users of accounts :
(i) To identify the historical changes in the flow of cash & cash equivalents.
(ii) To determine the future requirement of cash & cash equivalents.
(iii) To assess the ability to generate cash & cash equivalents.
(iv) To estimate the further requirement of generating cash &cash equivalents.
(v) To compare the operational efficiency of different enterprises.
(vi) To study the insolvency and liquidity position of an enterprise.
(vii) As an indicator of amount, timing and certainty of future cash flows.
(viii) To check the accuracy of past assessments of future cash flows In examining the
relationship between profitability and net cash flow and the impact of changing prices.
2. SOME IMPORTANT DEFINITIONS
CASH CASH EQUIVALENT CASH FLOWS
i. Cash in hand If all 3 condition fulfilled  Inflows & outflows of
ii. Demand cash & CE
i. Short term investment
deposit with (maximum 3 month)
bank ii. Readily marketable
iii. Insignificant risk
Example:
i. Treasury bill
ii. Certificate of deposit
iii. Commercial Paper
3. LOANS/ADVANCES GIVEN AND INTERESTS EARNED

(a) Loans and advances given and interests earned on them in the ordinary course of business are
operating cash flows for financial enterprises.
(b) Loans and advances given and interests earned on them are investing cash flows for non-
financial enterprises.
(c) Loans and advances given to subsidiaries and interests earned on them are investing cash
flows for all enterprises.
(d) Loans and advances given to employees and interests earned on them are operating cash
(e) Advance payments to suppliers and interests earned on them are operating cash flows for all
enterprises.
(f) Interests earned from customers for late payments are operating cash flows for non-financial
enterprises.
4. LOANS/ADVANCES TAKEN AND INTERESTS PAID
(a) Loans and advances taken and interests paid on them in the ordinary course of business are
(b) Loans and advances taken and interests paid on them are financing cash flows for non-
(c) Loans and advances taken from subsidiaries and interests paid on them are financing cash

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(d) Advance taken from customers and interests paid on them are operating cash flows for non-
(e) Interests paid to suppliers for late payments are operating cash flows for all enterprises.
(f) Interests taken as part of inventory costs in accordance with AS 16 are operating cash flows.
5. INVESTMENTS MADE AND DIVIDENDS EARNED

(a) Investments made and dividends earned on them in the ordinary course of business are
(b) Investments made and dividends earned on them are investing cash flows for non-financial
enterprises.
(c) Investments in subsidiaries and dividends earned on them are investing cash flows for all
enterprises.
6. DIVIDENDS PAID
Dividends paid are financing cash outflows for all enterprises.
7. INCOME TAX
(a) Tax paid on operating income is operating cash outflows for all enterprises
(b) Tax deducted at source against income are operating cash outflows if concerned incomes are
operating incomes and investing cash outflows if the concerned incomes are investment
incomes, e.g. interest earned.
(c) Tax deducted at source against expenses are operating cash inflows if concerned expenses are
operating expenses and financing cash inflows if the concerned expenses are financing
expenses, e.g. interests paid.
8. INSURANCE CLAIMS RECEIVED
(a) Insurance claims received against loss of stock or loss of profits are extraordinary operating
cash inflows for all enterprises.
(b) Insurance claims received against loss of fixed assets are extraordinary investing cash inflows
for all enterprises.
(c) AS 3 requires separate disclosure of extraordinary cash flows, classifying them as cash flows
from operating, investing or financing activities, as may be appropriate.
9. PROFIT OR LOSS ON DISPOSAL OF FIXED ASSETS
Profit or loss on sale of fixed asset is not operating cash flow. The entire proceeds of such transactions
should be taken as cash inflow from investing activity.
10. REPORTING CASH FLOWS ON NET BASIS
 AS 3 forbids netting of receipts and payments from investing and financing activities.
 Thus, cash paid on purchase of fixed assets should not be shown net of cash realised from sale of
fixed assets.
 For example, if an enterprise pays `50,000 in acquisition of machinery and realises `10,000 on
disposal of furniture, it is not right to show net cash outflow of `40,000.
 The exceptions to this rule are stated below. Cash flows from the following operating, investing
or financing activities may be reported on a net basis.
(a) Cash receipts and payments on behalf of customers, e.g. cash received and paid by a bank
against acceptances and repayment of demand deposits.
(b) Cash receipts and payments for items in which the turnover is quick, the amounts are large
and the maturities are short, e.g. purchase and sale of investments by an investment company.
(c) AS 3 permits financial enterprises to report cash flows on a net basis in the following three
circumstances.
(d) Cash flows on acceptance and repayment of fixed deposits with a fixed maturity date
(e) Cash flows on placement and withdrawal deposits from other financial enterprises
(f) Cash flows on advances/loans given to customers and repayments received there from.

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11. INTEREST AND DIVIDENDS

 Cash flows from interest and dividends received and paid should each be disclosed separately.
 Cash flows arising from interest paid and interest and dividends received in the case of a financial
enterprise should be classified as cash flows arising from operating activities.
 In the case of other enterprises, cash flows arising from interest paid should be classified as cash
flows from financing activities while interest and dividends received should be classified as cash
flows from investing activities.
 Dividends paid should be classified as cash flows from financing activities.
12. NON-CASH TRANSACTIONS
 Investing and financing transactions that do not require the use of cash or cash equivalents, e.g.
issue of bonus shares, should be excluded from a cash flow statement.
 Such transactions should be disclosed elsewhere in the financial statements in a way that provides
all the relevant information about these investing and financing activities.
13. BUSINESS PURCHASE
 The aggregate cash flows arising from acquisitions and disposals of subsidiaries or other business
units should be presented separately and classified as cash flow from investing activities.
(a) The cash flows from disposal and acquisition should not be netted off.
(b) An enterprise should disclose, in aggregate, in respect of both acquisition and disposal of
subsidiaries or other business units during the period each of the following:
i. The total purchase or disposal consideration; and
ii. The portion of the purchase or disposal consideration discharged by means of cash and
cash equivalents.
14. TREATMENT OF CURRENT ASSETS AND LIABILITIES TAKEN
OVER ON BUSINESS PURCHASE
 Business purchase is not operating activity. Thus, while taking the differences between closing
and opening current assets and liabilities for computation of operating cash flows, the closing
balances should be reduced by the values of current assets and liabilities taken over.
 This ensures that the differences reflect the increases/decreases in current assets and liabilities due
to operating activities only.
15. EXCHANGE GAINS AND LOSSES
 The foreign currency monetary assets (e.g. balance with bank, debtors etc.) and liabilities (e.g.
creditors) are initially recognised by translating them into reporting currency by the rate of
exchange transaction date.
 On the balance sheet date, these are restated using the rate of exchange on the balance sheet date.
The difference in values is exchange gain/loss.
 The exchange gains and losses are recognised in the statement of profit and loss.
 The exchange gains/losses in respect of cash and cash equivalents in foreign currency (e.g.
balance in foreign currency bank account) are recognised by the principle aforesaid, and these
balances are restated in the balance sheet in reporting currency at rate of exchange on balance
sheet date.
 The change in cash or cash equivalents due to exchange gains and losses are however not cash
flows.
 This being so, the net increases/decreases in cash or cash equivalents in the cash flow statements
are stated exclusive of exchange gains and losses.
 The resultant difference between cash and cash equivalents as per the cash flow statement and
that recognised in the balance sheet is reconciled in the note on cash flow statement.
16. DISCLOSURES
 AS 3 requires an enterprise to disclose the amount of significant cash and cash equivalent
balances held by it but not available for its use, together with a commentary by management. This
may happen for example, in case of bank balances held in other countries subject to such
exchange control or other regulations that the fund is practically of no use.

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 AS 3 encourages disclosure of additional information, relevant for understanding the financial
position and liquidity of the enterprise together with a commentary by management. Such
information may include:
(a) The amount of undrawn borrowing facilities that may be available for future operating
activities and to settle capital commitments, indicating any restrictions on the use of these
facilities; and
(b) The aggregate amount of cash flows required for maintaining operating capacity, e.g.
purchase of machinery to replace the old, separately from cash flows that represent increase in
operating capacity, e.g. additional machinery purchased to increase production.

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AS 10 PROPERTY PLANT & EQUIPMENT (REVISED)
AS 6 Accounting for Depreciation AS 10 Accounting for Fixed Asset (Old)
Withdrawn by ICAI
Introduced AS 10 (revised) Property, Plant and Equipment (PPE)
To bring uniformity with lnd. AS 16 and IFRS

1. OBJECTIVE
 Prescribe Accounting treatment for Property, Plant and Equipment (PPE)
 Recognition of the assets
 Determination of carrying amount of PPE
 Depreciation charges
 Impairment losses
2. SCOPE OF AS 10
 AS 10 should be applied in accounting for PPE.
 Exception: When another Accounting Standard requires or permits a different accounting
treatment.
AS 10 Not Applicable to
Biological Assets (other than Bearer Plants) Wasting Assets including Mineral rights,
Related to Agricultural activity Expenditure on the exploration for and
extraction of minerals, oil, natural gas and
similar non-regenerative resources
Note 1 Biological asset include living animal and plant

Note 2 Bearer plant is a plant:
 To be used in supply or production of agriculture product
 Life more than 12 month
 Plant not to be sold in ordinary course of business except as scrap

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3. DEFINITION OF PPE
 It is Tangible Assets
 Held for
 To be used in production OR Rendering Services
 To be used in Administrative work
 To be used in other purpose (i.e. rental purpose)
 Life more than 12 months
Note 3 Asset acquired for safety or environmental purpose will be also PPE.
4. RECOGNITION CRITERIA OF PPE
 If following two conditions is fulfil then PPE is to be recognized.
a. Future Expected Economic Benefit
b. Reliably Measurable Cost (Measurement)
Note 4
 It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies
and to apply the criteria to the aggregate value.
 An enterprise may decide to expense an item which could otherwise have been included as PPE,
because the amount of the expenditure is not material.
5. SPARE PARTS & STAND BY EQUIPMENTS
 If it fulfils definition of PPE than consider as a part of PPE
 If it is not fulfil definition of PPE than considered part of inventory under AS 2
6. TREATMENT OF SUBSEQUENT COSTS
Cost of day to day servicing Replacement of Parts Regular Major

of PPE Inspections
i. Not recognize as PPE
i. Recognize if fulfil
ii. Part of Repair and maintenance
iii. Debited to PL account criteria of PPE Similar to replacement
ii. Increase existing of Parts
carrying amount
iii. Derecognize
existing carrying
amount for replaced
part

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7. MEASUREMENT OF PPE
Initial Recognition Subsequent
Two Option
It is to be recognized using cost model
that is total cost incurred to bring PPE
present location and condition for Cost Model Revaluation
available to use Model
Revise the value of

Continue with total Cost
of assets Assets as per his fair
9. COST OF PP value
8. COST OF PPE
If Purchased If Self Constructed Under Exchange
It includes all the cost It includes: (i) If transaction is under

up to ready to use commercial substance than
(i) Cost of Material cost PPE taken will be fair
(deducted by recovery) value of PPE taken
(i) Purchase Price (ii) Directly attributable (ii) If not under commercial
(deducted by labour & overhead up to substance than cost of PPE will
Discount, subsidy read to use be book value of Assets given
or rebate) (iii) Exclude Internal Profit
Note : 5 up
(ii) Taxes & duties
Other Exp. Includes:
(Non-refundable)
(i) Installation
(iii) Any other cost to
(ii) Registration
get Assets ready
to use

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Note 5 INCLUSIONS IN COST OF PPE (Other expenses)

i. Site Preparation
ii. Installation
iii. registration
iv. Testing& Trial
v. Initial delivery and handling costs
vi. Professional fees etc.
Note 6
Estimated present value of cost of dismantling & decommissioning will be also part of cost of PPE
Note7 EXCLUSIONS FROM COST OF PPE

i. Costs incurred while an item capable of operating in the manner intended by management has
yet to be brought into use or is operated at less than full capacity.
ii. Initial operating losses, such as those incurred while demand for the output of an item builds
up.
iii. Costs of relocating or reorganising part or all of the operations of an enterprise.
iv. Cost of opening new facility
v. Borrowing cost unless AS 16 permits
vi. Cost of advertisement and promotional exp.
vii. Abnormal wastage/Losses
9. ACCOUNTING OF REVALUATION OF PPE

(a) If PPE revalued first time :
i.If increase then credit to revaluation reserve account.
ii.If Decrease then debit to PL account.
(b) If PPE revalued subsequently :
i.If previously increase and now also increase then credit to revaluation reserve account.
ii.If previously increase and now decrease then debit revaluation reserve up to balance available
in due to previous increase and for excessive decrease debit PL account.
iii.If previously decrease and now also decrease then debit to PL account.
iv.If previously decrease and now increase then credit to PL account up to previous decrease and
for balance increase credit revaluation reserve account.
(c) Revaluation is to be done class wise on group of Assets
(d) If PPE is discontinued or sold out in future than existing balance of revaluation reserve account
for Such category of Assets is to be transfer to General Reserve A/c
(e) Revaluation interval
i.If value of Assets changed significantly year to year then Revaluation every year
ii.If value changed insignificantly Revaluation with Interval of 3 to 5 year
10. DEPRECIATION
 Depreciation is to be charged year to year on PPE.
 It is to be charged on depreciable amount.
 It is to be charged on systematic basis.
 Method of depreciation may be SLM, WDV, Unit of production method any other will be used.
 If a particular PPE is having significant components than depreciation is to be charged on each
component separately (OR similar group of component)
 Review/change in :
(a) Carrying Amount of Assets
(b) Useful life
(c) Salvage Value
(d) Rate of Depreciation
(e) Method of depreciation

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Will be considered as change in estimation and it will have prospective effect.
 Depreciation is to be charged from the date of Assets become ready to use.
 Depreciation ceases to be charged when asset's residual value exceeds or equal to its carrying
amount
11. Disclosure
General Additional Disclosures related to

Revalued Assets
General Disclosures—
The financial statements should disclose, for each class of PPE:
(a) The measurement bases (i.e., cost model or revaluation model) used for determining the gross
carrying amount;
(b) The depreciation methods used;
(c) The useful lives or the depreciation rates used.
(d) In case the useful lives or the depreciation rates used are different from those specified in the
statute governing the enterprise, it should make a specific mention of that fact;
(e) The gross carrying amount and the accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the period; and
(f) A reconciliation of the carrying amount at the beginning and end of the period showing:
Additional Disclosures—
The financial statements should also disclose:
(a) The existence and amounts of restrictions on title, and property, plant and equipment pledged as
security for liabilities;
(b) The amount of expenditure recognised in the carrying amount of an item of property, plant and
equipment in the course of its construction;
(c) The amount of contractual commitments for the acquisition of property, plant and equipment;
(d) If it is not disclosed separately on the face of the statement of profit and loss, the amount of
compensation from third parties for items of property, plant and equipment that were impaired,
lost or given up that is included in the statement of profit and loss; and
(e) The amount of assets retired from active use and held for disposal.
Disclosures related to Revalued Assets:
If items of property, plant and equipment are stated at revalued amounts, the following should be
disclosed:
(a) The effective date of the revaluation;
(b) Whether an independent valuer was involved;
(c) The methods and significant assumptions applied in estimating fair values of the items;
(d) 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
(e) The revaluation surplus, indicating the change for the period and any restrictions on the
distribution of the balance to shareholders
Illustration 1—
A company bought an asset for 100,000 with an expected useful life of five years. After two years of
use company decided to change the depreciation method from straight-line basis to reducing balance
method at the rate of 15%.
Required: Calculate the depreciation for the third and fourth year

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Solution—
as per AS 10 Revised PPE, change in method of depreciation will be considered as change in
estimation and now it will have prospective effect therefore calculation will be as under:-
Step 1: Find the carrying amount at the date of change
Change in depreciation is made after two years so we will depreciate the asset for two years and it was
on straight line basis.
100,000 / 5 = 20,000 per year
For two years it will be 20,000 x 2 = 40,000
Thus, carrying amount of the asset at the end of second year was 100,000 - 40,000 = 60,000
Step 2: Depreciate the carrying amount on the new basis from the date of change
Carrying amount at the date of change = 60,000
New basis of depreciation = Reducing balance method @ 15%
Depreciation for the third year will be calculated as follows: 60,000 × 0.15 = 9,000
Depreciation for the fourth year will be calculated as follows: (60,000 – 9,000) × 0.15 = 7,650

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AS 11 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

1. OBJECTIVE
 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.
2. SCOPE
This Standard should be applied:
 In accounting for transactions in foreign currencies.
 In translating the financial statements of foreign operations.
 This Statement also deals with accounting for foreign currency transactions in the nature of
forward exchange contracts.
This Standard does not:
 Specify the currency in which an enterprise presents its financial statements. However, an
enterprise normally uses the currency of the country in which it is domiciled. If it uses a different
currency, the Standard requires disclosure of the reasons for using that currency. The Standard
also requires disclosure of the reason for any change in the reporting currency.
 Deal with the presentation in a cash flow statement of cash flows arising from transactions in a
foreign currency and the translation of cash flows of a foreign operation, which are addressed in
AS 3 'Cash flow statement'.
 Deal with exchange differences arising from foreign currency borrowings to the extent that they
are regarded as an adjustment to interest costs.
 Deal with the restatement of an enterprise's financial statements from its reporting currency into
another currency for the convenience of users accustomed to that currency or for similar purposes.
3. INITIAL RECOGNITION
 If Transactions occur in foreign currency
 Record transaction of foreign currency initially by using exchange rate prevailing on the date of
transaction.

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4. SUBSEQUENT RECOGNITION
If no further transactions will If settlement If settlement relating

occur in future in foreign subsequently in to that transaction in
currency related to initially same F.Y. foreign currency in
recognised transaction subsequent financial
year
No Adjustments Difference of initial recording On balance sheet date

and settlement is treated as monetary item of asset and
foreign Exchange loss / gain liability need to be disclosed by
and transferred to PL A/c of using closing rate and
same financial year. difference transferred to P/L
A/C of that year
Last recording in balance

sheet to settlement date,
difference will transfer to
P/L A/c in the year of
settlement
5. FORWARD CONTRACT IN FOREGN CURRENCY

 Contract entered between two parties for purchase/sale of foreign currency on a future date
and execution of performance will be also on a future date but terms and conditions are
predecided on the date of entering into forward contract.
 Treatment will be as under
Forward contract for non-speculation Forward contract for speculation
purpose purpose
Contract for avoidance of risk or arrangement of Contract for taking benefits against the
foreign currency to fulfils needs changes in exchange rates
Difference of transaction recorded (spot rate) and Difference in rates of sale and purchase of
rate agreed in to forward contract will be treated forward contract will be treated as
as loss/gain and, it will be allocated Foreign Exchange loss or gain and, will be
proportionately according to total period of transferred to P/L account in the year of
forward contract sale of forward contract
Closing rate and actual rate exist on date of Spot rate and closing rate is to be ignored
settlement is to be ignored

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6. AMENDMENTS IN AS-11 (ONLY FOR COMPANY)

Liability arise in foreign currency and is to Transaction for long term borrowing in
be settled on a future date due to foreign currency
acquisition of long term asset or fixed
asset
Difference of initial recording and closing Loss/gain of initial recording and closing
rate is to be added or deducted from cost rate is to be transferred to separate
of related fixed asset instead of reserve account known as foreign currency
transferring it to PL A/c and thereafter monetary item translation reserve a/c
depreciate fixes asset according to (FCMITR a/c)
revised value.
Alternatively adopt older treatment up to Amortize over the period according to
31.3.2020 thereafter amendment repayment of loan and un-amortized part
compulsory applicable will be disclosed as part of reserve &
surplus in Balance Sheet .
Alternatively adopt older treatment up to
31.3.2020 thereafter amendment
compulsory applicable .
7. DISCLOSURES:
 An enterprise should disclose:
(a) The amount of exchange differences included in the net profit or loss for the period.
(b) Net exchange differences accumulated in foreign currency translation reserve as a separate
component of shareholders' funds, and a reconciliation of the amount of such exchange
differences at the beginning and end of the period.
 When the reporting currency is different from the currency of the country in which the enterprise is
domiciled, the reason for using a different currency should be disclosed. The reason for any change
in the reporting currency should also be disclosed.
 When there is a change in the classification of a significant foreign operation, an enterprise should
disclose:
(a) The nature of the change in classification;
(b) The reason for the change;
(c) The impact of the change in classification on shareholders' funds; and
(d) The 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.

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AS 12 ACCOUNTING FOR GOVERNMENT GRANTS

1. OBJECTIVE AND SCOPE
 AS 12 deals with accounting for government grants such as subsidies, cash incentives, duty
drawbacks, etc. and specifies that the government grants should not be recognised until there
is reasonable assurance that the enterprise will comply with the conditions attached to them,
and the grant will be received.
 The standard also describes
(i) The treatment of non-monetary government grants;
(ii) Presentation of grants related to specific fixed assets and revenue
(iii) Those in the nature of promoters' contribution;
(iv) Treatment for refund of government grants etc.
 This Standard does not deal with :

(i) The special problems arising in accounting for government grants in financial
statements reflecting the effects of changing prices or in supplementary information of
a similar nature.
(ii) Government assistance other than in the form of government grants.
(iii) Government participation in the ownership of the enterprise.
2. GOVERNMENT GRANT
• Grant means assistance by government in the form of cash or kind in order to promote the
business.
• May be with or without condition
• Government means CG, SG and Local bodies etc.
TYPES OF GOVERNMENT GRANT
Grant for Specific Fixed Grant as Grant for revenue Grant in kind
Asset promoters
contribution

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3. GRANT FOR FIXED ASSETS
Capital Approach (Deductive Method) Revenue Approach (Deferment Method)

 Deduction from cost of Fixed Asset  Credited to deferred grant account
Bank A/c Dr. Bank A/c Dr.
To Fixed Asset A/c To Deferred grant A/c
 Depreciation on balance amount of FA  Written off over the period In ratio of

Depreciation to be charged:
 In case of refund of grant increase the carrying Deferred Grant A/c Dr.
amount of fixed asset and charge depreciation To P/L
on revised carrying value  Unamortised balance of deferred grant is to be
Fixed Asset A/c Dr. disclosed as a part of reserve & surplus in the
To Bank A/c balance sheet
Note  In case of refund first debited to deferred grant
 If grant is equal to cost of Fixed asset, Then a/c up to the credit balance of deferred grant
disclose FA at nominal value and depreciation and for balance refund P/L account is debited.
will not be charged on such value of FA Deferred grant A/c Dr.
 In this method there will be direct effect on
value of fixed asset for receiving & refund of P&L a/c Dr.
grant To Bank A/c
Note
 In this method there will be no effect on value
of fixed asset for receiving & refund of grant
4. GRANT AS PROMOTER CONTRIBUTION
When received credited to CR A/c When refund of grant

CR a/c Dr.
Bank A/c Dr. To Bank A/c
To CR A/c
5. GRANT FOR REVENUE EXPENSES
Received only against expenses of same Received against

F.Y. expenses to be incurred
for more than one F.Y.
 Credited to P/L A/c
 Disclose in credit side of P/L account or as Similar to be deferment
deduction from related expenses approach
 If refunded then debited to PL account

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6. GRANT IN KIND
If received at Free of cost If received at Concessional Price
 Disclose asset at nominal value  Cost of fixed asset will be equal to

 In case of refund of the amount of price paid
fixed asset  Increase cost of fixed asset for refund
Fixed asset A/c Dr. of concessional amount
To Bank A/c
7. DISCLOSURE
(i) The accounting policy adopted for government grants, including the methods of presentation in
the financial statements;
(ii) The nature and extent of government grants recognised in the financial statements, including
grants of non-monetary assets given at a concessional rate or free of cost.

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AS 13 (REVISED) ACCOUNTING FOR INVESTMENTS

1. OBJECTIVE AND SCOPE
 The standard deals with accounting for investments in the financial statements of enterprises
and related disclosure requirements.
 This Standard does not deal with :
a) The basis for recognition of interest, dividends and rentals earned on investments which
are covered by AS 9
b) Operating or finance leases
c) Investments on retirement benefit plans and life insurance enterprises
d) Mutual funds, venture capital funds and/ or the related asset management companies,
banks and public financial institutions formed under a Central or State Government Act
or so declared under the Companies Act, 2013
2. MEANING OF INVESTMENT
 Investments are assets held by an enterprise
 Earning income by way of dividends, interest, and rentals, for capital appreciation, or for
other benefits to the investing enterprise.
 Assets held as stock-in-trade (inventory) are not 'investments'
3. FORMS OF INVESTMENTS
 A current investment is an investment that is by its nature readily realisable and is intended to
be held for not more than one year from the date on which such investment is made.
 The intention to hold for not more than one year is to be judged at the time of purchase of
investment.
 A long term investment is an investment other than a current investment.

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4. CARRYING AMOUNT OF INVESTMENTS

 The carrying amount for current investments is the lower of cost and fair value.
 Long term investments are usually carried at cost. The carrying amount of long-term
investments is therefore determined on an individual investment basis.
 Where there is a decline, other than temporary, in the carrying amounts of long term valued
investments, the resultant reduction in the carrying amount is charged to the profit and loss
statement. The reduction in carrying amount is reversed when there is a rise in the value of
the investment, or if the reasons for the reduction no longer exist.
5. INVESTMENT PROPERTIES
 An investment property is an investment in land or buildings that are not intended to be
occupied substantially for use by, or in the operations of, the investing enterprise.
 An investment property is accounted for in accordance with cost model as prescribed in AS
10 (Revised), 'Property, Plant and Equipment'. 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
investment property, is added to the carrying amount of the investment property.
6. RECLASSIFICATION OF INVESTMENTS
 Where long-term investments are reclassified as current investments, transfers are made at the
lower of cost and carrying amount at the date of transfer.
 Where investments are reclassified from current to long-term, transfers are made at the lower
of cost and fair value at the date of transfer.
7. DISCLOSURE
The following disclosures in financial statements in relation to investments are appropriate :
a) The accounting policies followed for valuation of investments.
b) The amounts included in profit and loss statement for:
 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 deducted at source being
included under Advance Taxes Paid.
c) Profits and losses on disposal of current investments and changes in carrying amount of such
investments.
d) Profits and losses on disposal of long term investments and changes in the carrying amount of
such investments.
e) Significant restrictions on the right of ownership, realisability of investments or the remittance of
income and proceeds of disposal.
f) The aggregate amount of quoted and unquoted investments, giving the aggregate market value of
quoted investments.
g) Other disclosures as specifically required by the relevant statute governing the enterprise.

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AS 16 BORROWING COSTS
1. MEANING OF BORROWING COST
 It includes different types of cost relating to debt.
 e.g. interest on debt, Discount issue of debt, premium on redemption of debt and issue
expenses of debt
 Dividend cost is not considered part of borrowing cost—
2. ACCOUNTING TREATMENT OF BORROWING COSTS
CAPITAL NATURE REVENUE NATURE
 Added to cost of related assets if these 3  If these 3 conditions are not fulfilled
conditions are fulfilled :—  Debited to profit and loss account
(i) Amount is used for qualifying
asset
(ii) Expected future economic benefit
(iii) Reliable measurement on
estimation basis.
3. QUALIFYING ASSETS
 Asset or stock which is not already in ready to use or ready to sale condition.
 It will take substantial time to get ready to use/sale then it known as qualifying assets
 E.g. Construction of building/plant, timber plantation business etc.
4. TIMING OF CAPITALIZATION
Commencement of capitalization Suspension of work Ceasation of capitalization
 Expenditure for the acquisition,  Suspension is due to  Capitalization of interest will

construction or production of a expected reason then cease when asset/ stock will
qualifying asset is being incurred Capitalized it become ready to sale/use
 Borrowing costs are being condition
incurred.  Suspension is due to
 Activities that are necessary to unexpected reason Charge  It means work is almost/ fully
prepare the asset for its intended to P/L completed
use or sale are in progress
5. TYPES OF BORROWINGS
Specific Borrowing General Borrowing

Will be used in priority to general
borrowing.
Note
 If more than one type of general borrowing then calculate WACC (Weighted average cost of
capital)
 If amount of borrowing has been temporary invested then income from such investment is to be
deducted from overall borrowing cost.
6. DISCLOSURE:
The financial statements should disclose:
(i) The accounting policy adopted for borrowing costs; and
(ii) The amount of borrowing costs capitalised during the period.
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PRACITCAL QUESTIONS & ANSWERS
AS 1
Question 1—
What are the three fundamental accounting assumptions recognised by Accounting Standard (AS)?
Briefly describe each one of them.
Answer—
Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are as
follows:
(I) Going Concern:
The financial statements are normally prepared on the assumption that an enterprise will
continue its operations in the foreseeable future and neither there is intention, nor there is
need to materially curtail the scale of operations.
(II) Consistency:
 The principle of consistency refers to the practice of using same accounting policies for
similar transactions in all accounting periods unless the change is required
a. By a statute,
b. By an accounting standard or
c. For more appropriate presentation of financial statements.
(III) Accrual basis of accounting:
Under this basis of accounting, transactions are recognised as soon as they occur, whether or
not cash or cash equivalent is actually received or paid.
Question 2—
Mention few areas in which different accounting policies are followed by companies.
Answer—
Following are the examples of the areas in which different accounting policies may be adopted by
different enterprises:
i. Valuation of Stock
ii. Valuation of Goodwill
iii. Valuation of Investment
iv. Treatment of Government grant
v. Treatment of retirement benefits
vi. Treatment of Long term service contract
vii. Conversion of Foreign Country Transaction
viii. Treatment of life time membership fee
ix. Method of cash flow statement etc.

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AS 2
Question 3—
"In determining the cost of inventories, it is appropriate to exclude certain costs and recognize them
as expenses in the period in which they are incurred". Provide examples of such costs as per AS 2
"Valuation of Inventories?
Answer—
As per AS 2 "Valuation of Inventories?, certain costs are excluded from the cost of the inventories
and are recognised as expenses in the period in which incurred. Examples of such costs are:
a) Abnormal amount of wasted materials, labour, or other production costs;
b) Storage costs, unless those costs are necessary in the production process prior to a further
production stage;
c) Administrative overheads that do not contribute to bringing the inventories to their present
location and condition; and
d) Selling and distribution costs.
e) Borrowing Cost (Unless Permitted by AS 16)
Question 4—
The company X Ltd., has to pay for delay in cotton clearing charges. The company up to 31.3.2014
has included such charges in the valuation of closing stock. This being in the nature of interest, X Ltd.
decided to exclude such charges from closing stock for the year 2014-15. This would result in
decrease in profit by ` 5 lakhs. Comment.
Answer—
 As per para 12 of AS 2 (revised), interest and other borrowing costs are usually considered as not
relating to bringing the inventories to their present location and condition and are therefore,
usually not included in the cost of inventories.
 However, X Ltd. was in practice to charge the cost for delay in cotton clearing in the closing stock.
As X Ltd. decided to change this valuation procedure of closing stock, this treatment will be
considered as a change in accounting policy and such fact to be disclosed as per AS 1.
 Therefore, any change in amount mentioned in financial statement, which will affect the financial
position of the company should be disclosed properly as per AS 1, AS 2 and AS 5.
 Also a note should be given in the annual accounts that, had the company followed earlier system
of valuation of closing stock, the profit before tax would have been higher by ` 5 lakhs.
Question 5—
On 31st March 2013 a business firm finds that cost of a partly finished unit on that date is ` 530. The
unit can be finished in 2013-14 by an additional expenditure of ` 310. The finished unit can be sold
for ` 750 subject to payment of 4% brokerage on selling price. The firm seeks your advice regarding
the amount at which the unfinished unit should be valued as at 31st March, 2013 for preparation of
final accounts.
Answer—
Valuation of unfinished unit
`
Net selling price 750
Less: Estimated cost of completion (310)
440
Less: Brokerage (4% of 750) (30)
Net Realisable Value 410
Cost of inventory 530
Value of inventory (Lower of cost and net realisable value) 410

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Question 6—
Calculate the value of raw materials and closing stock based on the following information:
Raw material X
Closing balance 500 units
` per unit
Cost price including excise duty 200
Excise duty (Cenvat credit is receivable on the excise duty paid) 10
Freight inward 20
Unloading charges 10
Replacement cost 150
Finished goods Y
Closing Balance 1200 units
` per unit
Material consumed 220
Direct labour 60
Direct overhead 40
Total Fixed overhead for the year was ` 2,00,000 on normal capacity of 20,000 units.
Calculate the value of the closing stock, when
(i) Net Realizable Value of the Finished Goods Y is ` 400.
(ii) Net Realizable Value of the Finished Goods Y is ` 300.
Answer—
Situation (i)
When Net Realisable Value of the Finished Goods Y is ` 400
NRV is greater than the cost of Finished Goods Y i.e. ` 330 Hence, Raw Material and Finished Goods
are to be valued at cost
Value of Closing Stock:
Qty Rate Amount (`)
Raw Material X 500 220 1,10,000
Finished Goods Y 1,200 330 3,96,000
Total Cost of Closing Stock 5,06,000
Situation (ii)
When Net Realisable Value of the Finished Goods Y is ` 300
NRV is less than the cost of Finished Goods Y i.e. ` 330 Hence, Raw Material is to be valued at
replacement cost and Finished Goods are to be valued at NRV since NRV is less than the cost
Value of Closing Stock:
Qty Rate Amount (`)
Raw Material X 500 150 75,000
Finished Goods Y 1,200 300 3,60,000
Total Cost of Closing Stock 4,35,000

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Working Notes:
Raw Material X `
Cost Price 200
Less: Cenvat Credit (10)
190
Add: Freight Inward 20
Unloading charges 10
Cost 220
Finished goods Y `
Materials consumed 220
Direct Labour 60
Direct overhead 40
Fixed overheads (` 2,00,000/20,000 units) 10
Cost 330
Note: It has been considered that Raw Material X is used for the production of Finished Goods Y.

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AS 3
Question 7—
What are the main features of the Cash Flow Statement? Explain with special reference to AS 3.
Answer—
 According to AS 3 (Revised) on "Cash Flow Statement", cash flow statement deals with the
provision of information about the historical changes in cash and cash equivalents of an enterprise
during the given period from operating, investing and financing activities.
 Cash flows from operating activities can be reported using either
a) The direct method, whereby major classes of gross cash receipts and gross cash payments are
disclosed; or
b) The indirect method, whereby net profit or loss is adjusted for the effects of transactions of
non-cash nature, any deferrals or accruals of past or future operating cash receipts or
payments, and items of income or expense associated with investing or financing cash flows.
 As per para 42 of AS 3 (Revised), an enterprise should disclose the components of cash and cash
equivalents and should present a reconciliation of the amounts in its cash flow statement with the
equivalent items reported in the balance sheet.
 A cash flow statement when used in conjunction with the other financial statements, provides
information that enables users to evaluate the changes in net assets of an enterprise, its financial
structure (including its liquidity and solvency), and its ability to affect the amount and timing of
cash flows in order to adapt to changing circumstances and opportunities.
 This statement also enhances the comparability of the reporting of operating performance by
different enterprises because it eliminates the effects of using different accounting treatments for
the same transactions and events.

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AS 10
Question 8—
What are depreciable assets as per Accounting Standard-10? Explain why AS 10 does not apply to
Land.
Answer—
 As per AS 10 "PPE', depreciable assets are the assets which are expected to be used during more
than one accounting period; and
 Have a limited useful life; and
 Are held by an enterprise for use in the production or supply of goods and services, for rental to
others, or for administrative purposes and not for the purpose of sale in the ordinary course of
business.
 AS 10 does not apply to 'land' as land is considered to have unlimited useful life. Therefore, it is
not appropriate to charge depreciation on land.
Question 9—
A machinery costing ` 20 lakhs has useful life for 5 years. At the end of 5 years its scrap value would
be ` 2 lakhs. How much depreciation is to be charged in the books of the company as per Accounting
Standard 10?
Answer—
Calculation of depreciation as per Straight Line Method
`
Cost of machinery 20,00,000
Less: Scrap value at the end of its useful life (i.e. after 5 years) (2,00,000)
Amount to be written off during the useful life of the machinery 18,00,000
Useful life of the machinery 5 years
Depreciation to be provided each year (` 18,00,000 / 5 years) ` 3,60,000
Question 10—
MIs Progressive Company Limited has not charged depreciation for the year ended on 31st March,
2015, in respect of a spare bus purchased during the financial year 201 4-15 and kept ready by the
company for use as a stand-by, on the ground that, it was not actually used during the year. State your
views with reference to Accounting Standard 10 "PPE".
Answer—
 According to AS 10, "PPE'', depreciation is a measure of the wearing out, consumption or other
loss of value of a depreciable assets arising from use, effluxion of time or obsolescence through
technology and market changes.
 Accordingly, depreciation may arise even the asset is not used in the current year but was ready
for use in that year.
 The need for using the stand by bus may not have arisen during the year but that does not imply
that the useful life of the bus has not been affected.
 Therefore, non-provision of depreciation on the ground that the bus was not used during the year
is not tenable. So, depreciation should be changed on Spare Parts.
Question 11—
A computer costing ` 60,000 is depreciated on straight line basis, assuming 10 years working life and
Nil residual value, for three years. The estimate of remaining useful life after third year was
reassessed at 5 years. Calculate depreciation as per the provisions of Accounting Standard 10 "PPE".
Answer—
Depreciation per year = ` 60,000 / 10 = ` 6,000
Depreciation on SLM charged for three years = ` 6,000 × 3 years = ` 18,000
Book value of the computer at the end of third year = ` 60,000 - ` 18,000 = ` 42,000.
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Remaining useful life as per previous estimate = 7 years
Remaining useful life as per revised estimate = 5 years
Depreciation from the fourth year onwards = ` 42,000 / 5 = ` 8,400 per annum
Question 12
Narmada Ltd. purchased an existing bottling unit from Kaveri Ltd. Kaveri Ltd. followed straight line
method of charging depreciation on machinery of the sold unit whereas Narmada Ltd. followed
written down value method in its other units. The directors of Narmada Ltd. want to continue to
charge depreciation for the acquired unit in Straight Line Method which is not consistent with the
WDV method followed in other units. Discuss the contention of the directors with reference to the
Accounting Standard 10. Further during the year, Narmada Ltd. set up a new plant on coastal land. In
view of the corrosive climate, the Company felt that its machine life is reducing faster. Can the
Company charge a higher rate of depreciation?
Answer–
 According to AS 10 "PPE'', there are several methods of allocating depreciation over the useful
life of the assets.
 The management of a business selects the most appropriate method(s) based on various important
factors e.g., (i) type of asset, (ii) the nature of the use of such asset and (iii) circumstances
prevailing in the business.
 A combination of more than one method is sometimes used.
 A company may adopt different methods of depreciation for different types of assets, provided the
same methods are followed consistently.
 Thus Narmada Ltd. can continue to charge depreciation for the acquired unit as per straight line
method.
 The statute governing an enterprise may provide the basis for computation of the depreciation.
 For example, the Companies Act lays down the rates of depreciation in respect of various assets.
 Where the managements estimate of the useful life of an asset of the enterprise is shorter
than that envisaged under the provisions of the relevant statute, the depreciation provision is
appropriately computed by applying a higher rate.
 Therefore, in the given case, the Company can charge higher rates of depreciation based on its
estimate of the useful life of machinery, provided that such estimate is not less than the rate
prescribed by the Companies Act, for that class of assets.
 However, such higher depreciation rates and/or the reduced useful lives of the assets should be
disclosed by way of notes to the accounts in the Financial Statements.
Question 13
On 01.04.2010 a machine was acquired at ` 4,00,000. The machine was expected to have a useful life
of 10 years. The residual value was estimated at 10% of the original cost. At the beginning of the
4th year, an attachment was made to the machine at a cost of ` 1,80,000 to enhance its
capacity. The attachment was expected to have a useful life of 10 years and zero terminal value.
During the same time the original machine was revalued upwards by ` 90,000 and remaining useful
life was reassessed at 9 years and residual value was reassessed at NIL.
Find depreciation for the fourth year, if
(i) Attachment retains its separate identity.
(ii) Attachment becomes integral part of the machine

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Answer --
Depreciation of Original Machine
`
Original cost of Machine as on 01.04.2010 4,00,000
Less: Residual Value 10% (40,000)
Depreciable Value 3,60,000
Useful life 10 Years
Depreciation per year 36,000
Depreciation for 3 Years 1,08,000
Written down value at the beginning of 4th year (as on 1.04.2013) 2,92,000
(4,00,000 – 1,08,000)
Add: Revaluation 90,000
Total Book Value after revaluation 3,82,000
Reassessed remaining useful life 9 Years
Depreciation per year from 2013-14 42,444
Depreciation of Attachment
`
Original cost of Attachment as on 01.04.2013 1,80,000
Useful life 10Years
Depreciation per year from 2013-14 18,000
Depreciation for the year 2013-14
(i) If Attachment retains its separate identity:
Depreciation of Original Machine ` 42,444
Depreciation of Attachment ` 18,000
Total Depreciation for 2013-14 ` 60,444
(ii) If Attachment becomes integral part of the Machine:
Total value of Machine as on 01.04.2013
Original Machine at revalued cost (W.N.1) ` 3,82,000
Cost of attachment ` 1,80,000
` 5,62,000
Useful life 9 Years
Depreciation for 2013-14 ` 62,444
Question 14—
A machinery with a useful life of 6 years was purchased on 1st April, 2012 for ` 1,50,000.
Depreciation was provided on straight line method for first three years considering a residual value of
10% of cost.
In the beginning of fourth year the company reassessed the remaining useful life of the machinery at 4
years and residual value was estimated at 5% of original cost.
The accountant recalculated the revised depreciation historically and charged the difference to profit
and loss account. You are required to comment on the treatment by accountant and calculate the
depreciation to be charged for the fourth year.
Answer—
 As per AS 10 "PPE", when there is a revision of the estimated useful life of an asset, the
unamortized depreciable amount should be charged over the revised remaining useful life.
Accordingly revised depreciation shall be calculated prospectively.
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 Thus, the treatment done by the accountant regarding recalculating the revised depreciation
historically i.e. retrospectively is incorrect.
 As per AS10, if the depreciable assets are revalued, the provision for depreciation should be based
on the revalued amount and on the estimate of the remaining useful lives of such assets.
 In case the revaluation has a material effect on the amount of depreciation, the same should be
disclosed separately in the year in which revaluation is carried out.
Calculation of Depreciation
Depreciation per year charged for first three years= ` (1,50,000 - 15,000) / 6 = ` 22,500
WDV of the machine at the beginning of the fourth year = ` 1,50,000 - (` 22,500× 3) = ` 82,500
Depreciable amount after reassessment of residual vale = ` 82,500 - (1,50,000 x 5%) = ` 75,000
Remaining useful life as per revised estimate = 4 years
Depreciation from the fourth year onwards = ` 75,000 / 4 = ` 18,750
Question 15—
During the current year 2014-15, X Limited made the following expenditure relating to its plant
building:
` in lakhs
Routine Repairs 4
Repairing 1
Partial replacement of roof tiles 0.5
Substantial improvements to the electrical wiring system which will increase efficiency 10
What amount should be capitalized?
Answer—
 As per of AS 10 "PPE", expenditure that increases the future benefits from the existing asset
beyond its previously assessed standard of performance is included in the gross book value, e.g.,
an increase in capacity.
 Hence, in the given case, Repairs amounting ` 5 lakhs and Partial replacement of roof tiles should
be charged to profit and loss statement.
 ` 10 lakhs incurred for substantial improvement to the electrical writing system which will
increase efficiency should be capitalized.
Question 16—
During the year 2014-15, P Limited incurred the following expenses on machinery:
` 2.50 lacs as routine repairs and ` 75,000 on partial replacement of a part.` 7 lacs on replacement of
part of a machinery which will improve the efficiency of the machine. Which amount should be
capitalized as per AS 10?
Answer—
 As per AS 10 "PPE", only those expenditures that increase the future benefits from the existing
assets, is to be included in the gross book value. Example: Increase in capacity.
 Hence, in the given case, amount of ` 3.25 lacs spent on repairs and partial replacement of a part
of the machinery should be charged to Profit and Loss Account as they will help in maintaining
the capacity but will not improve the efficiency of the machine.
 However, ` 7 lacs incurred on replacement of a part of the machinery, which will increase the
efficiency, should be capitalized by inclusion in the gross book value of assets.
Question 17—
During the year MIs Progressive Company Limited made additions to its factory by using its own
workforce, at a cost of ` 4,50,000 as wages and materials. The lowest estimate from an outside
contractor to carry out the same work was ` 6,00,000. The directors contend that, since they are fully
entitled to employ an outside contractor, it is reasonable to debit the Factory Building Account with
` 6,00,000. Comment whether the directors' contention is right in view of

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Answer—
 AS 10, "PPE", clearly states that the gross book value of the self constructed fixed asset includes
the cost of construction that relate directly to the specific asset and the costs that are attributable
to the construction activity in general can be allocated to the specific asset.
 If any internal profit is there it should be eliminated.
 Thus, only ` 4,50,000 should be debited to the factory building account and not ` 6,00,000.
Hence, the contention of the directors of the company to capitalize ` 6,00,000 as cost of factory
building, on the ground that the company is fully entitled to employ an outside contractor is not
justifiable.
Question 21—
PQR Ltd. constructed a fixed asset and incurred the following expenses on its construction:
(`)
Materials 16,00,000
Direct Expenses 3,00,000
Total Direct Labour 6,00,000
(1/15th of the total labour time was chargeable to the construction)
Total Office & Administrative Expenses 9,00,000
(4% of office and administrative expenses are specifically attributable to
construction of a fixed asset)
Depreciation on assets used for the construction of this asset 15,000
Calculate the cost of the fixed asset
Answer—
Calculation of cost of fixed asset
`
Materials 16,00,000
Direct expenses 3,00,000
Direct labour (1/15th of ` 6,00,000) 40,000
Office and administrative expenses (4% ` 9,00,000) 36,000
Depreciation on assets 15,000
Cost of fixed asset 19,91,000
Question 22—
Amna Ltd. contracted with a supplier to purchase a specific machinery to be installed in Department
A in two months time. Special foundations were required for the plant, which were to be prepared
within this supply lead time. The cost of site preparation and laying foundations were ` 47,290. These
activities were supervised by a technician during the entire period, who is employed for this purpose
of ` 15,000 per month. The Technician's services were given to Department A by Department B,
which billed the services at ` 16,500 per month after adding 10% profit margin.
The machine was purchased at ` 52,78,000. Sales Tax was charged at 4% on the invoice ` 18,590
transportation charges were incurred to bring the machine to the factory. An Architect was engaged at
a fee of ` 10,000 to supervise machinery installation at the factory premises. Also, payment under the
invoice was due in 3 months. However, the Company made the payment in 2nd month. The company
operates on Bank Overdraft@ 11%.
Ascertain the amount at which the asset should be capitalized under AS 10.

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Answer—
Calculation of Cost of Fixed Asset (i.e. Machine)
Particulars `
Purchase Price Given 52,78,000
Add: Sales Tax at 4% ` 52,78,000 × 4% 2,11,120
Site Preparation Cost Given 47,290
Technician’s Salary Specific/Attributable overheads 30,000
for 2 months (See Note)
Initial Delivery Cost Transportation 18,590
Professional Fees for Installation Architect’s Fees 10,000
Total Cost of Asset 55,95,000
Note:
(i) Interest on Bank Overdraft for earlier payment of invoice is not relevant under AS 10.
(ii) Internally booked profits should be eliminated in arriving at the cost of Fixed Assets.
(iii) It has been assumed that the purchase price of ` 52,78,000 excludes amount of sales tax.

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Question 23—
M/s. Versatile Limited purchased machinery for ` 4,80,000 (inclusive of excise duty of ` 40,000).
CENVAT credit is available for 50% of the duty paid. The company incurred the following other
expenses for installation.
`
Cost of preparation of site for installation 21,000
Total labour charges . 66,000
(200 out of the total of 600 men hours worked, were spent
for installation of the machinery)
Spare parts and tools consumed in installation 6,000
Total salary of supervisor 24,000
(time spent for installation was 25% of the total time worked.)
Total administrative expenses 32,000
(1/10 relates to the plant installation)
Test run and experimental production expenses 23,000
Consultancy changes to architect for plant set up 9,000
Depreciation on assets used for the installation 12,000
The machine was ready for use on 15-1-2015 but was used from 1-2-2015. Due to this delay further
expenses of ` 19,000 were incurred. Calculate the value at which the plant should be capitalized in the
books of M/s. Versatile Limited.
Particulars `
Purchase Price Given 4,80,000
Add:
Site Preparation Cost Given 21,000
Labour charges (66,000/600x200) 22,000
Spare parts Given 6,000
Supervisor’s Salary 25% of ` 24,000 6,000
Administrative costs 1/10 of ` 32,000 3,200
Test run and experimental production charges Given 23,000
Architect Fees for set up Given 9,000
Depreciation on assets used for installation Given 12,000
Total Cost of Asset 5,82,200
Less: Cenvat credit receivable 50% of ` 40,000 20,000
5,62,200
Note: Expense of ` 19,000 from 15.1.2015 to 1.2.2015 to be charged to profit and loss A/c as plant
were ready for production on 15.1.2015.
Question 24—
Briefly explain the treatment of following items as per relevant accounting standards:
(i) An expense of ` 5 crores was incurred on a Machine towards its Repairs and Maintenance. The
accountant wants to capitalize the same considering the significance of amount spent.
(ii) A plant was ready for commercial production on 01.04.2014 but could commence actual
production only on 01.06.2014. The company incurred ` 50 Iakhs as administrative expenditure
during the period of which 20% was allocable to the plant. The accountant added ` 10 lakhs to
cost of plant.

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Answer—
(i) Only expenditure that increases the future benefits from the existing asset beyond its previously
assessed standard of performance is included in the gross book value, e.g., an increase in capacity.
The cost of an addition or extension to an existing asset which is of a capital nature and which
becomes an integral part of the existing asset is usually added to its gross book value. Any other
expenses incurred, though substantial, on machine towards its repairs and maintenance should not
be capitalized but charged to profit and loss account since it does not increase capacity.
(ii) If the interval between the date a project is ready to commence commercial production and the
date at which commercial production actually begins is prolonged, all expenses incurred during
this period are charged to the profit and loss statement. However, the expenditure incurred during
this period is also sometimes treated as deferred revenue expenditure, to be amortized over a
period not exceeding 3 to 5 years, after the commencement of commercial production. Thus the
amount of ` 10 lakh should either be charged to profit and loss statement in the year ended 31st
March, 2015 or may be amortized for a future period not exceeding 3 to 5 years after the
commencement of commercial production i.e. 1.6.2014.

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AS 11
Question 25—
Beekay Ltd. purchased fixed assets costing ` 5,000 lakh on 01.04.2012 payable in foreign currency
(US$) on 05.04.2013. Exchange rate of 1 US$ = ` 50.00 and ` 54.98 as on 01.04.2012 and
31.03.2013respectively.
The company also obtained a soft loan of US$ 1 lakh on 01.04.2012 payable in three annual equal
instalments. First instalment was due on 01.05.2013.
You are required to state, how these transactions would be accounted for in the books of accounts
ending 31st March, 2013.
Answer—
 As per AS 11 (Revised) 'The Effects of Changes in Foreign Exchange Rates', exchange
differences arising on the settlement of monetary items or on reporting an enterprise's monetary
items at rates different from those at which they were initially recorded during the period, or
reported in previous financial statements, should be recognised as income or as an expense in the
period in which they arise.
 However, Ministry of Corporate Affairs has recently amended AS 11 through a notification.
 As per the notification, exchange difference 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, in so far as they relate to requisition of
depreciable capital asset, can be added to or deducted from cost of asset.
 The MCA has given an option for the enterprises to capitalize the exchange differences arising on
reporting of long term foreign currency monetary items till 31st March, 2020.
 Thus the company can capitalize the exchange differences arising due to long term loans linked
with the acquisition of fixed assets.
Transaction 1:
Calculation of exchange difference on fixed assets
Foreign Exchange Liability == US $ 100 lakhs.
Exchange Difference = US $ 100 lakhs x (` 54.98 - ` 50) = ` 498 lakhs.
Loss due to exchange difference amounting ` 498 lakhs will be capitalised and added in the carrying
value of fixed assets. Depreciation on the unamortised amount will be provided in the remaining years
Transaction 2:
Soft loan exchange difference (US $ 1 lakh i.e` 50 lakhs) Value of loan 31.3.13 US $ 1 lakh x 54.98
= ` 54,98,000
AS 11 also provides that in case of liability designated as long-term foreign currency monetary item
(having a term of 12 months or more at the time of origination) the exchange difference is to be
accumulated in the Foreign Currency Monetary Item Translation Difference (FCMITD) and should
be written off over the useful life of such long-term liability, by recognition as income or expenses in
each of such periods.
Exchange difference between reporting currency (INR) and foreign currency (USD) as on 31.03.2013
= US$1.00 lakh X ` (54.98 - 50) = ` 4.98 lakh.
Loan account is to be increased to 54.98 Iakh and FCMITD account is to be debited by 4.98 lakh.
Since loan is repayable in 3 equal annual instalments, ` 4.98 lakh/3 = ` 1.66 lakh is to be charged in
Profit and Loss Account for the year ended 31st March, 2013 and balance in FCMITD A/c ` (4.98
lakh - 1.66 lakh) = ` 3.32 lakh is to be shown on the 'Equity & Liabilities' side of the Balance Sheet as
a negative figure under the head 'Reserve and Surplus' as a separate line item.
Note:The above answer is given on the basis that the company has availed the option under para 46A
of AS 11

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Question 26—
(a) Sterling Ltd. purchased a plant for US $ 20,000 on 31st December, 2011 payable after 4
months. The company entered into a forward contract for 4 months 48.85 per dollar. On 31st
December, 2011, the exchange rate was ` 47.50 per dollar.
How will you recognize the profit or loss on forward contract in the books of Sterling Limited
for the year ended 31st March, 2012.
(b)
Exchange Rate per $
Goods purchased on 1.1.2011 of US $ 10,000 ` 45
Exchange rate on 31.3.2011 ` 44
Date of actual payment 7.7.2011 ` 43
Ascertain the loss/gain for financial years 2010-11 and 2011-12, also give their treatment as
per AS 11.
Answer—
(a) Calculation of profit or loss to be recognized in the books of Sterling Limited
`
Forward Contract rate 48.85
Less: Spot rate (47.50)
Loss 1.35
Forward Contract Amount $ 20,000
Total loss on entering into forward contract =($20,000 × ` 1,35) ` 27,000
Contract period 4 months
Loss for the period 1st January, 2012 to 31st March, 2012 i.e. 3 ` 20,250
months falling in the year 2011-2012 will be ` 27,000 ×=
Balance loss of ` 6,750 (i.e. ` 27,000 - ` 20,250) for the month of April, 2012 will be
recognized in the financial year 2012-2013.
(b) As per AS 11 on 'The Effects of Changes in Foreign Exchange Rates', all foreign currency
transactions should be recorded by applying the exchange rate on the date of transactions
Thus, goods purchased on 1.1.2011 and corresponding creditor would be recorded at `
4,50,000 (i.e. $10,000 × ` 45)
According to the standard, at the balance sheet date all monetary transactions should be
reported using the closing rate. Thus, creditor of US $10,000 on 31.3.2011 will be reported at
` 4,40,000 (i.e. $10,000 × ` 44) and exchange profit of ` 10,000 (i.e. 4,50,000 - 4,40,000)
should be credited to Profit and Loss account in the year 2010-11.
On 7.7.2011, creditor of $10,000 is paid at the rate of ` 43. As per AS 11, exchange
difference on settlement of the account should also be transferred to Profit and Loss account.
Therefore, ` 10,000 (i.e. 4,40,000 - 4,30,000) will be credited to Profit and Loss account in
the year 2011-12.
Question 27—
Sunshine Company Limited imported raw materials worth US Dollars 9,000 on 25th
February, 2011, when the exchange rate was ` 44 per US Dollar. The transaction was recorded in the
books at the above mentioned rate. The payment for the transaction was made on 10th April, 2011,
when the exchange rate was ` 48 per US Dollar. At theyear end 31st March, 2011, the rate of
exchange was ` 49 per US Dollar.
The Chief Accountant of the company passed an entry on 31st March, 2011 adjusting the cost of raw
material consumed for the difference between ` 48 and ` 44 per US Dollar. Discuss whether this
treatment is justified as per the provisions of AS-11 (Revised).

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Answer—
 As per para 9 of AS 11, 'The Effects of Changes in Foreign Exchange Rates', initial recognition
of a foreign currency transaction is done in the reporting currency by applying the exchange rate
at the date of the transaction. Accordingly, on 25th February 2011, the raw material purchased
and its creditors will be recorded at US dollar 9,000 × ` 44 = ` 3,96,000.
 Also, as per para 11 of the standard, on balance sheet date such transaction is reported at closing
rate of exchange, hence it will be valued at the closing rate i.e. `49 per US dollar (USD 9,000 x
` 49 = ` 4,41,000) at 31st March, 2011, irrespective of the payment made for the same
subsequently at lower rate in the next financial year.
 The difference of ` 5 (49 - 44) per US dollar i.e. ` 45,000 (USD 9,000 x ` 5) will be shown as an
exchange loss in the profit and loss account for the year ended 31st March, 2011 and will not be
adjusted against the cost of raw materials.
 In the subsequent year on settlement date, the company would recognize or provide in the Profit
and Loss account an exchange gain of ` 1 per US dollar, i.e. the difference from balance sheet
date to the date of settlement between ` 49 and ` 48 per US dollar i.e. ` 9,000. Hence, the
accounting treatment adopted by the Chief Accountant of the company is incorrect i.e. it is not in
accordance with the provisions of AS 11.
Question 28—
Mr. Y bought a forward contract for three months of US $ 2,00,000 on 1st December 2010 at 1 US $
= ` 44.10 when the exchange rate was 1 US $ = ` 43.90. On 31-12-2010, when he closed his books,
exchange rate was 1 US $ = ` 44.20. On31st January, 2011 he decided to sell the contract at ` 44.30
per Dollar. Show how the profits from the contract will be recognized in the books of Mr. Y.
Answer—
 As per para 39 of AS 11 'Changes in Foreign Exchange Rates", in recording a forward exchange
contract intended for trading or speculation purpose, the premium or discount on the contract is
ignored and at each balance sheet date, the value of contract is marked to its current market value
and the gain or loss on the contract is recognised.
 Since the forward contract was for speculation purposes the premium on forward contract i.e. the
difference between the spot rate and the forward contract rate will not be recorded in the books.
Only when the forward contract is sold the difference between the forward contract rate and sale
rate will be recorded in the Profit & Loss Account.
`
Sale rate 44.30
Less: Contract rate (44.10)
Profit on sale of contract per US$ 00.20
Contract Amount US $ 2,00,000
Total profit (2,00,000 x 0.20) ` 40,000
Question 29—
Stem Ltd. purchased a Plant for US$ 30,000 on 30th November, 2013 payable after 6 months. The
company entered into a forward contract for 6 months @ ` 62.15 per dollar. On 30th November,
2013, the exchange rate was ` 60.75 per dollar.
How will you recognise the profit or loss on forward contract in the books of Stem Ltd. for the year
ended 31st March, 2014 ?
Answer—
Calculation of Profit or Loss on forward contract to be recognised in the book of Stem Ltd.
Forward contract rate ` 62.15 per dollar
Less: Spot Rate ` 60.75 per dollar
Loss ` 1.40 per dollar
Forward Contract Amount US$ 30000
Total Loss on entering into forward contract = US$ 30,000 x ` 1.40 = ` 42,000

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Contract Period 6 Months
Out of total contract period of 6 months, 4 months are falling in the financial year 2013-14.
Loss for the period from 1st Dec.2013 to 31st March, 2014= (` 42,000/6) x 4 = ` 28,000.
Thus the loss amounting to ` 28,000 for the period is to be recognised in the year ended 31st March,
2014.
Question 30—
Explain briefly the accounting treatment needed in the following cases as per AS 11 as on 31.3.2015.
Sundry Debtors include amount receivable from Umesh` 5,00,000 recorded at the prevailing
exchange rate on the date of sales, transaction recorded at US $ 1= ` 58.50.
Long term loan taken from a U.S. Company, amounting to ` 60,00,000. It was recorded at US $ 1
= ` 55.60, taking exchange rate prevailing at the date of transaction.
US $ 1 = ` 61.20 on 31.3.2015.
Answer—
 As per AS 11 "The Effects of Changes in Foreign Exchange Rates", exchange differences arising
on the settlement of monetary items or on reporting an enterprise's monetary items at rates
different from those at which they were initially recorded during the period, or reported in
previous financial statements, should be recognized as income or as expenses in the period in
which they arise.
 However, at the option of an entity, 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, in so far as they relate to the
acquisition of a non-depreciable capital asset can be accumulated in a "Foreign Currency
Monetary Item Translation Difference Account" in the enterprise's financial statements and
amortized over the balance period of such long-term asset/ liability, by recognition as income or
expense in each of such periods.
Debtors Foreign `
Currency Rate
Initial recognition US $8,547 (5,00,000/58.50) 1 US $ = ` 58.50 5,00,000
Rate on Balance sheet date 1 US $ = ` 61.20
Exchange Difference Gain US $ 8,547 × 23,077
(61.20-58.50)
Treatment: Credit Profit and Loss A/c by ` 23,077
Long term Loan
Initial recognition US $ 1,07,913.67 1 US $ = ` 55.60 60,00,000
(60,00,000/55.60)
Rate on Balance sheet date 1 US $ = ` 61.20
Exchange Difference Loss US $ 1,07,913.67 X 6,04,317
(61.20
– 55.60)
Treatment: Credit Loan A/c
And Debit FCMITD A/C or Profit and Loss A/c by
` 6,04,317
Thus Exchange Difference on Long term loan amounting ` 6,04,317 may either be charged to Profit
and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange
difference on debtors amounting ` 23,077 is required to be transferred to Profit and Loss A/c.

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AS 12
Question 31—
Explain the treatment of refund of Government Grants as per Accounting Standard 12.
Answer—
Para 11 of AS 12, "Accounting for Government Grants", explains treatment of government grants in
following situations:
(i) When government grant is related to revenue
(a) When deferred credit account has a balance: The amount of government grant refundable
will be adjusted against unamortized deferred credit balance remaining in respect of the
grant. To the extent that the amount refundable exceeds any such deferred credit the amount
is immediately charged to profit and loss account.
(b) Where no deferred credit account balance exists: The amount of government grant
refundable will be charged to profit and Loss account.
(ii) When government grant is related to specific fixed assets
(a) Where at the time of receipt, the amount of government grant reduced the cost of asset: The
amount of government grant refundable will increase the book value of the asset at the time
of refund.
(b) Where at the time of receipt, the amount of government grant was credited to "Deferred Grant
Account": The amount of government grant refundable will reduce unamortized balance of
deferred grant account and remaining refund debited to P & L A/c
(iii) When government grant is in the nature of Promoter's contribution
The amount of government grant refundable in part or in full on non-fulfillment of specific
conditions, the relevant amount recoverable by the government will be reduced from capital
reserve.
Note: A government grant that becomes refundable is treated as an extra-ordinary item as per AS 5.
Question 32—
Supriya Ltd. received a grant of ` 2,500 lakhs during the accounting year 2010-11 from government
for welfare activities to be carried on by the company for its employees. The grant prescribed
conditions for its utilization. However, during the year 2011-12, it was found that the conditions of
grants were not complied with and the grant had to be refunded to the government in full. Elucidate
the current accounting treatment, with reference to the provisions of AS-12.
Answer—
 As per para 11 of AS 12 'Accounting for Government Grants', Government grants sometimes
become refundable because certain conditions are not fulfilled. A government grant that becomes
refundable is treated as an extraordinary item as per AS 5.
 The amount refundable in respect of a government grant related to revenue is applied first against
any unamortized deferred credit remaining in respect of the grant. To the extent that the amount
refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is
charged immediately to profit and loss statement.
 In the present case, the amount of refund of government grant should be shown in the profit &
loss account of the company as an extraordinary item during the year 2011-12.
Question 33—
Santosh Ltd. has received a grant of ` 8 crores from the Government for setting up a factory in a
backward area. Out of this grant, the company distributed ` 2 crores as dividend. Also, Santosh Ltd.
received land free of cost from the State Government but it has not recorded it at all in the books as no
money has been spent. In the light of AS 12 examine, whether the treatment of both the grants is
correct.

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Answer—
 As per AS 12 'Accounting for Government Grants', when government grant is received for a
specific purpose, it should be utilized for the same. So the grant received for setting up a factory
is not available for distribution of dividend.
 In the second case, even if the company has not spent money for the acquisition of land, land
should be recorded in the books of accounts at a nominal value. The treatment of both the
elements in the treatment of the grant is incorrect as per AS 12.
Question 34—
Viva Ltd. received a specific grant of ` 30 lakhs for acquiring the plant of ` 150 lakhs during 2007-08
having useful life of 10 years. The grant received was credited to deferred income in the balance
sheet. During 2010-11, due to non-compliance of conditions laid down for the grant, the company
had to refund the whole grant to the Government. Balance in the deferred income on that date was
` 21 lakhs and written down value of plant was ` 105 lakhs.
(i) What should be the treatment of the refund of the grant and the effect on cost of the fixed
asset and the amount of depreciation to be charged during the year 2010-11 in profit and
loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the cost of the plant
during 2007-08 assuming plant account showed the balance of ` 84 lakhs as on 1.4.2010?
Answer—
 As per para 21 of AS-12, 'Accounting for Government Grants', "the amount refundable in
respect of a grant related to specific fixed asset should be recorded by reducing the deferred
income balance. To the extent the amount refundable exceeds any such deferred credit, the
amount should be charged to profit and loss statement.
(i)
• In this case the grant refunded is ` 30 lakhs and balance in deferred income is ` 21
lakhs, ` 9 lakhs shall be charged to the profit and loss account for the year 2010-11.
• There will be no effect on the cost of the fixed asset and depreciation charged will be on
the same basis as charged in the earlier years.
(ii)
• If the grant was deducted from the cost of the plant in the year 2007-08 then, para 21 of
AS-12 states that the amount refundable in respect of grant which relates to specific
fixed assets should be recorded by increasing the book value of the assets, by the
amount refundable.
• Where the book value of the asset is increased, depreciation on the revised book value
should be provided prospectively over the residual useful life of the asset.
• Therefore, in this case, the book value of the plant shall be increased by ` 30 lakhs. The
increased cost of ` 30 lakhs of the plant should be amortized over 7 years (residual life).
• Depreciation charged during the year 2010-11 shall be (84 + 30)/7 years =` 16.286
lakhs presuming the depreciation is charged on SLM.
Question 35—
M/s A Ltd. has set up its business in a designated backward area with an investment of` 200
Lakhs. The Company is eligible for 25% subsidy and has received `50 Lakhs from the
Government.
Explain the treatment of the Capital Subsidy received from the Government in the Books of the
Company.
Answer—
 As per para 10 of AS 12 "Accounting for Govt. Grants", Where the government grants are of
the nature of promoters' contribution, i.e., they are given with reference to the total
investment in an undertaking or by way of contribution towards its total capital outlay (for
example, central investment subsidy scheme) and no repayment is ordinarily expected in
respect thereof, the grants are treated as capital reserve.

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 Subsidy received by A Ltd. is in the nature of promoter's contribution, since this grant is
given with reference to the total investment in an undertaking and by way of contribution
towards its total capital outlay and no repayment is ordinarily expected in respect thereof.
 Therefore, this grant should be treated as capital reserve which can be neither distributed
as dividend nor considered as deferred income.

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AS 16
Question 36—
When capitalisation of borrowing cost should cease as per Accounting Standard 16?
Answer—
 Capitalisation of borrowing costs should cease when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale are complete.
 An asset is normally ready for its intended use or sale when its physical construction or
production is complete even though routine administrative work might still continue. If minor
modifications such as the decoration of a property to the user's specification, are all that are
outstanding, this indicates that substantially all the activities are complete.
 When the construction of a qualifying asset is completed in parts and a completed part is capable
of being used while construction continues for the other parts, capitalisation of borrowing costs in
relation to a part should cease when substantially all the activities necessary to prepare that part
for its intended use or sale are complete.
Question 37—
GHI Limited obtained a loan for ` 70 lakhs on 15th April, 2010 from JKL Bank, to be utilized as
under:
ìn lakhs
Construction of Factory shed 25
Purchase of Machinery 20
Working capital 15
Advance for purchase of Truck 10
In March 2011, construction of the factory shed was completed and machinery, which was ready for
its intended use, was installed. Delivery of Truck was received in the next financial year. Total
interest of ` 9,10,000 was charged by the bank for the financial year ending 31-03-2011.
Show the treatment of interest under AS 16 and also explain the nature of Assets.
Answer—
Treatment of Interest (Borrowing cost) as per AS 16 'Borrowing Costs'
Particulars Nature Interest to be capitalized Interest to be charged to
P&L A/c
Construction of Qualifying Asset 25
Factory Shed 9,10, 000  `3, 25, 000
70
Purchase of Not a Qualifying 20
Machinery (Refer Asset 9,10, 000  ` 2, 60, 000
70
Working Capital Not a Qualifying 15
Asset 9,10, 000  `1,95, 000
70
Advance for Not a Qualifying 9,10,000×10/70=`1,30,000
purchase of Truck Asset
`3,25,000 `5,85,000
Notes:—
1. It is assumed that construction of a factory shed was completed on 31st March, 2011.
2. It is assumed that the machinery being a non qualifying asset in this case, hence the interest
cost would not be capitalized as it was ready for its intended use at the time of its acquisition

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3. As per AS 16 'Borrowing Costs', borrowing costs that are directly attributable to the
acquisition, construction or production of qualifying assets should be capitalized as part of
the cost of that asset. Other borrowing costs are recognized as expense in the period in which
they are incurred.
4. Since the advance for the purchase of truck was paid before March 2011 although the delivery
was received in the next financial year, the money was used for its intended purpose and
hence the interest will not be capitalized.
As per AS 16, assets have been defined as 'qualifying asset' and 'non-qualifying asset'.
(i) Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale; whereas,
(ii) Non-qualifying asset is an asset which is ready for its intended use or sale at the time of its
acquisition.
Question 38—
Axe Limited began construction of a new plant on 1st April, 2011 and obtained a special loan of `
4,00,000 to finance the construction of the plant. The rate of interest on loan was 10%.
The expenditure that were made on the project of plant were as follows:
`
1st April, 2011 5,00,000
1st August, 2011 12,00,000
1st January, 2012 2,00,000
The company's other outstanding non-specific loan was ` 23,00,000 at an interest rate of 12%. The
construction of the plant completed on 31st March, 2012. You are required to:
(a) Calculate the amount of interest to be capitalized as per the provisions of AS 16 "Borrowing
Cost".
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the plant.
Answer—
Total expenses to be capitalized for borrowings as per AS 16 "Borrowing Costs":
`
Cost of Plant (5,00,000 + 12,00,000 + 2,00,000) 19,00,000
Add: Amount of interest to be capitalised (W.N.2) 1,54,000
20,54,000
Journal Entry
` `
31st March, 2012 Plant A/c Dr. 20,54,000
20,54,000
To Bank A/c
[Being amount of cost of plant
and borrowing cost thereon
capitalised]
Working Notes:
1.Computation of average accumulated annual borrowing:
`
12
1stApril, 2011 ` 5, 00, 000  5,00,000
12
8
1stAugust, 2011 `12, 00, 000  8,00,000
12

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3
1stJanuary, 2012 ` 2, 00, 000  50,000
12
Annual Average Borrowing 13,50,000
2. Amount of interest capitalized
`
On specific borrowing (` 4,00,000×10%) 40,000
On non-specific borrowings (` 13,50,000 – ` 4,00,000) = 9,50,000 × 12% 1,14,000
Amount of interest to be capitalized 1,54,000
Question 39—
Suhana Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.05.2013, to be utilized as under:
Particulars Amount (` in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2014, construction of the factory building was completed and machinery was installed and
ready for it's intended use. Total interest on debentures for the financial year ended 31.03.2014 was `
11,00,000. During the year 2013-14, the company had invested idle fund out of money raised from
debentures in banks' fixed deposit and had earned an interest of ` 2,00,000.
Show the treatment of interest under Accounting Standard 16 and also explain nature of assets.
Answer—
 According to para 6 of AS 16 "Borrowing Costs", borrowing costs that are directly attributable
to the acquisition, construction or production of a qualifying asset should be capitalised as part of
the cost of that asset. The amount of borrowing costs eligible for capitalisation should be
determined in accordance with this Standard. Other borrowing costs should be recognised as an
expense in the period in which they are incurred.
 Also para 10 of AS 16 "Borrowing Costs" states that to the extent that funds are borrowed
specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible
for capitalisation on that asset should be determined as the actual borrowing costs incurred on that
borrowing during the period less any income on the temporary investment of those borrowings.
 Thus, eligible borrowing cost= ` 11,00,000 - ` 2,00,000 = ` 9,00,000
Sr. Particulars Nature of assets Interest to be Interest to be

No. capitalized (`) charged to Profit &
Loss A/c (`)
i. Construction of Qualifying Asset* 9,00,000×40/100 NIL
factory building = `3,60,000
ii. Purchase of Not a qualifying Asset NIL 9,00,000 ×35/100
Machinery = `3,15,000
iii. Working Capital Not a qualifying Asset NIL 9,00,000×25/100
= `2,25,000
Total `3,60,000 `5,40,000
* A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.

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Question 40—
A company capitalizes interest cost of holding investments and adds to cost of investment every year,
thereby understating interest cost in profit and loss account. Comment on the accounting treatment
done by the company in context of the relevant AS.
Answer—
 The Accounting Standard Board (ASB) has opinioned that investments other than investment in
properties are not qualifying assets as per AS-16 Borrowing Costs.
 Therefore, interest cost of holding such investments cannot be capitalized. Further, even interest
in respect of investment properties can only be capitalized if such properties meet the definition
of qualifying asset, namely, that it necessarily takes a substantial period of time to get ready for
its intended use or sale.
 Also, where the investment properties meet the definition of 'qualifying asset', for the
capitalization of borrowing costs, the other requirements of the standard such as that borrowing
costs should be directly attributable to the acquisition or construction of the investment property
and suspension of capitalization as per paragraphs 17 and 18 of AS-16 have to be complied with.
Question 41—
M/s. Ayush Ltd. began construction of a new building on 1st January, 2014. It obtained` 3 lakh
special loan to finance the construction of the building on 1st January, 2014 at an interest rate of 12%
p.a. The company's other outstanding two non-specific loans were:
Amount Rate of Interest
` 6,00,000 11% p.a.
` 11,00,000 13% p.a.
The expenditure that were made on the building project were as follows:
01.01.2014 ` 3,00,000
01.04.2014 ` 3,50,000
01.07.2014 ` 5,50,000
01.12.2014 ` 1,50,000
Building was completed on 31st December, 2014. Following the principles prescribed in AS 16
'Borrowing Cost', calculate the amount of interest to be capitalized and pass one Journal entry for
capitalizing the cost and borrowing in respect of the building.
Answer
(i) Computation of average accumulated expenses
`
` 3,00,000 x 12 / 12 = 3,00,000
` 3,50,000 x 9 / 12 = 2,62,500
` 5,50,000 x 6 / 12 = 2,75,000
` 1,50,000 x 1 / 12 = 12,500
13,50,000 8,50,000

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(ii) Calculation of average interest rate other than for specific

Amount of loan (`) Rate of interest Amount of interest(`)
6,00,000 11% = 66,000
11,00,000 13% = 1,43,000
17,00,000 2,09,000
 2, 09, 000 
Weighted average rate of interest  17, 00, 000 100  = 12.29%
 
(iii) Interest amount to be capitalized

`
Specific borrowings (` 3,00,000 x 12%) = 36,000
Non-specific borrowings
[` 5,50,000(`8,50,000 – ` 3,00,000) x 12.29%] = 67,595
Amount of interest to be capitalized = 1,03,595
(iv) Journal Entry
Date Particulars Dr. (`) Cr. (`)
31.12.2014 Building account (13,50,000+1,03,595) Dr. 14,53,595
To Bank account 14,53,595
(Being amount of cost of building and
borrowing cost thereon capitalized)
Question 42—
Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year
2014-15 for its residential project at LIBOR + 3 %. The interest is payable at the end of the
Financial Year. At the time of availment, exchange rate was ` 56 per US $ and the
rate as on 31st March, 2015 ` 62 per US $. If Shan Builders Limited borrowed the loan in India in
Indian Rupee equivalent, the pricing of loan would have been 10.50%. Compute Borrowing Cost and
exchange difference for the year ending 31st March, 2015 as per applicable Accounting Standards.
(Applicable LIBOR is 1%).
Answer—
(i) Interest for the period 2014-15 = US $ 10 lakhs x 4% × ` 62 per US $ = ` 24.80 lakhs
(ii) Increase in the liability towards the principal amount = US $ 10 lakhs × ` (62 - 56) = ` 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ` 56 x 10.5% = ` 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency borrowing
= ` 58.80 lakhs - ` 24.80 lakhs = ` 34 lakhs.
 Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only
` 34 lakhs will be considered as the borrowing cost. Thus, total borrowing cost would be
` 58.80 lakhs being the aggregate of interest of ` 24.80 lakhs on foreign currency borrowings plus
the exchange difference to the extent of difference between interest on local currency borrowing
and interest on foreign currency borrowing of ` 34 lakhs.
 Hence, ` 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS
16 "Borrowing Costs" and the remaining ` 26 lakhs (60 - 34) would be considered as the
exchange difference to be accounted for as per AS 11 "The Effects of Changes in Foreign
Exchange Rates".
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PROFIT OR LOSS PRE AND POST INCORPORATION 5.1
CHAPTER – 5
PROFIT OR LOSS PRE AND POST INCORPORATION
MEANING OF PROFIT OR LOSS FOR PRE AND POST INCORPORATION

 When a company acquires running business of proprietorship or firm it is known as
business acquisition.
 It may be possible that purchasing company itself incorporated after acquisition of
business.
 In this case from date of acquisition (DoA) to date of incorporation (DoI), business is
to be continued on behalf of company by vendor/promoters/other person.
 After DOI, business is to be continued with name of the company.
 Profit or loss occur from DOA to DOI is known as profit or loss prior to incorporation.
 Such profit will belong to company but it will have capital nature, therefore it is to be
calculated separately.
 In case of profit, it is considered as capital reserve and in case of loss it is treated
as goodwill.
 After DOI, Profit or loss will be treated as normal profit (net profit or net loss)
NATURE OF PRE AND POST INCORPORATION PROFIT OR LOSS

PRE PERIOD PROFIT OR LOSS POST PERIOD PROFIT OR LOSS
 Capital nature  Revenue nature
 Not available for distribution of  Available for distribution of dividend
dividend
TREATMENT OF PRE AND POST INCORPORATION PROFIT AND LOSS

RESULT PRE PERIOD POST PERIOD
IF PROFIT Capital Reserve
or Net Profit
Profit prior to
incorporation
IF LOSS Goodwill
or Net Loss
Loss prior to incorporation

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DETERMINATION OF PRE AND POST PERIOD

PRE PERIOD POST PERIOD
Date of acquisition (DOA) Date of incorporation (DOI)
to to
Date of incorporation (DOI) End of financial year first by the company
Note 1
 Total of pre and post period will be generally 12 months. However it may be more or
less than 12 months.
 If date of commencement of business (DOC) is also given in the question, it is to be
ignored for defining pre and post period.
 However, if DOI is not given DOC is to be assumed at DOI.
TIME RATIO AND SALES RATIO

TIME RATIO SALES RATIO
Ratio calculated on the basis of pre Ratio calculated on the basis of pre
and post period and post period sales
Note 2 Relating to Calculation of sales ratio

 It may be calculated in following ways:
i. If sale for pre and post period already given in question, then calculate sales ratio
accordingly.
ii. If only total sales is given or detail of sales is not given then time ratio, will become
sales ratio assuming that entire sales is evenly spread throughout the year.
iii. If different part of sales is given, then allocate the common period sales in pre and
post period and find out total of pre and post period sales and calculate sales ratio
accordingly.
iv. If Proportionate language for sale is given then calculate ratio by establishing
equation.

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ALLOCATION OF REVENUE AND EXPENDITURE BETWEEN PRE & POST PERIOD

 No allocation of items relating to trading A/c unless specific adjustment is given for
adjustment of particular item.
 Items of revenue and expense relating to P&L A/c is to be allocated between pre and
post period as under
i. If already allocated then use as it is
ii. If Already allocated form is not given but basis of that allocation is given, then
allocate accordingly to the basis given.
iii. If Already allocated form and basis of allocation both are not given then use
most suitable/logical/appropriate basis considering nature of that item.
SUITABLE BASIS OF ALLOCATION
SUITABLE ITEMS OF REVENUE AND EXPENSE
BASIS
 Those items which relate to sales like items relating to selling
and distribution
 For example
SALES i. Gross profit,
ii. carriage outward,
RATIO iii. salesmen commission,
iv. Discount allowed,
v. bad debts,
vi. travelling expenses
vii. Tax audit fee
viii. Advertisement expenses
ix. Sales promotion expenses etc.
 Items which are fixed in nature like items relating to office or
administration
 For example
i. depreciation,
ii. rent,
TIME iii. salary,
iv. Insurance Premium,
RATIO v. Electricity charges,
vi. Printing and stationary
vii. Rates and taxes
viii. Telephone expenses & Postage etc.
100% PRE  Those item which never incurred in company
 For example
PERIOD
i. partner’s salary,
ITEM ii. interest on capital,
iii. interest on drawing etc.

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 Those items that incurred only in company

100%  For example
post i.
ii.
debenture interest,
discount on issue of share or debenture,
period iii. underwriting commission,
iv. dividend to share holders,
item v. Company audit fee
vi. director’s remuneration,
vii. director’s Fee,
viii. Preliminary/ formation expenses etc.
Note3 Interest on purchase consideration/interest to vendor (interest on PC)

 It is for the period from DOA to Date of payment of PC.
 Allocate it in specific time ratio calculate as per above period.
Note 4 Adjustment of Audit fees
If Tax Audit Fee If statutory audit fee or Audit fee If only audit fee is given
in Relation to Company
Sales Ratio 100 % post Period Allocate it in sales ratio

assuming it is tax audit fee
Note 5
Provision for tax is to be assumed 100% post period item Therefore it is to be disclosed in
post period column
PRESENTATION OF CALCULATION FOR PRE AND POST PERIOD PROFIT OR LOSS
BY PREPARING STATEMENT BY PREPARING P&L ACCOUNT IN

COLUMNAR FORM

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STATEMENT SHOWING PROFIT OR LOSS FOR PRE AND POST PERIOD

PARTICULAR BASIS PRE POST
GP xxx xxx
Add: Other Income of P&L xxx xxx
Less: Expenses xxx xxx
Profit/Loss xxx xxx
Goodwill Net Profit
or Or
CR Net Loss
BY PREPARING P&L ACCOUNT IN COLUMNAR FORM

PARTICULAR BASIS PRE POST PARTICULAR BASIS PRE POST
To Expenses xx xx By GP xx xx
To CR (B.F.) xx By Other Income xx xx
To NP (B.F.) xx By Goodwill (B.F.)
By Net Loss (B.F.) xx
xx
xx xx xx xx
QUESTION 1
Define Pre-incorporation expenses in brief.
ANSWER
Pre-incorporation expenses denote expenses incurred by the promoters for the purposes
of the company before its incorporation.
Broadly, these include expenses in connection with:
a) Preliminary analysis of the conceived idea,
b) Detailed investigation in terms of technical feasibility and commercial viability to
establish the soundness of the proposition,
c) Preparation of 'project report' or 'feasibility report' and its verification through
independent appraisal authority (before giving final approval to the proposition) and
d) Organisation of funds, property and managerial ability and assembling of other
business elements.

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QUESTION 2
A firm M/s. Alag, which was carrying on business from 1st July, 2013 gets itself
incorporated as a company on 1st November, 2013. The first accounts are drawn upto
31st March 2014. The gross profit for the period is ` 56,000. The general expenses are
`14,220; Director's fee ` 12,000 p.a.; Incorporation expenses ` 1,500. Rent upto31st
December was `1,200 p.a. after which it is increased to `3,000 p.a. Salary of the
manager, who upon incorporation of the company was made a director, is `6,000 p.a. His
remuneration thereafter is included in the above figure of fee to the directors.
Give Statement showing pre and post incorporation profit. The net sales are ` 8,20,000,
the monthly average of which for the first four months is one-half of that of the
remaining period. The company earned a uniform profit. Interest and tax may be ignored.
ANSWER
Statement showing pre and post-incorporation Profits
Particulars Basis Pre – Post- Total
incorporation incorporation
Period period
` ` `
Gross Profit Sales ratio 16,000 40,000 56,000
Less: General expenses Time ratio 6,320 7,900 14,220
Directors’ fee Actual – 5,000 5,000
Formation expenses Actual – 1,500 1,500
Rent (600 + 750) W.N. 2 400 950 1,350
Manager’s salary Actual 2,000 – 2,000
Net Profit transferred
to:
Capital Reserve 7,280 – –
P & L A/c – – 24,650 31,930
WORKING NOTES:
1. Calculation of Sales Ratio
Let the average monthly sales of first four months = 100
and next five months = 200
Total sales of first four months = 100 × 4 = 400 and Total sales of next five months
= 200 × 5 = 1,000 The ratio of sales = 400 : 1,000 = 2 : 5

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2. Rent
Till 31st December, 2013, rent was ` 1,200 p.a. i.e.`100 p.m. So, Pre-incorporation
rent = ` 100 × 4 months = ` 400
Post-incorporation rent = (`100 × 2 months) + (`250 × 3 months) = ` 950
3. Time ratio
Pre-incorporation period =1st July, 2013 to 31st Oct. 2013 = 4 months Post -
incorporation = 1 st November 2013 to 31st March 2014 = 5 months
= 4 months : 5 months
Thus, time ratio is 4:5
******************

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ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 6.1
CHAPTER 6
ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE
TOPIC 1 ACCOUNTING OF BONUS ISSUE

MEANING OF BONUS ISSUE
 When company decided to capitalize its reserves/profit, then it is known as bonus

issue
 In general sense, conversion of reserve of company in to share capital is known as

bonus issue.
TYPE OF BONUS ISSUE BY COMPANY

CONVERSION OF PARTLY PAID UP
BY ISSUE OF BONUS SHARES
SHARES TO FULLY PAID UP SHARES
WITHOUT RECEIVING CALL MONEY
 Issue of equity shares to existing  Journal entry with total uncalled

equity shares holder in a certain amount
proportion at free of cost (I) Due entry of final Call
 Journal entry with total face value of Equity share final Call A/c Dr.
bonus share To Equity Share Capital
(I) Due entry of Bonus (II) Due entry of Bonus
Reserve A/c Dr. Reserve A/c Dr.
To Bonus to Shareholders A/c To Bonus to Share holder A/c
(II) Allotment of Bonus Share (III)Cancellation of Bonus to
Bonus to Shareholder A/c Dr. shareholder and final call a/c
To Equity Share Capital with each other
Bonus to shareholder A/c Dr.
To Equity Share Final Call A/c

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GUIDELINES FOR BONUS ISSUE

 Provision in AOA
 On recommendation of BOD authorised in GM
 Issue of bonus share only when company has not defaulted in payment of debenture
holder, other borrowings and statuary liabilities towards employees etc.
 Ensure future liquidity position
 Existing shares must be fully paid up for issue of bonus share. If it is partly paid up
then first of all make them fully paid by receiving call money. Thereafter, issue bonus
shares

1) Due entry of final call
Equity share final call A/c Dr.
To Equity share capital
2) Entry for receiving call money

Bank A/c Dr.
To Equity Share Final Call A/c
 Separate disclosure in Balance Sheet for next five years. However detail of resources
is not required
 Change in authorized Capital if issued capital exceed existing authorized capital
 Adjustment for fully convertible debentures (F.C.D.) and partly convertible debenture
(P.C.D.) if it is not converted till the date of bonus issue
 FCD and PCD will also be entitled to bonus issue
 But it is to be allotted at the time of conversion
 However, required change in authorized capital is to be adjusted
immediately
 Utilization of reserve
 It will be equal to total face value/uncalled capital
 Only reserve realized in cash is to be considered.
 Therefore non cash reserve like revaluation reserve is not utilized.
 Order of utilization of reserve

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CRR A/c
Specific
Security Premium A/c
Reserve
Capital Reserve A/c
Revenue Reserve A/c

Free
General Reserve A/c
Reserve
Profit & Loss A/c
Any other Free Reserve

Note 1
By default, list of reserves given above will be assumed as cash profits. However, if cash
part of such reserve is given separately, the remaining will be non cash part and if non-
cash part of such reserve is given separately, then remaining will be cash part.
Note 2
If partly paid up shares is to be converted into the fully paid up by way of bonus then only
free reserve is to be utilised.
TOPIC 2 ACCOUNTING OF RIGHT ISSUE

MEANING OF RIGHT ISSUE SECTION 62 (1)
 Whenever a company intends to issue new shares, the voting and governance rights of
the existing shareholders may be diluted, if they are not allowed to preserve them.
 It may happen because new shareholders may subscribe to the issued share capital.
 Companies Act, 2013 allows existing shareholders to preserve their position by
offering the existing shareholders a right to subscribe to any fresh issue of shares by
the company in proportion to their existing holding for shares.
 They have an implicit right to renounce this right in favour of anyone else, or even
reject it completely.
RIGHT OF RENUNCIATION
 Right of renunciation refers to the right of the shareholder to surrender his right to
buy the securities and transfer such right to any other person.
 The renunciation of the right is valuable and can be monetised by the existing
shareholders in well-functioning capital market.
 The monetised value available to the existing shareholders due to right issue is known
as 'value of right'
 In case the right issue offer is availed by an existing shareholder, the value of right is
determined as given below:

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1) Ex-right value of the shares =
2) Value of right = Cum-right value of share - Ex-right value of share
Note 3
 Cum right value means fair value of share just before right issue.
 Ex right value means theoretically expected value of share after issue of right share.
*************

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REDEMPTION OF PREFERENCE SHARES 7.1
CHAPTER – 7
REDEMPTION OF PREFERENCE SHARES
MEANING (SECTION 55)
 It refers to repayment to preferences share holders.
 Redemption only of fully paid up preference share.
 Source of redemption of preference share:
A. Out of fresh issue of Share capital
B. Out of free reserve
C. Combination of above two
 Creating CRR for the part of redemption out of free reserve
JOURNAL ENTRIES FOR REDEMPTION OF PREFERENCE SHARES
1) CREATING CRR
Free Reserve A/c Dr.
To CRR A/c
2) DUE ENTRY OF REDEMPTION

Preference share capital A/c Dr.
Premium on Redemption of Preference Share A/c Dr.
To Preferences Share holder A/c
3) PAYMENT TO PREFERENCE SHARE HOLDERS
Preference Share Holder A/c Dr.
To Bank A/c
4) ADJUSTMENT OF PREMIUM ON REDEMPTION

Free Reserve A/c Dr.
To Premium on Redemption of Preference Share A/c
CALCULATION OF AMOUNT OF CRR

Total face value of preference share Capital to be Redeemed xxx
Less: Fresh issue of share capital xxx
Amount of CRR (Redemption out of Free Reserve) xxx
Note 1: CRR
 For calculation of amount of CRR, only face value of preference share capital
redeemed is to be considered even if it is redeemed at premium.
 Only fresh issue of share capital is deducted.
 If shares have been issued at par or premium, then par value (only capital part) is
deducted
If share is issued at discount, then discounted price is deducted

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Note 2
If multiple transaction occur on same date, then record first of all that transaction
which result inflows thereafter transactions of out flows
Note 3 Order of use of free reserve
 Revenue Reserve
 General Reserve
 Profit & Loss Account
 Other free Reserve
Note 4
 It has been assumed that companies are covered under section 133 therefore
security premium has been not used for providing premium on redemption.
 If it is given that company is not covered under section 133 then first of all
security premium is to be used for providing premium on redemption
Note 5 Calculation of number of fresh equity share is to issued For the purpose of
redemption of preference shares
 Calculate total amount of fresh share capital is to be issued from statement given
below
Total face value of preference share Capital to be Redeemed xxx
Less: Free reserve available for redemption xxx
fresh share capital is to be issued xxx
 Now if share capital is to be issued at par or premium then divide it by par value
 If share capital is to be issued at discount then divide it by discounted value
Note 6 Calculation of number of fresh equity share is to issued For the purpose of
cash requirement
 Calculate requirement of cash by issue of fresh capital from the cash a/c
 Now divide it by issue price of share capital
Note 6
 If number of shares to be issued includes a fraction, it must be approximated to
the next higher figure to ensure that provisions of Section 55 are not violated.
Note 7 Redemption of partly called up preference shares
 If question requires to redeem partly called up shares then first of all make them
fully paid up by passing journal entries for due & receiving final call & thereafter
redeem preference share
 If fully called up & partly called up both category of preference are given then by
default it is to be assumed that only fully called up category of preference share
capital is to be redeemed
 If call money is not received from PHS then company can forfeit his shares

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Note 8
If a particular PSH is not known therefore it is not possible to pay the amount then
final amount due to such PHS is to be disclosed as a part of other current liability
************

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REDEMPTION OF DEBENTURES 8.1
CHAPTER 8 REDEMPTION OF DEBENTURES

MEANING OF REDEMPTION OF DEBENTURES
 It refers to repayment to debenture holders.

 It may at the time of maturity on lump sum basis or installment basis.
 It may be by way of cancellation by purchase from open market before maturity.
 It may be by way of payment in cash or conversion.
TOPIC 1 ACCOUNTING FOR REDEMPTION OF DEBENTURES BY DIRECT

REDEMPTION ON MATURITY
1. Providing premium redemption :
PL a/c Dr.
To Premium on redemption a/c
2. Due entry of redemption
Debenture A/c Dr.
Premium on Redemption a/c Dr.
To Debenture holders a/c
3. Payment to debenture holders
(a) By Cash :-
Debenture holders a/c Dr.
To Bank a/c
(b) By Conversion :-
i. If equity shares are to be issued at par:
To Equity Share Capital a/c
ii. If equity shares are to issued at premium:
To Security premium a/c
iii. If equity shares are to be issued at Discount:
Discount on issue of Share a/c Dr.

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Note 1
In the above case, if shares are to be issued at premium or discount then calculate No.
of shares to be issued:
TOPIC 2 ACCOUNTING OF REDEMPTION OF DEBENTURE BY PURCHASE FROM

OPEN MARKET FOR IMMEDIATE CANCELLATION WITHOUT OWN
DEBENTURE A/C
(1) Purchase and cancellation of debenture

Debenture A/c Dr. (FV)
Loss on cancellation a/c Dr. (if cost > face value)
To Bank A/c (Cost)
To Profit on cancellation (If face value > COA)
(2) Debenture interest on purchase:

Debenture Interest A/c Dr.
To bank account
(3) Transfer of Profit on cancellation (face value > COA)

Profit on cancellation A/c Dr.
To C/R or PL A/c
(4) Transfer of Loss on Cancellation (Face Value < COA)

P&L A/c Dr.
To Loss on cancellation a/c

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TOPIC 3 ACCOUNTING OF REDEMPTION OF DEBENTURE BY PURCHASE FROM

OPEN MARKET FOR IMMEDIATE CANCELLATION WITH OWN
DEBENTURE A/C
(1) Purchase of own debenture
Own Debenture A/c Dr. (COA)
Own Debenture Interest A/c Dr. (With Interest)
To Bank A/c (Total)
(2) Cancellation of Debenture
Debenture A/c Dr. (Face Value)
Loss on cancellation a/c Dr. (if cost > face value)
To Own Debenture A/c (cost)
To Profit on cancellation (If face value > COA)
(3) Transfer of Profit on cancellation (face value > COA)
Profit on cancellation A/c Dr.
To C/R or PL A/c
(4) Transfer of Loss on Cancellation (Face Value < COA)

P&L A/c Dr.
To Loss on cancellation a/c
Note 2
In case of cancellation of debenture, loss is transferred to P&L A/c where as profit is
transferred to C/R or PL A/c.
TOPIC 4 DEBENTURE REDEMPTION RESERVE
 A company issuing debentures is required to create a debenture redemption

reserve account out of the profits available for distribution of dividend and
 Amounts credited to such account cannot be utilised by the company
except for redemption of debentures.
 Such an arrangement would ensure that the company will have sufficient
liquid funds for the redemption of debentures at the time they fall due for
payment.
 An appropriate amount is transferred from profits every year to Debenture
Redemption Reserve and its investment is termed as Debenture Redemption
Reserve Investment.
 In the last year or at the time of redemption of debentures, Debenture
Redemption Reserve Investments are encashed and the amount so
obtained is used for the redemption of debentures.

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TOPIC 5 ADEQUACY OF DEBENTURE REDEMPTION RESERVE (DRR)

As per Rule 18 (7) of the Companies (Share Capital and Debentures) Rules, 2019,
the company shall create a Debenture Redemption Reserve for the purpose of
redemption of debentures, in accordance with the conditions given below—
 the Debenture Redemption Reserve shall be created out of the profits of the
company available for payment of dividend;
 the company shall create Debenture Redemption Reserve (DRR) in accordance
with conditions given in below table:
TYPES OF COMPANIES REQUIREMENT OF DRR
 Financial Institutions (AIFIs)

regulated by Reserve Bank of
India

NO DRR
Banking Companies
 other Financial Institutions (FIs)
 NBFCs
 Housing Finance Companies (HFC)
 Other companies (Listed)
 Unlisted companies 10% OF THE OUTSTANDING

(other than AIFIs, Banking AMOUNT DEBENTURE
Companies, FIs, NBFCs and HFC)
Note 3
No DRR is to be created for part of debentures which are to be converted into
shares.
TOPIC 5 DEBENTURE REDEMPTION RESERVE INVESTMENT (DRRI)
 Every company required to create DRR shall on or before the 30th day of
April of each year,
 Deposit or invest by following method:
(a) in deposits with any scheduled bank, free from charge or lien;
(b) in unencumbered securities of the Central Government or of any
State Government;
(c) in unencumbered securities mentioned in clauses (a) to (d) and (ee)
of Section 20 of the Indian Trusts Act, 1882;
(d) in unencumbered bonds issued by any other company which is
notified under clause (f) of Section 20 of the Indian Trusts Act, 1882.

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 A sum which should not be less than 15% of the amount of its debentures
maturing during the year ending on the 31st day of March of next year,
 Utilized for the repayment of debentures maturing during the year.
Note 4
 No DRRI is to be created for part of debentures which are to be converted into
shares.
TOPIC 6 ACCOUNTING FOR DRR
On creating shortage of DRR Transfer of DRR to GR account

Profit and loss a/c Dr. DRR a/c Dr.
To DRR a/c To GR a/c
(it will be 10 % of debenture matured
during the year)
Note 5 Calculation of shortage of DRR:
Total required DRR (10% of existing outstanding balance of debenture) XXX
Less: Opening balance of DRR given XXX
Shortage of DRR XXX
Note 6 Format of DRR account

To GR account XXX By balance b/d (Opening) XXX
(10% of debenture redeemed By PL account
during the year)
(shortage of DRR) XXX
To balance c/d(closing)
XXX
XXX XXX
TOPIC 7 ACCOUNTING FOR DRRI
On investment in DRRI Sale of DRRI
(for shortage of DRRI) (15% of redeemed during the year)
DRRI a/c Dr. Bank a/c Dr.
To Bank a/c To DRRI
Note 7 Calculation of shortage of DRRI

Total required DRRI (15% of existing outstanding balance of debenture) XXX
Less: Opening balance of DRRI given XXX
Shortage of DRRI XXX

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Note 8 Format of DRRI account

To balance b/d (Opening) XXX By Bank account XXX
To Bank account (15% of debenture redeemed
during the year)
(shortage of DRRI) XXX XXX
To balance c/d (closing)

XXX XXX

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Investment Accounts 9.1
Chapter - 9
Investment Accounts
MEANING OF INVESTMENT:-
• Assets held by enterprise for :
· Periodic income: In the form of interest, dividend and rent etc.
· Capital appreciation: In the form of increase in market price of the investment.
· Other benefit
• Purchase with intention not to be sold in or Ordinary course of business (assets held as stock in
trade are not investments).
• Investment accounting is done as per AS 13.
Note: 1 AS 13 deals with accounting for investment in the financial statements and related disclosure
requirements except:
i. Bases for recognition of interest, dividend and rent earned on investment.
ii. Operating and financing lease.
iii. Investment of retirement benefits plans and life insurance enterprise.
iv. Mutual fund etc.
CLASSIFICATION/TYPES OF INVESTMENT
Current Investment Non-current-Investment
If following two conditions are Which is not current

satisfied investment
 Maximum intention to hold for
12 months
 Readily marketable

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PRACTICALLY COVERED TOPIC BY ACCOUNTING FOR
INVESTMENT
Accounting for Accounting for Reclassification

Investment In investment in interest of Investments
Shares bearing securities
TOPIC 1 :- ACCOUNTING FOR INVESTMENT IN SHARES

1. PURCHASE OF SHARE:
Investment A/c Dr. XX (with cost of acquisition)

To Bank A/c XX
2. RECEIVING BONUS SHARE:—

• When company issue equity shares to existing equity shareholder in a certain proportion free of cost.
• Calculate the number of bonus shares to be received on present holdings just before bonus issue.
• Since it is received free of cost, no journal entry is to be passed.
• Not to be disclosed in amount/cost column.
• It will increase the holding therefore it is disclosed in number of shares/face value column only.
• It will decrease the average cost per share of holding.
3. SALES OF SHARE :—
Bank A/c Dr. XX

To Investment A/c XX
(With net sale value)
4. CARRYING AMOUNT OR CLOSING BALANCE OF INVESTMENT
Current Investment Non-Current Investment
It will be lower of cost or fair It will always be valued at cost.

value However if fair price decrease
permanently then adjustment of such
decrease is required

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Note 2 :—Separate account are required in the books of a particular investor for each type of script as
per different types of investment on the basis of name or company or rate of investment.
Note 3 :— Cost of Acquisition(COA)
Purchase price XXX
Add : Brokerage and commission XXX
Add : Taxes and duties XXX
Add : other expenses on purchase XXX
COA
Note 4:— Cost of Acquisition (COA) if securities are acquired under exchange
If acquired by issue of shares/ other If acquired in exchange for another

securities then cost will be fair value of asset then cost will fair value of
share/security issued. asset given up or fair value of
investment acquired whichever is
more clearly evident.
Note 5:—Net sales value (NSV)

Total sale value XX
Less: - Expenses on sale XX
NSV
Note 6:—Profit or loss on sale :—
• Net sale value is compared with average cost of sales.
• If the net sale value is more than average cost of sales then the difference is profit on sales.
Investment A/c Dr. XX
To P& L A/c XX
• If the average cost of sale is more than net sale value then the difference is loss on sales.
P & L A/c Dr. XX
Note 7 :— Average cost per share :—
• Whenever average cost is needed then details of investment A/c just before current transaction are
to be used in the formula given below:
Total debit amount – Total credit amount
• Average cost per share 
Total debit Nos. – Total Credit Nos.

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Note 8 :—If closing balance is disclosed at average cost then investment account will automatically get
closed. However, if it is disclosed at fair value then short fall of credit side will be expected loss.
P &L A/c Dr. XX
Note 9 :— If market price of a particular time needed is not given, then preceding market price is to be
considered market price of that point of time.
Note 10:— Sometime question may require FIFO or other method for calculation of cost then accordingly
calculate cost of investment instead of average cost method.

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1. RECEIVING RIGHT OPTION FROM THE COMPANY
• When company further issue shares of already issued class of shares to fulfill requirement of funds,
then it is known as right shares.
• Company needs to give option to existing share holder for purchases of such right shares.
• Treatment of Right Option:—
If exercised/ Renouncement of Lapse of right

purchased/subscribed right option option
Entry for purchase of share in Option in transferred to No Entry

normal manner (brokerage is another person
not payable on such purchase)
There will be income from

renouncement
Treatment of such
income
Capital nature Income Revenue Nature Income
 If following two condition are satisfied  If the two conditions are not
 Before record date of Right option, satisfied.
market price was cum right basis.  Not disclosed in investment amount
 After record date of right, market  Directly credited to P & L A/c
price decreased (ex-Right Basis)
 Adjustment against cost of investment, Bank A/c Dr. XX
therefore disclosed in credit side of
To Sale of Right A/c XX
amount column
Sale of Right A/c Dr. XX
Bank A/c Dr. XX
To P& L A/c XX

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Note : From practical ponit of view if question required to prepare investment
account then by default income from renouncement is to be assumed of
revenue nature income.
However if question is specifically given for renuouncement of right
shares then income from such renuouncement will have to parts
A. Will have capital nature to the extent market value of existing investment
decreased
B. Will have revenue nature for remaining part of income.
1. TREATMENT OF DIVIDEND INCOME ON SHARES :—
 Basic Guideline for dividend
i) Dividend is calculated always on paid –up value (face value).
ii) Dividend is always given on yearly basis (no time proportionate of dividend).
iii) Dividend is given to that person who is share holder on date of dividend irrespective
of his period of holding.
iv) Amount of dividend = rate of dividend × total face of holding
 Types of Dividend :-
a) Final Dividend
 Dividend which is declared in AGM of the company with consent of shareholder
on proposal of board of director.
 Generally dividend which is paid in next year for current year is known as final
dividend.
 Calculate holding on date of dividend and analysis it.
 Final dividend not to be received on bonus and right share allotted by company
in current year because period of dividend belong to previous year where as it is
originally issued in current year.
 Dividend on purchase of share from open market:
i) It will be pre- acquisition dividend.
ii) Capital nature.
iii) Adjusted against cost of investment.
iv) Disclosed in amount column of in credit side of investment account

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Bank A/c Dr.
To Investment A/c
• Dividend income on opening balance :—
i) Post acquisition dividend
ii) Revenue Nature.
iii) Credited to dividend column and thereafter transferred to P&L A/c at the end of year.
Bank A/c Dr.
To Dividend Income A/c
Dividend Income A/c Dr.

To P&L A/c
b) Interim Dividend
• Which is declared between two AGM by BOD of company
• Dividend for current year given in current year
• Calculate holding on day of dividend
• Will be received on entire holding on date of dividend
• Credited to dividend column and thereafter transferred to P/L a/c
Bank A/c Dr.
To Dividend Income A/c
Dividend Income A/c Dr.

To P&L A/c
TOPIC 2: ACCOUNTING FOR INVESTMENT IN DEBT [INTEREST
BEARING SECURITIES]
(a) GUIDELINES RELATING TO INTEREST ARE AS UNDER:
1. Interest is calculated on face value of debt.
2. There will be pre-decided due date of interest by issuer (annually, half-yearly, quarterly etc.)
3. Interest is paid on due date of interest to that person who is holder of security on due date irrespective
of his period of holding and it will be from last due date to current due date.
4. Therefore, if security is traded in open market then buyer needs to pay interest to seller from last due
date to date of purchase.
5. If security is purchased or sold on due date of interest or just next date of due date then interest is not
paid/received on such purchase or sale.
Time Period
6. Amount of interest = Total face value of holding × Rate of interest ×
12
7. Here time period will be generally from last due date of interest to current action.

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8. Here current action means purchased, sale, current due date of interest, opening and closing balance
etc.
9. Security traded in open market on the basis of current market price and it will have two types-
• Ex-Interest Price
• Market price does not include interest
• Interest is to be settled in addition to market price
Buyer Seller
Purchase price = MP xx Sale value = MP xx

+ Exp. on purchase xx Less: Exp. on sale xx
COA xx Net sale value xx
Interest (last due date to date of purchase) Interest (last due date to date of sale)
• Cum-Interest Price:
• Market price already includes interest
• No adjustment of interest in addition to market price
Buyer Seller
Total = MP xx Total = MP xx
Less: Interest Less: Interest
(last due date to date of purchase price) xx (Last due date to date of sale) xx
Purchase Price xx Sale value xx
Add: Exp. on purchase xx (-) Exp. on sale xx
COA xx Net Sale Value xx
Note 11: If nature of market price not given for all transaction of purchase and sale, then it is to be
assumed at ex-interest price. If some market prices are given as ex-interest price and silent for remaining
prices, then remaining prices are to be assumed as cum-interest price and vice-versa
Note12: If due date of interest is not given then it is to be assumed annually at the end of every financial
year.
Note 13: Accrued Account
• If due date of interest is not coming at the end of year, then adjustment of accrued interest is
needed.
• It will be from last due date of end of financial year on opening and closing balance of holding.
• If due date of interest is coming it the end of financial year, then adjustment of accrued interest is
not needed

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1. PURCHASE OF SECURITY
Investment A/c Dr. [COA]
Interest on Investment A/c Dr. [with interest]
To Bank A/c [Total payment]
2. SALE OF SECURITY:
Bank A/c Dr. [Total Amount]
To Investment A/c [Net Sale Value]
To Interest of Investment A/c [with Interest]
3. PROFIT OR LOSS ON SALE: It is to be calculated similar to investment is shares and then
transferred to P&L A/c
Investment A/c Dr. [Profit on sale]

To P&L
P&L A/c Dr. [Loss on sale]

To Investment A/c
4. RECEIVING INTEREST ON EVERY DUE DATE:
Bank A/c Dr.
To Interest on Investments A/c
(from last due date to current due date as per holding on current due date)
5. AT THE END OF FINANCIAL YEAR
• Receiving interest if there is due date at the end of year
• Adjustment of accrued interest from last due date to end of year if there is no due date at the end of
year.
• Transfer balance of interest A/c to P&L account:
Interest on Investment A/c Dr.
To P&L A/c
• Carry down balance of investment account in normal manner similar to closing balance of investment
in shares.
Note 14:—Accrued interest is to be disclosed along with opening and closing balance of investment A/c

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TOPIC 3 : RE-CLASSIFICATION OF INVESTMENT
• Conversion of nature of investment from current to non-current or non-current to current investment
• At the time of re-classification the investment is to be disclosed as per following guidelines
Conversion from current to Conversion from non-current

non-current investment to current asset
It is to be disclosed at cost or It is to be disclosed at cost or

fair value whichever in lower carrying amount whichever is
lower.

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Question 1 —
MY Ltd. had acquired 200 equity shares of YZ Ltd. at 105 per share on 01.01.2009 and paid 200 towards
brokerage, stamp duty and STT. On 31st March, 2009, shares of YZ Ltd. were traded at 110 per share. At
what value investment is to be shown in the Balance Sheet of MY Ltd. as at 31st March, 2009.
Answer—
( )
Purchase price of Equity shares of YZ Ltd. (200 shares x Rs.1 05 per share) 21,000
Add: Brokerage, stamp duty and STT 200
Cost of investment 21,200
If the investment is a long term investment than it will be shown at cost. Therefore value of investment will
be 21 ,200. However, if the investment is a current investment, then it will be shown at lower of cost (i.e.
21,200) or net realizable value (i.e. 200 × 110 = 22,000). Therefore value of investment will be 21,200.
Question 2
Mr. Chatur had 12% Debentures of Face Value 100 of M/s. Unnati Ltd. as current investments.
He provides the following details relating to the investments.
1-4-2014 Opening balance 4,000 debentures costing 98 each
1-6-2014 Purchased 2,000 debentures @ 120 cum interest
1-9-2014 Sold 3,000 debentures @ 110 cum interest
1-12-2014 Sold 2,000 debentures @ 105 ex interest
31-1-2015 Purchased 3,000 debentures @ 100 ex interest
31-3-2015 Market value of the investments 105 each
Interest due dates are 30th June and 31st December.
Mr. Chatur closes his books on 31-3-2015. He incurred 2% brokerage for all his transactions. Show
investment account in the books of Mr. Chatur assuming FIFO method is followed.

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Working Notes
1. Valuation of closing balance as on 31.3.2015:
Market value of 4,000 Debentures at 105 = 4,20,000
Cost price of 1,000 debentures at 1,17,400
3,000 debentures at 3,06,000
4,23,400
Value at the end = 4,20,000 i.e. whichover is less
2. Profit on sale of debentrues as on 1.9.2014
Sales price of debentures (3,000 × 110) 3,30,000

Less : Brokerage @2% (6,600)
3,23,400
Less : Interest for 2 months (6,000)
3,17,400
 3,000 
Less : Cost price of Debentures  3,92,000   (2,94,000)
 4,000 
Profit on slae 23,400
3. Loss on sale cof debentures as on 1.12.2014
Sales price of debentures (2,000 × 105) 2,10,000

Less : Brokerage @ 2% (4,200)
2,05,800
Less : Cost price of Debentures (98,000 + 1,17,400) 2,15,400
Loss on sale 9,600
4. Purchases Cost of 2,000 debentures on 1.6.2014
2,000 Debentures @ 120 cum interest 2,40,000

Add: Brokerage @ 2% 4,800
2,44,800
Less : Interest for 5 months 10,000
Purchases cost of 2,000 debentures 2,34,800
5. Sale value for 3,000 debentures on 1.9.2014
Sale price of debentures cum interest (3,000 × 110) 3,30,000

Less : Brokerage @2% (6,600)
3,23,400
Less Interest for 2 months 6,000
Sale value for 3,000 debentures 3,17,400

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Question 3—
On 1st December, 2015, M/s Blue & Black purchased, 20,000 12% fully paid debentures of 100 each
at 105 cum interest price, also paying brokerage @ 1% of cum interest amount of the purchase. On
1st March, 2016, the firm sold all these debentures at 110 cum-interest price, again paying brokerage
@ 1% of cum interest amount. Prepare Investment Account in the books of M/s. Blue & Black for the
period 1st December, 2015 to 1st March, 2016. Interest being payable half yearly on 30th September
and 31st March of every accounting year.
Answer—
In the books of M/s Blue & Black Investment Account
for the period from 1st December 2015 to 1st March, 2016
(Scrip: 12% fully paid Debentures)
Date Particula Nominal Interest Cost Date Particula Nominal Interest Cost
rs Value ( ) rs Value ( )
( ) ( )
1.12.20 To Bank 20,00,000 40,000 20,81,000 1.03.2016 By Bank 20,00,000 1,00,000 20,78,000
15 A/c A/c
(W.N.1) (W.N.2)
1.3.2016 To Profit & - 1.3.2016 By Profit
loss A/c 60,000 3,000
& loss
A/c
20,00,000 1,00,000 20,81,000 20,00,000 1,00,000 20,81,000
Working Notes:
(i) Cost of 12% debentures purchased on 1.12.2015
Cost Value (20,000 × 105) = 21,00,000
Add: Brokerage (1% of 21,00,000) = 21,000
Less: Interest (20,000 × 100 x12% × 2/12) = (40,000)
Total = 20,81,000
(ii) Sale proceeds of 12% debentures sold on 1st March, 2016
Sales Price (20,000 × 110) = 22,00,000
Less: Brokerage (1% of 22,00,000) = (22,000)
Less: Interest (20,000 × 100 ×12% × 5/12) = (1,00,000)
Total = 20,78,000

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Question 4—
Kumar invests and disinvests from time to time in 10% Non-convertible Debentures (NCD) of Apple
Ltd. on FIFO basis. From the following transactions, prepare investment account as it would appear in
her books:
15.6.2011 Purchased 3,000 NCD, ex-interest @ Rs. 96 each
15.9.2011 Sold 3,000 NCD, ex-interest @ Rs. 100 each
15.12.2011 Purchased 2,000 NCD, cum-interest @ Rs. 99 each
15.2.2012 Sold 2,000 NCD, cum-interest @ Rs. 102 each
Opening balance of NCD of 100 each was 2,00,000 on 1.4.2011 and Cost of acquisition was 1,80,000.
Interest payment dates on NCD are 30th June and 31st December, Kumar follows financial year as
accounting year.
Answer—
In the books of Kumar
10% Non-Convertible Debentures (NCD) Account
Particular Face Value Interest Cost Particular Face Value Interest Cost
April 1 To Bal. b/d 2,00,000 5,000 1,80,000 June 30 By Bank 25,000

June 15 To Bank 3,00,000 13,750 2,88,000 Sept. 15 By Bank 3,00,000 6,250 3,00,000
Sept. 15 To P & L A/c 24,000 Dec. 31 By Bank 20,000
Dec. 15 To Bank 2,00,000 9,167 1,88,833 Feb. 15 By Bank 2,00,000 2,500 2,01,500
Feb. 15 To P & L A/c 9,500 Mar. 13 By Bal. c/d 2,00,000 5,000 1,88,833
Mar. 31 To P & L A/c 30,833
(Bal. Fig.)
7,00,000 58,750 6,90,333 7,00,000 58,750 6,90,333
Working Notes:
(i) Profit/Loss on sale of NCD
( )
Sold on 15.09.2011
Selling price (3,000 × 100) 3,00,000
Less: Cost of purchase
2000 × 90 (opening) (1,80,000)
1000 × 96 (purchase) (96,000)
Profit 24,000
Sold on 15.02.2012
Selling price (2,000 × 102) 2,04,000
Less: Interest included (2,500)
2,01,500
Less: Cost of purchase (2000 × 96) (1,92,000)
Profit 9,500
(ii) As the disinvestment is done on FIFO basis. NCDs purchased on 15.12.2011 remained in stock
on 31.03.2012 at a cost of Rs. 1,88,333.

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(iii) Interest calculation on various dates:
(a) On 1.4.11: ( )
3
2,00,000  10%   (1.1.09. – 31.3.09) = 5,000
12
(b) On 15.6.11:
5 .5
3,00,000 10%   (1.1.09. – 15.6.09) = 13,750
12
(c) On 30.6.11:
6
5,00,000  10%   (1.1.09. – 30.6.09) =25,000
12
(d) On 15.9.11
2 .5
3,00,000  10%   (1.7.09. – 15.9.09) = 6,250
12
(e) On 15.12.11:
5.5
2,00,000 10%   (1.7.09. – 15.12.09) = 9,167
12
(f) On 31.12.11:
6
4,00,000  10%   (1.7.09. – 31.12.09) = 20,000
12
(g) On 15.2.2012:
1 .5
2,00,000  10%   (1.1.10. – 15.2.10) = 2,500
12
(h) On 31.3.2012
3
2,00,000  10%   (1.1.10. – 31.3.10) = 5,000
12
Question 5 —
Mr. X purchased 1,000, 6% Government Bonds of Rs. 100 each on 31st January, 2009 at 95 each. Interest
is payable on 30th June and 31st December, The price quoted is cum interest. Journalize the transaction.
Answer—
Date Particulars Amount (Dr.) Amount (Cr.)
Rs. Rs.
31st Jan., 2009 Investment A/c Dr. 94,500
 6 1
Interest A/c  1,00,000    Dr. 500
 12 2 
To Bank 95,000
(Being purchase of 1,000, 6% Givernment bonds of
100 each at 95 each cum interest.)

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Question 6 —
Gaama Investment Company holds 1,000, 15% debentures of 100 each in Beta Industries Ltd. as on April
1, 2009 at a cost of 1,05,000. Interest is payable on June, 30 and December, 31 each year.
On May 1, 2009, 500 debentures are purchased cum-interest at 53,500. On November 1, 2009, 600
debentures are sold ex-interest at 57,300. On November 30, 2009, 400 debentures are purchased ex-
interest at 38,400. On December 31, 2009, 400 debentures are sold cum-interest for 55,000.
Prepare the investment account showing value of holdings on March 31, 2010 at cost, using FIFO method.
Answer—
In the books of Gaama Investments Ltd.
Investment Account (15% Debentures in Beta Industries Ltd.)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest value
1.04.09 To balance b/d 1,00,000 3,750 1,05,000 30.06.09 By Bank A/c – 11,250 –
(W.N. 1) (W.N. 3)
1.05.09 To Bank A/c 50,000 2,500 51,000 1.11.09 By Bank A/c 60,000 3,000 57,300
(W.N. 2) (W.N. 4)
30.11.09 To Bank A/c 40,000 2,500 38,400 1.11.09 By P & L A/c 5,700
(W.N. 5) (W.N. 11)
31.12.09 To P & L A/c 10,000 31.12.09 By Bank A/c 40,000 3,000 52,000
(W.N. 12) (W.N. 6 & 7)
31.03.10 To P & L A/c – 18,625 31.12.09 By Bank A/c – 6,750 –
(W.N. 8)
31.03.10 By Bank A/c 90,000 3,375 89,400
(W.N. 9 & 10)
1,90,000 27,375 2,04,400 1,90,000 27,375 2,04,400
Working Notes—
15 3
1 Accrued interest as on 1.4.09 = Rs. 1,00,000 × × = Rs. 3,750
100 12
15 4
2 Accrued interest = Rs. 50,000 × × = Rs. 2,500
100 12
3. Cost of investment for purchase on 1.5.09 = Rs.53,500- Rs.2,500 = Rs .51,000
15 6
4. Interest received = Rs. 1,50,000 × × = Rs. 11,250
100 12
15 4
Accrued interest = Rs. 60,000 × × = Rs. 3,000
5. 100 12
15 5
6. Accrued interest = Rs. 40,000 × × = Rs. 2,500
100 12
15 6
7. Accrued interest = Rs. 40,000 × × = Rs. 3,000
100 12

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Sale price of investment on 31.12.09 = Rs .55,000 - Rs.3,000 = Rs.52,000

15 6
100 12
15 3
100 12
Cost of investment as o n 31.3.10 = Rs.51,000 + Rs.38,400 = Rs.89,400
Loss on debentures sold on 1.11.2009:
Sales price of debentures Rs. 57,300
1,05,000
Less: Cost of Investment sold   6,000 63,000
1,000
Loss on Sales 5,700
Profit on debentures sold on 31.12.2009:
Sales price of debentures 52,000
1,05,000
Less: Cost of investment sold   400  42,000
1,000
Profit on sale 10,000
****************

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Insurance Claims for Loss of Stock and Loss of Profit 10.1
Chapter — 10
Insurance Claims for Loss of Stock
and Loss of Profit
MEANING/ CONCEPT OF INSURANCE:
• It is indemnity contract between two parties, i.e., insurer (insurance company) and insured (policy
holder).
• Policy holder will provide, premium to insurance company.
• Insurance company will provide monetary protection to policy holder for a certain future period
and specified probable risk of policy holder.
• Insurer will compensate for monitory loss incurred due to occurrence of event covered by the
policy.
• Chapter is given from policy holder’s point of view to find out amount of claim under certain
policies.
• Amount of claim will never exceed the policy amount.
• Amount of claim will never exceed the actual loss incurred.
PRACTICALLY COVERED TOPIC BY INSURANCE CLAIM
CLAIM FOR LOSS CLAIM FOR LOSS OF CLAIM FOR DETERMINATION

OF STOCK POLICY PROFIT POLICY COMPREHENSIVE OF OPTIMUM
POLICY AMOUNT OF
POLICY
TOPIC 1 :-LOSS OF STOCK BY FIRE POLICY :-
• Incident of fire has occurred in the business.
• It results loss of stock of the business.
• Policy taken to protect monetary loss against loss of stock is known as loss of stock policy.
• Process for calculation of claim will be as under

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STEP 1:-DETERMINATION OF GP RATE
• If G. P. rate is already given, then no calculation is needed just need to consider whether it is given on
cost or sales.
• If it is not given, then prepare trading A/c of previous year.
GP
G.P.Rate   100
Net Sales
• If increasing or decreasing trend of GP rate is given, then adjust it to G.P. rate calculated of previous
year in order to calculate adjusted GP rate for current year.
STEP 2:-CALCULATION OF STOCK ON DATE OF FIRE

• Prepare memorandum trading A/c of current year (from beginning of current year to date of fire)
• Disclose GP using GP rate determined in earlier step.
• Calculate closing stock as balancing figure and it will be stock on date of fire.
STEP 3:-CALCULATION OF LOSS OF STOCK
Stock on date of fire XX
Less :- salvaged stock(If any) XX
Loss of stock XX
Step 4:–
Calculation of Net Claim
If salvaged stock is not given If salvaged stock is given
Net claim will be lower of Application of average clause

Policy Amount or loss of
stock
No Yes
Full/over insurance Under insurance
Policy amount ≥ Policy amount < insurable amount

Insurable amount
Net claim=
Net claim = loss of stock 𝒑𝒐𝒍𝒊𝒄𝒚 𝒂𝒎𝒐𝒖𝒏𝒕
𝒙 𝒍𝒐𝒔𝒔 𝒐𝒇 𝒔𝒕𝒐𝒄𝒌
𝒊𝒏𝒔𝒖𝒓𝒂𝒃𝒍𝒆 𝒂𝒎𝒐𝒖𝒏𝒕

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Note :— If it is clearly given in the question that average clouse is not applied
then net claim will be lower of policy amount and actual loss incurred.
Note 1:-Average Clause:—
• It is a situation of under insurance.
• It is applied when policy amount is less than insurable amount.
• In such case claim for loss of stock is to be received proportionately in ratio of policy taken out
of insurable amount.
• If policy amount is more than or equal to insurable amount (over/full insurance) then average clause
is not applied.
• Insurable amount is stock on date of fire.
Note 2:- If stock is under or overvalued, then convert it into original cost.
Note 3:- By default GP rate will be on sales.
Note 4:- If entry for sales has been passed, but goods are not dispatched to customer till date of fire,
then deduct it from given amount of sales and vice versa.
Note 5 :- If entry for purchase of goods has been passed, but goods is not received in business
till date of fire, then deduct it from given amount of purchases and vice versa.
Note 6 :- If goods have been used otherwise than sales for example:
• Drawing of goods, loss of goods by theft, goods distributed as free sample, goods sent to
consignee and goods used in advertisement etc.
• Find out original cost of such goods.
• Disclose cost as a deduction from purchases or credited to trading A/c.

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Note 7:-Sale of goods on approved basis (sales or return basis)
• Entry for sale is passed immediately
• Adjustment on date of fire will be
If Sale already confirmed by If sale is not confirmed till date of fire

customer
 Deduct invoice value from given
No further adjustment sales
 Disclose cost separately in credit
side of trading A/c as stock with
customer.
 Closing stock as balancing figure
will be stock exist in business
premises and it is to be used for
further calculation

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Note 8:– Treatment of abnormal stock
 Part of the stock which is not possible to be sold at normal selling price is known as
abnormal stock.
 It may be sold out at cost or less profit or at loss.
 Reason of abnormal stock is damaged condition or near to expiry date or out dated
etc.
 Accounting treatment of Abnormal stock will be as under.
Adjustment in previous year trading Adjustment in memorandum

Amount trading A/c of current year
 It is to be disclosed at original  Disclose detail of normal and

cost even if N.R.V. is less than abnormal stock separately by
cost. drawing separate columns.
 Calculation of GP rate is not to be
affected by abnormal factors.  GP of normal sales is to be
calculated by applying GP
rate and for abnormal sale as
per given information.
 Closing stock of both type of

stock will become stock on
date of fire and remaining
calculation will be similar to
previous process.
Note:— If abnormal stock is fully sold out in current period then memorandum
Trading account can be prepared only for detail of normal stock.

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Note 9:-Journal Entries for loss of stock by fire
1. Entry for Total Loss of stock :-
Loss by fire A/c Dr.
To Purchases A/c
2. Uncovered loss from insurance 3. Filing claim with insurance co. for
loss by covered policy
P& L A/c Dr.
Insurance Co. Dr.
To Loss by fire A/c
To Loss by fire A/c
4. Receiving claim 5. Rejection of claim by Insurance Co.
Bank A/c Dr. P&L A/c Dr
To Insurance Co. A/c To Insurance Co. A/c
Note – 10. Treatment of Fire fighting expense :–

(i) If not overed by policy then completely ignore it.
(ii) If convered by the policy then calculate total loss in place of & loss of stock by including fire
figuthing expenses in loss of stock & there after use total loss in place of loss of stock under the step
no. 4
(iii) If question is silent then provide alternate solution by assuming covered with policy & not covered
with policy.

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Example 1:
Total stock on date of fire = 5,00,000
Salvaged value of stock = NIL
Calculate net claim, if policy is taken for
(i) 8,00,000
(ii) 5,00,000
(iii) 4,00,000
Solution:
Calculation of loss of stock
Stock on DOF 5,00,000
Less : Salvaged value Nil
Loss of Stock 5,00,000
Since, salvage stock does not exist,
Therefore net claim will be lower of loss of stock and plicy amount.
(i) (ii) (iii)
Loss of stock 5,00,000 5,00,000 5,00,000

Policy Amount 8,00,000 5,00,000 4,00,000
Net Claim (Lower) 5,00,000 5,00,000 4,00,000
Example 2:
Stock of DOF 5,00,000
Salvaged value of stock 2,00,000
Calculate amount of net claim is policy is taken for
(i) 8,00,000
(ii) 5,00,000
(iii) 2,00,000
Solution :
Calculation of loss of stock
Stock on DOF 5,00,000
Less : Salvaged stock 2,00,000
Loss of stock 3,00,000
Case 1:—
Policy Amount ฀ = 8,00,000
Insurable Amount (Stock on DOF) = 5,00,000
Over Insurance, it means average clause is not applied
 Claim will be equal to loss of stock, i.e. Rs. 3,00,000
Case 2:—
Policy Amount = 5,00,000
It is a case of full insurance, it means average clause is not applied.
 Claim will be equal to loss of stock , i.e. Rs. 3,00,000

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Case 3 :—
Policy Amount = 2,00,000
It is a case of under insurance, average clause is applied
Policy Amount
Net Claim   Loss of Stock
Insurable Amount
2,00,000
  3,00,000 = 1,20,000
5,00,000
TOPIC 2:—
LOSS OF PROFIT POLICY (CONSEQUENTIAL LOSS OF CLAIM
POLICY)
• After occurrence of incident of fire business will get disturbed in the upcoming period.
• In such period expected sales of normal business will not occur.
• Therefore, it results in loss of sales.
• Due to such loss of sales business had to forgone loss of profit.
• Policy taken to protect from such kind of losses is known as loss of profit policy.
• It cover 3 types of losses:
I. Loss of profit
II. Loss due to fixed cost(standing cost)
III. Loss due to additional expenditure.
SPECIFIC TERMS UNDER LOSS OF PROFIT POLICY
1 . Indemnity period (IP)
• It is the time period for which insurance company is going to compensate losses.
• Generally it is from date of fire to re-establishment of business.
• If actual disturbance period and IP covered by policy both are given, then lower of the two
will be IP for Calculation.
2. Annual Turnover :-
• 12 months sale just preceding date of fire.
• In other words, 12 months sales from the period ending on DOF.
3. Adjusted Annual Turnover(AAT) :-
• Annual Turnover adjusted with increasing/decreasing trend of sales.
4. G/P on Adjusted Turnover (GP on AAT) :-
• AAT × GP Rate
• It will be also insurable amount under loss of profit policy.

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5. Standing cost :-
• Fixed cost is known as standing cost.
• In absence of information, generally it will be office (administration) expenses and financial
expenses.
Insured standing cost (ISC) Uninsured standing cost(USC)
Fixed cost covered by policy Fixed cost not covered by policy
6. Additional Expenses (Additional cost of working):-

• Expenses incurred in IP for temporary arrangement in order to continue the business on
temporary basis during I.P.
• Part of additional expenses admissible from insurance company is known as admissible expense.
CALCULATION OF CLAIM UNDER LOSS OF PROFIT POLICY
NP  insured standing cost
Step 1 :— GP Rate  100
Net Sales
Note 10:-
• In the above formula, detail is to be taken for previous financial year.
• Adjust trend of GP rate if any, to calculate adjusted GP rate.
• Claim for loss of profit and fixed cost is calculated jointly because above formula
already includes NP and insured standing cost.
Step 2: — Calculation of short sales:—
Sales in previous year just corresponding IP XX
Add /Less : Increasing or decreasing trend in sales XX
Expected sales in IP if fire would have been not occurred (Standard Sales) XX
Less : Actual Sales in IP XX
Short Sales XX
Step 3 :- Loss of profit = short sales x GP Rate
Step 4 :- Admissible expenses (Additional cost of working)
(i) Actual Additional Expenses Incurred XX
(ii) GP on sales in IP due to additional expenditure
(sales in IP due to additional exp. X GP rate) XX
GPon AAT
(iii)  Additional Expenses XX
GP on AAT  uninsurd standing cost
Least of above XX

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Note 11 :— Notes for calculation of Admissible expenses (step 4)
• If additional expenses are not incurred, then skip step 4.
• In calculation of sub-point (ii) only that part of sales in IP is to be considered which occur due to
additional expenses.
• In absence of information, it is to be assumed that entire sales of IP is due to additional expenses.
Step 5 :— Calculation of gross claim

Loss of profit XX
Add : Admissible expense XX
Less : Saving in insured standing cost (if any) XX
Gross claim XX
Step 6 :— Calculation of net claim
If average clause not applied If average clause applied
Policy Amount ≥ insurable Amount If policy amount < insurable Amount

(Full/Over insurance)
(Under Insurance)
Net claim = gross claim 𝒑𝒐𝒍𝒊𝒄𝒚 𝒂𝒎𝒐𝒖𝒏𝒕

Net claim = 𝒊𝒏𝒔𝒖𝒓𝒂𝒃𝒍𝒆 𝑨𝒎𝒐𝒖𝒏𝒕 𝑿 𝑮𝒓𝒐𝒔𝒔 𝒄𝒍𝒂𝒊𝒎

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Note 12 :- Trend in sales
Given Not Given
Use as it is If Calculation is possible If Calculation is not possible
Ignore
Calculation as follow:-
• If sales for different previous year are given then calculate percent increase/decrease in sales each
time (excluding current year) and thereafter calculate average % of increasing/decreasing trend in
sales.
• If same period sales is given for previous and current year (must be normal period) then
calculate percent increase/decrease in sales as a trend in sales.
Note 13:— Adjusted Annual Turnover(AAT):—
• Annual Turnover adjusted with trend of sales.
• If annual turnover already given in question then entire annual turnover needs to be trend adjusted.
• If annual turnover is not given in the question, then part of annual turnover relating to previous year
is to be trend adjusted and part of annual turnover relating to current year is not to be trend adjusted
assuming that it is already trend adjusted.
TOPIC 3 :—
OPTIMUM AMOUNT OF POLICY
(AMOUNT OF POLICY IS TO BE TAKEN)
Loss of stock policy Loss of profit policy
It will be equal to expected It will be equal to total expected profit and

maximum level of stock at any fixed cost for the current year
point of time during policy period
In other words total expected

contribution for the current year

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Question 1— (C.A. Nov. 97)
A fire occurred in the premises of Agni on 25th August, 2011 when a large part of the stock was
destroyed. Salvage was 15,000. Agni gives you the following information for the period of January
1, 2011 to August 25th, 2011:
(a) Purchases 85,000.
(b) Sales 90,000
(c) Goods costing 5,000 were taken by Agni for personal use.
(d) Cost price of stock on January 1, 2011 was 40,000
Over the past few years, Agni has been selling goods at a consistent gross profit margin of 33-1/
3%. The insurance policy was for 50,000. It included an average clause.
Agni asks you to prepare a statement of claim to be made on the insurance company.
Answer—
Computation of Stock:
Memorandum Trading Account
Particulars Amount Amount Particulars Amount Amount
To Opening Stock 40,000 By Sales 90,000
To Purchases 85,000 By Closing Stock 60,000
Less Drawings 5,000 80,000
To Gross Profit 30,000

(33.33%)
1,50,000 1,50,000
Computing Loss of Stock

Closing Stock 25th Aug. 2013 60,000
Less : Salvage 15,000
Loss 45,000
Computing Claim:
Value of Stock on hand 60,000
Amount of policy 50,000
Policy 50,000
Claim   Loss   45,000  37,500
Stock 60,000

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Question 2— (C.A. Nov. 96)
On 30th June, 2011, accidental fire destroyed a major part of the stocks in the godown of Jay
associates. Stock costing 30,000 could be salvaged but not their stores ledgers. A fire insurance
policy was in force under which the sum insured was 3,50,000. From available records, the
following information was retrieved:
(1) Total of sales invoices during the period April-June amounted to 30,20,000. An analysis
showed that goods of the value of 3,00,000 had been returned by the customers before the
date of fire.
(2) Opening stock on 1.4.2011 was 2,20,000 including stocks of value of 20,000 being lower
of cost and net value subsequently realised.
(3) Purchases between 1.4.2011 and 30.6.2011 were 21,00,000
(4) Normal gross profit rate was 33-1/3% on sales.
(5) A sum of 30,000 was incurred by way of fire fighting expenses on the day of the fire.
Prepare a statement showing the insurance claim recoverable.
Answer—
Statement of Claim
Stock of the date of fire 5,00,000

Less: Stock salvaged 30,000
4,70,000
As the policy amount is less than value of closing stock, average clause will apply.
Amnount of policy
Amount of claim   Loss
Stock on the date of fire
3,50,000
  4,70,000  3,29,000
5,00,000
As fire fighting expenses have been incurred to salvage the goods, they may be admited as part of the loss.
In that case, loss will be = 4,70,000+ 30,000 = 5,00,000.
3,50,000
Claim   5,00,000  3,50,000
5,00,000
Working Notes—
Dr. Memorandum Trading Account from 1.4.2011 to 30.6.2011 Cr.
To Opening Stock 2,20,000 By Slaes 30,20,000
Less : Abnormal item 20,000 2,00,000 Less: Abnormal item 20,000
To Purchases 21,00,000 30,000,000
To Gross Profit @ 33-1/3% 9,00,000 Less : Returns 3,00,000 27,00,000
By Closing Stock 5,00,000

(balancing figure)
32,00,000 32,00,000

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Question 3—
Calculate the amount of Insurance claim to be lodged, based on the following information:
Value to Stock destroyed by fire 90,000
Insurance policy amount (subject to average clause) 65,000
Value of stock salvaged from fire 40,000
Answer—
Stock destroyed by fire

 Amount of Claim   Amount of Policy
Total Stock before fire
90,000
  65,000  45,000
1,30,000
Question 4—
The premises of Sad Ltd. caught fire on 22nd January, 2010 and his stock was damaged. The firm
made up accounts to 31 March each year and on 31st March, 2009 the stock at cost was Rs.
13,27,200 as against Rs. 9,62,200 on 31st March, 2008.
Purchases from 1st April, 2009 to the date of fire were Rs. 34,82,700 as against Rs. 45,25,000 for
the full year 2008-09 and the corresponding sales figure were Rs. 49,17,000 and Rs. 52,00,000
respectively.
You are given the following further information:
(i) In July, 2009, goods costing Rs. 1,00,000 were given away for advertising purposes, no
entries being made in the books.
(ii) During 2009-10, a clerk misappropriated unrecorded cash sales. It is estimated that the
defalcation averaged Rs. 2000 per week from 1st April, 2009 until the clerk was dismissed
on 18th August, 2009.
(iii) The rate of gross profit is constant.
From the above information, make an estimate of the stock in hand on the date of fire.
Answer—
Trading Account for the year ended 31st March, 2009
Dr. Cr.
To Opening stock 9,62,200 By Sales 52,00,000

To Purchase 45,25,000 By Closing stock 13,27,200
To Gross profit 10,40,000 .
65,27,200 65,27,200
Rate of gross profit sales = (10,40,000 / 52,00,000) × 100 = 20%
Period from 1st April, 2009 to 18th August, 2009 has 140 days or 20 weeks.
Hence, amount of defalcation = Rs. 2,000 × 20 = 40,000

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Memorandum Trading Account from 1 st
April, 2009 to 22 nd
January, 2010
Dr. Cr.

To Purchase 34,82,700 By Unrecorded cash sales
Less: Cost of goods
used for advertising 1,00,000 33,82,700 -defalcation 40,000
To Gross Profit - 20% of
recorded as well as
unrecorded sales 9,91,400 By Stock on 22nd January, 2010 (Bal. Fig.) 7,44,300
57,01,300 57,01,300
Stock in hand on the date of fire = Rs. 7,44,300.
Question 5—
On 2.6.2014 the stock of Mr. Black was destroyed by fire. However, following particulars were
furnished from the records saved:
Stock at cost on 1.4.2013 1,35,000

Stock at 90% of cost on 31.3.2014 1,62,000
Purchases for the year ended 31.3.2014 6,45,000
Sales for the year ended 31.3.2014 9,00,000
Purchases from 1.4.2014 to 2.6.2014 2,25,000
Sales from 1.4.2014 to 2.6.2014 4,80,000
Sales upto 2.6.2014 includes 75,000 being the goods not dispatched to the customers. The sales invoice
price is 75,000.
Purchases upto 2.6.2014 includes a machinery acquired for 15,000.
Purchases upto 2.6.2014 does not include goods worth 30,000 received from suppliers, as invoice not
received upto the date of fire. These goods have remained in the godown at the time of fire. The insurance
policy is for 1,20,000 and it is subject to average clause. Ascertain the amount of claim for loss of stock.
Anawer—
In the books of Mr. Black
Trading Account for the year ended 31.3.2014
To Opening Stock 1,35,000 By Sales 9,00,000

To Purchases 6,45,000 By Closing Stock at cost 1,80,000
100
To Gross Profit 3,00,000 1,62,000 
90
. . .
10,80,000 10,80,000

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Memorandum Trading A/c
for the period from 1.4.2014 to 02.06.2014
To Opening Stock at cost 1,80,000 By Sales 4,80,000

To Purchases 2,25,000 Less: Goods not dispatched 75,000 4,05,000
Add: Goods received but By Closing Stock (Balacing Fig.) 1,50,000
invoice not received 30,000
2,55,000
Less: Machinery 15,000
2,40,000
To Gross Profit (Refer W.N.) 1,35,000
.
5,55,000 5,55,000
Calculation of Insurance Claim
Actual loss of stock

Claim subject to average clause   Amount of Policy
Value of stock on the date of fire
1,50,000
= 1,20,000   1,20,000
1,50,000
Working Note:
3,00,000 1
 100  33 %
9,00,000 3
1
Amount of Gross profit = 4,05,000 33 %  1,35,000
3
Question 6— (C.A. May 99)
X Ltd. has insured itself under a loss of profit policy for 3,63,000. The indemnity period
under the policy is six months. On 1st September, 2010 a fire occurred in the factory of X Ltd.
and the normal business was affected upto 1st March, 2011.
The following information is compiled for the year ended on 31 st March, 2010:
Sales 20,00,000
Insured standing charges 2,40,000
Uninsured standing charges 20,000
Net profit 1,20,000
Following further details of turnover are furnished.
(a) Turnover during the period of 12 months ending on the date of fire was 22,00,000.
(b) Turnover during the period of interruption was 2,25,000.

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(c) Actual turnover during the period from 1.9.2009 to 1.3.2010 during the preceding year
corresponding to the indemnity period was 7,50,000.
X Ltd. spent an amount of ‘ 40,000 as additional cost of working during the indemnity period. On
account of this additional expenditure:
(a) There was a saving of 15,000 in insured standing charges during the period of indemnity.
(b) Reduced turnover avoided was 1,00,000. i.e. but for this expenditure, the turnover after
the date of fire would have been only 1,25,000.
A special clause in the policy stipulates that owing to the reasons acceptable to the insurer under
the special circumstances the following increases are to be made:
(a) Increase of turnover standard and actual by 10%.
(b) Increase in rate of gross profit by 2% from previous year’s level.
X Ltd. asks you to compute the claim for loss of profit. All calculations should be to the nearest
rupee.
Answer—
Computation of Loss of Profit for insurance claim
(1) Rate of gross profit
Net profit for the last financial year  Insured standing chares
 100
Turnover for the last financial year
1,20,000  2,40,000
 100 18%
20,00,000
Add: Adjustment for cincrease in gross profit rate= 2%
20%
(2) Calculation of short sales:
Turnover from 1.9.2009 7,50,000

Add : Adjustment for increase in turnover @ 10% 75,000
Adjusted turnover 8,25,000
Less : Actual trunover from 1.9.2010 to 1.3.2011 2,25,000
Short Sales 6,00,000
(3) Addi[tional Expenses:
(i) Actual Expenses 40,000

(ii) Gross Profit on sale generated by additional expenses [(20/100)× 1,00,000] 20,000
Gross profit on annual ajdusted turnover

(iii) Additional expenses 
Gross profit on annual adjusted turnover  Uninsured standing charges
20%  24,20,000 *
 40,000
(20% on 24,20,000) 20,000
4,84,000
 40,000  38,413
5 04,000
Least of the above three figures i.e. 20,000 is allowable.
* 22,00,000×(110/100)

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(4) Amount of claim before application of average clause
Gross profit on short sales (20% on 6,0000) 1,20,000

Add: Allowable additional expenses 20,000
1,40,000
Less: Saving in insured standing chares (15,000)
1,25,000
(5) Application of average clause
Annual trunover i.e. trunover from 1.9.2009 to 31.8.2010 22,00,000

Add: Adjustment for increase in turnover (10% of 22,00,000) 2,20,000
24,20,000
Gross profit on annual adjusted turnover (20% on 24,20,000) 4,84,000
Loss of profit policy value 3,63,000
Since the policy-value is less than gross profit on adjusted annual tunover, the average clause is
applicable.
Hence the amount of claim = 1,25,000×( 3,63,000/ 4,84,000)
= 93,750
Question 7— (C.A. May 2012)
Ramda & Sons had taken out policies (without Average Clause) both against loss of stock and
loss of profit, for 2,10,000 and 3,20,000 respectively. A fire occurred on 1st July, 2011 and as
a result of which sales were seriously affected for a period of 3 months.
Trading and Profit & Loss A/c of Ramda & Sons for the year ended on 31st March, 2011 is given
below:
Amount Amount
To Opening Stock 96,000 By Sales 12,00,000
To Purchases 7,56,000 By Closing Stock 1,85,000
To Wages 1,58,000
To Manufacturing Expenses 75,000
To Gross Profit c/d 3,00,000
13,85,000 13,85,000
To Administriative Expenses 83,600 By Gorss Profit b/d 3,00,000
To Selling Expenses (Fixed) 72,400
To Commission on sales 34,200
To Carriage Outward 49,800
to Net Profit 60,000
3,00,000 3,00,000

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Further detail provided is as below:
(a) Sales, Purchases, Wages and Manufacturing Expenses for the period 1.04.2011 to 30.06.2011 were ‘
3,36,000, 2,14,000, 51,000 and 12,000 respectively.
(b) Other Sales figure were as follows
From 01.04.2010 to 30.06.2010 3,00,000
From 01.07.2010 to 30.09.2010 3,20,000
From 01.07.2011 to 30.09.2011 48,000
(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to increase by 5% on
sales.
(d) 1,98,000 were additionally incurred during the period after fire. The amount of policy included
1,56,000 for expenses leaving 42,000 uncovered.
Compute the claim for stock, loss of profit and additional expenses
Answer—
Claim for loss of stock
Memorandum Trading Account for the period 1st April to 1st July,2011

To Purchases 2,14,000 By Closing stock
To Wages 51,000 (Bal.fig.) 2,26,800
To Manufacturing expenses 12,000
To Gross Profit @ 30% on sales
(W.N) 1,00,800 .
5,62,800 5,62,800
Claim for loss of stock will be limited to 2,10,000 only which is the amount of Insurance policy
and no average clause will be applied.
Loss of Profit
(a) Short Sales :
Sales from 1st July, 2010 to 30th Sept. 2010 3,20,000
Add: 12% rise observed in 2011-12 over 2010-11
(April- June 3,36,000 instead of 3,00,000) 38,400
3,58,400
Less: Sales from 1st July, 2011 to 30th Sept. 2011 (48,000)
Short-sales 3,10,400
(b) Gross profit ratio
Net Profit  Insured standing charges(2010 – 11)
 100
Sales (2010 – 11)
60,000  1,56,000
 100  18%
12,00,000
Add: Expected rise due to decline in material cost 5%
23%
(c) Loss of gross profit (3,10,400 × 23%) 71,392
(d) Annual turnover (12 months to 1st July, 2011):

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Amount
( )
Sales for April 2010–March, 2011 12,00,000
Less : From 1-4-2010 to 30.6.2010 (3,00,0000)
9,00,000
Add :From 1-4-2011 to 30-6-2011 3,36,000
12,36,000
Add: 12% increased trend (9,00,000 × 12%) 1,08,000
13,44,000
Gross Profit on annual trend 3,09,120
(e) Amount allowable in respect of Additional expenses
Least of the following : Amount
( )
(i) Actual expenses 1,98,000
(ii) Gross profit on sales during indemnity period 23% of 48,000 11,040
Gross Profit on annual (adjusted) turnove
(iii)  Additional Expenses
Gross Profit as above  Unisured charges
(3,09,120/3,51,120)×198,000 1,74,316
Least i.e. 11,040 is admissible Claim
Loss of Gross Profit 71,392
Add: Additional expenses 11,040
Insurance claim for loss of profit will be of 82,432 only.
Working Notes
Rate of Gross Profit in 2010–11
Gross Profit
100
Sales
3,00,000
 100  25%
12,00,000
In 2011-12, Gross Profit is expected to increase by 5% as a result of decline in material cost, hence the rate
of Gross Profit for loss of stock is taken at 30%.
Question 8—
A trader intends to take a loss of profit policy with indemnity period of 6 months, however, he
could not decide the policy amount. From the following details, suggest the policy amount:
Turnover in last financial year 6,75,000
Standing charges in the last financial year 1,14,750
Net profit earned in last year was 10% of turnover and the same trend expected in subsequent
year.
Increase in turnover expected 30%.
To achieve additional sales, trader has to incur additional expenditure of 42,500.

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Answer—
(i) Calculation of Gross Profit
Net Profit  Standing Chrages

Gross Profit   100
Turnover
= [(67,500 + 1,14,750)/6,75,000] × 100 = 27%
(ii) Calculation of policy amount to cover loss of profit
Turnover in the last financial year 6,75,000

Add: 30% increase in turnover 2,02,500
8,77,500
Gross profit on increased turnover (8,77,500 x 27%) 2,36,925
Add: Additional standing charges? 42,500
Policy Amount 2,79,425
Therefore, the trader should go in for a loss of profit policy of 2,79,425.
***********************

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CA INTERMEDIATE
ACCOUNTING
PART – B & C
CA INTERMEDAITE
ACCOUNTING
INDEX
Update : 31.07.2021
PART B
Chapter 2 FRAMEWORK FOR PREPARATION 2.1 – 2.24 24
AND PRESENTATION OF FINANCIAL
STATEMENTS
Chapter 4 36
Unit I PREPARATION OF FINANCIAL 4.1 - 4.10

STATEMENT
Unit II CASH FLOW STATEMENT 4.11 - 4.36
Chapter 12 DEPARTMENT ACCOUNTS 12.1 – 12.21 21

PART - B
FRAMEWORK FOR PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS 2.1
CHAPTER 2
FRAMEWORK FOR PREPARATION AND

PRESENTATION OF FINANCIAL STATEMENTS
1) PURPOSE OF THE FRAMEWORK

 The framework sets out the concepts underlying the preparation and presentation
of general-purpose financial statements prepared by enterprises for external
users.
 The main purpose of the framework is to assist:
(a) Enterprises in preparation of their financial statements in compliance with
Accounting Standards and in dealing with the topics not yet covered by
any Accounting Standard,
(b) ASB in its task of development and review of Accounting Standards,
(c) ASB in promoting harmonisation of regulations, Accounting Standards and
procedures relating to the preparation and presentation of financial
statements by providing a basis for reducing the number of alternative
accounting treatments permitted by Accounting Standards,
(d) Auditors in forming an opinion as to whether financial statements
conform to the Accounting Standards,
(e) Users in interpretation of financial statements,
(f) Those who are interested in the work of ASB with information about its
information to the formulation of Accounting Standards.
2) STATUS AND SCOPE OF THE FRAMEWORK
 The framework applies to general-purpose financial statements (hereafter
referred to as ‘financial statements’ usually prepared annually for external users,
by all commercial, industrial and business enterprises, whether in public or private
sector.
 The special purpose financial reports, for example computations prepared for tax
purposes are outside the scope of the framework.
 Nevertheless, the framework may be applied in preparation of such 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.

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3) COMPONENTS OF 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.
(a) Balance Sheet
 Portrays value of economic resources controlled by an
enterprise.
Also provides information about liquidity and solvency of an
enterprise which is useful in predicting the ability of the
enterprise to meet its financial commitments as they fall due.
(b) Statement of Profit and Loss
 Presents the result of operations of an enterprise for an
accounting period, i.e., it depicts the performance of an
enterprise, in particular its profitability.
(c) Cash Flow Statement
 Shows the way an enterprise has generated cash and the way
they have been used in an accounting period and helps in
evaluating the investing, financing and operating activities
during the reporting period.
(d) Notes and other statements
 Present supplementary information explaining different items of
financial statements. For example, they may contain additional
information that is relevant to the needs of users about the
items in the balance sheet and statement of profit and loss.
 They include various other disclosures such as disclosure of
accounting policies, segment reporting, related party disclosures,
earnings per share, etc.
4) OBJECTIVES AND USERS OF FINANCIAL STATEMENTS
 Objective :
 provide information about the financial position, performance and cash
flows of an enterprise that is useful to a wide range of users.
 Users:
 All users of financial statements expect the statements to provide
useful information needed to make economic decisions.
 The financial statements provide information to suit the common needs
of most users.
 However, they cannot and do not intend to provide all information that
may be needed, e.g. they do not provide non-financial data even if they
may be relevant for making decisions.

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a. Investors
b. Employees
c. Lenders
d. Suppliers and creditors
e. Customers
f. Government
g. Public
5) FUNDAMENTAL ACCOUNTING ASSUMPTIONS
IF FOLLOWED IF NOT FOLLOWED

No separate disclosure is needed Separate disclosure is needed
GOING CONCERN ACCRUAL CONSISTENCY

 Enterprise will continue in  According to AS-1  It is assumed that
operation in the Revenues and costs accounting policies
foreseeable future and are accrued, that is, are consistent from
neither there is an recognised as they one period to
intention, nor there is a are earned or another.
need to materially curtail incurred (and not as
 The consistency
the scale of operations. money is received or
improves
paid) and
 Financial statements comparability of
prepared on going concern  Recorded in the financial statements
basis recognise among financial statements through time.
other things the need for of the periods to
 According to
sufficient retention of which they relate.
Accounting
profit to replace assets
 Further Section Standards, an
consumed in operation and
128(1) of the accounting policy can
for making adequate
Companies Act, 2013 be changed if the
provision for settlement
makes it mandatory change is required
of its liabilities.
for companies to
(i) By a statute or
 If any financial maintain accounts on
statement is prepared on accrual basis only. (ii) By an
a different basis, e.g. Accounting
 In case, any income/
when assets of an Standard or
expense is recognised
enterprise are stated at (iii) For more
on cash basis, the
net realisable values in its appropriate
fact should be
financial statements, the presentation of
stated.
basis used should be financial
disclosed. statements.

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6) QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

a. Understandability
 The financial statements should present information in a manner as to be
readily understandable by the users with reasonable knowledge of business
and economic activities and accounting.
b. Relevancy
 It is not right to think that more information one discloses the better it
is.
 A mass of irrelevant information creates confusion and can be even more
harmful than non-disclosure.
 The financial statements should contain relevant information only.
 Information, which is likely to influence the economic decisions by the
users, is said to be relevant.
 Such information may help the users to evaluate past, present or future
events or may help in confirming or correcting past evaluations.
 The relevance of a piece of information should be judged by its materiality.
A piece of information is said to be material if its misstatement (i.e., omission
or erroneous statement) can influence economic decisions of a user.
c. Reliability
 To be useful, the information must be reliable; that is to say, they must be
free from material error and bias.
 The information provided are not likely to be reliable unless:
(a) Transactions and events reported are faithfully represented.
(b) Transactions and events are reported on the principle of
'substance over form.
(c) The reporting of transactions and events are neutral, i.e. free from
bias.
(d) Prudence is exercised in reporting uncertain outcome of
transactions or events.
(e) The information in financial statements must be complete.
d. Comparability
 Comparison of financial statements is one of the most frequently used and
most effective tools of financial analysis.
 The financial statements should permit both inter-firm and intra-firm
comparison. One essential requirement of comparability is disclosure of
financial effect of change in accounting policies.

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7) TRUE AND FAIR VIEW

 Financial statements are required to show a true and fair view of the
performance, financial position and cash flows of an enterprise.
 The framework does not deal directly with this concept of true and fair
view, yet application of the principal qualitative characteristics and
appropriate accounting standards normally results in financial statements
portraying true and fair view of information about an enterprise.
8) ELEMENTS OF FINANCIAL STATEMENTS

A. Asset
 An asset is a resource controlled by the enterprise as a result of past
events from which future economic benefits are expected to flow to
the enterprise.
 The following points must be considered while recognising an asset:
(a) It may be tangible or Intangible assets
(b) An asset is a resource controlled by the enterprise. A resource
cannot be recognised as an asset if the control is not sufficient. It is
possible to recognise a resource not owned but controlled by the
enterprise as an asset.
(c) To be considered as an asset, it must be probable that the resource
generates future economic benefit.
(d) To be considered as an asset, the resource must have a cost or value
that can be measured reliably.
(e) When flow of economic benefit to the enterprise beyond the current
accounting period is considered improbable, the expenditure incurred
is recognised as an expense rather than as an asset.
B. Liability
 A liability is a present obligation of the enterprise arising from past
events, the settlement of which is expected to result in an outflow
of a resource embodying economic benefits.
 The following points may considered:
(a) A liability is a present obligation i.e. an obligation the existence of
which, based on the evidence available on the balance sheet date is
considered probable.
(b) It may be noted that certain provisions, e.g. provisions for doubtful
debts, depreciation and impairment losses, represent diminution in
value of assets rather than obligations. These provisions are outside
the scope of Accounting Standards 29 and hence should not be
considered asliability.

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(c) A liability is recognised only when outflow can be reliably

measured. Otherwise, the liability is not recognised. For example,
liability cannot arise on account of future commitment. A decision by
the management of an enterprise to acquire assets in the future does
not, of itself, give rise to a present obligation. An obligation normally
arises only when the asset is delivered or the enterprise enters into
an irrevocable agreement to acquire the asset.
C. Equity
 Equity is defined as residual interest in the assets of an enterprise
after deducting all its liabilities.
 Equity is the excess of aggregate assets of an enterprise over its
aggregate liabilities.
 In other words, equity represents owners’ claim consisting of items like
capital and reserves, which are clearly distinct from liabilities, i.e. claims
of parties other than owners.
D. Income
 Income is increase in economic benefits during the accounting period in
the form of inflows or enhancement of assets or decreases in liabilities
that result in increase in equity other than those relating to
contributions from equity participants.
 The definition of income encompasses revenue and gains.
 Revenue is an income that arises in the ordinary course of activities of
the enterprise, e.g. sales by a trader.
 Gains are income, which may or may not arise in the ordinary course of
activity of the enterprise, e.g. profit on disposal of fixed assets.
 Gains are showed separately in the statement of profit and loss
because this knowledge is useful in assessing performance of the
enterprise.
 Income earned is always associated with either increase of asset or
reduction of liability. This means, no income can be recognised unless the
corresponding increase of asset or decrease of liability can be recognised.
 For example, a bank does not recognise interest earned on non-performing
assets because the corresponding asset (increase in advances) cannot be
recognised, as flow of economic benefit to the bank beyond current
accounting period is not probable.
E. Expense
 An expense is decrease in economic benefits during the accounting period
in the form of outflows or depletions of assets or incurrence of
liabilities that result in decrease in equity other than those relating to
distributions to equity participants.

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 The definition of expenses encompasses expenses that arise in the

ordinary course of activities of the enterprise, e.g. wages paid. Losses
may or may not arise in the ordinary course of activity of the
enterprise, e.g. loss on disposal of fixed assets.
 Losses are separately showed in the statement of profit and loss because
this knowledge is useful in assessing performance of the enterprise.
 Expenses are always incurred simultaneously with either reduction of
asset or increase of liability. Thus, expenses are recognised when the
corresponding decrease of asset or increase of liability are recognised by
application of the recognition criteria stated above.
9) MEASUREMENT OF ELEMENTS OF FINANCIAL STATEMENTS

 Measurement is the process of determining money value at which an element
can be recognised in the balance sheet or statement of profit and loss.
 The framework recognises four alternative measurement bases for the
purpose.
 These bases relate explicitly to the valuation of assets and liabilities.
 The valuation of income or expenses, i.e. profit is implied, by the value of
change in assets and liabilities.

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MEASUREMENT BASIS
Basis Assets Liabilities
Recorded at an amount of cash Recorded at the amount of proceeds received
or cash equivalent paid or the in exchange for the obligation. In some
Historical
fair value of the asset at the circumstances a liability is recorded at the
Cost
time of acquisition. amount of cash or cash equivalent expected to
be paid to satisfy it in the normal course of
business.
Assets are carried out at the Liabilities are carried at the undiscounted
amount of cash or cash amount of cash or cash equivalents that would
Current
equivalent that would have to be required to settle the obligation currently.
Cost
be paid if the same or an
equivalent asset was acquired
currently.
For liabilities, this is the undiscounted amount
Realisable For assets, this is the amount
of cash or cash equivalents expected to be paid
(Settlemen of cash or cash equivalents
on settlement of liability in the normal course
t) Value currently realisable on sale of
of business.
the asset in an orderly
disposal.
Assets are carried at the Liabilities are carried at the present value of
present value of the future the future net cash outflows that are
Present
net cash inflows that the item expected to be required to settle the
Value
is expected to generate in the liabilities in the normal course of business.
normal course of business.
10) CAPITAL MAINTENANCE

 Capital refers to net assets of a business. Since a business uses its assets for its
operations, a fall in net assets will usually mean a fall in its activity level.
 It is therefore important for any business to maintain its net assets in such a
way, as to ensure continued operations at least at the same level year after
year.
 In other words, dividends should not exceed profit after appropriate
provisions for replacement of assets consumed in operations.
 For this reason, the Companies Act does not permit distribution of dividend
without providing for depreciation on fixed assets. Unfortunately, this may not
be enough in case of rising prices.

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Type Guidelines
 Under this convention, opening and closing assets are stated
at respective historical costs to ascertain opening and
Financial Capital closing equity.
Maintenance At  If retained profit is greater than or equals to zero, the
Historical Cost capital is said to be maintained at historical costs.
 This means the business will have enough funds to replace its
assets at historical costs. This is quite right as long as
prices do not rise.
 Under this convention, opening and closing equity at
Financial Capital historical costs are restated at closing prices using average
Maintenance At price indices.
Current  A positive retained profit by this method means the
Purchasing Power business has enough funds to replace its assets at average
closing price. This may not serve the purpose because prices
of all assets do not change at average rate in real situations.
 Under this convention, the historical costs of opening and
closing assets are restated at closing prices using specific
price indices applicable to each asset.
Physical Capital  The liabilities are also restated at a value of economic
Maintenance At resources to be sacrificed to settle the obligation at
Current Costs current date, i.e. closing date.
 The opening and closing equity at closing current costs are
obtained as an excess of aggregate of current cost values of
assets over aggregate of current cost values of liabilities.
 A positive retained profit by this method ensures retention
of funds for replacement of each asset at respective closing
prices.

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Example 1
Balance sheet of a trader on 31st March, 20X1 is given below:
Liabilities ` Assets `
Capital 60,000 Fixed Assets 65,000
Profit and Loss Account 25,000 Stock 30,000
10% Loan 35,000 Trade receivables 20,000
Trade payables 10,000 Deferred costs 10,000
Bank 5,000
1,30,000 1,30,000
Additional information:
i. The remaining life of fixed assets is 5 years. The pattern of use of the asset is even. The net
realisable value of fixed assets on 31.03.X2 was `60,000.
ii. The trader’s purchases and sales in 20X1-X2 amounted to `4 lakh and `4.5 lakh
respectively.
iii. The cost and net realisable value of stock on 31.03.X2 were `32,000and `40,000
respectively.
iv. Expenses for the year amounted to `14,900.
v. Deferred cost is amortised equally over 4 years.
vi. Debtors on 31.03.X2 is `25,000, of which `2,000 is doubtful. Collection of another `4,000
depends on successful re-installation of certain product supplied to the customer.
vii. Closing trade payable is `12,000, which is likely to be settled at 5% discount.
viii. Cash balance on 31.03.X2 is `37,100.
ix. There is an early repayment penalty for the loan `2,500.
The Profit and Loss Accounts and Balance Sheets of the trader are shown below in two cases
i. assuming going concern
ii. Not assuming going concern.
Answer
Profit and Loss Account for the year ended 31st March, 20X2
Case (i) Case (ii) Case (i) Case (ii)
` ` ` `
To Opening Stock 30,000 30,000 By Sales 4,50,000 4,50,000
To Purchases 4,00,000 4,00,000 By Closing 32,000 40,000
Stock
To Expenses 14,900* 14,900* By Trade 600
payables
To Depreciation 13,000 5,000
To Provision for
doubtful 2,000 6,000
debts
To Deferred cost 2,500 10,000
To Loan penalty – 2,500

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To Net Profit 19,600 22,200

(b.f.)
4,82,000 4,90,600 4,82,000 4,90,600
*It is assumed that expense includes interest of 10% on loan as `3500.
Balance Sheet as at 31st March, 20X2

Liabilities Case (i) Case Assets Case (i) Case (ii)
` (ii)` ` `
Capital 60,000 60,000 Fixed Assets 52,000 60,000
Profit & Loss A/c 44,600 47,200 Stock 32,000 40,000
10% Loan 35,000 37,500 Trade receivables
(less provision) 23,000 19,000
Trade payables 12,000 11,400 Deferred costs 7,500 Nil

Bank 37,100 37,100
1,51,600 1,56,100 1,51,600 1,56,100
Example 2
(a) A trader purchased article A on credit in period 1 for `50,000.
(b) He also purchased article B in period 1 for `2,000cash.
(c) The trader sold article A in period 1 for `60,000 in cash.
(d) He also sold article B in period 1 for `2,500 on credit.
Profit and Loss Account of the trader by two basis of accounting are shown below. A look at the
cash basis Profit and Loss Account will convince any reader of the irrationality of cash basis of
accounting.
Cash basis of accounting

Cash purchase of article B and cash sale of article A is recognised in period 1 while purchase of
article A on payment and sale of article B on receipt is recognised in period 2.
Profit and Loss Account

` `
Period 1 To Purchase 2,000 Period 1 By Sale 60,000
To Net Profit 58,000
60,000 60,000
By Net Loss 47,500
50,000 50,000

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Accrual basis of accounting
Credit purchase of article A and cash purchase of article B and cash sale of article Aand credit sale
of article B is recognised in period 1 only.
Profit and Loss Account

` `
62,500 62,500
Example 3
 A Ltd. has entered into a binding agreement with P Ltd. to buy a custom-made machine
`40,000. At the end of 20X1-X2, before delivery of the machine, A Ltd. had to change its
method of production.
 The new method will not require the machine ordered and it will be scrapped after delivery.
The expected scrap value is nil.
 A liability is recognised when outflow of economic resources in settlement of a present
obligation can be anticipated and the value of outflow can be reliably measured. In the given
case, A Ltd. should recognise a liability of `40,000 to P Ltd.
 When flow of economic benefit to the enterprise beyond the current accounting period is
considered improbable, the expenditure incurred is recognized as an expense rather than as
an asset.
 In the present case, flow of future economic benefit from the machine to the enterprise is
improbable. The entire amount of purchase price of the machine should be recognised as an
expense.
 The accounting entry is suggested below:
` `
Loss on change in production Method Dr. 40,000
To P Ltd. 40,000
(Loss due to change in production method)
Profit and loss A/c Dr. 40,000
To Loss on change in production method 40,000
(loss transferred to profit and loss account)
Example 4
 Suppose at the beginning of an accounting period, aggregate values of assets, liabilities and
equity of a trader are `5 lakh, `2 lakh and `3 lakh respectively.
 Also suppose that the trader had the following transactions during the accounting period.
(a) Introduced capital `20,000.

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(b) Earned income from investment `8,000.

(c) A liability of `31,000 was finally settled on payment of `30,000. Balance sheets of the
trader after each transaction are shown below:
Assets Liabilities Equity

Transactions – =
`lakh `lakh `lakh
Opening 5.00 – 2.00 = 3.00
(a) Capital introduced 5.20 – 2.00 = 3.20
(b) Income from investments 5.28 – 2.00 = 3.28
(c) Settlement of liability 4.98 – 1.69 = 3.29
 This example given explains the definition of income. The equity increased by`29,000 during
the accounting period, due to (i) Capital introduction `20,000 and(ii) Income earned
`9,000 (Income from investment + Discount earned).
 Incomes are therefore increases in equity without introduction of capital.
Example 5
Continuing with the example 4 given above, suppose the trader had the following further
transactions during the period:
(a) Wages paid `2,000.

(b) Rent outstanding `1,000.
(c) Drawings `4,000.
Balance sheets of the trader after each transaction are shown below:
Transactions – =
`lakh `lakh `lakh
Opening 5.00 – 2.00 = 3.00
(a) Capital introduced 5.20 – 2.00 = 3.20
(b) Income from investments 5.28 – 2.00 = 3.28
(c) Settlement of liability 4.98 – 1.69 = 3.29
(d) Wages paid 4.96 – 1.69 = 3.27
(e) Rent Outstanding 4.96 – 1.70 = 3.26
(f) Drawings 4.92 – 1.70 = 3.22
 The example given above explains the definition of expense.

 The equity decreased by `7,000 from `3.29 lakh to `3.22 lakh due to (i) Drawings `4,000 and
(ii) Expenses incurred `3,000 (Wages paid + Rent).
 The example given above explains the definition of expense. The equity decreased by `7,000
from `3.29 lakh to `3.22 lakh due to (i) Drawings `4,000 and (ii) Expenses incurred `3,000
(Wages paid + Rent).

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Example 6
 Mr. X purchased a machine on 1st January, 20X1 at `7,00,000. As per historical cost basis, he
has to record it at `7,00,000 i.e. the acquisition price.
 As on 1.1.20X6, Mr. X found that it would cost `25,00,000 to purchase that machine. Mr. X also
took loan from a bank as on 20X1 `5,00,000 @ 18% p.a. repayable at the end of 15th year
together with interest.
 As per historical cost, the liability is recorded at `5,00,000 at the amount or proceeds
received in exchange for obligation and asset is recorded at `7,00,000.
Example 7
 A machine was acquired for $ 10,000 on deferred payment basis.
 The rate of exchange on the date of acquisition was `49/$. The payments are to be made in 5
equal annual instalments together with 10% interest per year.
 The current market value of similar machine in India is `5lakhs.
 Current cost of the machine = Current market price = `5,00,000.
 By historical cost convention, the machine would have been recorded at `4,90,000.
 To settle the deferred payment on current date one must buy dollars at `49/$. The liability is
therefore recognised at `4,90,000 ($ 10,000 × `49).
 Note that the amount of liability recognised is not the present value of future payments. This is
because, in current cost convention, liabilities are recognised at undiscounted amount.
Example 8
 Carrying amount of a machine is `40,000 (Historical cost less depreciation). The machine is
expected to generate `10,000 net cash inflow.
 The net realisable value (or net selling price) of the machine on current date is `35,000.
 The enterprise’s required earning rate is 10% per year.
 The enterprise can either use the machine to earn `10,000 for 5 years.
 This is equivalent of receiving present value of `10,000 for 5 years at discounting rate 10% on
current date.
 The value realised by use of the asset is called value in use. The value in use is the value of
asset by present value convention.
 Value in use = `10,000 (0.909 + 0.826 + 0.751 + 0.683 + 0.621) = `37,900
 Net selling price = `35,000
 The present value of the asset is `37,900, which is called its recoverable value.
 It is obviously not appropriate to carry any asset at a value higher than its recoverable value.
 Thus the asset is currently overstated by `2,100 (`40,000 – `37,900).

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Example 9
 A trader commenced business on 01/01/20X1 with ` 12,000 represented by 6,000 units of a
certain product at ` 2 per unit.
 During the year 20X1 he sold these units at ` 3 per unit and had withdrawn ` 6,000.
 Thus: Opening Equity = ` 12,000 represented by 6,000 units at ` 2 per unit.
 Closing Equity = ` 12,000 (` 18,000 – ` 6,000) represented entirely by cash.
 Retained Profit = ` 12,000 – ` 12,000 = Nil
 The trader can start year 20X2 by purchasing 6,000 units at ` 2 per unit once again for selling
them at ` 3 per unit.
 The whole process can repeat endlessly if there is no change in purchase price of the product.
Example 10
 In the previous example (Example 9), suppose that the average price indices at the beginning
and at the end of year are 100 and 120 respectively.
 Opening Equity = ` 12,000 represented by 6,000 units at ` 2 per unit.
 Opening equity at closing price = (` 12,000 / 100) x 120 = ` 14,400 (6,000 x ` 2.40)
 Closing Equity at closing price= ` 12,000 (` 18,000 – ` 6,000) represented entirely by cash.
 Retained Profit = ` 12,000 – ` 14,400 = (–) ` 2,400
 The negative retained profit indicates that the trader has failed to maintain his capital.
 The available fund ` 12,000 is not sufficient to buy 6,000 units again at increased price ` 2.40
per unit.
 In fact, he should have restricted his drawings to` 3,600 (` 6,000 – ` 2,400).
 Had the trader withdrawn ` 3,600 instead of ` 6,000, he would have left with ` 14,400, the fund
required to buy 6,000 units at ` 2.40 per unit.
Example 11 (Physical capital maintenance)
 In the previous example (Example 9) suppose that the price of the product at the end of year
is `2.50 per unit.
 In other words, the specific price index applicable to the product is125.
 Current cost of opening stock = (`12,000 / 100) x 125 = 6,000 x `2.50 = `15,000 Current cost of
closing cash = `12,000 (`18,000 – `6,000)
 Opening equity at closing current costs = `15,000
 Closing equity at closing current costs = `12,000 Retained Profit = `12,000 – `15,000 = (-)
`3,000
 The negative retained profit indicates that the trader has failed to maintain his capital.
 The available fund `12,000 is not sufficient to buy 6,000 units again at increased price `2.50
per unit.
 The drawings should have been restricted to `3,000 (`6,000 – `3,000).
 Had the trader withdrawn `3,000 instead of `6,000, he would have left with `15,000, the fund
required to buy 6,000 units at `2.50 per unit.
 Capital maintenance can be computed under all three bases as shown below:

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Financial Capital Maintenance At Historical Costs

` `
Closing capital (At historical cost) 12,000
Less: Capital to be maintained
Opening capital (At historical cost) 12,000
Introduction (At historical cost) Nil (12,000)
Retained profit Nil
Financial Capital Maintenance At Current Purchasing Power
` `
Closing capital (At closing price) 12,000
Opening capital (At closing price) 14,400
Introduction (At closing price) Nil (14,400)
Retained profit (2,400)
Physical Capital Maintenance
` `
Closing capital (At current cost) ( 4800units) 12,000
Opening capital (At current cost)(6000 units) 15,000
Introduction (At current cost) Nil (15,000)
Loss resulting in non-maintenances of capital (3,000)
MCQs
1. The 'going concern' concept assumes that
(a) The business can continue in operational existence for the foreseeable
future.
(b) The business cannot continue in operational existence for the foreseeable
future.
(c) The business is continuing to be profitable.
2. Two principal qualitative characteristics of financial statements are
(a) Under standability and materiality
(b) Relevance and reliability
(c) Relevance and materiality

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3. All of the following are components of the financial statement except

(a) Balance sheet
(b) Statement of PL
(c) Human responsibility report
4. An accounting policy can be changed if the change is required
(a) By statute or accounting standard
(b) For more appropriate presentation of financial statements
(c) Both (a) and (b)
5. Value of equity may change due to
(a) Contribution from or Distribution to equity participants
(b) Income earned / expenses incurred
6. An item that meets the definition of an element of financial statements should
be recognised in the financial statements if:
(a) It is possible that any future economic benefit associated with the item will
flow to the enterprise
(b) Item has a cost or value that can be measured with reliability
7. A machine was acquired in exchange of an old machine and ` 20,000 paid in
cash. The carrying amount of old machine was ` 2,00,000 whereas its fair value
was ` 1,50,000 on the date of exchange. The historical cost of the new
machine will be taken as
(a) ` 2,00,000
(b) ` 1,70,000
(c) ` 2,20,000
8. Which of the assumption is not considered as fundamental accounting
assumption?
(a) Going Concern
(b) Accrual
(c) Reliability.
9. Liabilities are recorded at the undiscounted amount of cash expected to be paid
on settlement of liability in the normal course of business under:
(a) Present value.
(b) Realizable value.
(c) Current cost.

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Answer
1 2 3 4 5 6 7 8 9
A B C C C C B C B
Theoretical Question
Question 1
With regard to financial statements name any four.

(1) Users
(2) Qualitative characteristics
(3) Elements
Answer
(1) Users of financial (2) Qualitative Characteristics (3) Elements of

statements of Financial Statements Financial
Statements
i. Investors, i. Understandability, i. Asset,
ii. Employees, ii. Relevance, ii. Liability,
iii. Lenders, iii. Comparability, iii. Equity,
iv. Supplies/Creditors, iv. Reliability iv. Income/Gain and
v. Customers, v. Expense/Loss
vi. Government &
vii. Public
Question 2
Explain in brief, the alternative measurement bases, for determining the value at which
an element can be recognized in the Balance Sheet or Statement of Profit and Loss.
Answer
 Measurement is the process of determining money value at which an element
can be recognised in the balance sheet or statement of profit and loss.
 The framework recognises four alternative measurement bases for the
purpose.
 These bases relate explicitly to the valuation of assets and liabilities.

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 The valuation of income or expenses, i.e. profit is implied, by the value of

change in assets and liabilities.
MEASUREMENT BASIS
Basis Assets Liabilities
Historical Recorded at an amount of cash Recorded at the amount of proceeds received
Cost or cash equivalent paid or the in exchange for the obligation. In some
fair value of the asset at the circumstances a liability is recorded at the
time of acquisition. amount of cash or cash equivalent expected to
be paid to satisfy it in the normal course of
business.
Current Assets are carried out at the Liabilities are carried at the undiscounted
Cost amount of cash or cash amount of cash or cash equivalents that would
equivalent that would have to be required to settle the obligation currently.
be paid if the same or an
equivalent asset was acquired
currently.
For liabilities, this is the undiscounted amount
Realisable For assets, this is the amount
of cash or cash equivalents expected to be paid
(Settlemen of cash or cash equivalents
on settlement of liability in the normal course
t) Value currently realisable on sale of
of business.
the asset in an orderly
disposal.
Present Assets are carried at the Liabilities are carried at the present value of
Value present value of the future the future net cash outflows that are
net cash inflows that the item expected to be required to settle the
is expected to generate in the liabilities in the normal course of business.
normal course of business.
Question 3
Write short note on main elements of Financial Statements.

Answer
 Elements of Financial Statements
 The framework classifies items of financial statements can be classified in five
broad groups depending on their economic characteristics
 Asset, Liability, Equity , Income/Gain and Expense/Loss.
Asset Resource controlled by the enterprise as a result of past events
from which future economic benefits are expected to flow to
the enterprise
Liability Present obligation of the enterprise arising from past events,
the settlement of which is expected to result in an outflow of a
resource embodying economic benefits.

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Equity Residual interest in the assets of an enterprise after deducting

all its liabilities.
Income/gain Increase in economic benefits during the accounting period in
the form of inflows or enhancement of assets or decreases in
liabilities that result in increase in equity other than those
relating to contributions from equity participants
Expense/loss Decrease in economic benefits during the accounting period in
the form of outflows or depletions of assets or incurrence of
liabilities that result in decrease in equity other than those
relating to distributions to equity participants.
Question 4
Explain the purpose and status of the conceptual framework for preparation and
presentation of financial statements in brief.
Answer:
PURPOSE OF THE FRAMEWORK
 The framework sets out the concepts underlying the preparation and presentation
of general-purpose financial statements prepared by enterprises for external
users.
 The main purpose of the framework is to assist:
(a) Enterprises in preparation of their financial statements in compliance
with Accounting Standards and in dealing with the topics not yet
covered by any Accounting Standard,
(b) ASB in its task of development and review of Accounting Standards,
(c) ASB in promoting harmonisation of regulations, Accounting
Standards and procedures relating to the preparation and
presentation of financial statements by providing a basis for reducing
the number of alternative accounting treatments permitted by
Accounting Standards,
(d) Auditors in forming an opinion as to whether financial statements
conform to the Accounting Standards,
(e) Users in interpretation of financial statements,
(f) Those who are interested in the work of ASB with information about its
information to the formulation of Accounting Standards.
STATUS AND SCOPE OF THEFRAMEWORK
 The framework applies to general-purpose financial statements (hereafter
referred to as ‘financial statements’ usually prepared annually for external users,
by all commercial, industrial and business enterprises, whether in public or private
sector.

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 The special purpose financial reports, for example computations prepared for
tax purposes are outside the scope of the framework.
 Nevertheless, the framework may be applied in preparation of such 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.
Question 5
What are the qualitative characteristics of the financial statements which improve the
usefulness of the information furnished therein?
Answer
a. Understandability
 The financial statements should present information in a manner as to be
readily understandable by the users with reasonable knowledge of
business and economic activities and accounting.
b. Relevancy
 It is not right to think that more information one discloses the better
it is.
 A mass of irrelevant information creates confusion and can be even more
harmful than non-disclosure.
 The financial statements should contain relevant information only.
 Information, which is likely to influence the economic decisions by the
users, is said to be relevant.
 Such information may help the users to evaluate past, present or
future events or may help in confirming or correcting past evaluations.
 The relevance of a piece of information should be judged by its
materiality. A piece of information is said to be material if its
misstatement (i.e., omission or erroneous statement) can influence
economic decisions of a user.
c. Reliability
 To be useful, the information must be reliable; that is to say, they must
be free from material error and bias.
 The information provided are not likely to be reliable unless:
(a) Transactions and events reported are faithfully represented.
(b) Transactions and events are reported on the principle of
'substance over form.

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(c) The reporting of transactions and events are neutral, i.e. free
from bias.
(d) Prudence is exercised in reporting uncertain outcome of
transactions or events.
(e) The information in financial statements must be complete.
d. Comparability
 Comparison of financial statements is one of the most frequently used
and most effective tools of financial analysis.
 The financial statements should permit both inter-firm and intra-firm
comparison. One essential requirement of comparability is disclosure of
financial effect of change in accounting policies.
Question 6
‘One of the characteristics of financial statements is neutrality’. Do you agree with this
statement?
Answer
 Yes, one of the characteristics of financial statements is neutrality.

 To be reliable, the information contained in financial statement must be
neutral, that is free from bias.
 Financial Statements are not neutral if by the selection or presentation of
information, the focus of analysis could shift from one area of business to
another there by arriving at a totally different conclusion on the business
results.
 For example If the assets of a company primarily consist of debtors and
insurance claims and the financial statements do not specify that the
insurance claims have been lying unrealized for a number of years or that a
few key debtors have not given balance confirmation certificates, an
erroneous conclusion may be drawn on the liquidity of the company.
 Financial statements are said to depict the true and fair view of the
business of the organization by virtue of neutrality.
Practical Question
Question 1
Mohan started a business on 1st April 20X1 with `12,00,000 represented by 60,000 units of ` 20
each. During the financial year ending on 31st March, 20X2, he sold the entire stock for ` 30
each. In order to maintain the capital intact, calculate the maximum amount, which can be
withdrawn by Mohan in the year 20X1-X2 if Financial Capital is maintained at historical cost.

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Answer
Particulars Financial Capital Maintenance at

Historical Cost(`)
Closing equity
18,00,000 represented by cash
(` 30 x 60,000 units)
Opening equity 60,000 units x ` 20 = 12,00,000
Permissible drawings to keep Capital intact 6,00,000 (18,00,000 – 12,00,000)
Question 2
Opening Balance Sheet of Mr. A is showing the aggregate value of assets, liabilities and
equity ` 8 lakh, ` 3 lakh and ` 5 lakh respectively. During accounting period, Mr. A has the
following transactions:
(1) Earned 10% dividend on 2,000 equity shares held of ` 100 each
(2) Paid ` 50,000 to creditors for settlement of ` 70,000
(3) Rent of the premises is outstanding ` 10,000
(4) Mr. A withdrew ` 9,000 for his personal use.
You are required to show the effect of above transactions on Balance Sheet in the form of Assets -
Liabilities = Equity after each transaction.
Answer
Effects of each transaction on Balance sheet of the trader are shown below:

Transactions – =
` lakh ` lakh ` lakh
Opening 8.00 – 3.00 = 5.00
(1) Dividend earned 8.20 – 3.00 = 5.20
(2) Settlement of Creditors 7.70 - 2.30 = 5.40
(3) Rent Outstanding 7.70 – 2.40 = 5.30
(4) Drawings 7.61 – 2.40 = 5.21
Question 2
Balance Sheet of Anurag Trading Co. on 31st March, 20X1 is given below:
Liabilities Amount (`) Assets Amount (`)

Capital 50,000 Fixed Assets 69,000
Profit and Loss A/c 22,000 Stock in Trade 36,000
10% Loan 43,000 Trade Receivables 10,000
Trade Payables 18,000 Deferred 15,000
Expenditure
- Bank 3,000
1,33,000 1,33,000

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Additional Information:
(i) Remaining life of fixed assets is 5 years with even use. The net realisable value of fixed
assets as on 31st March, 20X2 was `64,000.
(ii) Firm’s sales and purchases for the year 20X1-X2 amounted to `5 lacs and ` 4.50 lacs
respectively.
(iii) The cost and net realisable value of the stock were `34,000 and `38,000 respectively.
(iv) General Expenses for the year 20X1-X2 were`16,500.
(v) Deferred Expenditure is normally amortised equally over 4 years starting from F.Y. 20X0-X1
i.e. `5,000 per year.
(vi) Out of debtors worth `10,000, collection of `4,000 depends on successful redesign of
certain product already supplied to the customer.
(vii) Closing trade payable is `10,000 which is likely to be settled at 95%.
(viii) There is pre-payment penalty of `2,000 for Bank loan outstanding.
Prepare profit & loss account for the year ended 31st March, 20X2 by assuming it is not a Going
Concern.
Answer
Profit and Loss Account of Anurag Trading Co. for the year ended 31st March, 20X2
(Assuming business is not a going concern)
(`) (`)
To Purchases 4,50,000 By Trade Payables 500
To General Expenses 16,500 By Closing Stock 38,000
To Depreciation (69,000– 5,000
64,000)
To Provision for doubtful 4,000
debts
To Deferred expenditure 15,000
To Loan penalty 2,000
To Net Profit (b.f.) 10,000
5,38,500 5,38,500
************

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PREPARATION OF FINANCIAL STATEMENT Unit 1 | 4.1
CHAPTER – 4 (UNIT 1)
PREPARATION OF FINANCIAL STATEMENT
Practically covered topics
Managerial Dividend Financial Statement Other Topic

Remuneration of Company
Balance Sheet Statement of Cash Flow Notes to Statement of

of Company Profit or Loss Statement Accounts Change in
Equity
As per Part –I of As per Part –II of As per As per Provision of

Schedule III Schedule III AS - 3 Company law, As and
Other
TOPIC 1: PREPARATION OF BALANCE SHEET OF A COMPANY

 Financial statement of a company needs to be prepared as per revised format provided by
Companies Act, 2013
 It is applicable from 1st April, 2014 on onwards
 Only vertical format is available
 However, it not applicable to F/S of banking and insurance company as they have been provided
their separate formats.
 Format will include previous year column along with current year in order to compare result
however, if detail of previous year is not available then no need to prepare previous year column
 There will be column of "Note No.". it will be reference for Notes to Accounts prepared along
with main F/S.
 Notes to Accounts are the detailed description for information disclosed in main statement. (it is
annexure to main statement)
 If a particular heading is having more than one item or involves calculation for single item or
required different part of presentation for a single item or not resemble with name of heading,
then that heading will required Notes to Accounts
 If a heading is having only one item with no calculations and no different part of presentation and
resemble with name of that heading, then Notes to Accounts is not prepared for that item
 In a particular question, if heading of particular item not having information, then no need to
disclose it

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 If a statement is to be prepared partly, then it is known as "Extract" of that statement.

 Balance Sheet is to be prepared as per part-I of Schedule III.
 Other clarifications related to Balance Sheet is as under:
1. Share Capital—
 Always prepare notes to accounts
 Disclose authorized and issued capital separately if available
 Disclose detail of equity and preference share separately, if available
 Issue as bonus share or for consideration other than cash, then disclose it separately. Issue of
bonus share is to be disclosed separately for next five years. However, source of bonus issue
is not needed.
 Deduct calls in arrear
 Disclose balance of share forfeited A/c until re-issue of shares forfeited as a part of share
capital
 Calls in advance is not disclosed here. It will be part of other current liability
2. Reserve and Surplus—
 Disclose all types of reserves
 Generally notes to accounts is prepared for that
 Disclose final balance of each reserve
 Debit balance of P/L A/c is to be disclosed as negative item
 Appropriation is to be adjusted in balance of P&L A/c under the head of reserve & Surplus
 Reserves & Surplus include balance of P/L A/c, G/R A/c, Revenue Reserve A/c, Securities
Premium A/c, CR A/c, CRR A/c Revaluation Reserve A/c, DRR A/c etc.
3. Money Received Against Share Warrant
 If the share is issued in bearer form, then it is known as share warrant
 It is transferable by mere delivery
Details of share holder is not maintained by company
4. Share Application Money Received Pending Allotment:
 Application money has been received before end of year but shares is to be allotted in next
year then it is known as “application money received pending allotment”
5. Long Term Borrowing:
 It includes debentures, long term loan, bond and public deposits etc.
 By default, all these will be having long term nature.
 Part of long term borrowings payable within next 12 months is disclosed under other current
liability
 Disclose separately, detail of secured and unsecured part.
 Outstanding interest of such borrowings will be part of other current liability
6. Long Term Provisions:
 Provision created against outsider liabilities, having long term nature
 For example: PF Fund , Gratuity fund etc

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7. Deferred Tax:
 Difference in tax liability calculated by income from companies act & income tax act is
known as "Deferred Tax"
8. Short-Term Borrowings:
  It includes bank overdraft, cash credit limit, short term loan and other short term borrowings
9. Short Term Provisions:
 It includes provisions for tax and other short term provisions
10. Trade Payable:
 It includes creditors & B/P
 Disclose separately payable within 6 months and payable after 6 months
11. Other Current Liability
 Which is not covered in other 3 headings of current liability
 It includes calls in advance, part of long term borrowings payable within 12 months,
unearned income and outstanding expenses etc.
 It include dividend declared by company until it is paid to shareholder.
12. Tangible Fixed Assets
 Disclose at historical cost if possible
 Deduct total accumulated depreciation
13. Capital work-in-progress (CWIP)
 If tangible fixed asset is under construction
 For example, building under construction, plant under construction etc
 When it becomes ready to use it is transferred to corresponding tangible asset
14. Intangible Under Development:
 The intangible asset which is not ready to use at the end of year. For eg. Software under
development
 Transferred to corresponding intangible asset account when it becomes ready to use
15. Inventory:
 It is to be classified as
(i) Raw material
(ii) WIP
(iii) Finished goods
(iv) Stock in trade
(v) Loose tools & spares
16. Trade Receivables:
  It includes debtor and B/R
 Disclose separately receivable within 6 months & receivable other 6 months
17. Cash and Cash Equivalents:
 It includes cash & Bank Balances
 Disclose separately bank balances with scheduled banks and other
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 Disclose separately, normal bank balance and "Ear-marked" Bank Balance.

18. Other Current Assets:
 It includes prepaid expenses, accrued income & other current assets
Note 1: Contingent Liabilities & Capital Commitments:
 It includes contingent liabilities like claim pending in court, B/R discounted with bank,
guarantee given, investment in partly paid up shares and arrear of preference share dividend
etc.
 Capital commitment means capital nature contract which having executory nature at the end
of year. For eg., a new factory is to be opened next year.
 As per amendment in AS-4, proposed dividend is now not disclosed in Balance Sheet as a
part of short term provision. It is also to be disclosed under this head as a part of notes to
Accounts
Note 2: Always classify detail of particular item as much as possible according to
information given in the question
Note 3: By default, investment is to be considered as non-current investment and
non trade.
BALANCE SHEET FORMAT
Balance Sheet of …………. as at…………………
Particulars Note C.Y. P.Y.

No
Equity & Liabilities
I) Share Holders Fund
(a) Share Capital:
(b) Reserve & Surplus
(c) Money Received Against Share Warrant
II) Share Application Money received Pending Allotment
III) Non-Current Liabilities :
(a) Long term Borrowings
(b) Deferred Tax Liability (Net)
(c) Other non-current Liability
(d) Long term provisions
iv) Current Liabilities :
(a) Short Term Borrowings
(b) Trade Payable
(c) Other Current Liabilities
(d) Short term Provisions

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Assets
i) Non-Current Assets
(a) PPE
(b) Intangible Assets
(c) CWIP
(d) Intangible under development
(e) Non-current investment
(f) Deferred Tax Asset (Net)
(g) Non-current loans & advances
(h) Other noncurrent asset
ii) Current Assets
(a) Current Investment
(b) Inventory
(c) Trade Receivable
(d) Cash & Cash Equivalents
(e) Current Loans & Advances
(f) Other Current Assets
TOPIC 2: PREPARATION OF STATEMENT OF PROFIT AND LOSS OF COMPANY

 The format of P&L A/c of company is known as statement of profit & Loss and it is to be
prepared as per part-II of schedule III of Companies Act, 2013
 Following points are to be considered:
i) Revenue from operation
 It includes revenue by way of sale of goods, rendering services and other principle revenue
ii) Other income
 It includes interest income, dividend income, profit on sale of fixed assets/investment and other
income other than revenue from operation, exceptional item and extra ordinary item
iii) Detail of inventory:
 It is to be classified in following manner:
a) Raw material consumed = Opening RM + Purchase of RM - Closing RM
b) Purchase of stock in trade : Stock in trade means goods kept for sale which are not
manufactured by the company itself
c) Change in value of stock in trade
d) Change in value of Work-in-progress and finished goods
Note 4:
Finished goods means goods kept for sale which are manufactured by the company itself

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Note 5:
If opening stock is more than closing stock the change in value of stock is to be disclosed as a
positive item and vice-versa
iv) Employee Benefit Cost

It includes all types of payment to employees other than directors
v) Finance Cost
It includes interest on different types of borrowings
vi) Depreciation & other amortization
It includes current year depreciation on fixed asset and current year's amortization amount of
intangible assets
vii) Other expenses
It includes all other expenditure other than covered by above specific topics, exceptional and
extraordinary items
For Example – Office expense (other than employee) selling & distribution cost, fictitious assets
written off
viii) Exceptional item:
 It includes expenses/income by way of operational nature item but the amount of such items
occur abnormally
  For example, huge amount of bad debts as compared to past experience.
ix) Extra ordinary item
  It includes abnormal nature item like claim, compensation, damages received or paid, loss by
strike, loss due to natural calamities, refund of government grant, etc.
Statement of profit and loss of ……………….for the year ending………………
Particulars Note No. C.Y. P.Y.

A) Income
I) Revenue from operation
II) Other Income
B) Expenses
I) Raw Material Consumed
II) Purchase of stock in trade
III) Change in value of stock in trade
IV) Change in value of WIP and finished
goods
V) Employee Benefit Cost

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VI) Finance Cost

VII) Depreciation and other amortization
VIII) Other Expenses
Profit before tax, exceptional and extra
ordinary item
Add/Less: Exceptional items
Add/Less: Extra ordinary items
PBT
Less : Provision for tax
PAT/NP/EAT/ IAT
TOPIC 3:MAXIMUM MANAGERIAL REMUNERATION (SECTION 197)

 Applicable to public companies
 Managerial person means directors & managers of the company including managing directors (top
level management of company)
 Remuneration means salary/Bonus/Commission and other benefits given by company to them other
than legal payments and director fee.
 Maximum managerial remuneration is calculated under following two situation
a. If Company is Having Adequate Profit
b. If Company is not having Adequate Profit
CALCULATION OF MAXIMUM MANAGERIAL REMUNERATION IF COMPANY IS

HAVING ADEQUATE PROFIT
FOR WHOLE TIME DIRECTORS FOR PART TIME DIRECTORS
 Depends on Quantity of directors  Not depends on Quantity of directors

 If only 1 WTD then 5 % of profit  Depends on existence / non-existence
 If more than 1 WTD then 10 % of profit of whole time director
to all  If WTD exists then overall maximum
remuneration to PTD will be 1% of
profit
 If not WTD exists then overall
maximum remuneration to PTD will be
3 % of profit
Notes
 Overall maximum remuneration to WTD & PTD shall not exceed 11% of profit
 If actual remuneration is given within maximum limits, then need to take permission of
remuneration committee only.
 However, actual remuneration exceeds maximum limit then permission of Central
Government is to be obtained for such excess payment
 Managing director is always considered as WTD

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CALCULATION OF PROFIT FOR THE PURPOSE OF MAXIMUM MANAGERIAL

REMUNERATION (U/S 198)
GP as per trading A/c xxx
Add: Income related to P&L A/c (except following) xxx
(I) Capital nature profit on sale of fixed asset
(however revenue nature profit is to be added)
(II) Profit on Sale of under taking as a whole
(III) Profit on revaluation of Asset
(IV) Premium on issue of share & debenture
(V) Balance of share forfeiture account
(VI) Any other capital nature profit
(however subsidy and bounties is to be added)
Less: Expenses and losses related to P& L A/c (Except following) xxx
(I) Managerial remuneration given in the books
(However director fee is to be deducted)
(II) Depreciation given in the books
(However depreciation as per schedule of company law is to be
deducted)
(III) Voluntary payments of claim, compensation, damages etc.
(However if such payment is given due to contract then it is to be
deducted)
(IV) Income tax & other direct taxes
(V) Amount of intangible and fictitious assets written off
(VI) Revaluation of assets & liabilities (Loss)
(VII) Appropriations like transfer to reserve and dividend
(VIII) Excessive provisions created as compared to actual requirement for
operational expenses
(IX) Loss on Sale of undertaking as a whole
Profit (as per section 198) XXX

Notes
 If detail of directors is not available, then calculate maximum remuneration as per overall criteria of
11% of profit.
 If depreciation as per schedule of company law is not given separately, then it will be equal to
depreciation as per books
 In case of sale of fixed assets part of sale price in excess of original cost of asset will be capital profit
on sale otherwise profit is to be assumed as revenue nature.
CALCULATION OF MAXIMUM MANAGER REMUNERRATION IN CASE OF COMPANY

NOT HAVING PROFIT
 In this case maximum remuneration is to be calculated on the basis of effective capital of the
company
 In this case, detail of WTD/PTD and their quantity is not relevant.
 It is calculated overall for all director
 Limits can be increased by passing special resolution

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S. No. Effective Capital Annual Max. remuneration to all

Managerial Person
1 Less than 5 Cr. 60 Lakhs per annum
2 5Cr. or more but less than 100 84 Lakhs per annum
Cr.
3 100 Cr. or more but less than 120 Lakhs per annum
250Cr.
4 250 Cr. or more 120 Lakh per annum + (0.01% of effective
capital in excess of 250 crore)
CALCULATION OF EFFECTIVE CAPITAL
Total paid up share capital xxx

(excluding share application money received Pending allotment)
Add: Reserve & Surplus xxx
(Excluding Revaluation Reserve)
Add: Long term debt xxx
Less: Fictitious Assets xxx
Less: Not Trade Investments xxx
EFFECTIVE CAPITAL XXX

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TOPIC NO. 4
SOURCES OF DIVIDEND &MAXIMUM DIVIDEND OUT OF SOURCE OF DIVIDEND
 Dividend means cash distribution by company to its shareholders.
 Following are the main sources of dividend
Out of Current year Out of Past Reserves Out of funds provided by

Profit government for the
purpose of dividend
• Maximum divided will be equal to Only free Reserve can be

divisible profit
utilized
• It will be current year’s profit after
adjustment of current year depreciation
and unabsorbed depreciation as per
company law.
• However, previous years carry First utilize current year
forwarded losses are not adjustment profit up to divisible profit
here. thereafter free reserve can
be used.
Maximum utilization of past reserve will be within following three criteria:
i) Rate of dividend shall not exceed past three years average rate of dividend.
ii) Maximum withdrawal from reserve is equal to 10% of paid up capital & free
reserves.
iii) Minimum required free reserve after withdrawal will be 15% of paid up
capital.

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CASH FLOW STATEMENT UNIT - 2 | 4.11
Chapter 4 (Unit - 2)
CASH FLOW STATEMENT
MEANING OF CASH FLOW STATEMENT
 A cash flow statement is a statement which discloses the changes in cash position between the
two periods,
 To provide assistance in efficient cash management.
SOME IMPORTANT DEFINITIONS
CASH CASH EQUIVALENT CASH FLOWS

i. Cash in hand If all 3 condition fulfilled  Inflows & outflows of
ii. Demand deposit cash & CE
i. Short term investment
with bank (maximum 3 month)
ii. Readily marketable
iii. Insignificant risk
Example:
i. Treasury bill
ii. Certificate of deposit
iii. Commercial Paper
UTILITY/ USES OF CASH FLOW STATEMENT

 Helps in efficient cash management.
 Helps in internal financial management.
 Discloses the movements of cash.
 Discloses the success or failure of cash planning.
LIMITATIONS OF CASH FLOW STATEMENT
 Considers only cash item
 Manipulations is possible
 Cannot replace income statement or fund flow statement
TYPES OF ACTIVITIES IN CFS
i. Cash flow from ii. Cash flow from iii. Cash flow from
operating activity Investing activity Financing activity

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CASH FLOW FROM OPERATING ACTIVITY
PRINCIPAL REVENUE GENERATING ACTIVITIES OF THE ENTERPRISE
CASH INFLOW CASH OUTFLOW

 Sale of goods for cash  purchase of goods for cash
 Cash receipts from debtors  Cash payments to suppliers for
 Cash receipts from the rendering of goods
services  cash payments of operating
 Cash receipts from royalties, fees, expenses
commissions and other operational i. Payment of direct expenses
revenue ii. Payment of office expenses
 Cash received from extraordinary item iii. Payment of selling and
other than relating to investing and distribution expenses etc.
financing  Cash paid from extraordinary item
 Refund of income tax other than relating to investing and
 Cash receipts relating to futures contracts, financing
forward contracts, option contracts and  Income tax paid
swap contracts when the contracts are  Cash payments relating to futures
held for dealing or trading purposes. contracts, forward contracts, option
 Cash receipts of an insurance enterprise contracts and swap contracts when
for premiums and claims, annuities and the contracts are held for dealing
other policy benefits or trading purposes.
 Cash payments of an insurance
enterprise for premiums and claims,
annuities and other policy benefits

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CASH FLOW FROM INVESTING ACTIVITY

ACTIVITIES RELATING TO THE ACQUISITION AND DISPOSAL
OF LONG-TERM ASSETS AND OTHER INVESTMENTS


Sale of fixed asset for cash  purchase of fixed asset for cash

Sale of investment for cash  Purchase of investment for cash

Interest received on investment  Cash payments for futures contracts,

Dividend received on investment forward contracts, option contracts

Cash receipts for futures contracts, and swap contracts except when the
forward contracts, option contracts contracts are held for dealing or
and swap contracts except when the trading purposes
contracts are held for dealing or  Cash advances and loans made to
trading purposes third parties (other than advances
 Repayments of Cash advances and and loans made by a financial
loans made to third parties & (other enterprise)
than advances and loans made by  Cash payments to acquire shares,
a financial enterprise) warrants or debt instruments of
 Cash receipt from disposing shares, other enterprises and interests in
warrants or debt instruments of joint ventures
other enterprises and interests in
joint ventures
CASH FLOW FROM FINANCING ACTIVITY
ACTIVITIES THAT RESULT IN CHANGES IN THE SIZE AND

COMPOSITION OF THE SHARE CAPITAL AND BORROWINGS OF THE
ENTERPRISE
 Cash proceeds from issuing shares,  Cash repayments of shares,

debentures, loans, notes, bonds and debentures, loans, notes, bonds and
other short or long term borrowings other short or long term
borrowings
 Payment of interest & dividend on
share capital and borrowing
TREATMENT OF CASH FLOWS FROM SOME SPECIAL TRANSACTIONS

AS PER AS-3 (REVISED)
A. FOREIGN CURRENCY CASH FLOWS
 Cash flows arising from transactions in a foreign currency should be recorded in an
Enterprises reporting currency
 The reporting should be done by applying the exchange rate at the date of cash flow
statement.
 A rate which approximates the actual rate may also be used. For example, weighted average
 cash and cash equivalents held in foreign currency should be reported as a separate part in
the form of reconciliation
 Unrealised gains and losses arising from changes in foreign exchange rates are not cash
flows
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B. INTEREST AND DIVIDENDS

 The treatment of interest and dividends, received and paid, depends upon the nature of the
enterprise i.e., financial enterprises and other enterprises.
 In case of financial enterprises, cash flows arising from interest paid and interest &
Dividends received, should be classified as cash flows from operating activities.
 In case of other enterprises Cash outflows arising from interest paid on terms loans and
debentures should be classified as cash outflows from financing activities and
 Dividend paid on equity and preference share capital should be classified as cash outflow
from financing activities.
 Interest and dividends received should be classified as cash inflow from investing activities.
C. TAXES ON INCOME
 Cash flows arising from taxes on income should be separately disclosed. It should be
classified as cash flows from operating activities unless they can be specifically identified
with financing and investing activities.
D. INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES
 Cash flow arising shall be recorded as a part of investing activity.
E. TREATMENT OF SOME SPECIFIC ITEM

 Inflow and outflow of a particular item will relate to nature of main item like:
(a) Advance to supplier, interest received on Advance to supplier, Advance received from
customer & Interest paid on advance received from customers will have operational
nature.
(b) Claim & compensation relating to stock & Employees will be part of operating activity
(c) Claim & compensation relating to Fixed Assets & Investments will be part of investing
activity
(d) Expenses paid on purchase of investment or fixed assets will be part of investing
activity.
(e) TDS deducted from interest or dividend income is to be adjusted to investing activity.
(f) Dividend tax paid on dividend to shareholder will be part of financing Activity.
METHODS OF CASH FLOW STATEMENT

i. DIRECT METHOD
ii. INDIRECT METHOD
CFS BY DIRECT METHOD

 Under direct method cash from operation of operating activity is calculated by disclosing
directly operational nature cash inflows and outflows.
 After calculation of cash from operation remaining part of CFS under the both method will be
same.
 If CFS is required to prepare on the basis of cash account or cash summary given then it is
always prepared by direct method.
 In such case all the information is provided in form of cash inflows& outflows So No need to
provide any kind of working notes.

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FORMAT OF CASH FLOW STATEMENT BY DIRECT METHOD

(a) Cash Flow from Operating Activities:
Cash sales of goods & service rendered xxx
Cash receipts from customers xxx
Cash purchase of goods (xxx)
Cash paid to suppliers (xxx)
Cash payments of operational expenses (xxx)
Cash generated from operations XXX
Income tax paid (xxx)
Cash flow before extraordinary items XXX
Extraordinary items (xxx)
Net cash generated from Operating Activities (a) XXX
(b) Cash Flows from Investing Activities:

Proceeds from sale of F.A. or Investment xxx
Interest received xxx
Dividend received xxx
Purchase of fixed assets or Investment for cash (xxx)
Net cash from generated investing Activities (b) XXX
(c) Cash Flows from Financing Activities:
Proceeds from issue of share capital xxx
Proceeds from long-term or short term borrowings xxx
Redemption of Share capital (xxx)
Repayments of long-term or short term borrowings (xxx)
Interest paid (xxx)
Dividend paid (xxx)
Net cash generated from Financing Activities (c) XXX
Net Cash Generated From (A+B+C) Activity XXX
Cash and Cash Equivalents at beginning of period XXX
CASH AND CASH EQUIVALENT AT END OF PERIOD XXX

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(B) CASH FLOW STATEMENT BY INDIRECT METHOD

(a) Cash Flow from Operating Activities:
Profit before tax and extraordinary items xxx
Adjustments for:
Depreciation xxx
Fictitious or intangible assets written off/ Amortised xxx
Foreign exchange loss xxx
Loss on sale of fixed assets or investment xxx
Interest expenses xxx
Premium on redemption of share or debentures xxx
Foreign exchange gain (xxx)
Amortization of capital grant (xxx)
Gain on sale of fixed assets or investment (xxx)
Interest or dividend income (xxx)
Operating Activity before working capital changes XXX
Increase current liabilities xxx
Increase in current assets (xxx)
Decrease in current assets xxx
Decrease in current liabilities (xxx)
Cash generated from operations
XXX
Income tax paid
(xxx)
Cash flow before extraordinary items
XXX
Extraordinary items
(xxx)
Net cash generated from Operating Activities (a)
XXX
(b) Cash Flows from Investing Activities:

Proceeds from sale of F.A. or Investment xxx
Interest received xxx
Dividend received xxx
Purchase of fixed assets or Investment for cash (xxx)
Net cash from generated investing Activities (b) XXX
(c) Cash Flows from Financing Activities:
Proceeds from issue of share capital xxx
Proceeds from long-term or short term borrowings xxx
Redemption of Share capital (xxx)
Repayments of long-term or short term borrowings (xxx)
Interest paid (xxx)
Dividend paid (xxx)
Net cash generated from Financing Activities (c) XXX
Net Cash Generated From (A+B+C) Activity XXX
Cash and Cash Equivalents at beginning of period XXX
CASH AND CASH EQUIVALENT AT END OF PERIOD XXX

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INCOME STATEMENT / REVENUE STATEMENT / TRADING AND P&L A/C

Net Sales xxx
Less : COGS (xxx)
Opening Stock
+ Purchase
+ Direct Exp.
– Closing Stock
Gross Profit XXX
Add : Operating income of P & L A/c :–
Brokerage Income xxx
Discount Income xxx
Commission Income Etc.
xxx
XXX
Less : Operating expenses of P & L A/c :–
Depreciation on Fixed Asset (xxx)
Fictitious & Intangible w/off or amortised (xxx)
Selling & Distribution Exp. (xxx)
Admin. / Office Exp. (xxx)
Operating Profit XXX

Add : Non operating Income of P & L A/c :–
Profit on sale of FA or Investment xxx
Amortization of capital grant xxx
Foreign exchange gain xxx
Interest and Dividend Income etc. xxx
XXX
Less: Non operating Exp. or Losses of P & L A/c:–
Loss on sale of FA or Investment (xxx)
Premium on Redemption of shares or Debentures etc. (xxx)
Foreign exchange Loss etc. (xxx)
PBIT or EBIT XXX
Less: Interest expenses (xxx)
PBT or EBT XXX
Less: Provision for Tax (xxx)
PAT or EAT or NP XXX
Less: Preference share dividend (xxx)
Profit Available to ESH XXX

Less: ES Dividend (xxx)
Transfer to General Reserve
(xxx)
NP of C.Y. after appropriation XXX
Add : opening Balance of P & L A/c Xxx
CLOSING BALANCE OF P&L A/C XXX

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ADJUSTMENT OF CHANGE IN WORKING CAPITAL ITEM

 Changes in items relating to the current assets and current liabilities are to be disclosed.
 It is disclosed to convert the entire operational item from accrual basis to cash basis.
 Disclosed only those CA & CL which are relating to operational nature item.
 It will be Excluding:
a) Cash & Cash equivalent item
b) Those current assets & Current liabilities which are not related to operational nature item
like short term loan, prepaid interest, outstanding interest, Accrued interest & unearned
Interest etc.
 If directly change in net working capital is given then it is to be disclosed assuming similar to
current Assets. If increase in working capital then deducted & if decrease in working capital
then added.
Note:
Reversal of non-operational income & expenditure [Elimination of effect] from operating Activity
only if it is already adjusted to P & L A/c.
SELECTION OF PBT
1. If income Pick PBT from that No Adjustment of provision for tax,
statement is income statement Dividend & GR
given directly
2. If NP is given Pick that NP & calculate

in additional PBT by adding CY tax No Adjustment of Dividend & GR
information provision
3. If balance of Pick difference of Difference of balance of PL a/c xx

(+) Transfer to GR xx
PL a/c is given balance of PL a/c &
(+) Provision for Tax in CY xx
for PY & CY thereafter calculate PBT (+) Dividend declared in CY xx
PBT XXX
ADJUSTMENT OF EXTRA ORDINARY ITEM

 It may be of operating, investing & Financing Nature.
 By default belong to operating activity.
 Adjustment in CFS will be as under
Reversal in calculation of PBT & Disclose as inflow or outflow

extraordinary item if already according to his nature in the
adjusted to P & L A/c related activity

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CALCULATION & ADJUSTMENT OF PROVISION FOR TAX

 If only opening & closing balance given then opening balance will become tax paid in CY &
Closing Balance will become provision of tax made in CY.
 If Tax paid in CY is given, along with opening & closing balance then provision for tax made in
CY will be balancing figure.
 If CY tax provision is given, along with opening & closing Balance then tax paid in CY will be
balancing figure.
 If opening & closing balance not given then tax paid & Provision of tax in CY Both will be same.
 Adjustment in CFS:
a) CY tax provision is to be only used for Calculation of PBT under the Indirect method
b) Tax paid in CY will be outflow of operating just after calculation of cash from operation.
Provision for Tax A/C

Particulars Amount Particulars Amount
To Bank (Paid in C.Y.) xxx By Balance b/d xxx
To Balance c/d xxx By P & L a/c (Provision made in C.Y.) xxx
Note
If amount of tax is given in income statement / revenue statement/ P& L a/c etc. then it will
amount of tax provision made in CY.
CALCULATION & ADJUSTMENT OF DIVIDEND PAYABLE (FINAL DIVIDEND)

 If only opening & closing balance given then opening balance will become dividend paid in CY &
Closing Balance will become dividend declared in CY.
 If dividend paid in CY is given, along with opening & closing balance then dividend declared in
 If dividend declared in CY is given, along with opening & closing Balance then Dividend paid in
 If opening & closing balance not given then dividend paid & declared in CY Both will be same.
 Adjustment in CFS:
a) CY dividend declared is to be only used for Calculation of PBT under the Indirect method
b) Dividend paid in CY will be outflow of financing activity.
Dividend Payable A/C

To Bank (Paid in C.Y.) xxx By Balance b/d xxx
To Balance c/d xxx By P & L a/c (Declared in C.Y.) xxx
xxx xxx
CALCULATION & ADJUSTMENT OF INTERIM DIVIDEND

 Interim dividend paid & declared in C.Y. both will same because opening & Closing Balance of
interim dividend generally not given.
 Not to be mixed with dividend payable A/c & always disclose separately.
 Presentation will be similar to final dividend in CFS
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Note
 Calculation & Adjustment of dividend tax will similar to Calculation & Adjustment of Dividend.
 If amount of dividend is given in income statement / revenue statement/ P& L a/c etc. then it
will amount of dividend declared in CY.
 If dividend amount is directly given by company then it already includes preference share
dividend so in such case no need not to calculate preference share dividend separately.
CALCULATION OF AMOUNT OF INTEREST OR DIVIDEND
IF IT IS ASSUMED THAT ISSUE & REDEMPTION IF IT IS ASSUMED THAT ISSUE &

WAS AT THE BEGINNING OF CY REDEMPTION AT THE END OF THE YEAR
calculation of Internet or dividend on closing calculation of Interest or dividend on
balance Opening Balance
FIXED ASSETS ACCOUNT

 If opening & closing balance of provision for Depreciation /Depreciation Reserve /
Depreciation fund / Accumulated Depreciation / Depreciation are given in the question then FA
A/c is to be prepared at cost and in such case provision for depreciation A/c is to be also
prepared.
 Opening & closing balance of provision for depreciation may be given as deduction from value
of FA or in liability side or in Additional information
 If opening & Closing balance of provision for depreciation is given in additional information it
means value of FA given are at WDV convert them into cost by adding opening & Closing
Balance of provision to opening & closing value of FA respectively.
 If FA A/c is prepared at cost then total depreciation charge in C.Y. is to be disclosed in credit
side of provision for Depreciation A/c & total depreciation accumulated on FA sold / Discarded
is to be disclosed in FA A/c & provision for Depreciation A/c.
 If opening & Closing Balance of provision for depreciation not given in the question then FA A/c
is to be prepared at WDV & in such case provision A/c need not to be prepared.
 In such case total accumulated depreciation on FA disposed / sold is to be ignored and total
depreciation charge in C.Y. is to be disclosed in FA A/c.
Fixed Asset Account (At WDV)

To Balance b/d xxx By Bank a/c (Sale) xxx
(After deducting depreciation)
To P/L a/c (Profit on Sale) xxx By P/L a/c (Loss on sale) xxx
To Bank a/c (Purchase of FA for cash) xxx By Depreciation (Total C.Y. Depreciation) xxx
To Equity Share Capital a/c xxx By Balance c/d xxx
(FA is purchased by issued shares)
xxx xxx

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Fixed Asset Account (At Cost)

To Balance b/d xxx By Bank a/c (Sale) xxx
(Before deducting depreciation)
To P/L a/c (Profit on Sale) xxx By P/L a/c (Loss on sale) xxx
To Bank a/c (Purchase of FA for cash) xxx By Provision for Depreciation a/c xxx
(Total accumulated depreciation on FA sold)
To Equity Share Capital a/c xxx By Balance c/d xxx
(FA is purchased by issued shares) (Before deducting depreciation)
xxx xxx
Provision for Depreciation or Accumulated Depreciation A/C
To Assets a/c xxx By Balance b/d xxx
(Total accumulated depreciation on FA sold)
To Balance c/d xxx By P & L a/c (C.Y. Depreciation) xxx
xxx xxx
xxx xxx
UNDER / OVER VALUATION OF STOCK
FIND OUT EFFECT ON CY PROFIT VALUE OF STOCK
Opening Stock Closing Stock Calculate revised value of

stock and there after
disclose it as part of changes
Under Over Under Over in WC item.
Profit Increased Profit Decreased Profit Decreased Profit Increased
Adjustment in CFS
Reversal of the existing effect in calculation of PBT & extra ordinary item

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ISSUE OR REDEMPTION OF SHARE CAPITAL, DEBENTURE, BONDS ETC.

 If issued or redemption for consideration other than cash then there will be no inflow or
outflow.
 If issued or redemption for cash then it will be inflow or outflow of financing activity Activity
After adjusting premium or discount on such issue or redemption.
 Further adjustment of premium or discount will be as under:
a) Discount on issues: Part of discount on issue which has been written off from P & L A/c in
current year is to be added to operating activity.
b) premium on issue: No further adjustment except inflow in financing activity
c) Premium on redemption:
 If it is provided out of balance of P&L a/c then it is to be added to operating Activity.
 If it is provided out of balance of security premium a/c then no adjustment in operating
activity.
 If balance of SPR is available then it is to be assumed that premium on redemption is
taken out of balance of SPR in otherwise it is taken out of balance of P &L A/c.
PROVISION FOR TAX ACCOUNT WITH ADVANCE TAX A/C

(A) SETTLEMENT OF TAX LIABILITY OF PY
a) Checking For Adequacy b) Adjusting opening c) Final Settlement for
Of Provision For Previous Balance of advance tax previous year tax liabilities
Year By Comparing Actual against the tax liabilities due to excessive or short
Tax Liability Of PY With of previous year payment
Opening Balance Of
Provision
Creating further provision if Provision for Tax a/c Dr. Further payment of tax if
short provision due opening To Advance tax A/c advance tax adjusted is less
provision is less than actual than tax liability of previous
tax liabilities of previous year [With opening provision of year
Advance Tax]
P & L A/c Dr. Provision for tax A/c Dr.
To Provision for Tax A/c To Bank a/c
Reversal of excess provision if Receiving refund for
opening provision is more excessive payment if advance
than actual tax liability of tax adjusted is more than
previous year actual tax liabilities previous
year
Provision for tax A/c Dr.
To P & L A/c Bank A/c Dr.
To Provision for tax A/c
No further adjustment if No further adjustment if

opening provision is equal to advance tax adjusted is equal
actual tax liabilities of to actual tax liability of
previous year previous year

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(B) TAX ADJUSTMENT FOR CURRENT YEAR

a) Payment of Advance Tax in b) Creating provision at the end of current
current year year for estimated tax liabilities of C.Y.
Advance Tax A/c Dr. P & L A/c Dr.
To Bank A/c To Provision for Tax A/c
(C) ADVANCE TAX A/C

To Balance b/d[Opening Balance] xxx By Provision for Tax A/c xxx
[Advance tax opening Bal. adjusted to tax liability]
To Bank A/c (Advance Tax paid CY) xxx By Balance c/d (closing Balance) xxx
xxx xxx
(D) PROVISION FOR TAX A/C

To P & L A/c xxx By Bal. b/d [Opening Balance] xxx
(Reversal of excess provision of PY) By P & L A/c xxx
To Advance tax A/c xxx [Creating further provision for PY]
[Opening balance of advance tax adjusted] By Bank xxx
To Bank A/c xxx [Refund for excess payment for PY]
[Further Payment for PY tax liabilities] By P & L A/c xxx
To Balance c/d (closing Balance) xxx [Tax provision for CY]
xxx xxx
(E) PRESENTATION IN CFS

Overall net effect of tax paid & refund in Overall net effect of creating or reversal
the both a/c will be outflow or inflow of of provision with P & L A/c is to be used for
operating activity just after calculation of the purpose of calculation of PBT & Extra
cash from operation ordinary item.

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Practical Questions
Question 1—
Explain Classification of activities (with two examples) as suggested in AS 3, to be used for
preparing a cash flow statements.
Answer—
AS 3 (Revised) on Cash Flow Statements requires that the cash flow statement should report cash
flows by operating, investing and financing activities.
(A) Operating activities are the principal revenue-producing activities of the enterprise and other
activities that are not investing or financing activities. Cash receipts from sale of goods and cash
payments to suppliers of goods are two examples of operating activities.
(B) Investing activities are acquisition and disposal of long-term assets and other investments not
included in cash equivalents. Payment made to acquire machinery and cash received for sale of
furniture are examples of investing activities.
(C) Financial activities are those activities that result in changes in the size and composition of the
owner's capital (including preference share capital in the case of a company) and borrowings of
the enterprise. Cash proceeds from issue of shares and cash paid to redeem debentures are two
examples of financing activities.
Question 2—
Explain the difference between direct and indirect methods of reporting cash flows from operating
activities with reference to Accounting Standard 3, (AS 3) revised.
Answer—
As per Para 18 of AS 3 (Revised) on Cash Flow Statements, an enterprise should report cash flows
from operating activities using either:
(A) The direct method, whereby major classes of gross cash receipts and gross cash payments are
disclosed; or
(B) the indirect method, whereby net profit or loss is adjusted for the effects of transactions of a non-
cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and
items of income or expense associated with investing or financing cash flows.
The direct method provides information which may be useful in estimating future cash flows and
which is not available under the indirect method and is, therefore, considered more appropriate than
the indirect method. Under the direct method, information about major classes of gross cash receipts
and gross cash payments may be obtained either:
a) from the accounting records of the enterprise; or
b) by adjusting sales, cost of sales (interest and similar income and interest expense and similar
charges for a financial enterprise) and other items in the statement of profit and loss for:
c) changes during the period in inventories and operating receivables and payables;
d) other non-cash items; and
e) other items for which the cash effects are investing or financing cash flows.
Under the indirect method, the net cash flow from operating activities is determined by adjusting net
profit or loss for the effects of:
a) changes during the period in inventories and operating receivables and payables;
b) non-cash items such as depreciation, provisions, deferred taxes and unrealised foreign exchange
gains and losses; and
c) all other items for which the cash effects are investing or financing cash flows.
Alternatively, the net cash flow from operating activities may be presented under the indirect method
by showing the operating revenues and expenses, excluding non-cash items disclosed in the

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statement of profit and loss and the changes during the period in inventories and operating
receivables and payables.
Question 3—
On the basis of the following information prepare a Cash Flow Statement for the year ended 31st
March, 2015:
(i) Total sales for the year were `199 crore out of which cash sales amounted to ` 131 crore.
(ii) Cash collections from credit customers during the year, totalled ` 67 crore.
(iii) Cash paid to suppliers of goods and services and to the employees of the enterprise amounted
to ` 159 crore.
(iv) Fully paid preference shares of the face value of `16 crore were redeemed and equity shares
of the face value of `16 crore were allotted as fully paid up at a premium of 25%.
(v) ` 13 crore were paid by way of income tax.
(vi) Machine of the book value of ` 21 crore was sold at a loss of ` 30 lakhs and a new machine
was installed at a total cost of ` 40 crore.
(vii) Debenture interest amounting `1 crore was paid.
(viii) Dividends totalling ` 11.7 crore (including CDT) was paid on equity and preference shares.
(ix) On 31st March, 2014 balance with bank and cash on hand totalled ` 9 crore.
Answer—
Cash Flow Statement
For the Year Ended 31st March, 2015
(ìncrores) (ìncrores)
Cash flow from operating activities
Cash sales 131
Cash collected from credit customers 67
Less: Cash paid to suppliers for goods & services and to employees (159)
Cash from operations 39
Less: Income tax paid (13)
Net cash generated from operating activities 26.00
Cash flow from investing activities
Payment for purchase of Machine (40.00)
Proceeds from sale of Machine 20.70
Net cash used in investing activities (19.30)
Cash flow from financing activities

Redemption of Preference shares (16.00)
Proceeds from issue of Equity shares 20.00
Debenture interest paid (1.00)
Dividend Paid (11.70)
Net cash used in financing activities (8.70)
Net decrease in cash and cash equivalent (2.00)
Add: Cash and cash equivalents as on 1.04.2014 9.00
Cash and cash equivalents as on 31.3.2015 7.00

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Question 4—
Raj Ltd. gives you the following information for the year ended 31st March, 2015:
(i) Sales for the year ` 48,00,000. The Company sold goods for cash only.
(ii) Cost of goods sold was 75% of sales.
(iii) Closing inventory was higher than opening inventory by `50,000.
Additional information:—
(i) Trade payables on 31.3.2015 exceed the outstanding on 31.3.2014 by `1,00,000.
(ii) Tax paid during the year amounts to `1,50,000.
(iii) Amounts paid to Trade payables during the year `35,50,000.
(iv) Administrative and Selling expenses paid `3,60,000.
(v) One new machinery was acquired in December, 2014 for `6,00,000.
(vi) Dividend paid during the year `1,20,000.
(vii) Cash in hand and at Bank on 31.3.2015 ` 70,000.
(viii) Cash in hand and at Bank on 1.4.2014 ` 50,000.
Prepare Cash Flow Statement for the year ended 31.3.2015 as per the prescribed Accounting
standard.
Answer—
Cash flow statement of Raj Limited for the year ended 31.3.2015
Direct Method
Cash flow from operating activities: (`) (`)
Sales (Cash only) 48,00,000
Payment to supplier (35,50,000)
Adm. & Selling Expenses payment (3,60,000)
Cash generated from operation 8,90,000
Less: Tax paid (1,50,000)
Net cash from operating activities 7,40,000
Cash flow from investing activities:
Purchase of fixed assets (6,00,000)
Net cash used in investing activities (6,00,000)
Cash flow from financing activities:
Dividend Paid (1,20,000)
Net cash from financing activities (1,20,000)
Net cash flow from all activities 20,000
Add: Opening balance of Cash in Hand and at Bank 50,000
Cash in Hand and at Bank on 31.3.2015 70,000
Question 5—
The following are the summarized Balance Sheets of 'X' Ltd. as on March 31, 2014 and 2015:
Liabilities As on 31.3.2014 (`) As on 31.3.2015 (`)
Equity share capital 15,00,000 16,50,000
Capital Reserve — 10,000
General Reserve 2,50,000 3,00,000
Profit and Loss A/c 1,50,000 1,80,000
Trade payables 5,00,000 4,00,000
Provision for Taxation 50,000 60,000
Dividend payable 1,00,000 1,25,000
25,50,000 27,25,000
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Assets Year 2014 Year 2015

Land and Building 5,00,000 4,80,000
Machinery 7,50,000 9,20,000
Investment 1,00,000 1,50,000
inventory 3,00,000 2,80,000
Trade receivables 4,00,000 4,20,000
Cash in Hand 2,00,000 1,65,000
Cash at Bank 3,00,000 4,10,000
25,50,000 27,25,000
(i) Dividend of `1,00,000 was paid during the year ended March 31, 2015.
(ii) Machinery during the year purchased for `1,25,000.
(iii) Machinery of another company was purchased for a consideration of `1,00,000 payable in
equity shares.
(iv) Income-tax provided during the year `55,000.
(v) Company sold some investment at a profit of `10,000, which was credited to Capital reserve.
(vi) There was no sale of machinery during the year.
(vii) Depreciation written off on Land and Building `20,000.
From the above particulars, prepare a cash flow statement for the year ended March, 2015 as per AS
3 (Indirect method)
Answer—
Cash Flow Statement for the year ending on March 31, 2015
(`) (`)
I. Cash flows from Operating Activities
Net profit made during the year (W.N.1) 2,60,000
Adjustment for depreciation on Machinery (W.N.2) 55,000
Adjustment for depreciation on Land & Building 20,000
Operating profit before change in Working Capital 3,35,000
Decrease in inventory 20,000
Increase in trade receivables (20,000)
Decrease in trade payables (1,00,000)
Income-tax paid (45,000)
II. Cash flows from Investing Activities
Purchase on Machinery (1,25,000)
Sale of Investments 60,000 (65,000)
III. Cash flows from Financing Activities
Issue of equity shares (1,50,000-1,00,000) 50,000
Dividend paid (1,00,000) (50,000)
Net increase in cash and cash equivalent 75,000
Cash and cash equivalents at the beginning of the period 5,00,000
Cash and cash equivalents at the end of the period 5,75,000

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Working Notes:
(i) Net Profit made during the year ended 31-3-2015
(`)
Increase in P & L (Cr.) Balance 30,000
Add: Transfer to general reserve 50,000
Add: Provision for taxation made during the year 55,000
Add: Dividend payable during the year 1,25,000
2,60,000
(ii) Machinery Account

(`) (`)
To Balance b/d 7,50,000 By Depreciation (Bal. Fig.) 55,000
To Bank 1,25,000 By Balance c/d 9,20,000
To Equity share capital 1,00,000
9,75,000 9,75,000
(iii) Provision for Taxation Account
(`) (`)
To Cash (Bal. Fig.) 45,000 By Balance b/d 50,000
To Balance c/d 60,000 By P & L A/c 55,000
1,05,000 1,05,000
(iv) Dividend Payable Account
(`) (`)
To Bank 1,00,000 By Balance b/d 1,00,000
To Balance c/d 1,25,000 By P & L A/c(Bal. Fig.) 1,25,000
2,25,000 2,25,000
(v) Investment Account
(`) (`)
To Balance b/d 1,00,000 By Bank A/c 60,000
To Capital Reserve A/c 10,000 (Balanceing figure for investment
(Profit on sale of Sold)
investment) . By Balance c/d 50,000
1,10,000 1,10,00

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Question 6—
From the following information, prepare cash flow statement of A (P) Ltd. as at 31st March,
2015 by using indirect method:
Balance Sheet
2014 2015
(`) (`)
Liabilities:
Share capital 12,00,000 12,00,000
Profit and loss account 8,50,000 10,00,000
Long term loans 10,00,000 10,60,000
Trade payables 3,50,000 4,00,000
34,00,000 36,60,000
Assets:
Fixed assets 17,00,000 20,00,000
Investment in shares 2,00,000 2,00,000
Inventory 6,80,000 7,00,000
Trade receivables 7,60,000 6,90,000
Cash 60,000 70,000
34,00,000 36,60,000
Income Statement For the Year Ended 31 March, 2015
st
(`)
Sales 40,80,000
Less: Cost of sales (27,20,000)
Gross profit 13,60,000
Less: Operating expenses:
Administrative expenses 4,60,000
Depreciation 2,20,000 (6,80,000)
Operating profit 6,80,000
Add: Non-operating incomes (dividend received) 50,000
7,30,000
Less: Interest paid (1,40,000)
Profit before tax 5,90,000
Less: Income-tax (2,60,000)
Profit after tax 3,30,000
Statement of Retained Earnings
(`)
Opening balance 8,50,000
Add: Profit 3,30,000
11,80,000
Less: Dividend paid (1,80,000)
Closing balance 10,00,000

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Answer—
Cash Flow Statement of A (P) Ltd.
For the Year ended 31st March 2015
Amount Amount
(`) (`)
(i) Cash flows from operating activities
Profit before tax 5,90,000
Adjustments for
Depreciation 2,20,000
Interest paid 1,40,000
Dividend received (50,000)
Operating profit before working capital changes 9,00,000
Add:
Decrease in trade receivables 70,000
Increase in trade payables 50,000
10,20,000
Less:Increase in inventory (20,000)
Cash generated from operations 10,00,000
Less: Tax paid (2,60,000)
Cash flow from operating activities 7,40,000
(ii) Cash flows from investing activities
Purchase of fixed assets (5,20,000)
[20,00,000+2,20,000-17,00,000]
Dividend on investments 50,000
Cash used in investing activities (4,70,000)
(iii) Cash flows from financing activities
Long term loan taken 60,000
Interest paid (1,40,000)
Dividend paid (1,80,000)
Cash used in financing activities (2,60,000)
Net increase in cash during the year 10,000
Add: Opening cash balance 60,000
Closing Cash Balance 70,000

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Question 7—
The Balance Sheets of X Ltd. as on 31st March, 2014 and 31st March, 2015 are as follows:
Liabilities 2014 2015 Assets 2014 2015
Amount (`) Amount (`) Amount (`)Amount (`)
Share Capital 5,00,000 7,00,000 Land and Buildings 80,000 1,20,000
General Reserve 50,000 70,000 Plant and Machinery 5,00,000 8,00,000
Profit and Loss A/c 1,00,000 1,60,000 Inventory 1,00,000 75,000
Trade payables 1,93,000 240,000 Trade receivables 1,50,000 1,60,000
Cash 20,000 20,000
Outstanding Expenses 7,000 5,000 . .
8,50,000 11,75,000 8,50,000 11,75,000
(i) Plant having WDVRs.5,000 sold for Rs.8,000
(ii) Current year depreciation on plant 50,000
Prepare Cash Flow Statement.
Answer—
Cash Flow Statement for the year ended 31st March, 2015
Amount Amount
(`) (`)
I Cash Flows from Operating Activities
Closing Balance as per Profit & Loss A/c 1,60,000
Less: Opening Balance as per Profit & Loss A/c (1,00,000)
60,000
Add: Transfer to General Reserve 20,000
Net Profit before taxation and extra-ordinary items 80,000
Add: Depreciation on Plant and Machinery 50,000
Less:Profit on sale of machinery (Refer W.N.) (3,000)
Operating Profit 1,27,000
Add: Decrease in Inventory 25,000
Increase in trade payables 47,000 72,000
1,99,000
Less:Increase in trade receivables (10,000)
Decrease in Outstanding expenses (2,000) (12,000)
Net Cash from Operating Activities 1,87,000
II. Cash Flows from Investing Activities
Purchase of Land & Building (40,000)
Proceeds from Sale of Machinery (Refer W.N.) 8,000
Purchases of Plant & Machinery (Refer W.N.) (3,55,000)
Net Cash Used in Investing Activities (3,87,000)
III. Cash Flows from Financing Activities
Proceeds from Issuance of Share Capital 2,00,000
Net Cash from Financing Activities 2,00,000
Net Increase/Decrease in Cash & Cash Equivalents 0
Add: Cash in hand at the beginning of the year 20,000
Cash in hand at the end of the year 20,000

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Working Note:
Plant and Machinery Account
(`) (`)
To Balance b/d 5,00,000 By Bank 8,000
To Profit and Loss A/c(Profit on sale) 3,000 By Depreciation 50,000
To Purchases (Bal. fig.) 3,55,000 By Balance c/d 8,00,000
8,58,000 8,58,000
Question 8—
The following are the summarized Balance Sheet of Star Ltd. as on 31st March, 2014 and 2015:
(`'000)
2014
2015
Equity share capital of ` 10 each 3,400 3,800
Profit and Loss A/c 400 540
Securities Premium 40 80
14% Debentures 800 900
Long term borrowings 180 240
Trade payables 360 440
Provision for Taxation 20 40
Dividend payable 300 480
5,500 6,520
Sundry Fixed Assets:
Gross Block 3,200 4,000
Less: Depreciation (640) (1,440)
Net Block 2,560 2,560
Investment 1,200 1,400
Inventories 1,000 1,400
Trade receivables 640 900
Cash and Bank Balance 100 260
5,500 6,520
The Profit and Loss account for the year ended 31st March, 2015 disclosed:
(`'000)
Profit before tax 780
Less: Taxation (160)
Profit after tax 620
Less: Dividend payable (480)
Retained Profit 140
The following information are also available:
(1) 40,000 equity shares issued at a premium of `1 per share.
(2) The Company paid taxes of ` 1,40,000 for the year 2014–15.
(3) During the period, it discarded fixed assets costing ` 4 lacs, (accumulated depreciation `
80,000) at ` 40,000 only.
You are required to prepare a cash flow statement as per AS 3 (Revised), using indirect
method.

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Answer—
Cash Flow Statement for the year ended 31st March, 2015
`('000)
(A) Cash flow from operating activities
Net profit before tax 780
Add: Adjustment for depreciation 880
Loss on sale of fixed assets 280
Interest on debentures* 126
Operating profit before changes in working capital 2,066
Less: Increase in trade receivables (260)
Less: Increase in Inventories (400)
Add: Increase in trade payables 80
Cash generated from operations 1,486
Less: Income tax paid (W.N.1) (140)
Net cash from operating activities 1,346
(B) Cash Flow From investing activities
Purchase of fixed assets (1,200)
Sale of fixed assets 40
Purchase of investments (200)
Net cash used in investing activities (1,360)
(C) Cash flow from Financing Activities
Proceeds from issue of shares including premium (400 + 40) 440
Proceeds from issue of 14% debentures (900 - 800) 100
Proceeds from long term borrowings 60

Interest on debentures (126)
Payment of dividend (300)
Net cash from financing activities 174
Net increase in cash and cash equivalents (A+B+C) 160
Cash and cash equivalents at the beginning of the year 100
Cash and cash equivalents at the end of the year 260
Working Notes:
* It is assumed that debentures of ` 1,00,000 were issued at the beginning of the year.
(1) Calculation of lncome Tax paid during the year `('000)
Income tax expense for the year 160
Add: Income tax liability at the beginning of the year 20
180
Less: Income tax liability at the end of the year (40)
Income tax paid during the year 140
(2) Calculation of Fixed assets purchased during the year
Closing balance of gross block of fixed assets 4,000
Add: Cost of assets discarded during the year 400
4,400
Less: Opening balance of gross block of fixed assets (3,200)
Fixed assets purchased during the year 1,200
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(3) Calculation of Depreciation charged during the year

Closing balance of accumulated depreciation 1,440
Add : Depreciation charged on assets discarded during the year 80
1,520
Less: Opening balance of accumulated depreciation (640)
Depreciation charged during the year 880
Question 9—
The following figures have been extracted from the books of X Limited for the year ended on
31.3.2015. You are required to prepare a cash flow statement.
(i) Net profit before taking into account income tax and income from law suits but after taking
into account the following items was `20 lakhs:
a. Depreciation on Fixed Assets `5 lakhs.
b. Discount on issue of Debentures written off `30,000.
c. Interest on Debentures paid `3,50,000.
d. Book value of investments ` 3 lakhs (Sale of Investments for `3,20,000).
e. Interest received on investments `60,000.
f. Compensation received `90,000 by the company in a suit filed.
(ii) Income tax paid during the year `10,50,000.
(iii) 15,000, 10% preference shares of ` 100 each were redeemed on 31.3.2015 at a premium of
5%. Further the company issued 50,000 equity shares of `10 each at a premium of 20%
on2.4.2014. Dividend on preference shares were paid at the time of redemption.
(iv) Dividend paid for the year 2013-2014 ` 5 lakhs and interim dividend paid ` 3 lakhs for the
year 2014-2015.
(v) Land was purchased on 2.4.2014 for ` 2,40,000 for which the company issued 20,000 equity
shares of ` 10 each at a premium of 20% to the land owner as consideration.
(vi) Current assets and current liabilities in the beginning and at the end of the years were as
detailed below:
As on 31.3.2014 As on 31.3.2015
(`) (`)
Inventory 12,00,000 13,18,000
Trade receivables 258000 253100
Cash in hand 1,96,300 35,300
Trade payables 211000 211300
Outstanding expenses 75,000 81,800
Answer—
X Ltd.
Cash Flow Statement For the year ended 31st March, 2015
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 20,00,000
Adjustments for:
Depreciation on fixed assets 5,00,000
Discount on issue of debentures 30,000
Interest on debentures paid 3,50,000
Interest on investments received (60,000)
Profit on sale of investments (20,000) 8,00,000
Adjustments for:

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Increase in inventory (1,18,000)

Decrease in trade receivable 4,900
Increase in trade payables 300
Increase in outstanding expenses 6,800 (1,06,000)
Income tax paid (10,50,000)
16,44,000
Cash flow from extraordinary items:
Compensation received in a suit filed 90,000
Net cash flow from operating activities 17,34,000
Cash flow from Investing Activities
Sale proceeds of investments 3,20,000
Interest received on investments 60,000
Net cash flow from investing activities 3,80,000
Cash flow from Financing Activities
Proceeds by issue of equity shares at 20% premium 6,00,000
Redemption of preference shares at 5% premium (15,75,000)
Preference dividend paid (1,50,000)
Interest on debentures paid (3,50,000)
Dividend paid (5,00,000 + 3,00,000) (8,00,000)
Net cash used in financing activities (22,75,000)
Net decrease in cash and cash equivalents during the year (1,61,000)
Add: Cash and cash equivalents as on 31.3.2014 1,96,300
Cash and cash equivalents as on 31.3.2015 35,300
Note: Purchase of land in exchange of equity shares (issued at 20% premium) has not been
considered in the cash flow statement as it does not involve any cash transaction.
Question 10—
Surya Ltd. has provided you the following particulars. Prepare Cash Flow from Operating Activities
by Indirect Method in accordance with AS 3 :
Profit & Loss Account of Surya Ltd. for the year ended 31st March, 2015
Particulars ` Particulars `
To Depreciation 86,700 By Operating Profit before depreciation 11,01,600
To Patents written off 35,000 By Profit on Sale on Investments 10,000
To Provision for Tax 1,25,000 By Refund of Tax 3,000
To Dividend payable 72,000 By Insurance Claim-Major Fire Settlement 1,00,000
To Transfer to Reserve 87,000
To Net Profit 8,08,900 .
12,14,600 12,14,600
31.3.2014 31.3.2015
Inventory 1,20,000 1,60,000
Trade Receivables 7,500 75,000
Trade Payables 23,735 87,525
Provision for Tax 1,18,775 1,25,000
Prepaid Expenses 15,325 12,475

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Marketable Securities 11,775 29,325

Cash Balance 25,325 35,340
Answer—
Indirect Method
Cash flow from Operating activities for the year ended 31st March, 2015
(`)
Net Profit as per Profit & Loss A/c 8,08,900
Add: Dividend payable 72,000
Add: Transfer to reserve 87,000
Add: Provision for Tax made during the Current Year 1,25,000
Less: Refund of tax (3,000)
Less: Extraordinary items (i.e. Insurance Claim - Major Fire Settlement) (1,00,000)
Net Profit before taxation, and extraordinary items 9,89,900
Add: Depreciation 86,700
Add: Patents written off 35,000
Less: Profit on sale of investments (10,000)
Increase in Inventory (40,000)
Increase in trade receivables (67,500)
Increase in trade payables 63,790
Decrease in prepaid expenses 2,850 (40,860)
Income taxes paid (net of refund) 1,15,775
Cash flow before extraordinary item 9,44,965
Insurance claim recovery (major fire settlement) 1,00,000
****************

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Departmental Account 12.1
Chapter - 12
Departmental Account
CONCEPT OF DEPARTMENTS AND DEPARTMENTAL ACCOUNTING:—
• Business is divided into several departments on the basis of nature of different products, services
or activities.
• In such cases, business wants to determine performance of every department separately.
• In order to determine profit / loss of each department. There is a need to prepare departmental
trading A/c.
• By preparing departmental Trading and P&L A/c, performance of each department is determined
and result is analyzed in depth.
• This entire concept is known as departmental Accounting.
PRACTICALLY COVERED TOPIC BY DEPARTMENTAL ACCOUNTING
Preparation of Questions relating to basic calculations e.g. Accounting of

department wise calculation of correct departmental profit, departmental
Trading and P&L profitability in case of uniform GP rate and stock A/c with
A/c profitability in case of sale with discount. Mark-up A/c
TOPIC – 1 : PREPARATION OF DEPARTMENTAL WISE TRADING AND P&L A/C

Pa rt icu lars A B T otal P art icula rs A B To ta l
To O pen ing Sto c k By Sales
To Purchas e By Tran sfer to
To D irect exp ens es o the r departmen ts
To Trans fer fro m By Retu rn to
oth er d epart ment o the r departmen ts
To Return from By Clo sin g Stoc k
oth er d epart ment s
To G /P
xx x xx x xx x xx x xx x xx x
To In dire ct Ex pe n ses By G /P
To N /P By In dir ect In com e A /c
xx x xx x xx x xx x xx x xx x

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Overall P&L A/c or P&L Appropriation A/c or General P&L A/c
Particular Amount Particular Amount
To Unallocated expenses By department's net profit
To Stock reserve A/c (Closing) By Unallocated Income
To Balance c/d By Stock Reserve A/c (Opening)
xxx xxx
ALLOCATION OF DIFFERENT REVENUE AND EXPENDITURE DEPARTMENT WISE

• If already given in allocated form then use as it is (actual basis).
• If not given in allocated form but basis of allocation is given then allocate it according to basis given.
• If allocated form not given and basis of allocation is also not given then allocate those items on the
most suitable basis according to considering nature of that item. (Detail of suitable basis refer to
stydt material Page No. 12.5)
• If allocation is not possible then Directly disclose those items in General P&L A/c in overall form.
INTER DEPARTMENT TRANSFER
• Transfer of goods from one department to other department.
• Transfer price may be of three types :
(1) at cost
(2) at cost + profit
(3) at normal selling price (Invoice Value)
• It is to be disclosed in departmental trading a/c with value at which it has been transferred.
• Debit transferee department and credit transfer dept.
Transferee Department Trading A/c Dr.
To Transferor department trading a/c

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STOCK RESERVE (UNREALIZED GAIN IN STOCK)
• It may be possible that transferred stock from one department to other department remains unsold
with transferee department as a part of opening or closing stock.
• If it has been transferred at cost plus profit or Normal Selling Price (NSP) then profit included in such
unsold stock is known as stock reserve or unrealized gain in stock.
• It is calculated only when goods have been transferred at ‘cost + profit’ or ‘NSP’ and such stock
remain unsold.
Calculation of amount of stock reserve
(1) If rate of profit for Interdepartmental transfer is given then calculate amount of stock reserve by using
rate of profit of transferor department and apply it on the opening and closing stock of transferee
department.
(2) If inter departmental transfer is at normal GP rate (If rate of profit is not given)
 Calculate GP rate of transferor department:
GP
 100
Sales  transfer – returns
 Apply it on transferee’s department’s stock.
Accounting treatment of Stock Reserve in Profit & Loss A/c
 In absence of information it is adjusted in overall / general P&L A/c
 If question requires, then it can be adjusted in the transferor department.
 Accounting will be as under :
(1) Separate disclosure of opening and closing stock reserve
 Credit opening stock reserve and dr. closing stock reserve in the P&L A/c
(2) Adjustment on net amount basis
 Disclose net opening stock reserve in Cr. side and if net closing stock reserve, then dr.
side of P&L A/c.
Accounting treatment of Stock Reserve in Balance Sheet
• Closing Stock Reserve is to be deducted from the closing stock in the balance Sheet

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Topic-3 : Memorandum Department Stock A/c with Memorandum Mark-up A/c
 In this method, two memorandum a/c will be opened in the books of business.
(1) Memorandum Stock A/c
(2) Memorandum Mark up A/c
 Certain % of profit on cost is added to cost of stock in order to convert it into invoice value of
stock.
 Such percentage of profit on cost is known as Mark-up.
 Memorandum stock A/c is prepared on the basis of Invoice Value.
 Debit side of stock A/c will be disclose invoice value of opening stock and other receipts of stock
at invoice value.
 Credit side of stock a/c will disclose sale of stock, closing stock and other outflow of stock at
invoice value.
 In this case Stock A/c will not reflect GP because both sides are prepared on the basis of Invoice
value.
 Therefore another a/c will be prepared which is known as Memorandum Markup A/c.
 Profit element included in opening and closing stock will become opening and closing balance of
Memorandum Markup A/c.
 All other profit elements of Stock A/c is also reversed in Markup A/c accept profit on sales.
 Result of Markup A/c will be GP of that department.
 If part of stock is offered to sale at reduced price then such discount offered is known as mark
down.
(1) Discount offered on opening stock is known as Opening Mark down.
(2) Discount offered on closing stock is known as Closing Mark down.
(3) Discount offered in current year is known as Mark down in current year.
(4) Discount on stock sold out in current year known as Mark down on sale.
 Opening, Closing and Mark down in current year need to be adjusted in Stock A/c and Markup A/c
 Mark down on Sales will affect GP of current year under the calculation of verification of GP.

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Format of Memorandum Stock A/c
Particulars Rs. Particulars Rs.
To Balance b/d By Sales (Actual)
Cost xx
+ Mark up xx By Shortage
(-) Mark down (xx) xxx Cost
To Purchase + Mark up xx
Cost xx
+ Markup xx xx By Transfer to other departments
To Transfer from other Cost
Department + Markup xx
Cost xx
+ Mark up xx xx By Mark up A/c
(Mark down in CY)
By Balance c/d
Cost
+ Mark up
(-) Mark down (note 1)
Memorandum Mark Up A/c
Particulars Rs. Particulars Rs.
To Memorandum Stock A/c By Balance B/d xx
- Markup in shortage (Net Markup in opening stock)
- Mark down in CY xx By Memorandum Stock A/c
- Mark up in transfer to xx - Mark up in Purchases xx
to other department - Mark up in transfer from other xx
To G.P. (B/F) department
To Balance c/d xx
(Net Mark up in closing stock)
(Mark up Mark down) xx xx
NOTE :
(1) Details of Closing Stock
Net Value of Closing Stock in xx
outer column
Add : Mark down in closing stock xx
(NSP) Invoice value of closing stock (Normal) xx
(divide it in to Cost & Mark-up)
(2) Verification of G.P.

Actual Sales xx
Add : Mark down in Sales (discount) xx
Normal Sales (if discount not given) xx
Mark up rate (Normal GP Rate) xx
Normal GP (if discount not given) xx
Less : Discount on Sales (Mark down) (xx)
Actual GP xx

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Questions and Answers
Question 1—
(a) Give the basis of allocation of the following common expenditure among different departments:
(i) Insurance of Building
(ii) Discount and bad debts
(iii) Discount received
(iv) Repairs and maintenance of capital assets
(v) Advertisement expenses
(vi) Labour welfare expenses
(vii) PF/ESI contributions
(viii) Carriage inward
Answer—
S.No. Expenses Basis

(i) Insurance of building Floor area occupied by each department
(if given) otherwise on time basis
(ii) Discount and bad debts Sales of each department
(iii) Discount received Purchases of each department
(iv) Repairs and maintenance Value of assets of each department
of capital assets otherwise on time basis
(v) Advertisement expenses Sales of each department otherwise on
time basis or equally among departments
(vi) Labour welfare expenses Number of employees in each department
(vii). PF/ESI contributions Wages and salaries of each department
(viii) Carriage inward Purchases of each department
Question 2—
Write short note on basis of allocation of common expenditure among different
departments.
Answer—
While preparing department accounts, expenses should be allocated among the different
departments on the basis of the following principles:
1. Expenses incurred specially for each department are charged directly thereto e.g., insurance
charges of stock held by a department.
2. Common expenses, the benefit of which is shared by all the departments and which are capable
of precise allocation, (e.g., rent, lighting expenses etc.) are distributed among the departments concerned
on some equitable · basis considered suitable in the circumstances of the case. Rent is charged to different
departments according to the floor area occupied by each department, having regard to any favourable
location specially allocated to a department. Lighting and heating expenses are distributed on the basis
of consumption of energy by each department and so on.

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Question 3—
Siva Ltd. has two departments X and Y. From the following particulars prepare
departmental trading accounts and general profits and loss account for the year
ending 31st March, 2012:
Department X Department Y
Opening stock (at cost) 80,000 48,000

Purchases 3,68,000 2,72,000
Carriage inward 8,000 8,000
Wages 48,000 32,000
Sales 5,60,000 4,48,000
Purchased goods transferred
By department Y to X 40,000 -
By department X to Y - 32,000
Finished goods transferred
By department Y to X 1,40,000 -
By department X to Y - 1,60,000
Return of finished goods
By department Y to X 40,000 -
By department X to Y - 28,000
Closing stock
Purchased goods 18,000 24,000
Finished goods 96,000 56,000
Purchased goods have been transferred mutually at their respective departmental purchase cost and finished
goods at departmental market price and that 25% of the closing finished stock with each department
represents finished goods received from the other department.

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Answer—
Department Trading Account in the books of Siva Ltd.

for the year ended 31st March, 2012
Particulars Department Department Particulars Department Department
X Y X Y
To Purchases 3,68,000 2,72,000 By Transfers:
To Carriage inward 8,000 8,000 Purchased goods 32,000 40,000
To Wages 48,000 32,000 Finished goods 1,20,000* 1,12000*
To Transers: By Closing Stock:
Purchased goods 40,000 32,000 Purchased goods 18,000 24,000
Finished goods 1,12,000 1,20,000 Finished goods 96,000 56,000
To Gross Profit c/d 1,70,000 1,68,000
8,26,000 6,80,000 8,26,000 6,80,000

Profit and Loss A/c
Particulars Paticulars
To Provision for unrealized By Gross Profit b/d
Profit included in closing
stock
Department X (W.N..3) 7,200 Department X 170,000
Department Y (W.N. 3) 3,500 Department Y 1,68,000
To Net profit 3,27,300
3,38,000 3,38,000

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Working Notes :
1. Calculation of rates of gross profit margin on sales
Deartment X Department Y
Sales 5,60,000 4,48,000

Add: Transfer of finished goods 1,60,000 1,40,000
7,20,000 5,88,000
Less : Return of finished goods (40,000) (28,000)
6,80,000 5,60,000
Gross Profit 1,70,000 1,68,000
1,70,000 1,68,000
Gross profit margin =  100  25%  100  30%
6,80,000 5,60,000
2. Finished goods from other department cincluded in the closing stock
Department X Department Y
Stock of fininshed goods 96,000 56,000

Stock related to other department
(25% of fininshed goods) 24,000 14,000
3. Unrealized profit included in the closing stock
Department X = 30% of 24,000 = 7,200; Deprtment Y = 25% of 14,000 = 3,500

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Question 4—
Mega Ltd. has two departments, A and B. From the following particulars, prepare
departmental Trading A/c and General Profit & Loss Account for
the year st
ended 31 March, 2014.
Particulars Amount ( )
Department A Department B
Opening Stock as on 01.04.2013 70,000 54,000
Purchases 3,92,000 2,98,000
Carriage Inward 6,000 9,000
Wages 54,000 36,000
Sales 5,72,000 4,60,000
Purchased Goods Transfer :
By Department B to A 50,000
By Department A to B 36,000
Finished Goods Transfered :
By Department B to A 1,50,000
By Department A to B 1,75,000
Return of Finished Goods:
By Department B to A 45,000
By Department A to B 32,000
Closing Stock :
Purchased Goods 24,000 30,000
Finished Goods 1,02,000 62,000
Purchased goods have been transferred mutually at their respective departmental purchase cost and finished
goods at departmental market price and that 30% of the closing finished stock with each department
represents finished goods received from the other department.

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Answer—
Departmental Trading Account in the books of Mega Ltd.
Particulars Department Department Particulars Department Department
A B A B
( ) ( ) ( ) ( )
To Purchases 3,92,000 2,98,000 By Transfer :
To Carriage Inward 6,000 9,000 Purchaesed Goods 36,000 50,000
To Wages 54,000 36,000 Finished Goods 1,30,000 1,18,000
To Transfers: By Closing Stock:
Purchased Goods 50,000 36,000 Purchased 24,000 30,000
Finished Goods** 1,18,000 1,30,000 Finished Goods* 1,02,000 62,000
To Gross Profit c/d 1,74,000 1,57,000
8,64,000 7,20,000 8,64,000 7,20,000
*Finished goods from other department included in closing stock

Particulars Department A ( ) Department B ( )
Stock of Finished Goods 1,02,000 62,000
Stock related to other department 30,600 18,600
(30% of Finished Goods)
** Net transfer of Finished Goods by
Department A to B = (1,75,000 – 45,000) = 1,30,000
Department B to A = (1,50,000–32,000) = 1,18,000
General Profit and Loss A/c
For the year ended 31st March, 2014
Particulars Amount ( ) Particulars Amount( )
To Provision for unrealised profit By Gross Profit b/d:

included in closing stock: Department A 1,74,000
Department A (W.N.2) 8,311 Department B 1,57,000
Department B (W.N.2) 4,611
To Net Profit 3,18,078
3,31,000 3,31,000

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Working Notes
1. Calculation of ratio of gross profit margin on slaes:
Particulars Department A( ) Department B ( )
Sales 5,72,000 4,60,000
Add : Transfer of Finished Goods 1,75,000 1,50,000
7,47,000 6,10,000
Less : Return of Finished Goods (45,000) (32,000)
7,02,000 5,78,000
Gross Profit 1,74,000 1,57,000
1,74,000 1,57,000
Gross Profit margin =  100  24.79%  100  27.16%
7,02,000 5,78,000
2. Unrealised profit included in the closing stock
Department A = 27.16% of 30,600 (30% of stock of Finished Goods 1,02,000) = 8,311.00
Department B = 24.79% of 18,600 (30% of stock of Finished Goods 62,000) = 4,611.00
Question 5—
M/s. AM Enterprise had two departments, Cloth and Readymade Clothes. The readymade
clothes were made by the firm itself out of the cloth supplied by the Cloth Department
at its usual selling price. From the following figures, prepare Departmental Trading
and Profit & Loss Account for the year ended 31 st March, 2012:
Cloth Department Readymade Clothes
Department
Opening Stock on 1 st April, 2011 31,50,000 5,32,000
Purchases 2,10,00,000 1,68,000
Sales 2,31,00,000 47,25,000
Transfer to Readymade Clothes Department 31,50,000 –
Manufacring Expenses – 6,30,000
Selling Expenses 2,10,000 73,500
Rent & warehousing 8,40,000 5,60,000

Stock on 31st March, 2012 21,00,000 6,72,000
In addition to the above, the following information is made available for necessary consideration :
The stock in the Readymade Clothes Department may be considered as consisting of 75% cloth and 25%
other expenses. The Cloth Department earned a gross profit at the rate of 15% in 2010-11. General expenses
of the business as a whole amount to 10,85,000.

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Answer
Departmental Trading and Profit and Loss Account
for the year ended 31 st March, 2012
Particulars C loth ( ) Readymade Total Particulars C loth ( ) Readymade Total
Clothes ( ) ( ) Clothes ( ) ( )
To O pening 31,50,000 5,32,000 36,82,000 By Sales 2,31,00,000 47,25,000 2,78,25,000

Stock
To Purchases 2,10,00,000 1,68,000 2,11,68,000 By Transfer to 31,50,000 – 31,50,000

Ready made
Clothes Deptt.
To Transfer from 31,50,000 31,50,000 By Closing Stock 21,00,000 6,72,000 27,72,000

Cloth Department
To Manufacturing 6,30,000 6,30,000

Expenses
To Gross Profit 42,00, 000 9,17,000 51,17,000

c/d
2,83,50,000 53,97,000 3,37,47,000 2,83,50,000 53,97,000 3,37,47,000
To Selling 2,10,000 73,500 2,83,500 By Gross Profit 42,00,000 9,17,000 51,17,000

Expenses b/d
To Rent & 8,40,000 5,60,000 14,00,000

warehousing
To N et Profit 31,50,000 2,83,500 34,33,500
42,00,000 9,17,000 51,17,000 42,00,000 9,17,000 51,17,000
General Profit and Loss Account

Particulars Amount ( ) Particulars Amount ( )
To General expenses 10,85,000 By Net profit 34,33,500
To Unrealized profit (Refer W.N.) 20,790
To General net profit (Bal.fig.) 23,27,710
34,33,500 34,33,500
Working Note:
Calculation of Stock Reserve
Gross Profit
Rate of Gross Profit of Cloth Department, for the year 2011–12   100
Total Sales
42,00,000
 100  16%
(2,31,00,000  31,50,000)
Closing Stock of cloth in Readymade Clothes Department = 75%
i.e. 6,72,000× 75% = 5,04,000
Stock reserve for unrealized profit included in opening stock of readymade clothes @ 15% i.e.
( 5,32,000 × 75% × 15%) = 59,850
Additional Stock Reserve required during the year = 80,640 – 59,850 = 20,790.

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Question 6—
The following balance were extracted from the books of M/s Division. You are required to prepare Departmental
Trading Account and Profit and Loss Account for the year ended 31st December, 2011 after adjusting the
unrealized department profits if any.
Deptt. A Deptt. B
Rs. Rs.
Opening Stock 50,000 40,000
Purchase 6,50,000 9,10,000
Sales 10,00,000 15,00,000
(i) General expense incurred for both the departments were Rs. 1,25,000 and you are also supplied with the
following information: (a) Closing stock of Department A Rs. 1,00,000 including goods from Department B
for Rs. 20,000 at cost of Department A. (b) Closing stock of Department B Rs. 2,00,000 including goods
from Department A for Rs. 30,000 at cost to Department B. (c) Opening stock of Department A and
Department B include goods of the value of Rs. 10,000 and Rs. 15,000 taken form Department B and
Department A respectively at cost to transferee departments. (d) The gross profit is uniform from year to
year.
Answer—
Note :—
• Since detail of inter departmental transfer are not given therefore it has been assumed
that given amount of purchase and sales are already adjusted with inter departmental
transfer.
• Since general expenses has been given for department therefore in absense of
information it has been allocated in sales ratio.
(i) Departmental Trading and Loss Account of M/s Division

For the year ended 31st December, 2011
Deptt. A Deptt. B Deptt. A Deptt. B
Rs. Rs. Rs. Rs.
To Opening stock 50,000 40,000 By Sales 10,00,000 15,00,000
To Purchases 6,50,000 9,10,000 By Closing 1,00,000 2,00,000
Stock
To Gross Profit 4,00,000 7,50,000
11,00,000 17,00,000 11,00,000 17,00,000
To General 50,000 75,000 By Gross profit 4,00,000 7,50,000

Expenses
(in ratio of sales)
To Profit to general 3,50,000 6,75,000

profit and loss
account
4,00,000 7,50,000 4,00,000 7,50,000

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General Profit and Loss Account
Rs. Rs.
To Stock reserve required By Profit from :
(additional
Stock in Deptt. A Deptt. A 3,50,000
50% of (Rs. 20,000 - Rs. 10,000) 5,000 Deptt. B 6,75,000
(W.N. 1)
Stock in Deptt. B
40% of (Rs. 30,000 - Rs. 15,000) 6,000
(W.N. 2)
To Net Profit 10,14,000
10,25,000 10,25,000
Working Notes:
1. Stock of department A will be adjusted according to the rate applicable to department B =
[(7,50,000 ÷ 15,00,000) × 100] = 50%.
2. Stock of department B will be adjusted according to the rate applicable to department A =
[(4,00,000 ÷ 10,00,000) × 100] = 40%.
Question 7—
FGH Ltd. has three departments I, J and K. The following information is provided for
the year ended 31.3.2012:
I J K
Opening stock 5,000 8,000 19,000

Opening reserve for unrealised profit ― 2,000 3,000
Materials consumed 16,000 20,000 ―
Direct labour 9,000 10,000 ―
Closing stock 5,000 20,000 5,000
Sales ― ― 80,000
Area occupied (sq. mtr.) 2,500 1,500 1,000
No. of employees 30 20 10
Stocks of each department are valued at costs to the department concerned. Stocks of I are transferred to J
at cost plus 20% and stocks of J are transferred to K at a gross profit of 20% on sales. Other common
expenses are salaries and staff welfare 18,000, rent 6,000.
Prepare Departmental Trading, Profit and Loss Account for the year ending 31.3.2012

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Answer
FGH Ltd. Departmental Trading and Profit and Loss Account
for the year ended 31st M arch, 2012
I J K Total I J K Total
To O pening S tock 5,000 8,000 19,000 32,000 By Sales 80,000 80,000
To M atrial 16,000 20,000 36,000 By Inter-departmental 30,000 60,000 90,000

purchased transfer
To Dirct Labour 9,000 10,000 – 19,000
To Inter 30,000 60,000 90,000 By C losing Stock 5,000 20,000 5,000 30,000
departmental
transfer
To Gross Profit 5,000 12,000 6,000 23,000
35,000 80,000 85,000 200000 35,000 80,000 85,000 200000
To Salaries and staff 9,000 6,000 3,000 18,000 By Gross Profit b/d 5,000 12,000 6,000 23,000
welfare
To Rent 3,000 1,800 1,200 6,000 By N et Loss 7,000 7,000
To N et P rofit 4,200 1,800 6,000
12,000 12,000 6,000 30,000 12,000 12,000 6,000 30,000
To N et Loss (I) 7,000 By Stock reserve b/d 5,000

(J+K )
To Stock reserve 3,000 By N et Profit (J+K ) 6,000

(J+K ) (Refer
(W.N .)
To Balance 1,000
transfered to Profit
& Loss A/c
11,000 11,000
Working Notes: Calculation of Inter Department Transfer
A. From Dept I to Dept J
Op Stock + Material Purchased + Dir Labour Cost – Cl Stock = 25,000/-
Profit on trnasfer is 20% of Cost = 5,000/-. Hence transfer = 30,000/-
B. From Dept J to Dept K
Op Stock + Material Purchased + Direct Labour + Inward Transfer – Cl Stock = 48,000/-
profit on transfer = 20% of sale value i.e. 25% of cost price = Rs. 12,000/-
Hence, stock transferred to K at a value of Rs. 60,000/-

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Working Note:
Calculation of unrealized Profit on Closing Stock
Stock reslerve of J Department

Cost – Material purchased + Direct Labour 30,000
Cost Transfer from I department 30,000
60,000
Closing Stock of J department 20,000
30,000
Proportion of stock of I department  20,000   10,000
60,000
20
Stock reserve  10,000   1,667 =(approx.)
120
Stock reserve of K department
Closing Stock (being stock transfered from J department) 5,000

Less: Profit (stock reserve) 5,000×20% (1,000)
Cost to J department (4,000)
30,000
Proportion of stock of I department  ,000   2,000
60,000
20
Stock Reserve  2,000   333(approx )
120
Total stock reserve = 1,000+ 333 = 1,333

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Question 8—
X Ltd has three departments A, B and C. From the particulars given below compute:
(a) the values of stock as on 31st Dec. 2012 and
(b) the departmental results
(i)
A B C
`
Stock (on 1.1. 2012) 24,000 36,000 12,000
Purchases 1,46,000 1,24,000 48,000
Actual sales 1,72,500 1,59,400 74,600
Gross Profit on normal selling price 20% 25% 33 1/3%
(ii) During the year certain items were sold at discount and these discounts were reflected in the
value of sales shown above. The items sold at discount were:
A B C
Sales at normal price 10,000 3,000 1,000

Sales at actual price 7,500 2,400 600
Answer—
1. Calculatioln of Departmental Results (Actual Gross Profit):
A( ) B( ) C( )
Actual Sales 1,7 2,5 00 1,5 9,4 00 74 ,60 0
Add back: Discount (Refer W.N.) 2,5 00 60 0 40 0
Normal sale 1,7 5,0 00 1,6 0,0 00 75 ,00 0
Gross profit % on normal sales 2 0% 25% 33 .33 %
Normal gross profit 3 5,0 00 4 0,0 00 25 ,00 0
Less: Discount (2,5 00) (6 00) (40 0)
Actual gross profit 3 2,5 00 3 9,4 00 24 ,60 0
2. Computation of value of stock as on 31st Dec. 2012.
Departments A B C
Stock (on 1.1. 2012) 24,000 36,000 12,000

Add: Purchases 1,46,000 1,24,000 48,000
1,70,000 1,60,000 60,000
Add: Actual gross profit 32,500 39,400 24,600
2,02,500 1,99,400 84,600
Less: Actual Sales (1,72,500) (1,59,400) (74,600)
Closing stock as on 31.12.2012 (bal.fig.) 30,000 40,000 10,000

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Working Note:
Calculation of discount on sales:
Departments A B C
Sales at normal price 10 ,00 0 3 ,00 0 1, 00 0

Less: Sales at actual price (7 ,50 0) (2 ,40 0) (60 0)
2,50 0 60 0 40 0
Question 9—
Sona Ltd. has three departments— P, Q and R. From the following particulars given below, compute:
(i) The departmental results;
(ii) The value of stock as on 31st December, 2014;
Particulars P Q R
Stock as on 01.01.2014 30,000 45,000 15,000
Purchases 1,60,000 1,30,000 60,000
Actual Sales 1,88,00 1,66,000 93,000
Gross Profit on normal Sales price 25% 33 1 % 40%

3
During the year 2014 some items were sold at discount and these discounts were refflected in the
above sales value. The details are given below:
Particulars P Q R
Sales at normal price 15,000 8,000 6,000
Sales at actual price 11,000 6,000 4,000
Answer—
Calculation of Departmental Results:
P( ) Q( ) R( )
Actul Sales 1,88,000 1,66,000 93,000
Add: Discount (Refer W.N.) 4,000 2,000 2,000
Normal Sale 1,92,000 1,68,000 95,000
Gross Profit % on normal sales 25% 33.33% 40%
Normal gross profit 48,000 56,000 38,000
Less: Discount (4,000) (2,000) (2,000)
Actual gross profit 44,000 54,000 36,000
Computation of value of stock as on 31st Dec. 2014
Departments P( ) Q ( )
Stock (on 1.1.2014) 30,000 45,000 15,000
Add: Purchases 1,60,000 1,30,000 60,000
1,90,000 1,75,000 75,000
Add: Actual gross profit 44,000 54,000 36,000

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2,34,000 2,29,000 1,11,000
Less: Actual Sales (1,88,000) (1,66,000) (93,000)
Closing Stock as on 31.12.2014 46,000 63,000 18,000
Working Note:
Calculation of discount on sales
Department P( ) Q( ) R( )
Sales at normal Price 15,000 8,000 6,000
Less : Sales at actual price (11,000) (6,000) (4,000)
4,000 2,000 2,000
************************

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CA INTERMEDAITE
ACCOUNTING
INDEX
Update : 31.03.2021
PART C
Chapter 1 INTRODUCTION TO ACCOUNTING 1.1 – 1.14 14
STANDARDS
Chapter 3
Unit I APPLICABILITY OF ACCOUNTING 3.1 – 3.8 8

STANDARDS
Chapter 11 HIRE PURCHASE AND INSTALMENT 11.1 – 11.21 21

SALE TRANSACTIONS
Chapter 13 ACCOUNTING FOR BRANCHES 13.1 – 13.48 48

INCLUDING FOREIGN BRANCHES
Chapter 14 ACCOUNTS FROM INCOMPLETE 14.1 – 14.41 41

RECORDS
PART - C
INTRODUCTION TO ACCOUNTING STANDARDS 1.1
CHAPTER 1
INTRODUCTION TO ACCOUNTING STANDARDS
1) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
 Refer to a common set of accepted

i. accounting principles,
ii. standards,
iii. and procedures
 That business reporting entity must follow when it prepares and present its
financial statements.
 GAAP is a combination of authoritative standards (set by policy boards) and
the commonly accepted ways of recording and reporting accounting
information.
 At international level such authoritative standards are known as International
Financial Reporting Standards (IFRS) and in India we have authoritative
standards named as AS and IND-AS.
2) DEFINITION OF ACCOUNTING STANDARDS
 written policy documents
 Issued by the Government
 With the support of the regulatory bodies(e.g., Ministry of Corporate Affairs
(MCA) issuing Accounting Standards for corporate
 In consultation with National Financial Reporting Authority (NFRA)
 Covering the following aspects of accounting transaction in financial statements
i. Recognition,
ii. Measurement,
iii. Presentation,
iv. And disclosure.
3) ACCOUNTING STANDARDS DEAL WITH THE FOLLOWING (ISSUES
COVERED BY AS)
i. Recognition of events and transactions in the financial statements,
ii. Measurement of these transactions and events,
iii. Presentation of these transactions and events in the financial statements in
a manner that is meaningful and understandable to the reader, and
iv. Disclosure relating to these transactions and events to enable the public at
large and the stakeholders and the potential investors in particular, to get an
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insight into what these financial statements are trying to reflect and there
by facilitating them to take prudent and informed business decisions.
4) BENEFITS OF ACCOUNTING STANDARDS

i. Standardisation of alternative accounting treatments
ii. Requirements for additional disclosures
iii. Comparability of financial statements
5) STANDARD – SETTING PROCESS

i. Identification of area
ii. Constitution of study group
iii. Preparation of draft and its circulation
iv. Ascertainment of views of different bodies on draft
v. Finalisation of exposure draft (E.D.)
vi. Comments received on exposure draft (E.D.)
vii. Modification of the draft
viii. Issue of AS
6) STATUS OF ACCOUNTING STANDARDS

 Developed by the Accounting Standards Board (ASB)
 Issued under the authority of its Council
 The Institute not being a legislative body can enforce compliance
 Also, the standards cannot override laws and local regulations.
 Made mandatory from the dates specified in respective standards and are
generally applicable to all enterprises, subject to certain exception.
 The implication of mandatory status of an Accounting Standard depends on
whether the statute governing the enterprise concerned requires
compliance with the Accounting Standards.
 The Companies Act had earlier notified 28 accounting standards and
mandated the corporate entities to comply with the provisions stated
therein.

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 However, in 2016 the MCA has withdrawn AS 6. Hence, effectively there are
now only 27 notified Accounting Standards as per the Companies (Accounting
Standards) Rules, 2006 (as amended in 2016).
7) NEED FOR CONVERGENCE TOWARDS GLOBAL STANDARDS
 Each country has its own set of rules and regulations for accounting and
financial reporting. Therefore, when an enterprise decides to raise capital
from the markets other than the country in which it is located, the rules and
regulations of that other country will apply and this in turn will require that
the enterprise is in a position to understand the differences between the
rules governing financial reporting in the foreign country as compared to
its own country of origin. Therefore translation and re-instatements are of
utmost importance in a world that is rapidly globalizing in all ways.
 The harmonization of financial reporting around the world will help to raise
confidence of investors generally in the information they are using to
make their decisions and assess their risks.
 Also a strong need was felt by legislation to bring about uniformity,
rationalization comparability, transparency and adaptability in financial
statements.
 Having a multiplicity of accounting standards around the world is against the
public interest.
 If accounting for the same events and information produces different
reported number, depending on the system of standards that are being
used, then it is self-evident that accounting will be increasingly
discredited in the eyes of those using the numbers.
 It created confusion, encourages error and facilitates fraud. The cure for
these ills is to have a single set of global standards, of the highest
quality, set in the interest of public.
 Convergence facilitates accounting and reporting for companies with global
operations and eliminates some costly requirements say reinstatement of
 It has the potential to create a new standard of accountability and greater
transparency, which are value of great significance to all market
participants including regulators. It reduces operational challenges for
accounting firms and focuses their value and expertise around an increasingly
unified set of standards.
 It creates an unprecedented opportunity for standard setters and other
stakeholders to improve the reporting model.
 For the companies with joint listing in both domestic and foreign country,
the convergence is very much significant.
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8) BECOMING IFRS COMPLIANT
 Any country can become IFRS compliant either by adoption process or by

convergence process.
 Adoption would mean that the country sets a specific timetable when specific
entities would be required to use IFRS as issued by the IASB.
 Convergence means that the country will develop high quality, compatible
accounting standards over time.
 Convergence means alignment of the standards of different standard setters
with a certain rate of compromise, by adopting the requirements of the
standards either fully or partially.
 Indian Accounting Standards are almost similar to IFRS but with few carve
outs so as to make them suitable for Indian Environment.
9) CONVERGENCE WITH IFRS WILL RESULT IN FOLLOWING BENEFITS

 Improves investor confidence across the world with transparency and
comparability
 Improves inter-unit/ inter-firm/inter-industry comparison
 Group consolidation will be easy with same standard by all companies in group
irrespective of their global location.
 Acceptability of financial statements stock exchanges across the globe, which
will facilitate entry of any Indian company to any stock exchange.
10) WHAT ARE CARVE OUTS/ INS IN IND AS

 The Government of India in consultation with the ICAI decided to converge and
not to adopt IFRS issued by the IASB.
 The decision of convergence rather than adoption was taken after the detailed
analysis of IFRS requirements and extensive discussion with various
stakeholders.
 Accordingly, while formulating IFRS converged Indian Accounting Standards
(Ind AS), efforts have been made to keep these Standards, as far as possible,
in line with the corresponding IAS/IFRS and departures have been made
where considered absolutely essential.
 These changes have been made considering various factors, such as:
A. Various terminologies related changes have been made to make it
consistent with the terminology used in law, e.g., ‘statement of profit and
loss’ in place of ‘statement of comprehensive income’ and ‘balance sheet’ in
place of ‘statement of financial position’.

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B. Removal of options in accounting principles and practices in Ind AS vis-

a-vis IFRS, have been made to maintain consistency and comparability of
the financial statements to be prepared by following Ind AS. However,
these changes will not result into carve outs.
C. Certain changes have been made considering the economic environment
of the country, which is different as compared to the economic
environment presumed to be in existence by IFRS. These differences are
due to differences in economic conditions prevailing in India. These
differences which are in deviation to the accounting principles and
practices stated in IFRS, are commonly known as ‘Carve-outs’.
D. Additional guidance given in Ind AS over and above what is given in IFRS
is termed as ‘Carve in’.
11) WHAT ARE INDIAN ACCOUNTING STANDARDS (IND - AS)

 Indian Accounting control of Accounting Standards Board (ASB) of Standards
(Ind AS) are IFRS converged standards issued by the Central Government of
India under the supervision and ICAI and in consultation with NFRA.
 ASB is a committee under Institute of Chartered Accountants of India (ICAI)
which consists of representatives from government department, academicians,
other professional bodies viz. ICSI, ICAI, representatives from ASSOCHAM,
CII, FICCI, etc.
 NFRA recommend these standards to the Ministry of Corporate Affairs
(MCA). MCA has to spell out the Accounting Standards applicable for
companies in India.
 Ind AS are named and numbered in the same way as the corresponding
International Financial Reporting Standards (IFRS).
A. Globalization and Liberalisation
B. Transparency of financial statements
C. Comparability of financial statements
D. Enhanced Disclosure requirements

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12) ROADMAP FOR IMPLEMENTATION OF INDIAN ACCOUNTING

STANDARDS
For Companies Other Than Banks, NBFCs And Insurance Companies
PHASE I PHASE II
1st April 2015 (2015-16) or thereafter 1st April 2017 (2017-18) :
(with Comparatives): Voluntary Basis for Mandatory Basis
any company and its holding, subsidiary, JV
or associate company  All companies which are
listed/or in process of listing
inside or outside India on Stock
1st April 2016 (2016-17) : Mandatory Basis Exchanges not covered in Phase
(a) Companies listed/in process of listing on I (other than companies listed
Stock Exchanges in India or Outside on SME Exchanges);
India having net worth of INR 500 crore  Unlisted companies having net
or more; worth of INR 250 crore or
(b) Unlisted Companies having net worth of more but less than INR
INR 500 crore or more; 500crore;
(c) Parent, Subsidiary, Associate and JV of  Parent, Subsidiary, Associate

above. and JV of above.
Special Points to Consider:-

i. Companies listed on SME exchange are not required to apply Ind AS
ii. Once Ind AS are applicable, an entity shall be required to follow the Ind AS
for all the subsequent financial statements.
iii. Companies not covered by the above roadmap shall continue to apply Accounting
Standards notified in Companies (Accounting Standards) Rules, 2006.

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13) ROADMAP FOR IMPLEMENTATION OF INDIAN ACCOUNTING

STANDARDS
For Scheduled Commercial Banks (Excluding RRBs), Insurers/Insurance

Companies and Non-Banking Financial Companies (NBFC’s)
Non-Banking Financial Companies (NBFC’s)
PHASE I PHASE II
From 1st April, 2018 (2018-19) with From 1st April, 2019 (2019-20)
comparatives with comparatives
 NBFCs (whether listed or unlisted)
 NBFCs whose equity and/or
having net worth 500 crore or more
debt securities are listed or are
 Holding, Subsidiary, JV and Associate
in the process of listing on any
companies of above NBFC other than
stock exchange in India or out
those already covered under corporate
side India and having net worth
roadmap shall also apply from said date
less than 500 crore
 NBFCs that are unlisted having
net worth 250 crore or more
but less 500 crore
 Holding, Subsidiary, JV and
Associate companies of above
other than those already
covered under corporate
roadmap shall also apply from
said date
Special Points to Consider:-
 Applicable for both Consolidated and individual Financial Statements
 NBFC having net worth below 250 crore shall not apply Ind AS.
 Adoption of Ind AS is allowed only when required as per the road map.
 Voluntary adoption of Ind AS is not allowed.
Scheduled Commercial banks (excluding RRB’s) and Insurers/Insurance
companies
 From 1st April, 2019 (with comparatives) for Scheduled Commercial Banks
(Excluding RRB’s) and
 1st April, 2021 for Insurers/Insurances Companies
 Holding, subsidiary, JV and Associates companies of scheduled commercial banks
(excluding RRB’s) shall also apply from the said date irrespective of it being covered
under corporate road map.
 Applicable for both Consolidated and individual Financial Statements
 Urban Cooperative banks (UCBs) and Regional Rural banks (RRBs) are not required to
apply Ind AS.

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MCQs
1. Accounting Standards for non-corporate entities in India are issued by

(a) Central Govt.
(b) State Govt.
(c) Institute of Chartered Accountants of India.
2. Accounting Standards
(a) Harmonise accounting policies and eliminate the non-comparability of financial
statements.
(b) Improve the reliability of financial statements.
(c) Both (a) and (b).
3. It is essential to standardize the accounting principles and policies in order to
ensure
(a) Transparency
(b) Consistency
4. Which committee is responsible for approval of accounting standards and their
modification for the purpose of applicability to companies?
(a) NFRA
(b) Central Government Advisory Committee
(c) Advisory Committee for approval of Accounting Standards.
5. Global Standards facilitate
(a) Cross border flow of money
(b) Comparability of financial statements
6. Additional guidance given in Ind AS over and above what is given in IFRS are
called
(a) Carve-outs
(b) Carve-ins
(c) Carve clarifications
7. IASB stands for
(a) International Accounting Standards Bureau
(b) International Advisory Standards Board
(c) International Accounting Standard Board

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8. IFRS stands for

(a) International Financial Reporting System
(b) International Finance Reporting Standard
(c) International Financial Reporting Standard
9. Phase I of Ind AS was applicable to:
(a) All listed companies in India or outside India
(b) Companies with turnover INR 500 crores or more
(c) Companies with net worth INR 500 crores or more.
Answers
1 2 3 4 5 6 7 8 9
C C C A C B C C C
Question 1
What are the issues, with which Accounting Standards deal?
Answer
Accounting Standards deal with the issues of
(i) Recognition of events and transactions in the financial statements,

(ii) Measurement of these transactions and events,
(iii) Presentation of these transactions and events in the financial statements in as
manner that is meaningful and understandable to the reader, and
(iv) Disclosure requirements.
Question 2
Short note on Accounting Standards

Answer
 Accounting Standards (ASs) are written policy documents issued by the
Government
 with the support of other regulatory bodies (e.g., Ministry of Corporate Affairs
(MCA) issuing Accounting Standards for corporate in consultation with National
Financial Reporting Authority (NFRA)

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 Accounting Standards deal with the issues of

(i) Recognition of events and transactions in the financial statements,
(ii) Measurement of these transactions and events,
(iii) Presentation of these transactions and events in the financial statements in a
manner that is meaningful and understandable to the reader, and
(iv) Disclosure requirements which should be there to enable the public at large and
the stakeholders and the potential investors in particular, to get an insight into
what these financial statements are trying to reflect and thereby facilitating
them to take prudent and informed business decisions.
 Accounting Standards standardize diverse accounting policies with a view, to the
maximum possible extent,
(i) To eliminate the non-comparability of financial statements and thereby
improving the reliability of financial statements, and
(ii) To provide a set of standard accounting policies, valuation norms and
disclosure requirements the existing shareholders
Question 3
Write short notes on the advantages and disadvantages of setting of Accounting

Standards.
Answer
 The Accounting Standards seek to describe the accounting principles, the valuation
techniques and the methods of applying the accounting principles in the preparation
and presentation of financial statements so that they may give a true and fair view.
 The ostensible purpose of the standard setting bodies is to promote the
dissemination of timely and useful financial information to investors and certain
other parties having an interest in companies economic performance.
 The setting of accounting standards has the following advantages:
(i) Standardization of selection of accounting treatments: Standards reduce to a

reasonable extent or eliminate altogether confusing variations in accounting
treatments used to prepare financial statements.
(ii) Requirement of additional disclosure: There are certain areas where important
information are not statutorily required to be disclosed. Standards may call for
disclosure beyond that required by law.
(iii) Comparability of financial statements: The application of accounting
standards would, to a limited extent, facilitate comparison of financial
statement of companies situated in different parts of the world and also of
different companies situated in the same country. However, it should be noted
in his respect that differences in institutions, traditions and legal systems from

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one country to another give rise to differences in accounting standards

practiced in different countries.
(iv) Reduction in scope of creative Accounting
 However, there are some disadvantages of setting of accounting standards:
(i) Difficulties in selection of alternatives: Alternative solutions to certain
accounting problems may each have arguments to recommended them.
Therefore, the choice between different alternative accounting treatments may
become difficult.
(ii) Lack of flexibilities: There may be a trend towards rigidity and away from
flexibility in applying the accounting standards.
(iii) Restricted Scope: Accounting standards cannot override the statute. The
standards are required to be framed within the ambit of prevailing statutes.
Question 4
Explain in brief the reasons for convergence of Indian Accounting Standards towards
global standards.
Answer
 Each country has its own set of rules and regulations for accounting and
financial reporting. Therefore, when an enterprise decides to raise capital
from the markets other than the country in which it is located, the rules and
regulations of that other country will apply and this in turn will require that
the enterprise is in a position to understand the differences between the
rules governing financial reporting in the foreign country as compared to
its own country of origin. Therefore translation and re- instatements are
of utmost importance in a world that is rapidly globalizing in all ways.
 The harmonization of financial reporting around the world will help to raise
confidence of investors generally in the information they are using to make
their decisions and assess their risks.
 Also a strong need was felt by legislation to bring about uniformity,
rationalization comparability, transparency and adaptability in financial
statements.
 Having a multiplicity of accounting standards around the world is against the
public interest.
 If accounting for the same events and information produces different
reported number, depending on the system of standards that are being used,
then it is self-evident that accounting will be increasingly discredited in the
eyes of those using the numbers.
 It created confusion, encourages error and facilitates fraud. The cure for
these ills is to have a single set of global standards, of the highest
quality, set in the interest of public.

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 Convergence facilitates accounting and reporting for companies with global

operations and eliminates some costly requirements say reinstatement of
 It has the potential to create a new standard of accountability and greater
transparency, which are value of great significance to all market participants
including regulators. It reduces operational challenges for accounting firms
and focuses their value and expertise around an increasingly unified set of
standards.
 It creates an unprecedented opportunity for standard setters and other
stakeholders to improve the reporting model.
 For the companies with joint listing in both domestic and foreign country,
the convergence is very much significant.
Question 5
Explain the objective of “Accounting Standards” in brief. State the advantages of

setting Accounting Standards.
Answer
Accounting Standards are the written policy documents issued by Government relating to
various aspects of measurement, treatment, presentation and disclosure of accounting
transactions and events.
Following are the objectives of Accounting Standards:
a) Accounting Standards harmonize the diverse accounting policies and practices
followed by different companies in India.
b) Accounting Standards facilitates the preparation of financial statements and make
them comparable.
c) Accounting Standards give a sense of faith and reliability to the users.
The main advantage of setting accounting standards are as follows:
a) Accounting Standards makes the financial statements of different companies
comparable which helps investors in decision making.
b) Accounting Standards prevent any misleading accounting treatment.
c) Accounting Standards prevent manipulation of data by the management.

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Question 6
What is the significance of issue of Indian Accounting Standards?
Answer
 The Government of India in consultation with the ICAI decided to converge and not
to adopt IFRSs issued by the IASB.
analysis of IFRSs requirements and extensive discussion with various stakeholders.
 Accordingly, while formulating IFRS-converged Indian Accounting Standards (Ind
AS), efforts have been made to keep these Standards, as far as possible, in line with
the corresponding IAS/IFRS and departures have been made where considered
absolutely essential.
Question 7
Explain the significance of emergence of IFRS as Global Standards.
Answer
 Global Standards facilitate cross border flow of money, global listing in

different bourses and comparability of financial statements.
 Global Standards improves the ability of investors to compare investments on a
global basis and thus lowers their risk of errors of judgment.
 It facilitates accounting and reporting for companies with global operations and
eliminates some costly requirements say reinstatement of financial statements.
Question 8
What do you mean by Carve outs/ins in Ind AS? Explain.
Answer
A. Certain changes have been made considering the economic environment of the
country, which is different as compared to the economic environment presumed to
be in existence by IFRS. These differences are due to differences in economic
conditions prevailing in India. These differences which are in deviation to the
accounting principles and practices stated in IFRS, are commonly known as
‘Carve-outs’.
B. Additional guidance given in Ind AS over and above what is given in IFRS is
termed as ‘Carve in’.

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Question 9
Briefly explain the process of issuance of Indian Accounting Standards.
Answer
 Due to the recent stream of overseas acquisitions by Indian companies, there is need
for adoption of high quality standards to convince foreign enterprises about the
financial standing as also the disclosure and governance standards of Indian
acquirers.
 The Government of India in consultation with the ICAI decided to converge and not
to adopt IFRSs issued by the IASB.
analysis of IFRSs requirements and extensive discussion with various
stakeholders.
 The ICAI has worked towards convergence of global accounting standards by
considering the application of IFRS in Indian corporate environment.
 Recognising the growing need of full convergence of Ind AS with IFRS, ICAI
constituted a Task Force to examine various issues involved.
 Ind AS are issued by the Central Government of India under the supervision and
control of ASB of ICAI and in consultation with NFRA.
 NFRA recommends these standards to the MCA and MCA has to spell out the
accounting standards applicable for companies in India.
**********

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APPLICABILITY OF ACCOUNTING STANDARDS UNIT 1 | 3.1
CHAPTER 3 UNIT 1
APPLICABILITY OF ACCOUNTING STANDARDS
1) APPLICATION OF AS
All the non corporate entities divided into 2 categories
NON SME’S SME’S
 No relaxation in relation to application if  Some relaxation in relation to
AS application if AS
 Exemptions are not available  Exemptions are available as compare
to SME’s
LEVEL I under non SME’s (Big LEVEL II under non SME’s
entities) (Medium entities)
 It includes 8 kind 0f business  It must be out of remaining entities
other than Level 1
1. Entities whose equity or debt
 It includes 4 Business
securities are listed or
(i) All commercial, industrial and
2. Are in the process of listing on
business reporting entities,
any stock exchange, whether in
whose turnover (excluding
India or outside India.
other income) exceeds rupees
3. Banks (including co-operative one crore but does not exceed
banks), financial institutions or rupees fifty crore in the
4. Entities carrying on insurance immediately preceding
business. accounting year.
5. All commercial, industrial and (ii) All commercial, industrial and

business reporting entities, business reporting entities
whose turnover (excluding having borrowings (including
other income) exceeds rupees public deposits) in excess of
fifty crore in the immediately rupees one crore but not in
preceding accounting year. excess of rupees ten crore at
any time during the
6. All commercial, industrial and
immediately preceding
business reporting entities
accounting year.
having borrowings (including
public deposits) in excess of (iii) Holding and
rupees ten crore at any time (iv) Subsidiary entities of any one of
during the immediately the above.
preceding accounting year. LEVEL III under non SME’s
7. Holding and (Small entities)
 Entities which are not covered under
8. Subsidiary entities of any one of the
Level I and Level II are considered as
above.
Level III entities.

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2) ADDITIONAL NOTES
(1) Where an entity, being covered in Level II or Level III, had qualified for any
exemption or relaxation previously but no longer qualifies for the relevant
exemption or relaxation in the current accounting period, the relevant
standards or requirements become applicable from the current period and
the figures for the corresponding period of the previous accounting period
need not be revised merely by reason of its having ceased to be covered in
Level II or Level III, as the case may be. The fact that the entity was
covered in Level II or Level III, as the case may be, in the previous period
and it had availed of the exemptions or relaxations available to that Level of
entities should be disclosed in the notes to the financial statements.
(2) Where an entity has been covered in Level I and subsequently, ceases to be
so covered, the entity will not qualify for exemption/relaxation available to
Level II entities, until the entity ceases to be covered in Level I for two
consecutive years. Similar is the case in respect of an entity, which has been
covered in Level I or Level II and subsequently, gets covered under Level
III.
(3) If an entity covered in Level II or Level III opts not to avail of the
exemptions or relaxations available to that Level of entities in respect of
any but not all of the Accounting Standards, it should disclose the
Standard(s) in respect of which it has availed the exemption or relaxation
(4) If an entity covered in Level II or Level III desires to disclose the
information not required to be disclosed pursuant to the exemptions or
relaxations available to that Level of entities, it should disclose that
information in compliance with the relevant Accounting Standard.
(5) An entity covered in Level II or Level III may opt for availing certain
exemptions or relaxations from compliance with the requirements
prescribed in an Accounting Standard: Provided that such a partial
exemption or relaxation and disclosure should not be permitted to mislead
any person or public.
3) APPLICABILITY OF ACCOUNTING STANDARDS TO COMPANIES

 Accounting Standards applicable to all companies in their entirety for
accounting periods commencing on or after 7th December, 2006
AS 1 Disclosures of Accounting Policies

AS 2 (Revised) Valuation of Inventories
AS 4 (Revised) Contingencies and Events Occurring After the Balance
Sheet Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies
AS 7 Construction Contracts
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AS 9 Revenue Recognition
AS 10 (Revised) Property, Plant and Equipment
AS 11 The Effects of Changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants
AS 13 (Revised) Accounting for Investments
AS 14 (Revised) Accounting for Amalgamations
AS 16 Borrowing Costs
AS 18 Related Party Disclosures
AS 22 Accounting for Taxes on Income
AS 24 Discontinuing Operations
AS 26 Intangible Assets
 Exemptions or Relaxations for SMCs

(A) Accounting Standards not applicable to SMCs in their entirety:
AS3 Cash Flow Statements
AS 17 Segment Reporting
(B) Accounting Standards not applicable to SMCs since the relevant

Regulations require compliance with them only by certain Non-SMCs
(i) AS 21 (Revised), Consolidated Financial Statements
(ii) AS 23, Accounting for Investments in Associates in Consolidated
Financial Statements
(iii) AS 27, Financial Reporting of Interests in Joint Ventures (to the
extent of requirements relating to Consolidated Financial
Statements)
4) APPLICABILITY OF ACCOUNTING STANDARDS TO NON-CORPORATE

ENTITIES
 Accounting Standards applicable to all Non-corporate Entities in their
entirety (Level I, Level II and Level III)
AS 1 Disclosures of Accounting Policies

AS 2 (Revised) Valuation of Inventories
AS 4 (Revised) Contingencies and Events Occurring After the Balance
Sheet Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies
AS 7 Construction Contracts

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AS 9 Revenue Recognition
AS 10 (Revised) Property, Plant and Equipment
AS 11 The Effects of Changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants
AS 13 (Revised) Accounting for Investments
AS 14 (Revised) Accounting for Amalgamations
AS 16 Borrowing Costs
AS 22 Accounting for Taxes on Income
AS 26 Intangible Assets
 Exemptions or Relaxations for Non-corporate Entities falling in Level II

and Level III(SMEs)
(A) Accounting Standards not applicable to Non-corporate Entities falling
in Level II in their entirety:
AS 3 Cash Flow Statements

(B) Accounting Standards not applicable to Non-corporate Entities falling

in Level III in their entirety:
AS 3 Cash Flow Statements

AS 18 Related Party Disclosures
AS 24 Discontinuing Operations
(C) Accounting Standards not applicable to all Non-corporate Entities

since the relevant Regulators require compliance with them only by
certain Level I entities:
(i) AS 21 (Revised), Consolidated Financial Statements
(ii) AS 23, Accounting for Investments in Associates in Consolidated
Financial Statements
(iii) AS 27, Financial Reporting of Interests in Joint Ventures (to
the extent of requirements relating to Consolidated Financial
Statements)
Example 1
M/s Omega & Co. (a partnership firm), had a turnover of ` 1.25 crores (excluding other
income) and borrowings of ` 0.95 crores in the previous year. It wants to avail the
exemptions available in application of Accounting Standards to non-corporate entities for
the year ended 31.3.2016. Advise the management of M/s Omega & Co in respect of the
exemptions of provisions of ASs, as per the directive issued by the ICAI.

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Solution
 The question deals with the issue of Applicability of Accounting Standards to a non-
corporate entity.
 For availment of the exemptions, first of all, it has to be seen that M/s Omega & Co.
falls in which level of the non-corporate entities.
 Its classification will be done on the basis of the classification of non-corporate
entities as prescribed by the ICAI.
 According to the ICAI, non-corporate entities can be classified under 3 levels viz
Level I, Level II (SMEs) and Level III (SMEs).
 An entity whose turnover (excluding other income) exceeds rupees fifty crore in the
immediately preceding accounting year, will fall under the category of Level I
entities.
 Non-corporate entities which are not Level I entities but fall in any one or more of
the following categories are classified as Level II entities:
(i) All commercial, industrial and business reporting entities, whose turnover
(excluding other income) exceeds rupees one crore but does not exceed
rupees fifty crore in the immediately preceding accounting year.
(ii) All commercial, industrial and business reporting entities having borrowings
(including public deposits) in excess of rupees one crore but not in excess of
rupees ten crore at any time during the immediately preceding accounting
year.
(iii) Holding and subsidiary entities of any one of the above.
 As the turnover of M/s Omega &Co. is more than `1 crore, it falls under 1st
criteria of Level II non-corporate entities as defined above.
 Even if its borrowings of .95 crores is less than `1 crores, it will be classified as
Level II Entity. In this case, AS 3, AS 17, AS 21 (Revised), AS 23, AS 27 will not
be applicable to M/s Omega &Co.
 Relaxations from certain requirements in respect of AS 15, AS 19, AS 20, AS 25,
AS 28 and AS 29 (Revised) are also available to M/s Omega & Co.
1. Non-corporate entities which are not Level I entities whose turnover (excluding
other income) exceeds rupees __ _____ but does not exceed rupees fifty
crore in the immediately preceding accounting year are classified as Level II
entities.
(a) Five crores
(b) Two crores
(c) One crores

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2. The following Accounting Standard is not applicable to Non-corporate Entities

falling in Level II in its entirety
(a) AS 10
(b) AS17
(c) AS 2
3. All commercial, industrial and business reporting entities, whose turnover
(excluding other income) exceeds rupees fifty crore in the immediately preceding
accounting year, are classified as
(a) Level II entities.
(b) Level I entities.
(c) Level III entities
Answers
1 2 3
c b b
Question 1
XYZ Ltd., with a turnover of ` 35 lakhs and borrowings of ` 10 lakhs during any time in
the previous year, wants to avail the exemptions available in adoption of Accounting
Standards applicable to companies for the year ended 31.3.2017. Advise the management
on the exemptions that are available as per the Companies (AS) Rules, 2006.
If XYZ is a partnership firm is there any other exemptions additionally available.
Answer
 The question deals with the issue of Applicability of Accounting Standards for
corporate &non-corporate entities .
 The companies can be classified under two categories viz SMCs and Non SMCs under
the Companies (AS) Rules, 2006.
 As per the Companies (AS) Rules, 2006, criteria for above classification as SMCs,
are: “Small and Medium Sized Company” (SMC) means, a company-
whose equity or debt securities are not listed or are not in the process of listing on
any stock exchange, whether in India or outside India;
 which is not a bank, financial institution or an insurance company;
 whose turnover (excluding other income) does not exceed rupees fifty crore in
the immediately preceding accounting year;
 which does not have borrowings (including public deposits) in excess of rupees
ten crore at any time during the immediately preceding accounting year; and
 which is not a holding or subsidiary company of a company which is not a small and
medium-sized company.
 The following relaxations and exemptions are available to XYZ Ltd.
1. AS 3 “Cash Flow Statements” is not mandatory.
2. AS 17 “Segment Reporting” is not mandatory.
3. SMEs are exemption from some paragraphs of AS 19 “Leases”.

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4. SMEs are exempt from disclosures of diluted EPS (both including and excluding
extraordinary items).
5. SMEs are allowed to measure the ‘value in use’ on the basis of reasonable estimate
thereof instead of computing the value in use by present value technique under
AS 28 “Impairment of Assets”.
6. SMEs are exempt from certain disclosure requirements of AS 29 (Revised)
“Provisions, Contingent Liabilities and Contingent Assets”.
7. SMEs are exempt from certain requirements of As 15 “Employee Benefits”.
8. Accounting Standards 21, 23, 27 are not applicable to SMEs.
 However, it XYZ is a partnership firm and not a corporate, then its classification will
be done on the basis of the classification of non-corporate entities as classified
under 3 levels viz Level I, Level II (SMEs) and Level III (SMEs).
 Since, turnover of XYZ, a partnership firm is less than ` 1 crore & borrowings of `10
lakhs is less than `1 crore, therefore, it will be classified as Level III SME. In this
case AS 3, AS 17, AS 18, AS 21 (Revised), AS 23, AS 24, AS27 will not be applicable
to XYZ a partnership firm.
 Relaxations from certain requirements in respect of AS 15, AS 19, AS 20, AS 25,
AS 28 and AS 29 (Revised) are also available to XYZ a partnership firm.
Question 2
A company was classified as Non-SMC in 2015-2016. In 2016-2017 it has been classified
as SMC. The management desires to avail the exemption or relaxations available for
SMCs in 2016-2017. However, the accountant of the company does not agree with the
same. Comment.
Answer
 As per Rule 5 of the Companies (Accounting Standards) Rules, 2006, an existing

company, which was previously not an SMC and subsequently becomes an SMC,
should not be qualified for exemption or relaxation in respect of accounting
standards available to an SMC until the company remains an SMC for two
consecutive accounting periods.
 Therefore, the management of the company cannot avail the exemptions available
with the SMCs for the year ended 31st March, 2017.
Question 3
Comment whether the following Companies can be classified as a Small and
Medium Sized Company (SMC) as per the Companies (Accounting Standards),
Rules, 2006:
(i) A Pvt. Ltd., a subsidiary of a multinational company listed on London Stock
Exchange. It has a turnover of Rs. 12 crores and borrowings of Rs. 5
crores.
(ii) B Pvt. Ltd., has a turnover of Rs. 45 crores, other income of Rs. 7 crores
and bank borrowings of Rs. 9 crores

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Answer
 As per the companies (Accounting Standards) Rules, 2006, “Small and
Medium Sized Company” (SMC) means, a company:
(a) Whose equity or debt securities are not listed or are not in the process
of listing on any stock exchange, whether in India or outside India‟
(b) Which is not a bank, financial institution or an insurance company;
(c) Whose turnover (excluding other income) does not exceed rupee; fifty
crore in the immediately preceding accounting year;
(d) Which does not have borrowings (including public deposits) in excess of
rupees ten crore at any time during the
immediately preceding accounting year; and
(e) which is not a holding or subsidiary company of a company which is not a
small and medium-sized company.
 Explanation: a company shall qualify as a Small and Medium Sized Company, if the
condition mentioned, therein are satisfied as at the end of the relevant
accounting period.
(i) As per the definition of SMC, point (v), a company will be a SMC, if it is
not holding or subsidiary company of another company which is not a SMC.
Since A Pvt. Ltd., is a subsidiary of another Company which is listed, on
London Stock Exchange (and is therefore not a SMC), A Pvt. Ltd., cannot
be a SMC. The turnover and borrowings are not relevant in this case.
(ii) As per the definition of SMC, point (iii), a company will be a SMC if its
turnover does not exceed Rs. 50 crores or borrowings do not exceed Rs.10
crore. For calculating this turnover, other income is not to be included.
Since B Pvt. Ltd., has a turnover of Rs. 45 crores and borrowing of Rs. 9
crores, it will satisfy the definition and can be classified as SMC.
Question 4
List the criteria to be applied for rating a non-corporate entity as Level-I entity and
Level II entity for the purpose of compliance of Accounting Standards in India
Answer Refer to Level I and II given on page no. 1
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Hire Purchase and Installment Sale Transactions 11.1
Chapter — 11
HIRE PURCHASE AND INSTALLMENT SALE
TRANSACTIONS
MEANING OF HIRE PURCHASE:—
• It is a contact between two parties, i.e., Hire vender & Hire Purchaser.
• Whereby Hire vender sales goods/assets to Hire Purchaser.
• Amount is to be settled by way series of payment in installments.
• Ownership is to be transferred from Hire vender to Hire purchaser after settlement of all
installments.
• If Hire purchaser defaulted in payment of installment, Hire vender has right to repossess the
goods since ownership has been not transferred so far.
• In this case amount received already from Hire purchaser is treated as hire charges for use of asset
till date of repossession.
• Therefore, it is known as hire or purchase contract.
DIFFERENCE BETWEEN HIRE PURCHASE AND INSTALLMENT SALE:—
Basis of Difference Hire Purchase Installment Sale
1. Transfer of After payment of all Immediately at the time of
Ownership installments entering in to contract
2. If Purchaser Vendor can repossess Vender can’t repossess asset
Defaulted in payment asset as ownership still as ownership has already been
of installment belong to him. transferred. However there is
a remedy for legal action to
recover the amount due.
3. Existence of Down Generally required Generally not required
Payment
Note 1:—
There will be no major difference in accounting point of view for question relating to hire purchase or
installment sale.

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SPECIAL TERMINOLOGY FOR HIRE PURCHASE:—
1. Cash Price:-
 Value at which asset is to be sold by cash system instead of hire purchase system.
 It does not include any interest element.
2. Down payment/cash down (DP/CD) :— Part of cash price which the purchaser has
to pay at the time of entering into the contract, known as down payment.
3. Hire purchase price:— Total value, inclusive of interest for which entered into contract
is known as the Hire purchase price.
4. Formulas :—
 Hire Purchase Price = Cash price + Total Interest
Or
Down Payment + Total Value of Instalments including interest
 Cash Price = Hire Purchase price – Total Interest
Or
Down Payment + Total value of Principal in instalments
PRACTICALLY COVERED TOPIC IN HIRE PURCHASE
High Value Item
Basic Calculation Basic calculation & Accounting
Accounting in books of Hire Accounting in books of Hire

Purchaser Vendor
Method of Hire Purchase Accounting
• Cash Price method (also known as sales method from hire vendor’s point of view
• Interest suspense method

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TOPIC 1 :-BASIC CALCULATION :—
 Under basic calculation, missing value related to hire purchase contract is determined.
 For example :- calculation of cash price, hire purchase price, interest of each installment, installment
value inclusive of interest and total interest, etc.
 It will cover following cases :—
CASE I:- IF PRINCIPAL OF EACH INSTALMENT AND INTEREST RATE IS GIVEN,
THEN CALCULATION OF INTEREST FOR CASH INSTALMENT:—
 Calculate total principal outstanding before each installment.
Calculate interest of each installment, according to that outstanding balance with given rate of interest.
Example 1.
Cash Price = 5,00,000
Down Payment = 2,00,000
Interest Rate = 10% p.a.
Annual instalment (p)
1. 1,50,000
2. 70,000
3. 80,000
Calculate interest of each instalment, instalment value including interest, Total
Interest &HPP
Solution:— Cash price 5,00,000
Less: DP 2,00,000
Total “P” in instalments 3,00,000
Inst. No. o/s Bal. Int. (10%) “P” P+I
1. 3,00,000 30,000 1,50,000 1,80,000
2. 1,50,000 15,000 70,000 85,000
3. 80,000 8,000 80,000 88,000
Cash price 5,00,000

Total Int. 53,000
HPP 5,53,000

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CASE II:— CALCULATION OF INTEREST OF EACH INSTALMENT IF PRINCIPAL
OF EACH INSTALMENT AND TOTAL INTEREST IS GIVEN BUT
INTEREST RATE IS NOT GIVEN:—
 Calculate ratio on the basis of total outstanding principal before each installment.
 Allocate total interest according to that ratio.
Example 2 :—
Cash price 5,00,000
DP 2,00,000
Annual Instalment:—
1. 1,20,000
2. 90,000 Total interest = 38,000
3. 90,000
Calculate interest of each instalment?
Solution:
Cash price 5,00,000
DP 2,00,000
Total “P” in installment 3,00,000
Inst. O /s Bal. Rat io of O /s Bal. Int . of Instalment

N o. each
1. 3,00,000 10 38,000 x = 20,000
2. 1,80,000 6 38,000 x = 12,000
3. 90,000 3 38,000 x = 6,000
CASE III :— CALCULATION OF INTEREST OF EACH INSTALMENT IF

INTEREST RATE, INSTALMENT VALUE INCLUSIVE OF INTEREST
AND CASH PRICE IS GIVEN
 Calculate total principal outstanding before first installment.
 Calculate interest of first installment accordingly.
 Calculate principal of first installment.
 Repeat the same process on remaining installment.

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Example3 :—
Cash price 5,00,000
DP 2,00,000
Interest rate 10% p.a.
Annual instalment inclusive of interest:-

1. 1,40,000
2. 1,09,000 Calculate interest of each installment
3. 1,10,000
Solution
Cash price 5,00,000
DP 2,00,000
Inst. No. O/s Bal. Int. (10%) “P”
1. 3,00,000 30,000 (1,40,000 – 30,000) = 1,10,000
2. 1,90,000 19000 (1,09,000 -19,000) = 90,000
3. 1,00,000 10,000 (1,10,000 – 10,000) = 1,00,000
CASE IV:- CALCULATION OF INTEREST OF EACH INSTALMENT IF INTEREST

RATE AND INSTALMENT VALUE INCLUSIVE OF INTEREST IS GIVEN
BUT CASH PRICE IS NOT GIVEN
 In this case calculation will be in reverse order from last installment to first installment, because
last installment includes interest only for its principal.
Interest in each installment =
Note 2:—
If instalment is on intra –year basis (half yearly/monthly/quarterly etc.), then convert the interest rate
accordingly and thereafter it is to be used in above formula.

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Example 4:—
DP = 2,00,000, Int. Rate = 10% P.a.
Annual Instalment including interest (P+I)
1. 1,50,000
2. 88,000 calculate interest in each installment and cash price
3. 1,21,000
Solution
Int. = x (value of current installment + Total “P” in upcoming instalments)
Int. No. Int. P “Cum. P”
3. 1,21,000-11,000 1,10,000
2. 88,000-18,000 1,80,000
1. 1,50,0000-30,000 3,00,000
=1,20,000
+ DP = 2,00,000
Cash price 5,00,000
CASE V: - CALCULATION OF INTEREST OF EACH INSTALMENT, IF INSTALMENT

VALUE IS INCLUSIVE OF INTEREST AND TOTAL INTEREST IS GIVEN,
BUT INTEREST RATE IS NOT GIVEN
 In this case, first of all, calculate interest rate of the question.
 In order to calculate interest rate, concept of internal rate of return (IRR) which is used in capital
Budgeting chapter of FM is to be used.
 The IRR will become interest rate of the question.
 After determination of interest rate apply process of case III, to find out interest of each installment.
Case VI —Calculation of cash price by Annuity method of if annuity factors are
given in the question.
Cash Price = Downpayment + (Annual "Installment × Annuity factor)

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TOPIC 2 :- ACCOUNTING FOR HIRE PURCHASE, IN THE BOOKS OF HIRE PURCHASER
BY CASH PRICE METHOD
i) ROUTINE PROCESS OF ACCOUNTING
At the time of contract Due date of each instalment At the end of each
financial year
1. Purchase of Asset 1. Due entry of interest
1. Depreciation On asset
Assets A/c Dr Interest A/c Dr.
Depreciation A/c Dr.
To Hire Vendor a/c To Hire Vendor A/c
To Asset A/c
(with total cash price) 2. Payment of instalment
2. Transfer of Dep. a/c &
2. Payment of DP Hire Vendor A/c Dr.
interest A/c to P&L
Hire Vender a/c Dr. To Cash A/c
P&L A/c Dr.
To Cash a/c To Interest A/c
To Depreciation
A/c
Note 3: Cost of asset will be always cash price, the interest element paid additionally is to be treated as
revenue nature expenditure and it is to be transferred to P/L A/c.
Note 4: If provision for depreciation account is required separately, then entry for depreciation will be:
P & L A/c Dr.
To Provision for depreciation A/c
Note 5:
Due to substance over form, asset is to be recognized immediately in the books of purchaser
and depreciation is to be charged also.
Note 6: Balance of hire Vendor a/c and Asset A/c is to be carried down for next year. Balance of Hire-
Vendor A/c is to be disclosed as a part of liability and balance of asset a/c as a part of asset in the
Balance Sheet.
Note 7: If purchaser did not defaulted in payment, then balance of hire vendor a/c at the end of every
year will be equal to total principal of remaining installments and automatically get closed after
settlement of all the installments

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(i) ACCOUNTING IN CASE OF PURCHASER DEFAULTING IN PAYMENT—
• Due entry of interest up to date of repossession
Interest A/c Dr.
To Hire Vendor A/c
• Charging depreciation up to date of repossession

To Asset A/c
• Accounting for repossession of Asset by vendor
If ag reed value not given If agreed value given

(i) Entry for repossession (i) Entry for repossession
Hire Vendor A/c Dr. Hire Vendor A/c Dr.
To Asset A/c To Asset A/c
(With balance of hire-vendor A/c on (W ith agreed value)
repossession) (ii) Loss on repossession
(ii) Loss on repossession P/L A/c Dr.
P/L A/c Dr. To Asset A/c
To Asset A/c (If book value of asset repossessed is
(If book value of asset repossessed is more than agreed value)
more than balance of vendor a/c) (iii) Profit on rep ossession
(iii) Profit on repossession Asset A/c Dr.
Asset A/c Dr. To P/L A/c
To P/L A/c (Agreed value is more than book value of
(Balance of vendor A/c more than book asset repossessed)
value of asset repossessed) (iv) Settlement of Vendor’s balance
with cash
Hire Vendor A/c Dr.
To C ash A/c
(Final payment to vendor)
C ash A/c Dr.
To Hire Vendor A/c
(Final payment received from vendor)

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TOPIC 3 :- ACCOUNTING OF HIRE PURCHASE IN THE BOOK OF HIRE
PURCHASER BY INTEREST SUSPENSE METHOD :-
• It is applied only if it is specifically given in the question.
• Routine accounting procedure will be as under.
At the time of entering into Due Date of each installment End of financial year
contract
1. Purchase of asset 1. Due entry of interest At the end of each
Asset A/c Dr. (C. P.) Interest A/c Dr. financial year
Interest Suspense A/c Dr. (Int.) To Interest Suspense A/c
To Hire Vendor A/c (HPP) 1. Depreciation On asset
2. Payment of installment Depreciation A/c Dr.
2. Payment of DP Hire Vendor A/c Dr.
Hire Vendor A/c Dr. To Cash A/c To Asset A/c
To Cash A/c
2. Transfer of Dep. a/c &
interest A/c to P&L
P&L A/c Dr.
To Interest A/c
To Depreciation A/c
Note 8:
Carried down balance of Asset a/c, vendor a/c and interest suspense a/c at the end of
each year. Balance of interest suspense a/c is to be disclosed as a deduction from balance
of vendor a/c in the liability side of Balance Sheet.
Note 9:
In the normal question, at the end of financial year, balance of vendor a/c will be equal
to total value of remaining instalment including interest and interest suspense a/c will
be equal to total interest of remaining instalment. At the expiry of contract, both accounts
will automatically get closed.
Note 10:Accounting for repossession
 Due entry of interest up to date repossession
Interest A/c Dr.
To Interest Suspense A/c
 Charging depreciation up to repossession
To Asset A/c
 Transfer balance of Interest suspense A/c to vendor A/c
Vendor A/c Dr.
To Interest suspense A/c
 Remaining process will be similar to case price method
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Example 5
Cash Price - 5,00,000
Down payment - 2,00,000
Interest rate @ 10% p.a.
Depreciation is to be charged 20% p.a. by SLM method
Principal in annual instalments is as under
Interest No. Principal
1 1,00,000
2 1,00,000
3 1,00,000
Prepare necessary ledgers in the books of hire-purchaser by cash price method
for three years.
Solution :
1.
Cash price 5,00,000
DP 2,00,000
2.
Install. No. O/s Balance Interest 10% P P+1
1 3,00,000 30,000 1,00,000 1,30,000
2 2,00,000 20,000 1,00,000 1,20,000
3 1,00,000 10,000 1,00,000 1,10,000
3. Ledger in the books of purchaser.
(i) Asset A/c
To Vendor A/c 5,00,000 By depreciation a/c 1,00,000
By balance c/d 4,00,000
5,00,000 5,00,000
To balance b/d 4,00,000 B y depreciation 1,00,000

By balance c/d 3,00,000
4,00,000 4,00,000
To balance b/d 3,00,000 B y depreciation 1,00,000
. . By balance c/d 2,00,000
3,00,000 3,00,000

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(ii) Hire Vendor A/c
To Cash 2,00,000 By Asset A/c 5,00,000
To Cash 1,30,000 By Interest A/c 30,000
To Balance c/d 2,00,000
5,30,000 5,30,000
To Cash 1,20,000 By Balance b/d 2,00,000

To Balance c/d 1,00,000 By Interest A/c 20,000
2,20,000 2,20,000
To Cash 1,10,000 By Balance b/d 1,00,000

By Interest A/c 10,000
1,10,000 1,10,000
(i) Depreciation A/c
To Asset A/c 1,00,000 By P&L A/c 1,00,000
(ii) Interest A/c
To Vendor A/c 30,000 By P&L A/c 30,000

Example 6:
Assume in example 5, purchaser defaulted in payment of second instalment and therefore vendor repossesses
it immediately. Prepare asset and vendor a/c in the books of purchaser.
Solution:
(i) Asset A/c
To Vendor A/c 5,00,000 By Depreciation 1,00,000
By Balance c/d 4,00,000
To Balance b/d 5,00,000
4,00,000 By Depreciation 1,00,000
1,00,000
By Vendor 2,20,000
.0 By P&L A/c 80,000
4,00,000 4,00,000

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(ii) Vendor A/c
By Cash 2,00,000 By Asset 5,00,000
By Cash 1,30,000 By Interest A/c 30,000
5,30,000 5,30,000
To Asset A/c 2,20,000 By Balance b/d 2,00,000
. . By Interest A/c 20,000
2,20,000 2,20,000
Example 7:
Suppose in example 6, Vendor repossessed it with agreed value of asset. It is to be depreciated @ 25%
p.a. from vendor’s point of view remaining amount settled immediately then prepare asset & vendor a/c in
the books of purchaser.
Solution:
(i) Asset A/c

. By Balance c/d 4,00,000
5,00,000 5,00,000
To Balance c/d 4,00,000 By Depreciation 1,00,000
By Vendor 2,50,000
. By P & L A/c 50,000
4,00,000 4,00,000
(ii) Vendor A/c
By Cash 2,00,000 By Asset 5,00,000
By Cash 1,30,000 By Interest A/c 30,000
By Balance c/d 2,00,000 .
5,30,000 5,30,000
To Asset A/c 2,50,000 By Balance b/d 2,00,000
By Interest A/c 20,000
By Cash (B.F.) 30,000
2,50,000 2,50,000

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Example 8:
Prepare necessary ledgers a/c’s for 3 year by Interest suspense method using details of example 5.
Solution: Asset A/c
5,00,000 5,00,000
To Balance b/d 4,00,000 By Depreciation 1,00,000
4,00,000 4,00,000
To Balance b/d 3,00,000 By Depreciation 1,00,000
. . By Balance c/d 2,00,000
3,00,000 3,00,000
To Balance b/d 2,00,00
Vendor A/c
By Cash 2,00,000 By Asset 5,00,000
By Cash 1,30,000 By Interest 60,000
By Balance c/d 2,30,000 Suspense A/c
5,60,000 5,60,000
To Cash A/c 1,20,000 By Balance b/d 2,30,000
To Balance c/d 1,10,000 . .
2,30,000 2,30,000
To Cash A/c 1,10,000 Balance b/d 1,10,000
Depreciation A/c
To Asset A/c 1,00,000 By P & L 1,00,000
1,00,000 1,00,000
To Asset A/c 1,00,000 By P & L 1,00,000

1,00,000 1,00,000
To Asset A/c 1,00,000 By P & L 1,00,000
1,00,000 1,00,000

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Interest A/c
To Interest Suspense 30,000 By P & L 30,000
30,000 30,000

20,000 20,000
10,000 10,000
Interest Suspense A/c

To Vendor A/c 60,000 By Interest 30,000
. . By Balance c/d 30,000
60,000 60,000
To Balance b/d 30,000 By Interest 20,000
. . By Balance c/d 10,000
30,000 30,000
To Balance b/d 10,000 By Interest 10,000
10,000 10,000
TOPIC 4 ACCOUNTING IN THE BOOKS OF VENDOR BY SALES METHOD

1. Routine accounting
Entering in to contract Entering in to contract End of Year

• Sale of goods • Due entry of interest • Transfer of sales
HP debtor A/c Dr. HP debtor A/c Dr. HP debtor
Sales A/c Dr.
To HP Sales A/c To Interest A/c To Trading A/c
• Receiving DP • Receiving Installment • Transfer of Interest
Cash A/c Dr. Cash A/c Dr. Interest A/c Dr.
To HP Debtor A/c To HP Debtor A/c To P & L A/c
Note11:
Debtor A/c will have balance equal to total principal of remaining instalment & disclosed as a part of asset
in Balance Sheet and gets automatically closed after receiving all instalments.

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1. Accounting for Repossession in the Books of Vendor—
(i) Due entry of interest up to date of repossession
HP Debtor A/c Dr.
To Interest A/c
(ii) Entry for Repossession
Repossession Repair Expenses Incurred Resale of goods repossessed

on goods repossessed
Goods Repossessed A/c Dr. Cash A/c Dr.
To HP Debtor A/c To Goods Repossessed A/c
Goods repossessed A/c Dr.
(With estimated market
value on date repossession) To Cash A/c
Note 12:
After resale of goods repossessed balance of goods repossessed a/c is transferred to P&L A/c as a profit
or loss on resale. Until it is resold balance of the A/c is to be disclosed as a part of asset in the Balance
Sheet at the end of the year.
Note 13 : Format of Goods Repossessed A/c
To HP Debtor A/c (Estimated Value xxx By Cash A/c (Resale Value) xxx
on repossession
By P& L A/c (Loss of resale as a xxx
To Cash A/c (repair expenses) balancing figure)
xxx
To P& L a/c (Profit in resale as
balancing figure) xxx
xxx xxx
Example 9:
Sales on 1st January, 2015 by hire purchase system with following details. Prepare HP Debtor A/c and
Interest A/c in the books of vendor
Cash Price 1,00,000
DP 40,000
Balance is payable in 5 half yearly equal instalment with interest @ 12% p.a. assuming all the instalment
is duly received.

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Solution:
Cash Price 1,00,000
(-) DP 40,000
Total “P” 60,000
“P” in each installments 12,000
Installm ent O /s Balance Interest @ P P+I

No. 12%
1 60,000 3600 12,000 15,600
2 48,000 2880 12,000 14,880
3 36,000 2160 12,000 14,160
4 24,000 1440 12,000 13,440
5 12,000 720 12,000 12,720
Interest A/c
31/12/15 To P&L A/c 6480 30/06/15 By HP Debtor 3600
. . 31/12/15 By HP Debtor 2880
6480 6480
. . 31/12/16 By HP Debtor 1440
3600 3600
720 720
HP Debtor A/c
01/01/15 To HP Sales 1,00,000 01/01/15 By Cash A/c 40,000
30/06/15 To Interest 3600 30/06/15 By Cash A/c 15,600
. . 31/12/15 By Bal c/d 36,000
1,06,480 1,06,480
01/01/16 To Bal. b/d 36000 30/06/16 By Bank A/c 14160
30/06/16 To Interest A/c 2160 31/12/16 By Bank A/c 13440
31/12/16 ToInterest A/c 1440 31/12/16 By Bal c/d 12,000
39,600 39,600
01/01/17 To Bal. b/d 12000 01/01/17 By Bank A/c 12720
30/06/17 To Interest A/c 720 . .
12,720 12,720
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Example 10:
Suppose in example 9, purchaser defaulted in payment of 3rd installment therefore vendor repossessed it
immediately with following further information. Prepare necessary ledger in the books of hire vendor.
Estimated value of asset on the day of repossession Rs. 45,000 Further repair incurred on goods repossessed
Rs. 4,000 on 01.10.2016 Resale of repossessed goods for Rs. 50,000 on 01.11.2016.
Solution:
HP Debtor A/c
01/01/15 To HP Sales 1,00,000 01/01/15 By Cash A/c 40,000
. . 31/12/15 By Bal c/d 36,000
1,06,480 1,06,480
01/01/16 To Bal b/d 36000 30/06/16 By Goods 45,000

30/06/16 To Interest 2160 Repossessed A/c
30/06/16 To P&L 6840
(Profit on repos. as B/F)
. .
45,000 45,000
Interest A/c
. . 31/12/15 By HP Debtor 2880
6480 6480
31/12/16 To P&L A/c 2160 By HP Debtor 2160
2160 2160
Goods Repossessed A/c
30/06/16 To HP Debtor 45,000 01/11/16 By Cash A/c (Resale) 50,000
(Estimated Value
of goods reposs.)
01/10/16 To Cash (Exp) 4000
To P&L (Profit on
resale) 1,000 . .
50,000 50,000

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Questions & Answers
Question 1. Statement showing differences between Hire Purchase and Installment
System.
Answer :
Basis cof Distinction Hire Purchase Installment
1. Governing Act It is governed by Hire It is governed by the State of

Purchases Act, 1972 Goods Act, 1930
2. Nature of Contract It is an agreeement of hiring. It is an agreement of sale.
3. Passing of Title (ownership) The title to goods passes on The title to goods passes
last payment. immediately as in the case of
usual sale.
4. Right to Return goods The hirer may return goods Unless seller defaults, goods are
without futther payment except not returnable.
for accrued installments.
5. Seller's right to respossess The seller may take possession The seller can sue for price if
of the goods if hirer is in the buyer take possession of
default. the goods.
6. Right of Disposal Hirer cannot hire out sell, The buyer may dispose off the
pledge or assign entitling goods and give good title to the
transferee to retain possession bona fide purchaser.
as against the hire vendor.
7. Resklponsiblity for Risk of Loss The hirer is not responsible for The buyer is resoponsible for
risk of loss of goods if he risk of loss of goods because of
precaution because the the ownership has transferred.
ownership has not yet
transferred.
8. Name of Parties involved The parties involved are called The parties involved are called
Hirer and Hire vendor. buyer and seller.
9. Component other than cash Component other than Cash Component other than Cash
price. Price included in installment is Price includeed in Instalment is
called Hire charges. called Interest.

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Question 2 —
Features of Hire Purchase Installment system.
Answer—
Features of Hire Purchase Installment system
1. Possession: The hire vendor transfers only possession of the goods to the hire purchaser immediately
after the contract for hire purchase is made.
2. Installments: The goods is delivered by the hire vendor on the condition that a hire purchaser should
pay the amount in periodical installments.
3. Down Payment: The hire purchaser generally makes a down payment on signing the agreement.
4. Constituents of Hire purchase installments: Each installment consists partly of a finance charge
(interest) and partly of a capital payment.
5. Ownership: The property in goods is to pass to the hire purchaser on the payment of the last-
installment and exercising the option conferred upon him under the agreement.
6. Repossession: In case of default in respect of payment of even the last installment, the hire vendor
has the right to take the goods back without making any compensation
Question 3—
The hire purchase price was payable 19,152 on 1.1.2011 and 15,000 at the end of three successive years.
Given the present value of an annuity of 1 p.a. @ 5% interest is 2.7232. Calculate the cash price with the
help of annuity factor.
Answer—
Cash = Down Payment + Present Value of Installments
= 19,152 + 15,000 × 2.7232
= 19,152 + 40,848
= 60,000
Question 4—
The following particulars relate to hire purchase transactions:
(a) X purchased three cars from Y on hire purchase basis, the cash price of each car being
2,00,000.
(b) The hire purchaser charged depreciation @ 20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second installment was not paid at the end of the
second year. The hire vendor valued the two cars at cash price less 30% depreciation charged
under it diminishing balance method.
(d) The hire vendor spent 10,000 on repairs of the cars and then sold them for a total amount of
1,70,000.
You are required to compute:
(i) Agreed value of two cars taken back by the hire vendor.
(ii) Book value of car left with the hire purchaser.
(iii) Profit or loss to hire purchaser on two cars taken back by their hire vendor.
(iv) Profit or loss of cars repossessed, when sold by the hire vendor.

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Answer—
(i) Price of two cars = 2,00,000 × 2 4,00,000

Less: Depreciation for the first year @ 30% 1,20,000
2,80,000
30
Less: Depreciation for the second year  2,80,000  84,000
100
Agreed value of two cars taken back by the hire 1,96,000
Vendor Cash purchase price of one year
(ii) Depreciation on 2,00,000 @ 20% for the first year 2,00,000
Less: Written down value at the end of the first year 40,000
1,60,000
Less: Deprectiation on 1,60,000 @ 20% for the second year 32,000
Book value of car left with the hire purchaser 1,28,000
Book value of one car as calculated in working note (ii) above 1.28,000
(iii) Book value of Two cars = 1,28,000 × 2 2,56,000
Value at which the two cars were taken back, calculated in working Note (i)
above 1,96,000
Hence, loss on cars taken back = 2,56,000 – 1,96,000 = 60,000
(iv) Sale proceeds of cars repossesed 1,70,000
Less: Value at which plant were taken back 1,96,000
Repair 10,000 2,06,000
Loss on resale 36,000
Question 5—
On 1st April, 2012, M/s Power Motors sold on hire purchase basis a truck whose cash price was 9,00,000
to M/s Singh & Singh a transport firm. The terms of the contract was that the transporters were to pay
3,00,000 down and six four monthly installments of 1,00,000 plus interest on outstanding amount of cash
price for the intervening four months. The installments were payable on 31st July, 30th November and 31st
March in each one of the two accounting years. Interest was calculated @ 12 per annum.
M/s Singh & Singh duly paid the installment on 31st July, 2012 but failed to pay the installment on 30th
November, 2012. M/s Power Motors, after legal formalities, repossessed the truck valuing it at 7,00,000.
M/s Power Motors spent 80,000 on repairs and repainting of the truck and on 7th January, 2013 sold if for
7,50,000 cash.
You are required to prepare M/s Singh & Singh's A/c and Goods Repossessed Account in the books of M/
s Power Motors.

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Answer—
In the books of M/s Power Motors
M/s Singh & Singh's Account
Date Particulars Rs. Date Particulars Rs.

01.04.2012 To Hire Purchase 9,00,000 01.04.2012 By Bank (Down 3,00,000
Sales A/c (Cash payment)
Price)
31.07.2012 To Interest A/c 24,000 31.07.2012 By Bank 1,24,000
(1,00,000+24,000)
(6,00, 000 ×12% 31.11.2012 By Goods 7,00,000
× 4 /12) Repossessed A/c
30.11.2012 To Interest A/c
(5,00, 000 × 12% 20,000
× 4 /12)
31.10.2012 To Profit & Loss 1,80,000
A/c
(Bal. Fig.)
11,24,000 11,24,000
Goods Repossessed Account
Date Particulars Rs. Date Particulars Rs.

30.11.2012 To Singh & Singh's 7,00,000 07.01.2013 By Bank A/c 7,50,000
A/c
07.01.2013 To Bank A/c 80,000 07.01.2013 By By Profit & Loss 30,000
(Repairs) A/c - Loss
7,80,000 7,80,000
********************

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Accounting for Branches Including Foreign Branch 13.1
CHAPTER -13
ACCOUNTING FOR BRANCHES INCLUDING
FOREIGN BRANCHES
CONCEPT OF BRANCH ACCOUNTING
• Expansion of business by opening branches of the business geographically in different areas.
• Determination of Branch profits separately for each branch.
• Final result of the branch as a profit or loss and asset and liability of branch will be disclosed as a part
of overall financial statement of the enterprise in the books of head-office.
Classification of Branches
Inland Branches
Dependent Branch Independent Branch Foreign Branch
Separate set of books Separate set of books Reporting Currency

of accounts as per of accounts as per of Branch is different
double entry system double entry system is from Reporting
is not kept by branch. kept by branch itself currency of H.O.
DEPENDENT BRANCH
• In case of dependent branch, branch itself does not maintain separate set of books of accounts on
double entry system.
• Branch maintains the list of transactions in normal manner without using double entry system.
• Detail of transactions is sent to H.O. periodically.
• Transactions of Branch is recorded by H.O. in its books of accounts, therefore accounting of depen-
dent branch will always in the books of head office by using following method:
Methods of Accounting of Dependent
Branches in the Books of H.O.
Stock & Debtor Branch Trading

Debtor Method
Method & P & L A/c Method
If goods sent at If goods sent at

cost by H.O. invoice value by H.O.

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TOPIC – 1 : ACCOUNTING OF DEPENDENT BRANCH IN THE BOOKS OF
H.O. BY ‘STOCK AND DEBTOR’ METHOD (IF GOODS ARE SENT AT COST)
• Each transaction will be posted into appropriate account according to Journal Entry of that transaction.
• Open different account as required by journal entries of the transactions e.g.
(1) Branch Stock A/C
• Disclose details of stock at cost except sale.
• Disclose opening (Dr Side) and closing balance (Cr. side) of stock.
• Dr. Branch stock A/C whenever branch stock increases and Cr branch stock A/C whenever
branch stock A/C is decreases.
• Final result will be G.P. and it is transferred to Branch P&L A/C
(2) Branch Debtors A/C
(3) Branch Cash A/C
(4) Branch Petty Cash A/C
(5) Branch Asset A/C
(6) Branch Expense A/C
• Dr. each time whenever branch incurred expenses.
• Balance will transferred to Branch P&L A/C
(7) Branch P&L A/C
• Final Balance will be Net Profit of Branch and it is transferred to General P&L A/C
• The manner in which entries are recorded in the above method is shown below:
Transaction Account debited Account credited

(a) Cost of goods sent to the Branch Stock A/C Goods sent to Branch
Branch A/C
(b) Remittances for expenses Branch Cash A/C H.O. Cash A/c
(c) Any assets (e.g. furniture) Branch Asset (Furniture) A/C (i) (H.O.) Cash A/C or
provided by H.O. (ii) Creditors A/C
(iii) (H.O.) Furniture
A/C
(d) Cost of goods returned by the Goods sent to Branch A/C Branch Stock A/C
branch
(e) Cash Sales at the Branch Branch Cash A/C Branch Stock A/C
(f) Credit Sales at the Branch Branch Debtors A/C Branch Stock A/C
(g) Return of goods by debtors Branch Stock A/C Branch Debtors A/C
to the Branch
(h) Cash paid by debtors Branch Cash A/C Branch Debtors A/C
(i) Discount & allowance to Branch Expenses A/C Branch Debtors A/C
debtors, bad debts
( j) Remittances to H.O. (H.O.) Cash A/C Branch Cash A/C
(k) Expenses met by H.O. Branch Expenses A/C (H.O.) Cash A/C

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NOTE 1:
• Goods sent to branch A/C is always prepared and its balance is transferred to Trading / Purchase A/C (It
belongs to part of HO ledger)
• Alternative accounting treatments for recording expenses:
a) Initially recording to Branch expense A/C and then transfer it to Branch P&L A/C.
b) Initially recording to related expense A/C and then transfer to branch P&L A/C.
c) Initially recording to related expense A/C then transfer to branch expense A/C and thereaf-
ter transfer of branch expenses to branch P&L A/C.
TOPIC-2 :
ACCOUNTING OF DEPENDENT BRANCH IN THE BOOKS OF H.O. BY STOCK AND
DEBTOR METHOD
(IF GOODS SENT BY H.O. TO BRANCH AT INVOICE VALUE)
• In this case, Branch stock A/C is prepared on invoice value basis.
• Profit element of Branch Stock A/C is reversed in Branch adjustment A/C except profit included in
Sales.
• Branch adjustment A/C will reflect G.P. and it will be transferred to Branch P&L A/C.
• Concept of Branch stock A/C at Invoice value and Branch Adjustment A/C is almost similar to
departments stock A/C with Markup A/C.
• Specific general entries will be as under :
Note 2: Journal entries for Goods sent to Branch A/C
Option I Option II
Branch Stock A/c Dr. (I.V.) Branch Stock A/c Dr. (I.V.)
To Good Sent to Branch A/c (I.V.) To Good Sent to Branch A/c (Cost)
To Branch Adjustment A/c (Loading)
Goods sent to Branch A/c Dr. (Loading)
To Branch Adjustment A/c (Loading)
Note3: Treatment of Stock Reserve

• Opening and Closing Stock includes profit element and it is known as opening and closing stock
reserve.
• It will be treated as opening and closing balance of Branch Adjustment A/C.
OR
• If stock reserve is required in question then firstly it is disclosed as opening and closing balance of
Stock Reserve A/C and thereafter it is transferred to Branch Adjustment A/C(separately or net
basis).

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Note 4:
Treatment of difference of Branch Stock A/C (after whole adjustment)
If deficiency in debit side exists If deficiency in credit side exists
Possible reason is part of the Possible reason

stock has been sold out for value
more than normal selling price
(N.S.P.)
Option-I Option-II
Part of the stock is sold at a value Due to Shortage of Stock
less than N.S.P. and entire
difference is transferred to
Branch adjustment A/C
Entire balance is transferred Branch Adjustment A/c Dr.

toBranch Adjustment A/C To Branch Stock A/c
Branch Stock A/C Dr.
To Branch Adjustment A/C Profit element Cost
Transferred to Branch Transferred to

Adjustment A/c Branch P & L A/c

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TOPIC-3 : ACCOUNTING OF DEPENDENT BRANCH IN THE BOOKS OF H.O. BY
DEBTOR METHOD (IF GOODS ARE SENT TO BRANCH AT COST)
• In this method, H.O. will prepare only Branch A/C in order to calculate final profit of Branch.
• For the purpose of Branch A/C, Transactions of Branch is classified into three categories.
(A) Transactions effecting only H.O.:
• Journal Entry of transaction affect only ledger of H.O.
• e.g. Sale by HO, purchase by H.O. etc.
• Ignore it for the purpose of preparation of Branch A/C.
(B) Transactions effecting only Branch:
• Journal Entry of transaction includes ledgers of only branch.
• for e.g. –
(i) cash sales by branch
(ii) cash purchase by branch
(iii) Branch expenses paid by branch
(iv) Branch Debtors collected by branch
• Ignore it for the purpose of preparation of Branch A/C.
(C) Transactions affecting ledgers of H.O. and Branch both in a single entry:
• Those transactions which includes one A/C in relation to branch and other one in relation to
H.O.
• Classified into two categories
Debited to Branch A/c Credited to Branch A/c

• In addition to above, opening and closing balances of assets and liabilities of branch will be disclosed
in Branch A/C.
• Final result of Branch A/C will be Net Profit and it will be transferred to General P&L A/C.

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• Format of Branch A/C will be as under :
Branch A/C (By debtor method) in the book of H.O.
Particulars (Rs.) Particulars (Rs.)
To Balance b/d(opening balances xxx By Balance b/d(opening xxx

of branch assets) balances of branch liabilities)
To Goods sent to Branch A/C By Goods sent to Branch

xxx (Return) xxx
To Cash A/C:
By Cash A/C
- Remittance by H.O. to branch
xxx (Remittance by Branch to xxx
- Branch expenses paid by HO HO)
xxx
- Branch creditor paid by HO By Balance c/d
xxx xxx
- Branch purchase paid by H.O. (Closing balances of branch
etc. xxx
assets)
To N.P. of Branch transferred to xxx
General P&L A/C as (B/F)
To Balance C/d (Closing balances

of branch liabilities)
xxx
xxx xxx
NOTE 5:—
• Only those transactions will be disclosed in branch A/C which effect both parties i.e. H.O. and
branch.
• In addition to branch A/C suitable working note will be prepared to determine different missing
values required to disclose in branch A/C e.g. branch cash A/C and branch debtor A/C etc.
NOTE 6: If H.O. sends goods at invoice price to branch then adjustment will be as
under:
o Disclose opening stock, closing stock, goods sent and goods returned at invoice price in Branch A/C.
o Reverse the profit element of opening and closing stock as opening and closing stock reserve in
Branch A/C.
o Reverse the profit element in goods sent and return in branch A/C as loading (may be separately or
net basis).
o All other adjustment will be similar to if goods sent by H.O. to branch at cost.

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TOPIC-4 : ACCOUNTING OF DEPENDENT BRANCH IN THE BOOKS OF H.O. BY
BRANCH TRADING AND P&L A/C METHOD (IF GOODS ARE SENT AT COST)
• Normal Trading and P&L A/C in relation to branch will be prepared in the books of H.O.
• Disclose all expenses and revenues relating to branch.
• Final balance as Branch Net profit from Branch P&L A/C will be transferred to General P&L A/C
NOTE 7: If H.O. sends goods at Invoice Value then convert at cost opening stock,
closing stock, good sent and returned then disclose accordingly in the Branch
Trading A/C.
TOPIC-5 : INDEPENDENT BRANCH
• Branch will maintain separate set of books of accounts on the basis of double entry system.
• Therefore accounting will be in the books of H.O. and branch separately.
• In this case, practically covered topic will be as under
In this case, practically covered topic will be as under
Accounting for day Reconciliationof Balance Finalization of books of

to day transactions of H.O. A/C and Branch A/C branch (Final A/C of Branch)
Finalization ofTrading Finalization of Balance

and P&L A/C sheet
By preparing Branch Trading By preparing Branch Trading And P & L A/c in the
and P&L A/C in the books of HO books of branch and then final result transferred to
H.O.

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TOPIC - 6 : ACCOUNTING FOR DAY TO DAY TRANSACTIONS IN CASE OF
INDEPENDENT BRANCH
• Branch and H.O. will record transactions separately by treating them independent from each other.
• Transactions which affect only H.O. are recorded only by H.O. in normal manner.
• Transactions which affect only Branch will be recorded only by branch in normal manner.
• Transactions which affect both branch and H.O. (Mutual) will be recorded by H.O. and Branch
separately.
• In order to record mutual transactions books of H.O. will open branch A/C and in books of branch
H.O. A/C will be opened.
If Branch is receiver from H.O. If Branch is giver is from H.O.

H.O. A/C is credited in branch books H.O. A/C is debited in the
And Branch A/C is debited books of branch and
In H.O.'s Books Branch A/C will be
Credited in Books of H.O.

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Transaction Head Office Books Branch Books
1 Dispatch of goods to Branch A/c Dr. Goods Received from H.O. A/c Dr.
branch by H.O. To Good sent to Branch A/c To Head Office A/c
2 When goods are returned Good sent to Branch A/c Dr. Head Office A/c Dr.
by the branch to H.O. To Branch A/c To Goods received from H.O. A/c
3 Branch Expenses are paid No Entry Expenses A/c Dr.

by the Branch To Bank or Cash A/c
4 Branch Expenses are paid Branch A/c Dr. Expenses A/c Dr.
by H.O. To Bank or Cash To Head Office A/c
5. Outside purchases made No Entry Purchases A/c Dr.

by the Branch To Bank (or) Creditors A/c
6. Collection from Debtors Bank A/c Dr. Head Office A/c Dr.
of the Branch reced. by To Branch A/c To Sundry Debtors A/c
H.O.
7. Payment by H.O. for Branch A/c Dr. Pruchases/Sundry Creditors A/c Dr.
Purchases made by To Bank A/c To Head Office
Branch
8. Purchases of Assets by No Entry Sundry Assets Dr.

Branch To Bank (or) Liability
9. Assets purchased by the Branch Assets A/c Dr. Head Office Dr.
Branch but Assets A/c To Branch A/c To Bank (or) Liability
retained at H.O. books
10. Depreciation on (9) above Branch A/c Dr. Depreciation A/c Dr.
To Branch Asset To Head Office A/c
11. Remittence of funds by Branch A/c Dr. Bank A/c Dr.

H.O. to Branch To Bank A/c To H.O. A/c
12. Remittence of funds by Bank A/c Dr. HO A/c Dr.

Branch to H.O. To Branch A/c To Bank A/c
13. Sales by Branch No Entry Cash/Debtors A/c Dr.

To Sales A/c

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Special Adjustment of Inter Branch Transactions
• One Branch will not open A/C of other Branch in its books.
• For Inter Branch transactions from Accounting point of view, there will be always intermediation of
H.O. between two branches.
• Therefore, Inter Branch transactions will be divided into two parts and it is recorded in books of both
branches as well as books of H.O.
• For example - cash remitted by Branch A to Branch B.
– Cash remitted by Branch A to H.O. (in books of branch A)
H.O. A/C Dr.
To Cash A/C
– Cash remitted by H.O. to Branch B (in books of branch B)
Cash A/C Dr.
To H.O. A/C
– Books of H.O.
Branch B A/C Dr.
To Branch A A/C
(3) Special Adjustment for fixed assets of Branch used by branch but record for
that assets is maintained by H.O.
• In this case, instead of Related Asset A/C, recording is done in H.O. A/C in the books of branch.
• H.O. will record it in similar manner to dependent branch.
– Asset purchased by the Branch but Asset A/C is retained by H.O. books
• In the books of H.O.
Branch Assets A/c Dr.
To Branch A/c
• In the books of Branch:
H.O. A/c Dr.
To Cash or Creditors A/c
• Depreciation on such asset
In books of H.O.
Branch A/C Dr.
To Branch Asset A/C
• In books of branch :
Depreciation A/C Dr.
To H.O. A/C.

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TOPIC - 7 : RECONCILIATION OF BALANCE OF HO A/C IN BRANCH BOOK WITH
BALANCE OF BRANCH A/C IN HO BOOKS
• Generally Balance of H.O. A/C will agree with Balance of Branch A/C at any point of time having
opposite nature of balances.
• Sometimes it may be possible that balance of both accounts does not agree to each other.
• In such case, Reconciliation of balance of both A/C is needed.
• Reason of Reconciliation is as under :
(A) Difference due to transit item
- Sender has already passed the entry but receiver has not passed any entry up to the end of the year.
- It will be adjusted in the books of recipient.
Name of Transit Item Books of H.O. Books of Branch
I.Goods sent by H.O. not received No Entry Goods in Transit A/C Dr.
by Branch
To H.O.
II.Goods returned by Branch but not GIT A/C Dr. No Entry

received by H.O.
To Branch
III.Cash remitted by Branch to H.O. Cash in Transit A/C No Entry

but not received by H.O. Dr.
To Branch
IV.Cash remitted by H.O. to branch No Entry C.I.T. A/C Dr.

but not received by Branch
To H.O. A/C
NOTE : 9 G.I.T. will be treated as a part of closing stock of the receiver and C.I.T. is treated as
part of cash and cash equivalent of receiver.
(B) Difference due to error incurred in Accounting
– It is rectified by those books of accounts in which error has been incurred.

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TOPIC - 8 : FINAL A/C OF BRANCH (FOR ITEMS RELATING TO TRADING AND
P&L A/C)
• If Branch itself prepare Trading and P&L A/C and then final balance as Net Profit or Net Loss out
of PL account is transferred to H.O. in order to merge it into general PL of HO.
Name of Transaction In books of Branch In Books of H.O.
(1) If Net Profit of Branch P&L A/ Dr. Branch A/C Dr.
To HO A/C To P&L A/C
(2) If Net loss of Branch H.O. A/C Dr. P&L A/C Dr.
To P&L A/C To Branch A/C
• Entire list of Revenue and expenditure A/C is transferred by Branch to H.O. and thereafter H.O.
will prepare Branch trading and P&L A/C in its books of accounts and then final result is transferred
to General P&L A/C
TOPIC-9 : FINAL A/C OF INDEPENDENT BRANCH (FOR ITEMS OF B/S OF BRANCH)
• Assets and liabilities of Branch will be transferred to H.O. at the end of the year.
• H.O. will disclose Branch's assets and liabilities in its balance sheet.
• Transfer of asset and liability will be as under :
Name of Item Branch books H.O. Books
(1) For Assets HO A/C Dr. Branch Assets A/C Dr.
To Asset A/C To Branch A/C
(2) For liabilities Liabilities A/C Dr. Branch A/C Dr.
To H.O. A/C To Branch liabilities

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NOTES :
10. After adjustment of Final A/C, Branch A/C in book of HO and HO A/C in books of branch will get
automatically closed. Therefore in consolidated B/s, HO A/C and Branch A/C is not disclosed any-
where.
However if separate balance sheet is prepared for HO and Branch then balance of HO account is
disclosed in liability side of balance sheet of branch and balance of branch account is disclosed in
asset side of balance sheet of HO.
11. Reverse entry at the beginning of year will be passed for above table in order to incorporate Branch
asset and liability in branch books.
12. Goods sent to Branch will not be disclosed in Total column of Trading and P&L A/C.
13. If HO sent goods to branch at invoice in case of independent branch then adjustment will be as
under:
• Calculate opening and closing stock reserve out of stock of branch that was earlier received from
HO.
• Disclose stock reserve to PL account of HO.
• Credit opening stock reserve and debit closing stock reserve alternatively treatment may be on net
basis.
• Another treatment of stock reserve will be deduct closing stock reserve from the value of closing
stock in the balance sheet.
TOPIC - 10: FOREIGN BRANCH
• If recording currency of Branch is different from 'recording currency' of H.O. then Branch shall be
treated as 'foreign Branch' for H.O.
• Foreign Branch is classified into following to categories from accounting point of view.
Integral Foreign Non- Integral Foreign

Operation (IFO) Operation (NIFO)
– Objective Branches – Local purchases are allowed
to extension business of H.O. – Local borrowings are allowed
– Freedom of business
is not given to branch
– Direct purchase by Branch
is not allowed (Deals exclusively
in Goods received from H.O.)
– Local Borrowings by Branch
is not allowed.
Practically topics covered by Foreign Branch
(1) Conversion of Branch's trail balance in H.O.'s currency (in the books of H.O.)
(2) Preparation of Branch Trading and P&L A/C and Balance Sheet in the books of H.O. after
conversion.

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Basis for conversion of Branch's Trial Balance into HO's currency. (Use of
Foreign Exchange Rates)
Name of Ledger If IFO If NIFO
(1) Opening Stock Opening Rate Opening Rate
(2) Closing Stock Closing Rate Closing Rate
(3) Item of Revenue and Average Rate or actual rate Average Rate or actual rate
Expenditure on date of transaction on date of transaction
(4) Monetary Item Closing Rate Closing Rate
(5) Fixed Assets and Rate existing on Date of Closing Rate

Depreciation on Fixed purchase if not revalued
Assets
or
Rate on Date of
Revaluation if revalued
(6) Goods received from As per value recorded by As per value recorded by
H.O. H.O. H.O.
(7) Balance of H.O. A/Cs As per balance of Branch As per balance of Branch
A/C in H.O. Book A/C in HO's Books
(8) Other Transactions As per value recorded by As per value recorded by

with H.O. H.O. H.O.
(9) Treatment of difference Treated as foreign Treated as foreign

of converted Trial exchange loss/gain and exchange translation
Balance disclosed in Branch P&L reserve and it will
A/C disclosed in B/S.

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Questions & Answers
Question 1 —
Concept, with its Head Office at Mumbai has a branch at Nagpur. Goods are invoiced to the Branch at cost
plus 33-1/3%. The following information is given in respect of the branch for the year ended 31st March,
2013:
Goods sent to Branch (invoice price) 4,80,000

Stock at Branch on 1.4.2012 (invoice price) 24,000
Cash sales 1,80,000
Return of goods by customers to the Branch 6,000
Branch expenses (paid in cash) 53,500
Branch debtors balance on 1.4.2012 30,000
Discount allowed 1,000
Bad debts 1,500
Collection from Debtors 2,70,000
Branch debtors cheques returned dishonoured 5,000
Stock at Branch on 31.3.2013 (Invoice price) 48,000
Branch debtors balance on 31.3.2013 36,500
Prepare, under the Stock and Debtors system, the following Ledger Accounts in the books of the Head
Office:
(i) Nagpur Branch Stock Account
(ii) Nagpur Branch Debtors Account
(iii) Nagpur Branch Adjustment Account.
Also compute shortage of Stock at Branch, if any.
Answer—
In the books of head office
Nagpur Branch Stock Account
1.4.2012 To Balance b/d 24,000 31.3.13 By Bank A/c (Cash Sales) 1,80,000
31.3.2013 To Goods sent to 4,80,000 By Branch Debtors (Credit 2,80,000

Branch A/c Sales)
To Branch Debtors 6,000 By Stock shortage :
Branch P & L A/c 1,500*
Branch Adjustment A/c 500 2,000

(Loading )
By Balacne c/d 48,000
5,10,000 5,10,000

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Nagupur Branch Debtors Account
1.4.2012 To Balance b/d 30,000 31.3.20- By Bank A/c (Collection) 2,70,000

13
31.3.2013 To Bank Ac/ By Branch Stock A/c 6,000
(dishonour of cheques) 5,000 By Bad Debts 1,500
To Branch Stock A/c 2,80,000* By Discount Allowed 1,000
By Balance c/d 36,500
3,15,000 3,15,000
Nagpur Branch Adjustment Account
To Branch Stock A/c (loading of loss) 500* By Stock Reserve A/c 6,000
To Stock Reserve 12,000 By Goods sent to Branch A/c 1,20,000
To Gross Profit c/d 1,13,500 .
1,26,000 1,26,000
To Branch Stock A/c (Cost of loss) 1,500 By Gross Profit b/d 1,13,500
To Branch Expenses 56,000
To Net Profit (Transferred to
General P& L A/c ) 56,000 .
1,13,500 1,13,500
*Balancing figure.
Working Notes:
1. Loading is 33.33 % or Cost; i.e. 25% of invoice value ]
Loading on opening stock = 24,000 25% = 6,000
2. Total Branch Expenses = Cash expenses + Bad debt + Discount allowed
= 53,500 + 1,500 + 1,000 = 56,000
3. Gross Profit
33.33
Total sales (at invoice price) - Goods returned by customers (at invoice price) 
100  33.33
33.33
{( 1,80,000 + 2,80,000)– 6,000}   1,13,500
133.33
4. Loading on goods sent = 4,80,000 25% = 1,20,000
Loading on Closing Stock = 48,000 25% = 12,000

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Question 2—
Red and White of Mumbai started a branch at Bangalore on 1.4.2012 to which goods were sent at 20%
above cost. The branch makes both cash sales and credit sales. Branch expenses are met from branch cash
and balance money remitted to H.O. The branch does not maintain double entry books of account and
necessary accounts relating to branch are maintained in H.O. Following further details are given for the year
ending on 31.3.2013:
Cost of goods sent to branch 1,00,000

Goods received by branch till 31.3.2013 at Invoice price 1,08,000
Credit sales for the year 1,16,000
Closing debtors on 31.3.2013 41,600
Bad debts written off during the year 400
Cash remitted to H.O. 86,000
Closing cash on hand at branch on 31.3.2013 4,000
Cash remitted by H.O. to branch during the year 6,000
Closing stock in hand at branch at invoice price 12,000
Expenses incurred at branch 24,000
Draw up the necessary Ledger Accounts like Branch Debtors Account, Branch Stock Account, Goods sent
to Branch Account, Branch Cash Account, Branch Expenses Account and Branch Adjustment A/c for
ascertaining gross profit and Branch Profit and Loss A/c for ascertaining Branch profit.
Answer—
Branch Debtors A/c
To Branch Stock A/c 1,16,000 By Branch Cash A/c (Balancing figure) 74,000
By Bad Debts (Written off) 400
. By Balance c/d 41,600
1,16,000 1,16,000
Goods Sent To Branch A/c
To Branch Adjustment A/c 20,000 By Branch Stock A/c 1,20,000
20
1,00,000 
100
To Purchases Trading A/c 1,00,000 .
1,20,000 1,20,000

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Branch Cash A/c
To Good set to Branch A/c 74,000 By Branch Expenses A/c 24,000

To H.O. A/c (cash remittance) 6,000 By H.O. (cash remittance) 86,000
To Branch Stock A/c By Balance c/d 4,000
– Cash Sales (balancing figure) 34,000 .
1,14,000 1,14,000
Branch Expenses A/c
To Branch Cash A/c 24,000 By Branch P & L A/c 24,000

Branch Adjustment A/c
To Stock Reserve A/c 2,000 By Goods sent to Branch A/c 20,000

To Goods in transit Reserve A/c 2,000 By Branch Stock A/c 54,000
To Branch P & L A/c (Balancing figure) 70,000 .
74,000 74,000
Branch P & L A/c
To Branch Expenses A/c 24,000 By Branch Adjustment A/c 70,000

To Bad Debts 400
To Net Profit (transferred to
General P&L A/c) 45,600 .
70,000 70,000
Working Notes:
1. Loading is 20% of cost i.e. 16.67% (1/6th) of invoice value.
Loading on closing stock = 1/6th of 12,000 = 2,000.
2. Loading on goods sent to branch = 1/6th of 1,20,000 = 20,000.
3. Loading on goods in transit = 1/6th of 12,000 = 2,000.

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Question 3—
Neo with headquarters at Mumbai, maintains a branch at Goa. Goods are invoiced at cost plus 25%. In
respect of Goa branch, the following information pertaining to the year ended 31st March, 2013 are made
available to you:
Goods sent to Branch (at Invoice price) 6,75,000

Goods returned by branch during the year (at Invoice price) 24,000
Cash sales effected by branch 1,85,000
Discount allowed to customers 2,500
Amount received from branch debtors 3,25,000
Cheques of customers which got dishonoured 8,000
Branch expenses met in cash 72,500
Sales return at Goa branch 10,000
Bad debts 5,500
On 31 March, 2013
st
On 31 March, 2012
st
Branch debtors 1,05,000 50,000

Stock at branch (at Invoice price) 2,36,000 1,50,000
Adopting the Stock and debtors system, you are required to prepare the following Ledger accounts, as
appearing in the books of the Head Office:
(i) Goa branch debtors account;
(ii) Goa branch adjustment account;
(iii) Goa branch profit and loss account.
Answer—
In the books of Neo (Head Office)
Goa Branch Debtors Account
Date Particulars Date Particulars
14.2012. To Balance b/d 50,000 31.3.13 By Bank (Collection from 3.25.000

debtors)
31.3.2013 To Bank A/c (Dishnour of 8,000 By Branch Stock (Goods 10,000

Cheque) returned by Customers)
To Branch Stock A/c (Credit 3,90,000 By Bad debts 5,500

Sales)
By Discount Allowed 2,500
4,48,000 4,48,000

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Goa Branch Adjustment Account
31.3.2013 To Goods sent to Goa 4,800 1.4.2012 By Balance b/d 30,000

Branch A/c (goods returns to
H.O.)
To Branch P & L A/c (Profit 1,13,000 31.3.2013 By Goods sent to Goa 1,35,000
on sale at invoice price) Branch A/c (Loading)
To Balance c/d (Closing 47,200

Stock reserve)
1,65,000 1,65,000
Goa Branch Profit and Loss Account

for the year ending 31st March, 2013
To Branch Expenses A/c 72,500 By Branch Adjustment A/c 1,13,000

To Branch Debtors - Discount 2,500
Bad debts 5,500
To Net Profit (Transferred to General
Profit & Loss A/c) 32,500 .
1,13,000 1,13,000
Working Note:
Goa Branch Stock Account
1.4.12 To Balance b/d 1,50,000 31.3.13 By Bank (Cash Sales) 1,85,000
31.3.13 To Goods sent to Goa Br. 6,75,000 By Brach Debtors (Credit sales) 3,90,000
To Branch Debtors 10,000 By Goods sent to Goa Br. (Goods 24,000
(Goods returned) Returned to H.O.)
8,35,000 8,35,000

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Question 4—
Pawan, of Delhi has a branch at Jaipur. Goods are invoiced to the branch at cost plus 25%. The branch is
instructed to deposit the receipts everyday in the head office account with the bank. All the expenses are
paid through cheque by the head office except petty cash expenses which are paid by the Branch.
From the following information, you are required to prepare Branch Account in the books of Head office:
Stock at invoice price on 1.4.2012 1,64,000

Stock at invoice price on 31.3.2013 1,92,000
Debtors as on 1.4.2012 63,400
Debtors as on 31.3.2013 84,300
Furniture & fixtures as on 1.4.2012 46,800
Cash sales 8,02,600
Credit sales 7,44,200
Goods invoiced to branch by head office 12,56,000
Expenses paid by head office 2,64,000
Petty expenses paid by the branch 20,900
Furniture acquired by the branch on 1.10.2012 (payment was made by the 5,000
branch from cash sales and collection from debtors)
Depreciation to be provided on branch furniture & fixtures @ 10% p.a. on WDV basis.

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Answer—
In the Books of Pawan Delhi (Head Office)
Jaipur Branch Account
To Opening balances: By Branch stock reserve 32,800

Branch stock A/c 1,64,000 By Bank A/c (W.N. 4) 15,00,000
Branch debtors A/c 63,400 By Goods sent to branch A/c 2,51,200
Branch Furniture A/c 46,800 (Loading)
To Goods sent to branch 12,56,000 By Closing Balances:
To Bank (Branch expenses) 2,64,000 Branch stock A/c 1,92,000
To Branch stock reserve A/c 38,400 Branch debtors A/c 84,300
To Profit and Loss A/c (Bal. Fig.) 2,74,570 Branch furniture A/c (W.N. 2) 46,870
21,07,170 21,07,170
Working Notes:
1. Depreciation on Furniture
10% p.a. on 46,800 4,680

10% p.a. for 6 months on 5,000 250
4,930
2. Closing Balance of Branch furniture as on 31.3.2013
Branch furniture as on 1.4.2012 46,800

Add: Acquired during the year 5,000
51,800
Less: Depreciation (W.N. 10 4,930
Branch furniture as on 31.3.2013 46,870
3. Collection from branch debtors
Branch Debtors Account
To Balance b/d 63,400 By Bank A/c (Bal. Fig.) 7,23,300

To Sales 7,44,200 By Balacne c/d 84,300
8,07,600 8,07,600
4. Cash remitted by the branch to head office
Cash sales + Collection from debtors - Petty expenses - Furniture acquired by branch
8,02,600 + 7,23,300 (W.N. 3) – 20,900 - 5,000 = 15,00,000

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Question 5—
Ram of Chennai has a branch at Nagpur to which office, goods are invoiced at cost plus 25%. The branch
makes sales both for cash and on credit. Branch expenses are paid direct from Head Office and the branch
has to remit all cash received into the Head Office Bank Account at Nagpur.
From the following details, relating to the year 2013, prepare the accounts in Head Office Ledger and
ascertain Branch Profit as per stock and debtors method. Branch does not maintain any books of accounts,
but sends weekly returns to head office:
Goods received from head office at invoice price 1,20,000
Returns to head office at invoice price 2,400
Stock at Nagpur branch on 1.1.2013 at invoice price 12,000
Sales during the year - Cash 40,000
Credit 72,000
Debtors at Nagpur branch as on 1.1.2013 14,400
Cash received from debtors 64,000
Discounts allowed to debtors 1,200
Bad debts during the year 800
Sales returns at Nagpur branch 1,600
Salaries and wages at branch 12,000
Rent, rates and taxes at branch 3,600
Office expenses at Nagpur branch 1,200
Stock at branch on 31.12.2013 at invoice price 24,000
Answer—
Nagpur Branch Stock Account
To Balance b/d 12,000 By Goods sent to branch A/c 2,400
(Returns)
To Goods sent to Branch A/c 1,20,000 By Bank A/c (Cash sales) 40,000
To Branch debtors A/c 1,600 By Branch debotors (Credit sales) 72,000
To Branch adjustment A/c By Balance c/d 24,000
(Surplus over invoice price) 4,800
. .
1,38,400 1,38,400

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Nagpur Branch Adjustment Account
Particulars Amount ( ) Particulars Amount( )
To Stock reserve – 20% of 4,800 By Stock reserve – 20% of 2,400
24,000 (Closing Stock) 12,000 (Opening Stock)
To Branch Profit & Loss A/c 25,920 By Goods sent to branch A/c– 23,520
20% of 1,17,600
. By Branch Stock A/c 4,800
30,720 30,720
Branch Profit & Loss A/c
To Branch Expenses A/c 16,800 By Branch Adjustment A/c 25,920
To Branch Debtors A/c (Discount) 1,200 (Gross Profit)
To Branch debtors A/c (Bad Debts) 800
To Net profit (transferred to Profit & 7,120
Loss A/c) . .
25,920 25,920
Branch Expenses Account
To Bank A/c (Rent, rates & taxes) 3,600 By Branch profit and loss A/c 16,800
To Bank A/c (Salaries & wages) 12,000 (Transfer)
To Bank A/c (Office expenses) 1,200 .
16,800 16,800
Branch Debtors Account
To Balance b/d 14,400 By Bank A/c 64,000
To Branch Stock A/c 72,000 By Branch profit and loss A/c 2,000
By Branch stock a/c (Sales returns) 1,600
. By Balance c/d (Bal. Fig.) 18,800
86,400 86,400
Goods Sent to Branch Account
To Branch stock A/c 2,400 By Branch stock A/c 1,20,000
To Branch adjustment A/c 23,520
To Purchases A/c 94,080 .
1,20,000 1,20,000

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Question 6—
XYZ is having its Branch at Kolkata. Goods are invoiced to the branch at 20% profit on sale. Branch has
been instructed to send all cash daily to head office. All expenses are paid by head office except petty
expenses which are met by the Branch Manager. From the following particulars prepare branch account in
the books of Head Office.
Stock on 1st April 2011 30,000 Discount allowed to debtors 160

(Invoice price) Expenses paid by head office:
Sundry Debtors on 1st April, 2011 18,000 Rent 1,800
Cash in hand as on 1st April, 2011 800 Salary 3,200
Office furniture on 1st April, 2011 3,000 Stationery & Printing 800
Goods invoiced from the head Petty expenses paid by the branch 600
office (invoice price) 1,60,000 Depreciation to be provided on branch
Goods return to Head Office 2,000 furniture at 10% p.a.
Goods return by debtors 960 (invoice price)
Cash received from debtors 60,000
Cash Sales 1,00,000 Stock on 31st March, 2012
Credit sales 60,000 (at invoice price) 28,000

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Answer—
In the books of Head Office - XYZ
Kolkata Branch Account (at invoice)
To Balance b/d
Stock 30,000 By Stock reserve (opening) 6,000
Debtors 18,000 By Remittances:
Cash in hand 800 Cash Sales 1,00,000
Furniture 3,000 Cash from Debtors 60,000
To Goods sent to branch 1,60,000 By Goods sent to branch (loading) 32,000
To Goods returned by branch (loading) 400 By Goods returned by
To Bank (expenses paid by H.O.) Branch (Return to H.O.) 2,000
Rent 1,800 By Balance c/d
Salary 3,200 Stock 28,000
Stationary & printing 800 Debtors 16,880
To Stock reserve (closing) 5,600 Cash (800–600) 200
To Profit transferred to Furniture (3,000–300) 2,700
General Profit & Loss A/c 24,180 .
2,47,780 2,47,780
Working Note:
Debtors Account
To Balance b/d 18,000 By Cash account 60,000

To Sales account (credit) 60,000 By Sales return account 960
By Discount allowed account 160
78,000 78,000
Note: It is assumed that goods returned by branch are at invoice price.

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Question 7—
Give Journal Entries in the books of Head Office to rectify or adjust the following:
(i) Goods sent to Branch 12,000 stolen during transit. Branch manager refused to accept any liability.
(ii) Branch paid 15,000 as salary to the officer of Head Office on his visit to the branch.
(iii) On 28th March, 2012, the H.O. dispatched goods to the Branch invoiced at 25,000 which was not
received by Branch till 31st March, 2012.
(iv) A remittance of 10,000 sent by the branch on 30th March, 2012, received by the Head Office on 1st
April, 2012.
(v) Head Office made payment of 25,000 for purchase of goods by Branch and wrongly debited its
own purchase account.
Answer—
In the books of Head Office Journal Entries
Particulars Dr. Cr.
Amount Amount
(i) Loss of goods due to theft during transit Dr. 12,000

To Branch Account 12,000
(Being goods lost on account of theft during transit)
(ii) Salaries Account Dr. 15,000
To Branch account 15,000
(Being salary paid by the branch for H.O. Employee)
(iii) No entry in the books of head office for goods sent to
branch not received by branch till 31st March 2012
(iv) Cash in transit account Dr. 10,000
To Branch account 10,000
(Being remittance by branch not received by 31 March, 2012)
st
(v) Branch Account Dr. 25,000

To Purchases account 25,000
(Being rectification of entry for payment for goods purchased
by Branch wrongly debited to purchase account)
Note:— In entry (i), it is assumed that refusal of branch manager (to accept liability of stolen goods) is
accepted by the Head Office. Alternatively, Branch account will be credited on the basis of assumption that
refusal of branch manager is not accepted by the Head Office.
Note: In entry (iii) the goods in transit entry will be passed in the Books of the Branch.

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Question 8—
M/s. Sandeep, having Head Office at Delhi has a Branch at Kolkata. The Head Office does wholesale
trade only at cost plus 80%. The Goods are sent to Branch at the wholesale price viz. cost plus 80%. The
Branch at Kolkata wholly engaged in retail trade and the goods are sold at cost to Head Office plus 100%.
Following details are furnished for the year ended 31st March, 2014:
Head Office Kolkata Branch
( ) ( )
Opening Stock (As on 01.04.2013 1,25,000 –
Purchases 21,50,000 –
Goods sent to Branch (Cost to H.O. plus 80%) 7,38,000 –
Sales 23,79,600 7,30,000
Office Expenses 50,000 4,500
Selling Expenses 32,000 3,300
Staff Salary 45,000 8,000
You are required to prepare Trading and Profit & Loss Account of the Head Office and Branch for the Year
ended 31st March, 2014.

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Answer—
Trading and Profit and Loss A/c
For the year ended 31St March, 2014
Particulars H.O. Branch Particulars H.O. Branch
To Opening Stock 1,25,000 – By Sales 23,79,600 7,30,000
To Purchases 21,50,000 – By Goods sent to 7,38,000 –

branch
To Goods received – 7,38,000 By Closing Stock 5,43,000 81,000

from H.O. (W.N. 1 & 2)
To Gross Profit c/d 13,85,600 73,000
36,60,600 8,11,000 36,60,600 8,11,000
To Office Expenses 50,000 4,500 By Gross Profit 13,85,600 73,000

b/d
To Selling Expenses 32,000 3,300
To Staff salaries 45,000 8,000
To Branch Stock 36,000 –

Reserve (W.N. 3)
To Net Profit 12,22,600 57,200
13,85,600 73,000 13,85,600 73,000

Working Notes:
(1) Calculation of Closing stock of head office:
Opening stock of head office 1,25,000
Goods purchased by head office 21,50,000
22,75,000
Less: Cost of goods sold [(31,17,600 (23,79,600 + 7,38,000) × 100/180] (17,32,000)
5,43,000
(2) Calculation of closing stock of branch:
Goods received from head office [At invoice value] 7,38,000
Less: Invoice value of goods sold [7,30,000 × 180/200] 6,57,000
81,000
(3) Calculation of unrealized profit in branch stock:
Branch stock 81,000
Profit included 80% of cost
Hence, unrealized profit would be = 81,000 × 80/180 = 36,000

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Question 9—
M/s Shah commenced business on 1.4.2012 with Head Office at Mumbai and a Branch at Chennai. Pur-
chases were made exclusively by the Head Office, where the goods were processed before sale. There
was no loss or wastage in processing.
Only the processed goods received from Head Office were handled by the Branch. The goods were sent to
branch at processed cost plus 10%.
All sales, whether by Head Office or by the Branch, were at uniform gross profit of 25% on their
respective cost.
Following is the Trial Balance as on 31.3.2013.
Head Office Branch
Dr.( ) Cr.( ) Dr.( ) Cr.( )
Capital 3,10,000
Drawings 55,000
Purchases 19,69,500
Cost of Processing 50,500
Sales 12,80,000 8,20,000
Goods sent to Branch 9,24,000
Administrative expenses 1,39,000 15,000
Selling expenses 50,000 6,200
Debtors 3,09,600 1,13,600
Branch Current account 3,89,800
Creditors 6,01,400 10,800
Bank Balance 1,52,000 77,500
Head Office Current account 2,61,500
Goods received from H.O. 8,80,000
31,15,400 31,15,400 10,92,300 10,92,300

Following further information is provided:
(i) Goods sent by Head Office to the Branch in March, 2013 of 44,000 were not received by the
Branch till 2.4.2013.
(ii) A remittance of 84,300 sent by the Branch to Head Office was also similarly not received upto
31.3.2013.
(iii) Stock taking at the Branch disclosed a shortage of 20,000 (at selling price to the branch).
(iv) Cost of unprocessed goods at Head Office on 31.3.2013 was 1,00,000.

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Prepare Trading and Profit and Loss account in columnar form and Balance Sheet of the business as a
whole as at 31.3.2013
Answer—
In the Books of Shah
Trading and Profit and Loss Account for the year ended 31st March, 2013
Particulars H. O. Branch Total Particulars H.O. Branch Total
( ) ( ) ( ) ( ) ( ) ( )
To Purchases 19,69,500 – 19,69,500 By Sales 12,80,000 8,20,000 21,00,000
To Cost of 50,500 – 50,500 By Goods sent to 9,24,000 – –

Processing Branch
To Goods received – 8,80,000 – By Stock shortage – 16,000 14545

from H.O.
To Gross Profit c/d 3,40,000 1,64,000 5,02,545 By Goods in 44,000

transit
By Closing Stock:
Processed goods 56,000 2,08,000 2,64,000
Unprocessed 1,00,000 – 1,00,000

goods
23,60,000 10,44,000 25,22,545 23,60,000 10,44,000 25,22,545
To Admn. Exp. 1,39,000 15,000 1,54,000 By Gross Profit 3,40,000 1,64,000 5,02,545
b/d
To Selling Exp. 50,000 6,200 56,200
To Stock Shortage – 16,000 14,545
To Stock reserve 22,909 – 22,909
To Net Profit 1,28,091 1,26,800 2,54,891
3,40,000 1,64,000 5,02,545 3,40,000 1,64,000 5,02,545

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Balance Sheet as at 31st March 2013
Liabilities Assets
Captial 3,10,000 Debtors
Add; Net Profit 2,54,891 HO. 3,09,600
5,64,891 Branch 1,13,600
Less: Drawings (55,000) 5,09,891 Closing Stock:
Creditors: Processed goods
H.O. 6,01,400 H.O. 56,000
Branch 10,800 6,12,200 Branch 2,08,000
2,64,000
Less: Stock reserve 18,909 2,45,091
Unprocessed goods 1,00,000
Bank Balance
H.O. 1,52,000
Branch 77,500
Goods in transit 44,000
Less: Stock reserve 4,000 40,000
Cash in transit 84,300
11,22,091 11,22,091

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Workihng Notes:
1. Calculation of closing stock:
Stock at Head Office:
Cost of goods processed (19,69,500 + 50,500 – 1,00,000) 19,20,000

Less: Cost of goods sent to Branch
100
9,24,000  8,40,000
110
100
Cost of goods sold 12,80,000  10,24,000 18,64,000
125
Stock of processed goods with H.O. 56,000
Stock at Branch:
Goods received from H.O. (at invoice price) 8,80,000

Less: Invoice value of goods sold
100
8,20,000  6,56,000
125
100
Invoice value of stock shortage 20,000  16,000 (6,72,000)
125
Stock at Branch at invoice price 2,08,000
10
Less: Stock Reserve 20,8000  (18,909)
110
Stock of processed goods with Branch (at cost) 1,89,091
2. Stock Reserve:
 10 
Unrealised profit on Branch stock  20,8000   18,909
 110 
 10 
Unrealised profit on goods in transit  44,000   4,000
 110 
22,909

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Question 10—
On 31st March, 2012, the following ledger balances have been extracted from the books of Washington
branch office of A Ltd whose Head Office is in Mumbai:
Ledger Accounts $
Building 180
Stock as on 1.4.2011 26
Cash and Bank Balances 57
Purchases 96
Sales 110
Commission receipts 28
Debtors 46
Creditors 65
You are required to convert above Ledger balances into Indian Rupees.
Use the following rates of exchange:
per $
Opening rate 46
Closing rate 50
Average rate 48
For fixed assets 42
Answer—
Conversion of ledger balances (in Dollars) into Rupees
$ Rate per $ Amount in
Building 180 42 7,560
Stock as on 01.04.2011 26 46 1,196
Cash and bank balances 57 50 2,850
Purchases 96 48 4,608
Sales 110 48 5,280
Commission receipts 28 48 1,344
Debtors 46 50 2,300
Creditors 65 50 3,250
Notes: Unless otherwise stated, all Balance Sheet items will be valued at the specific opening or closing
rates as applicable. All P&L Account balances will be valued at the average exchange rate as these trans-
actions were settled at various applicable exchange rates during the year.

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Question 11—
Omega has a branch at Washington. Its Trial Balance as at 30th September, 2012 is as follows:
Dr. Cr.
US $ US $
Plant and machinery 1,20,000 -
Furniture and fixtures 8,000 -
Stock, Oct. 1, 2011 56,000 -
Purchases 2,40,000 -
Sales - 4,16,000
Goods from Omega (H.O.) 80,000 -
Wages 2,000 -
Carriage inward 1,000 -
Salaries 6,000 -
Rent, rates and taxes 2,000 -
Insurance 1,000 -
Trade expenses 1,000 -
Head Office A/c - 1,14,000
Trade debtors 24,000 -
Trade creditors - 17,000
Cash at bank 5,000 -
Cash in hand 1,000 -
5,47,000 5,47,000
The following further information is given :
(1) Wages outstanding - $ 1,000.
(2) Depreciate Plant and Machinery and Furniture and Fixtures @ 10 % p.a.
(3) The Head Office sent goods to Branch for 39,40,000.
(4) The Head Office shows an amount of 43,00,000 due from Branch.
(5) Stock on 30th September, 2012 - $ 52,000.
(6) There were no in transit items either at the start or at the end of the year.
(7) On September 1, 2010, when the fixed assets were purchased, the rate of exchange was 38 to one $.
On October 1, 2011, the rate was 39 to one $.
On September 30, 2012, the rate was 41 to one $. Average rate during the year was 40 to one $.
You are asked to prepare:
(a) Trial balance incorporating adjustments given under 1 to 4 above, converting dollars into rupees.
(b) Trading and Profit and Loss Account for the year ended 30th September, 2012 and Balance Sheet
as on that date depicting the profitability and net position of the Branch as would appear in India for the
purpose of incorporating in the main Balance Sheet.

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Answer—
(a) In the books of Omega
Washington Branch Trial Balance (in Rupees)
as on 30th September, 2012
Dr. C r . Conversion Dr. Cr.
US $ US $ rate ( '000) ( '000)
Plant and Machinery 1,08,000 41 44,28,000
Depreciation on plant and 12,000 41 4,92,000
machinery
Furniture and fixtures 7,200 41 2,95,200
Depreciation on furniture and fixtures 800 41 32,800
Stock, Oct. 1, 2011 56,000 39 21,84,000
Purchases 2,40,000 40 96,00,000
Sales 4,16,000 40 1,66,40,000
Goods from Omega (H.O.) 80,000 39,40,000
Wages 3,000 40 1,20,000
Outstanding wages 1,000 41 41,000
Carriage inward 1,000 40 40,000
Salaries 6,000 40 2,40,000
Rent, rates and taxes 2,000 40 80,000
Insurance 1,000 40 40,000
Trade expenses 1,000 40 40,000
Head Office A/c 1,14,000 43,00,000
Trade debtors 24,000 41 9,84,000
Trade creditors 17,000 41 6,97,000
Cash at bank 5,000 41 2,05,000
Cash in hand 1,000 41 41,000
Exchange gain (bal. fig.) . . . 10,84,000
5,48,000 5,48,000 2,27,62,000 2,27,62,000

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(b) Washington Branch Trading and Profit and Loss Account
for the year ended 30th September, 2012
To Opening stock 21,84,000 By Sales 1,66,40,000

To Purchases 96,00,000 By Closing stock (52,000 US $ × 41) 21,32,000
To Goods from Head Office 39,40,000
To Wages 1,20,000
To Carriage inward 40,000
To Gross profit c/d 28,88,000 .
1,87,72,000 1,87,72,000
To Salaries 2,40,000 28,88,000
To Rent, rates and taxes 80,000
To Insurance 40,000
To Trade expenses 40,000
To Depreciation on plant and
machinery 4,92,000
To Depreciation on furniture and
fixtures 32,800
To Net Profit c/d 19,63,200 .
28,88,000 28,88,000
Balance Sheet of Washington Branch as on 30th September, 2012
Liabilities Assets
Head Office A/c 43,00,000 Plant and Machinery 49,20,000
Add: Net Profit 19,63,200 62,63,200 Less: Depreciation 4,92,000 44,28,000
Foreign currency Furniture & Fixture 3,28,000
Trnalation reserve 10,84,000 Less: Depreciation 32,800 2,95,200
Trade creditors 6,97,000 Closing Stock 21.32.000
Outstanding wages 41,000 Trade debtors 9,84,000
Cash in hand 41,000
Cash at bank 2,05,000
80,85,200 80,85,200
Note: (1)Depreciation has been calculated at the given depreciation rate of 10% on WDV basis.
(2) The above solution has been given assuming that the Washington branch is a non-integral foreign
operation of the Omega.

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Question 12—
Moon Star has a branch at Virginia (USA). The Branch is a non-integral foreign
operation of the Moon Star. The trial balance of the Branch as at 31st March, 2012
is as follows:
Particulars US $
Dr. Cr.
Office equipments 48,000
Furniture and Fixtures 3,200
Stock (April 1, 2011) 22,400
Purchases 96,000
Sales --- 1,66,400
Goods sent from H.O 32,000
Salaries 3,200
Carriage inward 400
Rent, Rates & Taxes 800
Insurance 400
Trade Expenses 400
Head Office Account --- 45,600
Sundry Debtors 9,600
Sundry Creditors --- 6,800
Cash at Bank 2,000
Cash in Hand 400 .
2,18,800 2,18,800
The following further information's are given:
(1) Salaries outstanding $ 400.
(2) Depreciate office equipment and furniture & fixtures @10% p.a. at written down value.
(3) The Head Office sent goods to Branch for 15,80,000
(4) The Head Office shows an amount of 20,50,000 due from Branch.
(5) Stock on 31st March, 2012 -$21,500.
(6) There were no transit items either at the start or at the end of the year.
(7) On April 1, 2010 when the fixed assets were purchased the rate of exchange was 43 to one $. On
April 1, 2011, the rate was 47 per $. On March 31, 2012 the rate was 50 per $. Average rate during
the year was 45 to one $.
Prepare:
(a) Trial balance incorporating adjustments given converting dollars into rupees.
(b) Trading, Profit and Loss Account for the year ended 31st March, 2012 and Balance Sheet as on
date depicting the profitability and net position of the Branch as would appear in the books of Moon
Star for the purpose of incorporating in the main Balance Sheet.

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Answer—
In the books of Moon Star
Trial Balance (in Rupees) of Virginia (USA)
Branch as on 31st March, 2012
Dr. Cr. Conversion Dr. Cr.
US$ US $ rate
Office Equipment 43,200 50 21,60,000
Dep. on Office equip. 4,800 50 2,40,000
Furniture & Fixtures 2,880 50 1,44,000
Dep. on Furniture & 320 50 16,000

Fixtures
Stock (1st April, 2011) 22,400 47 10,52,800
Purchases 96,000 45 43,20,000
Sales 1,66,400 45 74,88,000
Goods sent from H.O. 32,000 15,80,000
Carriage inward 400 45 18,000
Salaries (3,200 + 400) 3,600 45 1,62,000
Outstanding Salaries 400 50 20,000
Rent, rates and taxes 800 45 36,000
Insurance 400 45 18,000
Trade Expenses 400 45 18,000
Head Office A/c 45,600 20,50,000
Trade debtors 9,600 50 4,80,000
Trade Creditors 6,800 50 3,40,000
Cash at Bank 2,000 50 1,00,000
Cash in hand 400 50 20,000
Exchange gain (bal. fig.) 4,66,800
2,19,200 2,19,200 1,03,64,800 1,03,64,800

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(b) Trading and Profit and Loss Account of Virginia Branch

To Purchases 43,20,000 By Closing stock 10,75,000
To Goods from Head Office 15,80,000 (21,500 US $ × 50)
To Carriage inward 18,000
To Gross profit c/d 15,92,200
85,63,000 85,63,000
To Salaries 1,62,000 By Gross profit b/d 15,92,200
To Rent, rates and taxes 36,000
To Insurance 18,000
To Trade expenses 18,000
To Depreciation on office equipment 2,40,000
To Depreciation on furniture
and fixtures 16,000
To Net Profit c/d
11,02,200 .
15,92,200 15,92,200
Balance Sheet of Virginia Branch
as on 31st March 2012
Liabilities Assets
Head Office A/c 20,50,000 Office Equipment 24,00,000
Add : Net profit 11,02,200 31,52,200 Less : Depreciation (2,40,000) 21,60,000
Foreign Currency Translation Reserve 4,66,800 Furniture and fixtures 1,60,000
Trade creditors 3,40,000 Less : Depreciation (16,000) 1,44,000
Outstanding salaries 20,000 Closing stock 10,75,000
Trade debtors 4,80,000
Cash in hand 20,000
. Cash at bank 1,00,000
39,79,000 39,79,000

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Question 13—
DM Delhi has a branch in London which is an integral foreign operation of DM. At the end of the year 31st
March, 2011, the branch furnishes the following trial balance in U.K. Pound:
Particulars £ £
Dr. Cr.
Fixed assets (Acquired on 1 April, 2007)
st
24,000
Stock as on 1 April, 2010
st
11,200
Goods from head Office 64,000
Expenses 4,800
Debtors 4,800
Creditors 3,200
Cash at bank 1,200
Head Office Account 22,800
Purchases 12,000
Sales . 96,000
1,22,000 1,22,000
In head office books, the branch account stood as shown below:
London Branch A/c
To Balance B/d 20,10,000 By Bank A/c 52,16,000

To Goods sent to branch 49,26,000 By Balance C/d 17,20,000
69,36,000 69,36,000
The following further information is given:
(a) Fixed assets are to be depreciated @ 10% p.a. on WDV.
(b) On 31st March, 2010:
Expenses outstanding - £ 400
Prepaid expenses - £ 200
Closing stock - £ 8,000
(c) Rate of Exchange:
1st April, 2007 - 70 to £ 1
st April, 2010 - 76 to £ 1
31st March, 2011 - 77 to £ 1
Average - 75 to £ 1
You are required to prepare:
(1) Trial balance, incorporating adjustments of outstanding and prepaid expenses, converting U.K.
pound into Indian rupees.
(2) Trading and profit and loss account for the year ended 31st March, 2011 and the Balance Sheet as
on that date of London branch as would appear in the books of Delhi head office of DM..

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Answer—
Trial Balance of London Branch as on 31st March, 2011
Particulars U.K. Rate per
Pound U.K. Pound Dr. ( ) Cr. ( )
Fixed Assets 24,000 70 16,80,000
Stock (as on 1st April, 2010) 11,200 76 8,51,200
Goods from Head Office 64,000 - 49,26,000
Sales 96,000 75 72,00,000
Purchases 12,000 75 9,00,000
Expenses (4,800 + 400 - 200) 5,000 75 3,75,000
Debtors 4,800 77 3,69,600
Creditors 3,200 77 2,46,400
Outstanding Expenses 400 77 30,800
Prepaid expenses 200 77 15,400
Cash at Bank 1,200 77 92,400
Head office Account – 17,20,000
Difference in Exchange . 12,400
92,09,600 92,09,600
Closing stock will be (8,000 × 77) = 6,16,000
Trading and Profit & Loss A/c
( ) ( )
To Purchases 9,00,000 By Closing Stock 6,16,000
To Goods from H.O. 49,26,000
To Gross Profit 11,38,800 .
78,16,000 78,16,000
To Expenses 3,75,000 By Gross Profit 11,38,800

To Depreciation 1,68,000 By Profit due to Exchange difference 12,400
11,51,200 11,51,200

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Balance Sheet as on 31st March, 2011
Liabilities Assets
Head office Fixed Assets 16,80,000
Balance 17,20,000 Less: Depreciation (1,68,000) 15,12,000
Add: Net Profit 6,08,200 23,28,200 Debtors 3,69,600
Outstanding 30,800 Cash at bank 92,400
expenses Prepaid
Creditors 2,46,400 expenses 15,400
. Closing stock 6,16,000
26,05,400 26,05,400
Working Note:
Since London Branch is an integral foreign operation. Hence,
(1) Fixed assets (cost and depreciation) are translated using the exchange rate at the date of purchase of
the assets.
(2) Exchange difference arising on translation of the financial statement is charged to Profit and Loss
Account.

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Question 14—
ABCD Ltd., Delhi has a branch in New York, USA, which is an integral foreign operation of the company.
At the end of 31st March, 2013, the following ledger balances have been extracted from the books of the
Delhi office and the New York Branch :
Delhi ( thousand) New York ($ thousands)

Debit Credit Debit Credit
Share Capital 1,250
Reserves and Surplus 940
Land 475
Building (cost) 1,000
Buidings Derecitaion Reserve 200
Plant & Machinery (Cost) 2,000 100
Plant & Machinery Dep. Reserve 500 20
Trade Receivables/Payables 500 270 60 20
Stock (01.04.2012) 250 25
Branch Stock Reserve 65
Cash & Bank Balances 125 4
Purchases/Sales 275 600 25 125
Goods sent to Branch 1,500 30
Managing Director's Salary 50
Wages & Salary 100 18
Rent 6
Office Expenses 25 12
Commiossion receipts 275 100
Branch/H.O. Current A/c 800 15
5,600 5,600 280 280

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The following information is also available:
(1) Stock as at 31-03-2013
Delhi - 2,00,000
New York - $ 10 (all stock received from Delhi)
(2) Head Office always sent goods to the Branch at cost plus 25%.
(3) Provision is to be made for doubtful debts at 5%.
(4) Depreciation is to be provided on Buildings at 10% and on Plant and Machinery at 20% on written
down values.
You are required:
(a) To convert the branch Trial Balance into rupees, using the following rates of exchange: Exchange:
Opening rate 1$= 50
Closing rate 1$= 55
Average rate 1$= 52
For fixed assets 1$= 45
(b) To prepare the Trading and Profit & Loss Account for the year ended 31st March, 2013, showing to
the extent possible, Head Office results and Branch results separately.

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Answer—
ABCD Ltd.
New York Branch Trial Balance As on 31st March 2013
$ thousand) ( ' 000)
Debit Credit Conversion Dr. Cr.

per $
Plant & Machinery (cost) 100 45 4,500
Plant & Machinery Dep. Reserve 20 45 900
Trade receivable/payable 60 20 55 3,300 1,100
Stock (1.4.2012) 25 50 1,250
Cash & Bank 4 55 220
Purchases/Sales 25 125 52 1,300 6,500
Goods received from H.O. 30 Actual 1,500
Wages & Salaries 18 52 936
Rent 6 52 312
Office Expenses 12 52 624
Commission Receipts 100 52 5,200
H.O. Current A/c 15 Actual 800
13,942 14,500
Exchange loss (bal. fig.) 558
280 280 14,500 14,500
Closing stock 0.010 55 0.55

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Working Notes:
(1) Calculation of Depreciation—
H.O. ' 000 Branch 200
Building – Cost 1,000
Less: Dep. Reserve (200)
800
Depreciation @ 10% (A) 80
Plant & Machinery 2,000 4,500
Less: Dep. Reserve (500) (900)
1,500 3,600
Depreciation @ 20% (B) 300 720
Total Depreciation (A + B) 380 720
(2) Calculation of Additional Branch Stock Reserve
( ' 000)
Closing stock of Branch 0.55
Reserve on closing stock (0.55×1/5) 0.11
Less: Branch Stock Reserve (as on 1.4.2012) (65)
Reversal of Stock Reserve (64.89)
******************

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Accounts from Incomplete Record 14.1
CHAPTER — 14
ACCOUNTS FROM INCOMPLETE
RECORDS
MEANING OF INCOMPLETE RECORD: —
When complete set of books of accounts is not available as per double entry system, then the books
are known as incomplete records.
• It will have following two reasons
Books of accounts are Books of accounting are maintained

maintained by single by double entry system but presently
entry system unavailable due to:-
Loss of books by natural calamities.
Loss of books by fire.
Loss of books by delft.
 Books of Accounts are seized by govt.,
etc.

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PRACTICALLY COVERED TOPIC BY INCOMPLETE RECORDS

DETERMINATION OF PROFIT OR LOSS BY INCOMPLETE RECORDS
By preparing statement By conversion method

of profit or loss
In this method all the information is
Prepare opening & Closing converted into double entry books
statement of Affair of accounts and there after
final account is to be prepared
Thereafter, prepare statement of profit and loss in following manner.
STATEMENT OF PROFIT/LOSS
Closing balance of capital as per Closing SOA XX
Add: Item deducted from capital
(i) Drawings XX
(ii) Interest on drawings, etc XX
XX
Add: Unrecorded Income XX
Less: Item added to capital
(i) Additional capital XX
(ii) Interest on capital XX
(iii) Bonus/Salary/Commission to partner etc. XX
XX
Less: Unrecorded losses/expenses XX
Less: Opening Balance of capital as per opening SOA XX
CURRENT PERIOD PROFIT/LOSS XX

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Questions & Answers
Question 1—
If both the sides of a cash book are not tallied i.e. debit side exceeds credit side then
what are the possible items for recording the difference?
Answer:
If debit side exceeds credit side then the difference may be any of the following item:
(i) Closing cash balance or bank balance; or
(ii) Opening bank overdraft;
(iii) Cash purchase; or
(iv) Bills Payable discharged; or
(v) payment to creditors; or
(vi) Drawings; or
(vii) Purchase of fixed assets; or
(viii) Sundry expense
(ix) Cash embezzlement by cashier.
Question 2—
On 1st April, 2008, Chhotu started business with an initial Capital of Rs. 70,000. On
1st October, 2008, he introduced additional capital of Rs.40,000. On 7th of every
month, he withdraws Rs.5,000 for household expenses. On 31st March, 2009 his
Assets and Liabilities were Rs.2,00,000 and Rs.70,000 respectively.
Ascertain the profit earned by Chhotu during the year ended 31st March, 2009.
Answer—
( Rs.)
Capital as on 31.3.2009 (Rs.2,00,000- Rs. 70,000) 1, 30,000
Add: Drawings (Rs.5,000 x 12 months) 60,000
1,90,000
Less: Additional capital introduced as on 1.10.2008 (40,000)
1,50,000
Less: Capital on 01.04.2008 (70,000)
Profit for the year ended as on 31.3.2009 80,000

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Question 3—
The details of Assets and Liabilities of Mr. 'A' as on 31-3-2012 and 31-3-2013 are
as follows:
31.3.2012 31.3.2013
Assets:
Furniture 50,000
Building 1,00,000
Stock 1,00,000 2,50,000
Sundry Debtors 60,000 1,10,000
Cash in hand 11,200 13,200
Cash at Bank 60,000 75,000
Liabilities :
Loans 90,000 70,000
Sundry Creditors 50,000 80,000
Mr. 'A' decided to provide depreciation on building by 2.5% and furniture by 10% for the period ended on
31-3-2013. Mr. 'A' purchased jewellery for 24,000 for his daughter in December 2012. He sold his car on
30-3-2013 and the amount of 40,000 is retained in the business. You are required to :
(i) Prepare statement of affairs as on 31-3-2012 and 31-3-2013.
(ii) Calculate the profit received by 'A' during the year ended 31-3-2013.
Answer—
(i) Statement of Affairs
Liabilities 31.3.12 ( ) 31.3.13 ( ) Assets 31.3.12 ( ) 31.3.13 ( )
Loans 90,000 70,000 Furniture 50,000 45,000
Creditors 50,000 80,000 Building 1,00,000 97,500
Capital A/c 2,41,200 4,40,700 Stock 1,00,000 2,50,000
Debtors 60,000 1,10,000
Cash in hand 11,200 13,200
Cash at bank 60,000 75,000
3,81,200 5,90,700 3,81,200 5,90,700

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Working Notes:
Dep. on Building 2,500 (2.5% of 1,00,000)
Dep. on Furniture 5,000 (10% of 50,000)
Capital A/c
To Drawings 24,000 By Balance b/d 2,41,200

To Balance c/d 4,40,700 By P & L A/c (Bal. figure) 1,83,500
. By Cash 40,000
4,64,700 4,64,700
Question 4—
Find out the profit of Mr. A from the following information:
Capital at the beginning of the year Rs. 20,00,000
Drawings made by Mr. A Rs. 2,00,000
Capital at the end of the year Rs. 25,00,000
Additional capital introduced during the year Rs. 1,00,000
Answer—
Statement showing profit earned during the year
Rs.
Capital at the end of the year 25,00,000
Add: Drawings 2,00,000
27,00,000
Less: Additional Capital (1,00,000)
26,00,000
Less: Capital at the beginning of the year (20,00,000)
Profit earned during the year 6,00,000

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Question 5—
(a)A, B and C run a business sharing profits and losses in proportion of 2:2:1. On 1st January, 2008 their
respective capitals were Rs.96,000, Rs.90,000 and Rs.84,000.
On 30th June, 2008 the following was the position:
(Rs. 000)
Creditors 30,000
Furniture 9,000
Book debts 1,80,000
Stock 90,000
Cash in hand and at bank 36,000
The drawings of the partners respectively were Rs. 12,000 Rs.9, 000 and Rs. 6, 000 during the half-year.
Each partner is entitled to ·an interest at the rate of 5% p.a. on capital. Interest on drawings was calculated
as Rs.600 for A, Rs.450 in case of Band Rs.300 in case of C.
(i) A statement of affair as on 30th June, 2008.
(ii)Calculate the profits for the half-year ending on 30th June, 2008 and allocate the same amongst the
partners. Also calculate capital of each partner as on 30th June, 2008.
Answer—
(a) (i) Statement of Affairs of A, B & C As on 30th June, 2008
Liabilities Rs. Assets Rs.

Capital (Bal. Fig.) 2,85,000 Furniture 9,000
Creditors 30,000 Stock 90,000
Book debts 1,80,000
Cash in hand. and at bank 36,000
3,15,000 3,15,000
(ii)Statement showing Profit and Loss of Partners A,B and C for six months ending
on 30th Jund 2008
Particulars Rs.
Capital as on 30th June, 2008 2,85,000
Add: Drawings of A, B and C (Rs. 12,000 + Rs. 9,000 + Rs. 6,000) 27,000
Add: Interest on drawings of A, B and C (Rs. 600 + Rs. 450 + Rs. 300) 1,350
Less: Interest on capital of A, B and C (Rs. 2,400+Rs.2,250+Rs.2,1 00) 3,13,350
(6,750)
3,06,600
Less. Capital as on 1st January, 2008 of A, Band C (Rs.96,000 + Rs.90;000 + (2,70,000)
Rs.84,000)
Ne t Profit 36,600

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Statement showing allocation of profits and other adjustments in the capital accounts of A, B and C.
Particulars Rs. Rs. Rs.

Capital as on 1st January, 2008 96,000 90,000 84,000
Add: Net profit in the ratio of 2:2:1 14,640 14,640 7,320
Add: Interest capital @ 5% p.a. for 6 months 2,400 2,250 2,100
1,13,040 1,06,890 93,420
Less: Drawings (12,000) (9,000) (6,000)
Less: Interest on drawings (600) (450) (300)
Capital as on 30 th June , 2008 1,00,440 97,440 87,120
Question 6—
The closing capital of Mr. B as on 31.3.2010 was 4,00,000. On 1.4.2009 his capital was 3,50,000. His
net profit for the year ended 31.3.2010 was 1,00,000. He introduced 30,000 as additional capital
in February, 2010. Find out the amount drawn by Mr. B for his domestic expenses.
Answer—
Computation of drawings during the year
Opening capital as on 01.04.2009 3,50,000

Add: Net profit 1,00,000
4,50,000
Add: Additional capital introduced in February, 2010 30,000
4,80,000
Less: Closing capital as on 31.3.2010 (4,00,000)
Drawings by Mr. 'B' during the year 2009 - 2010 80,000

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Question 7—
Lokesh, who keeps books by single entry, had submitted his Income -tax returns to Income-tax authorities
showing his incomes to be as follows:
Year ending March 31, 2005 = 33,075

The Income-tax officer is not satisfied as to the accuracy of the incomes returned. You are appointed as a
consultant to assist in establishing correctness of the incomes returned and for that purpose you are given the
following information:
(a) Business liabilities and assets at March 31, 2004 were:
Creditors: 32,940, Furniture & Fittings: 22,500, Stock : 24,390 (at selling price which is 25%
above cost), Debtors: 11,025, Cash at Bank and in hand 15,615.
(b) Lokesh owed his brother 18,000 on March 31, 2004. On February 15, 2007 he repaid this amount
and on April 1, 2009, he lent his brother 13,500.
(c) Lokesh owns a house which he purchased in 1999 for 90,000 and a car which he purchased in
October, 2005 for 33,750. In January, 2009, he bought debentures in X Ltd. having face value of
40,000 for 33,750.
(d) In May, 2009 a sum of 13,500 was stolen from his house.
(e) Lokesh estimates that his living expenses have been 2004 -05 – 13,500; 2005-06 – 18,000; 2006-
07 – 27,000; 2007-08, 2008-09 and 2009-10 – 31,500 p.a. exclusive of the amount stolen.
(f) On March 31, 2010 business liabilities and assets were: Creditors 37,800, Furniture, Fixtures and
Fittings 40,500, Stock 54,330 (at selling price with a gross profit of 25%), Debtors 26,640,
Cash-in-Hand and at Bank 29,025.
From the information submitted, prepare statements showing whether or not the incomes declared by Lokesh
are correct.
Answer—
Statement of Affairs of 'Lokesh'
as on March 31, 2004
Liabilities Assets
Creditors 32,940 Furniture, Fixtures & Fittings 22,500
Loan from brother 18,000 Stock (24,390 x 100/125) 19,512
Capital (Bal. fig.) 1,07,712 Debtors 11,025
Cash-in-Hand and at Bank 15,615
Building (House) 90,000
1,58,652 1,58,652

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Statement of Affairs of 'Lokesh' as on March, 31, 2010
Liabilities Assets
Creditors 37,800 Furniture, Fixtures & Fittings 40,500
Capital (Bal. fig.) 2,70,112 Stock (54,330 x 75%) 40,747
Debtors 26,640
Cash-in-Hand and at Bank 29,025
Loan to Brother 13,500
Building (House) 90,000
Car 33,750
. Debentures in 'X Ltd.' 33,750
3,07,912 3,07,912
Statement of Profit:—
Particulars
Capital as on March 31, 2010 2,70,112
Add: Drawings
2004-05 13,500
2005-06 18,000
2006-07 27,000
2007-08 31,500
2008-09 31,500
2009-10 31,500 1,53,000
4,23,112
Add: Amount stolen in May, 2009 13,500
4,36,612
Less: Opening Capital as on March 31, 2004 1,07,712
3,28,900
Less: Profit as shown by I.T.O.
For the year ending March 31, 2005 33,075
For the year ending march 31, 2008 61,875
For the year ending March 31, 2010 41,670 2,59,965
Understatement of Income 68,935
Note : In the absence of the information regarding depreciation in the question, no depreciation has been
provided on Building (house) and Car. The candidates may assume any appropriate rate of
depreciation and can provide depreciation.

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Question 8—
M/s Ice Limited gives you the following information to find out Total Sales and Total
Purchases:
Particulars Amount ( )
Debtors as on 01.04.2011 70,000
Creditors as on 01.04.2011 81,000
Bills Receivables received during the year 47,000
Bills Payable issued during the year 53,000
Cash received from customers 1,56,000
Cash paid to suppliers 1,72,000
Bad Debts recovered 16,000
Bills Receivables endorsed to creditors 27,000
Bills Receivables dishonoured by customers 5,000
Discount allowed by suppliers 7,000
Discount allowed to customers 9,000
Endorsed Bills Receivables dishonoured 3,000
Sales Return 11,000
Bills Receivable discounted 8,000
Discounted Bills Receivable dishonoured 2,000
Cash Sales 1,68,500
Cash Purchases 1,97,800
Debtors as on 31.03.2012 82,000
Creditors as on 31.03.2012 95,000
Answer—
1. Total Sales = Cash sales + Credit sales
= 1,68,500 + 2,25,000 (W.N.1)
= 3,93,500
2. Total Purchases = Cash Purchases + Credit Purchases
= 1,97,800 + 2,70,000 (W.N.2)
= 4,67,800

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Working Notes:
1. Debtors Account
Particulars Particulars
To Balance b/d 70,000 By Bills receivable 47,000
To Bills receivable dishonoured 5,000 By Cash 1,56,000
To Bills receivable dishonoured (endorsed) 3,000 By Discount allowed 9,000
To Bills receivable dishonoured(discounted) 2,000 By Sales return 11,000
To Credit sales (bal.fig.) 2,25,000 By Balance c/d 82,000
3,05,000 3,05,000
2. Creditors Account
To Bills payable 53,000 By Balance b/d 81,000
To Cash 1,72,000 By Bills receivable dishonoured 3,000
To Discount received 7,000 (endorsed)
To Bills receivable endorsed 27,000 By Credit purchases (bal.fig.) 2,70,000
To Balance c/d 95,000 .
3,54,000 3,54,000
Note: It is assumed that Sales return is at of Credit sales only.
Question 9—
Lucky does not maintain proper books of accounts. However, he maintains a record of his bank transactions
and also is able to give the following information from which you are requested to prepare his final accounts
for the year 2011:
1.1.2011 31.12.2011
Debtors 1,02,500 –
Creditors – 46,000
Stock 50,000 62,500
Bank Balance – 50,000
Fixed Assets 7,500 9,000
Details of his bank transactions were as follows:
Received from debtors 3,40,000

Additional capital brought in 5,000
Sale of fixed assets (book value 2,500) 1,750
Paid to creditors 2,80,000
Expenses paid 49,250
Personal drawings 25,000
Purchase of fixed assets 5,000
No cash transactions took place during the year. Goods are sold at cost plus 25%. Cost of goods sold was
2,60,000.

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Answer—
Trading and Profit and Loss Account
for the year ended 31st December, 2011
Amount Amount
To Opening stock 50,000 By Sales ( 2,60,000 × 125/100) 3,25,000

To Purchases (balancing figure) 2,72,500 By Closing stock 62,500
To Gross profit c/d
( 2,60,000 × 25/100) 65,000
3,87,500 3,87,500
To Expenses 49,250 By Gross profit b/d 65,000
To Loss on sale of fixed assets 750
To Depreciation on fixed assets (W.N.1) 1,000
To Net profit 14,000 .
65,000 65,000
Balance Sheet as on 31 st
December, 2011
Amount Amount
Liabilities Assets
Capital (W.N. 5) 1,69,000 Fixed Assets 9,000
Add: Additional capital 5,000 Debtors (W.N. 3) 87,500
Net profit 14,000 Stock 62,500
1,88,000 Bank Balance 50,000
Less: Drawings (25,000) 1,63,000
Creditors 46,000 .
2,09,000 2,09,000
Working Notes:
1. Fixed Assets Account
To Balance b/d 7,500 By Bank (Sale) 1,750

To Bank 5,000 By Loss on sale of fixed assets (2,500 – 1,750) 750
By Depreciation (balancing figure) 1,000
12,500 12,500

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2. Bank Account
To Balance b/d 62,500 By Creditors 2,80,000

To Debtors 3,40,000 By Expenses 49,500
To Capital 5,000 By Drawings 25,000
To Sale of fixed assets 1,750 By Fixed assets 5,000
4,09,250 4,09,250
3. Debtors Account
To Balance b/d 1,02,500 By Bank 3,40,000

To Sales 3,25,000 By Balance c/d (Bal. figure) 87,500
125
( 2,60,000  ) 4,27,500 4,27,500]
100
To Bank 2,80,000 By Balance b/d (balancing figure) 53,500

To Balance c/d 46,000 By Purchases (from trading account) 2,72,500
3,26,000 3,26,000
5. Balance Sheet as on 1st January , 2011
Liabilities Assets
Creditors (W.N. 4) 53,500 Fixed assets 7,500
Capital (balanceing figure) 1,69,000 Debtors 1,02,500
Stock 50,000
. Bank balance (W.N. 2) 62,500
2,22,500 2,22,500

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Question 10—
From the following furnished by Shri Ramji, prepare Trading and Profit and Loss account for the year ended
31.3.2011. Also draft his Balance Sheet as at 31.3.2011:
1.4.2010 31.3.2011
Creditors 3,15,400 2,48,000

Expenses outstanding 12,000 6,600
Fixed assets (includes machinery) 2,32,200 2,40,800
Stock in hand 1,60,800 2,22,400
Cash in hand 59,200 24,000
Cash at bank 80,000 1,37,600
Sundry debtors 3,30,600 ?
Details of the year's transactions are as follows:
Cash and discount credited to debtors 12,80,000
Returns from debtors 29,000
Bad debts 8,400
Sales (Both cash and credit) 14,36,200
Discount allowed by creditors 14,000
Returns to creditors 8,000
Capital introduced by cheque 1,70,000
Collection from debtors (Deposited into bank after receiving cash) 12,50,000
Cash purchases 20,600
Expenses paid by cash 1,91,400
Drawings by cheque 8,600
Machinery acquired by cheque 63,600
Cash deposited into bank 1,00,000
Cash withdrawn from bank 1,84,800
Cash sales 92,000
Payment to creditors by cheque 12,05,400
Note : Ramji has not sold any Fixed Asset during the year.

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Answer—
In the books of Shri Ramji
Trading and Profit and Loss Account for the year ended 31st March, 2011
To Opening Stock 1,60,800 By Sales:
To Purchases: Cash 92,000
Cash 20,600 Credit 13,44,200
Credit (W.N. 3) 11,60,000 14,36,200
Less: Returns 8,000 11,72,600 Less : Returns (29,000) 14,07,000
To Gross profitc/d 2,96,200 By Closing stock 2,22,400
16,29,600 16,29,600
To Discount allowed 30,000 By Gross profit b/d 2,96,200
To Bad debts 8,400 By Discount 14,000
To General Exp. 1,86,000

(W.N.4)
To Depreciation 55,000
(W.N.4)
3,10,200 3,10,200
Balance Sheet as at 31st March, 2011
Liabilities Assets
Capital (W.N. 1) 5,35,400 Sundry Assets 2,32,200
Add: Additional cap. 1,70,000 Add: New machinery 63,600
Net Profit 30,800 2,95,800
7,36,200 Less: Depreciation 55,000 2,40,800
Less: Drawings (8,600) 7,27,600 Stock in trade 2,22,400
Sundry Creditors 2,48,000 Sundry debtors (W.N.2) 3,57,400
Expenses outstanding 6,600 Cash in hand 24,000
Cash in Bank 1,37,600
9,82,200 9,82,200

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Working Notes:
1. Statement of Affairs as at 31st March, 2010
Liabilities Assets
Sundry creditors 3,15,400 Sundry assets 2,32,200
Outstanding Expenses 12,000 Stock 1,60,800
Ramji's Capital Debtors 3,30,600
(Balancing figure) 5,35,400 Cash in hand 59,200
. Cash at Bank 80,000
8,62,800 8,62,800
2. Sundry Debtors Account
To Balance 3,30,600 By Cash 12,50,000

To Sales (14,36,200 – 92,000) 13,44,200 By Discount 30,000
By Returns (sales) 29,000
By Bad Debts 8,400
. By Balance c/d (Bal. Fig.) 3,57,400
16,74,800 16,74,800
3. Sundry Creditors Account
To Bank – Payments 12,05,400 By Cash 3,15,400

To Discount 14,000 By Purchases credit 11,60,000
To Returns 8,000 (Bal. Figure)
To Balance c/d (Closing balance)2,48,000 .
14,75,400 14,75,400
4. Depreciation on Fixed Assets:
Opening Balance 2,32,200
Add: Additions 63,600
2,95,800
Less: Closing balance (2,40,800)
Depreciation 55,000
5. Expenses to be shown in profit and loss account
Expenses (in cash) 1,91,400
Add: Outstanding of 2011 6,600
1,98,000
Less: Outstanding of 2010 12,000
1,86,000

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6. Cash and Bank Account
Liabilitie s As s e ts
To Balance b/d 59,200 80,000 By Purchases 20,600 –
To C apital 1,70,000 By Expenses 1,91,400
To Debtors 12,50,000 By Plant and M achinery 63,600
To Bank 1,84,800 By Drawings 8,600
To C ash 1,00,000 By C reditors 12,05,400
To Sales 92,000 By C ash 1,84,800
By Bank 1,00,000
By Balance c/d 24,000 1,37,600
3,36,000 16,00,000 3,36,000 16,00,000

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Question11—
Mr. X runs a retail business. Suddenly he finds on 31.3.2011 that his Cash and Bank
balances have reduced considerably. He provides you the following information:
(i) Balances 31.3.2010 31.3.2011
Sundry Debtors 35,400 58,800

Cash at Bank 1,08,400 2,500
Cash in Hand 10,400 500
Rent (Outstanding for one month) 2,400 3,000
Stock 11,400 20,000
Electricity and Telephone bills-outstanding -- 6,400
(ii) Bank Pass-book reveals the following
Total Deposits 10,34,000
Withdrawals:
Creditors 8,90,000
Professional charges 34,000
Furniture and Fixtures (acquired on 1.10.10) 54,000
Proprietor's drawings 1,61,900
(iii) Rent has been increased from January, 2011.
(iv) Mr. X deposited all cash sales and collections from debtors after meeting wages, shop expenses,
rent, electricity and telephone charges.
(v) Mr. X made all purchases on credit.
(vi) His credit sales during the year amounts to 9,00,000.
(vii) He incurred 6,500 per month towards salary.
(viii) He incurred following expenses:
(a) Electricity and telephone charges 24,000 (paid)
(b) Shop expenses 18,000 (paid).
(ix) Charge depreciation on furniture and fixtures @10% p.a.
Finalise the accounts of Mr. X and compute his profit for the year ended 31.3.2011. Prepare his statement of
affairs and reconcile the profit and capital balance.

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Answer—
Trading and profit and Loss Account of Mr. X
For the year ended 31st March, 2011
To Opening Stock 11,400 By Sales:

To Purchases 8,28,000 Cash 2,97,500
To Gross Profit 3,78,100 Credit 9,00,000 11,97,500
. By Closing Stock 20,000
12,17,500 12,17,500
To Salary 78,000 By Gross Profit 3,78,100
To Rent* 30,600
To Electricity & Telephone** 30,400
To Professional Charges 34,000
To Shop Expenses 18,000
10 1
( 54,000   )
100 2
3,78,100 3,78,100
* Rent Paid 30,000

Less: Outstanding on 1.4.2010 (2,400)
27,600
Add: Outstanding on 31.3.2011 3,000
** Electricity & Telephone charges paid 24,000

Add: Outstanding on 31.3.2011 6,400
30,400

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Statement of Affairs of Mr. X as on 31.03.2010 & 31.3.2011
Liabilities 31.3.201 31.3.20 Assets 31.3.201 31.3.201
Capital Account Furniture – 51,300
(Bal. Figure) 78,800 1,01,300 Stock 11,400 20,000
Sundry Creditors 84,400 22,400 Sundry Debtors 35,400 58,800
Outstanding Exp. Bank 1,08,400 2,500
Rent 2,400 3,000 Cash 10,400 500
Electricity & Telephone 6,400
1,65,600 1,33,100 1,65,600 1,33100

Reconciliation of Profit
Capital on 31.3.2011 1,01,300

Add: Drawings 1,61,900
2,63,200
Less: Opening Capital on 1.4.2010 (78,800)
Profit for the year 1,84,400
Working Notes:
1. Total Debtors Account
To Balance b/d 35,400 By Cash (Balancing Figure) 8,76,600

To Credit Sales 9,00,000 By Balance c/d 58,800
9,35,400 9,35,400
2. Total Creditors Account
To Bank 8,90,000 By Balance b/d 84,400

To Balance c/d 22,400 By Credit Purchases 8,28,000
9,12,400 9,12,400

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3. Cash Account
Liabilities Cash ( ) Bank ( ) Assets Cash ( ) Bank ( )
To Balance b/d 10,400 1,08,400 By Bank 10,34,000 –
To Sundry Debtors 8,76,600 – By Wages 78,000 –
To Cash Sales 2,97,500 – By Rent 30,000 –
(Balancing Fig.) – By Electricity & Tel.e. 24,000 –
To Cash A/c (conta) – 10,34,000 By Shop expenses 18,000 –
By Professional – 34,000
Charges
By Sundry Creditors – 8,90,000
By Furniture – 54,000
By Drawings A/c – 1,61,900
By Balance c/d 500 2,500
11,84,500 11,42,400 11,84,500 11,42,400

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Question 12—
The following is the Balance Sheet of Sri Agni Dev as on 31st March, 2010:
Liabilities Assets
Capital Account 2,52,500 Machinery 1,20,000
Sundry Creditors for purchases 45,000 Furniture 20,000
Stock 33,000
Debtors 1,00,000
Cash in hand 8,000
. Cash at Bank 16,500
2,97,500 2,97,500
Riots occurred and fire broke out on the evening of 31st March, 2 011, destroying the books of account and
Furniture. The cashier was grievously hurt and the cash available in the cash box was stolen.
The trader gives you the following information:
(i) Sales are effected as 25% for cash and the balance on credit. His total sales for the year ended 31st
March, 2011 were 20% higher than the previous year. All the sales and purchases of goods were
evenly spread throughout the year (as also in the last year).
(ii) Terms of credit
Debtors 2 Months
Creditors 1 Month
(iii) Stock level was maintained at 33,000 all throughout the year.
(iv) A steady Gross Profit rate of 25% on the turnover was maintained throughout. Creditors are paid by
cheque only, except for cash purchase of 50,000.
(v) His private records and the Bank Pass-book disclosed the following transactions for the year.
(i) Miscellaneous Business expenses 1,57,500 (including 5,000 paid by cheque
and 7,500 was outstanding as on 31st March, 2011)
(ii) Repairs 3,500 (paid by cash)
(iii) Addition to Machinery 60,000 (paid by cheque)
(iv) Private drawings 30,000 (paid by cash)
(v) Travelling expenses 18,000 (paid by cash)
(vi) Introduction of additional capital 5,000
by depositing in to the Bank
(vi) Collection from debtors were all through cheques.
(vii) Depreciation on Machinery is to be provided @ 15% on the Closing Book Value.
(viii) The Cash stolen is to be charged to the Profit and Loss Account.
(ix) Loss of furniture is to be adjusted from the Capital Account.
Prepare Trading, Profit and Loss Account for the year ended 31st March, 2011 and a Balance Sheet as on
that date. Make appropriate assumptions whenever necessary. All workings should form part of your
answer.

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Answer—
Trading and Profit and Loss Account of Sri. Agni Dev

To Purchases 7,20,000 By Closing Stock 33,000
9,93,000 9,93,000
To Business Expenses 1,57,500 By Gross Profit b/d 2,40,000
To Repairs 3,500
To Travelling Expenses 18,000
To Loss by theft 1,500
To Net Profit 32,500 .
2,40,000 2,40,000
Balance Sheet of Sri Agni Dev as at 31 st
March, 2011
Liabilities Amount Assets Amount ( )

( )
Capital 2,52,500 Machinery 1,20,000
Add: Additional Capital 5,000 Add: additions 60,000
Net Profit 32,500 1,80,000
2,90,000 Less : Deprecition (27,000) 1,53,000
Less: Loss of Furniture (20,000) Stock in Trade 33,000
Drawings (30,000) 2,40,000 Sundry Debtors 1,20,000
Bank Overdraft 2,667
Sundry Creditors 55,833
Outstanding Expenses 7,500
3,06,000 3,06,000

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Working Notes:
1. Sales during 2010-2011
Debtors as on 31st March, 2010 1,00,000
(Being equal to 2 months' sales)
Total credit sales in 2009- 2010, 1,00,000 × 6 6,00,000
Cash Sales, being equal to 1/3rd of credit sales or 1/4th of the total 2,00,000
Sales in 2009- 2010 8,00,000
Increase, 20% as stated in the problem 1,60,000
Total sales during 2010-2011 9,60,000
Cash sales : 1/4th 2,40,000
Credit sales : 3/4th 7,20,000
2. Debtors equal to two months credit sales 1,20,000
3. Purchases
Sales in 2010-2011 9,60,000
Gross Profit @ 25% 2,40,000
Cost of goods sold being purchases 7,20,000
(Since there is no change in stock level)
4. Sundry Creditors for goods
( 7,20,000 - 50,000) /12 = 6,70,000/12 55,833
5. Collections from Debtors
Opening Balance 1,00,000
Add: Credit Sales 7,20,000
8,20,000
Less: Closing Balance (1,20,000)
7,00,000
6. Payment to Creditors
Opening Balance 45,000
Add: Credit Purchases ( 7,20,000 – 50,000) 6,70,000
7,15,000
Less: Closing Balance (55,833)
Payment by cheque 6,59,167

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Particulars Cash Bank Particulars Cash Bank
To Balance b/d 8,000 16,500 By payment to
Credit 50,000 6,59,167
To Collection from Debtors – 7,00,000 By Misc. Exp. 1,45,000 5,000
To Sales 2,40,000 By Repairs 3,500 –
To Additional Capital – 5,000 By Addition to machinery – 60,000
To Balance c/d – 2,667 By Travelling Expenses 18,000 –
(Bank overdraft) By Private Drawings 30,000 –
. . By Balance c/d (lost by theft) 1,500 .
2,48,000 7,24,167 2,48,000 7,24,167
Question 13 —
Mr. Ashok keeps his books in Single Entry system. From the following information, prepare Trading and
Profit & Loss Account for the year ended 31st March, 2011 and the Balance Sheet as on that date:
Assets and Liabilities 31.3.2010 31.3.2011

Outstanding expenses 1,000 500
Fixed Assets 23,000 22,000
Stock 16,000 22,500
Cash in Hand and at Bank 14,000 16,000
Sundry Debtors ? 36,000
Following further details are available for the Current year:
Total receipts from debtors 1,30,000 Cash purchases 2,000

Returns inward 3,000 Fixed Assets purchased and paid by cheque 1,000
Bad Debts 1,000 Drawings by cheques 6,500
Total Sales 1,50,000 Deposited into the bank 10,000
Discount received 1,500 Withdrawn from bank 18,500
Return outwards 1,000 Cash in hand at the end 2,500
Capital introduced Paid to creditors by cheques 1,20,000
(paid into Bank) 15,000 Expenses paid 20,000
Cheques received from Debtors 1,25,000

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Answer—
Trading and Profit and Loss Account for the year ended on 31st March, 2011
Particulars Amount ( ) Amount ( ) Particulars Amount ( )

To Purchases: Cash (W.N. 1) 6,500
Cash 2,000 Credit 1,43,500
Credit (W.N.3) 1,17,500 1,50,000
1,19,500 Less: Returns (3,000) 1,47,000
Less: Returns (1,000) 1,18,500 By Stock 22,500
To Gross Profit c/d 35,000
1,69,500 1,69,500
To Expenses 20,000 By Gross Profit b/d 35,000
Add: O/s at the end 500 By Discount Received 1,500
20,500
Less: O/o at the 1,000 19,500
beginning
To Bad debts 1,000
36,500 36,500

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Balance Sheet as on 31 st
March, 2011
Liabilities Amount ( ) Assets Amount ( )
Cacpital (W.N. 5) 48,500 Fixed Assets 23,000
Add: Additional Add: Purchased during 1000

the year
Capital 15,000 Less: Depreciation (2,000) 22,000
Add: Net Profit 14,000 Stock 22,500
Less: Drawings (6,500) 71,000 Cash 2,500
Creditors 25,000 Bank 13,500
Outstanding Exp. 500 Debtors 36,000
96,500 96,500
Working Notes:
1. Cash Account
To Balance b/d 4,500 By Purchases 2,000
To Sales (Bal. Fig.) 6,500 By Bank (contra) 10,000
To Debtors 5,000 By Expenses 20,000
To Bank (contra) 18,500 By Balance c/d 2,500
34,500 34,500
2. Bank Account
To Balance b/d (Bal. Fig.) 9,500 By Fixed Assets 1,000
To Capital 15,000 By Drawings 6,500
To Cash (Contra) 10,000 By Cash (contra) 18,500
To Debtors 1,25,000 By Creditors 1,20,000
. By Balabnce c/d 13,500
1,59,500 1,59,500
To Bank 1,20,000 By Balance b/d 30,000
To Returns 1,000 By Purchases (Bal. Fig.) 1,17,500
To Discount received 1,500
To Balance c/d 25,000 .
1,47,500 1,47,500

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4. Debtors Account
To Balance b/d 26,500 By Cash 5,000
To Sales 1,43,500 By Bank 1,25,000
By Bad Debts 1,000
By Returns 3,000
1,70,000 1,70,000
5. Opening Balance Sheet as on 31.3.2010
Liabilities Amount Assets Amount
Creditors 30,000 Fixed Assets 23,000
O/s Expenses 1,000 Stock 16,000
Capital (Bal. Fig.) 48,500 Cash 4,500
Bank (W.N. 2) 9,500
. Debtors (W.N. 4) 26,500
79,500 79,500

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Question 14—
'A' and 'B' are in partnership sharing profits and losses equally. They keep their books by single entry system.
The following balances are available from their books as on 31.3.2010 and 31.3.2011
31.3.2010 31.3.2011
Building 1,50,000 1,50,000

Equipments 2,40,000 2,72,000
Furniture 25,000 25,000
Debtors ? 1,00,000
Creditors 65,000 ?
Stock ? 70,000
Bank Loan 45,000 35,000
Cash 60,000 ?
The transactions during the year ended 31.3.2011 were the following:
Collection from debtors 3,80,000

Payment to creditors 2,50,000
Cash purchases 65,000
Expenses paid 40,000
Drawings by 'A' 30,000
On 1.4.2010 an equipment of book value 20,000 was sold for 15,000. On 1.10.2010, some equipments
were purchased.
Cash sales amounted to 10% of sales.
Credit sales amounted to 4,50,000.
Credit purchases were 80% of total purchases.
The firm sells goods at cost plus 25%.
Discount allowed 5,500 during the year.
Discount earned 4,800 during the year.
Outstanding expenses 3,000 as on 31.3.2011.
Capital of 'A' as on 31.3.2010 was 15,000 more than the capital of 'B', equipments and furniture to be
depreciated at 10% p.a. and building @ 2% p.a.
(i) Trading and Profit and Loss account for the year ended 31.3.2011 and
(ii) The Balance Sheet as on that date.

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Answer—
Trading and Profit and Loss A/c for the year ended 31.3.2011
Amount ( ) Amount ( )
To Opening Stock 1,45,000 By Sales –Cash (W.N. 50,000

(W.N. 3) 10
To Purchases – Cash 65,000 Credit 4,50,000 5,00,000
Credit (Wl.N. 2) 2,60,000 3,25,000 By Closing stock 70,000
5,70,000 5,70,000
By Loss on slae of 5,000 By Gross Profit b/d 1,00,000

equipment
(20,000–15,000) By Discount received 4,800

To Depreciation
Building 3,000
Furniture 2,500
Equipment 24,600 30,100
(W.N. 4)
To Expenses Paid 40,000
Add: Outstanding
expenses 3,000 43,000
To Discount allowed 5,500
To Net Profit to
A's Capital A/c 10,600
B's Capital A/c 10,600 21.200
1,04,800 1,04,800

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Balance Sheet as on 31-3-2011
Liabilities Amount ( ) Asserts Amount ( )
A's Capital 2,80,250 Building 1,50,000
Less: Drawings (30,000) Less: Depreciation (3,000) 1,47,000
2,50,250 Equitpments 2,72,000
Add: Net Profit 10,600 2,60,850 Less: Depreciation (24,600) 2,47,400
B's Capital 2,65,250 Furniture 25,000
Add: Net Profit 10,600 2,75,850 Less: Depreciation (2,500) 22,500
Sundry creditors 70,200 Debtors 1,00,000
(W.N. 5) Stock 70,000
Bank Loan 35,000 Cash Balance (W.N. 8) 58,000
Outstanding Exp. 3,000
6,44,900 6,44,900
Working Notes :
1. Caculation of total sales and cost of goods sold
Cash sales = 10% of total sales
Credit sales = 90% of total sales = 4,50,000
4,50,000
Total sales =  100  5,00,000
90
Cash sales = 10% of 5,00,000 = 50,000
2. Calculation of total purchases and credit purchases
Cash purchases = 65,000
Credit purchases = 80% of total purchases
Cash purchases = 20% of total purchases
65,000
Total Purchases   100  3,25,000
20
Credit purchases = 3,25,000 –65,000 = 2,60,000

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3. Calculation of opening stock
Stock Account
To Balance b/d (Bal. Fig.) 1,45,000 By Cost of goods sold
5,00,000
100 4,00,000
125
To Total Purchases (W.N. 2) 3,25,000 By Balance c/d 70,000
4,70,000 4,70,000
4. Purchase of equipment & depreciation on equipments
Equipment Account
To Balance b/d 2,40,000 By Cash -equipment sold 15,000

To Cash - purchases (Bal. Fig.) 52,000 By Profit and Loss Accounts
( Loss on sale) 5,000
2,92,000 2,92,000
Depreciation on equipment:
@ 10% p.a. on 2,20,000 (i.e. 2,40,000 - 20,000) = 22,000
@ 10% p.a. on 52,000 for 6 months (i.e. during the year) = 2,600
24,600
5. Calculation of closing balance of creditors
Creditors Account
To Cash 2,50,000 By Balance b/d 65,000

To Discount received 4,800 By Credit purchases 2,60,000
To Balance c/d (Bal. Fig.) 70,200 .
3,25,000 3,25,000
6. Calculation of opening balance of debtors
Debtors Account
To Balance b/d (Bal. Fig.) 35,500 By Cash 3,80,000

To Sales (Credit) 4,50,000 By Discount allowed 5,500
4,85,500 4,85,500

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7. Calculation of capital accounts of A & B as on 31.3.2010
Balance Sheet as on 31.3.2010
Liabilities Assets
Combined Capital Accounts of Building 1,50,000
A & B (Bal. Fig.) 5,45,500 Equipments 2,40,000
Creditors 65,000 Furniture 25,000
Bank Loan 45,000 Debtors (W.N.6) 35,500
Stock (W.N.3) 1,45,000
. Cash balance 60,000
6,55,500 6,55,500
Combined Capitals of A & B 5,45,500

Less: Difference in capitals of A and B (15,000)
5,30,500
5,30,500
A's Capital as on 31.3.2010 =  2,65,250  15,000  2,80,250
2
5,30,500
B's Capital as on 31.3.2010   2,65,250
2
8. Cash Account
To Balance b/d 60,000 By Creditors 2,50,000

To Debtors 3,80,000 By Purchases 65,000
To Equipment (Sales) 15,000 By Expenses 40,000
To Cash Sales 50,000 By A's drawings 30,000
By Bank loan paid 10,000
(45,000 – 35,000)
By Equipment purchased 52,000
(W.N.4)
. By Balance c/d (Bal. Fig.) 58,000
5,05,000 5,05,000

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Question 15—
Ram carried on business as retail merchant. He has not maintained regular account books. However, he
always maintained 10,000 in cash and deposited the balance into the bank account. He informs you that he
has sold goods at profit of 25% on sales.
Following information is given to you:
Assets and Liabilities As on 1.4.2010 As on 31.3.2011
Cash in Hand 10,000 10,000
Cash at Bank 50,000 (Cr.) 80,000 (Dr.)
Sundry Debtors 1,00,000 3,50,000
Stock in Trade 2,80,000 ?
Analysis of his bank pass book reveals the following information:
(a) Payment to creditors 7,00,000
(b) Payment for business expenses 1,20,000
(c) Receipts from debtors 7,50,000
(d) Loan from Laxman 1,00,000 taken on 1.10.2010 at 10% per annum
(e) Cash deposited in the bank 1,00,000
He informs you that he paid creditors for goods 20,000 in cash and salaries 40,000 in cash. He has drawn
80,000 in cash for personal expenses. During the year Ram had not introduced any additional capital.
Surplus cash if any, to be taken as cash sales.
Prepare:
(i) Trading and Profit and Loss Account for the year ended 31.3.2011.
(ii) Balance Sheet as at 31st March, 2011.
Answer—
To Opening stock 2,80,000 By Sales

To Purchases 7,70,000 Cash 2,40,000
To Gross Profit @ 25% 3,10,000 Credit 10,00,000 12,40,000
. By Closing Stock (Bal. Fig.) 1,20,000
13,60,000 13,60,000
To Salaries 40,000 By Gross Profit 3,10,000
To Business expenses 1,20,000
To Interest on loan 5,000
(10% of 1,00,000*6/12)
3,10,000 3,10,000

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Balance Sheet as at 31 st
March 2011
Liabilities Assets
Ram's Capital Cash in Hand 10,000
Opening 3,00,000 Cash at Bank 80,000
Add: Net Profit 1,45,000 Sundry Debtors 3,50,000
4,45,000 Stock in trade 1,20,000
Less: Drawings 80,000 3,65,000
Loan from Laxman (including interest due) 1,05,000
Sundry Creditors 90,000 .
5,60,000 5,60,000
Working Notes:
1. Sundry Debtors Account
To Balance b/d 1,00,000 By Bank A/c 7,50,000

To Credit sales (Bal. fig) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000
2. Sundry Creditors Account
To Bank A/c 7,00,000 By Balance b/d 40,000
To Cash 20,000 By Purchases (Bal. Fig.) 7,70,000
To Balacne c/d 90,000 .
8,10,000 8,10,000
Cash Bank Cash Bank
To Balance b/d 10,000 By Balance b/d 50,000
To Sales (bal. Fig.) 2,40,000 By Bank A/c (C) 1,00,000
To Cash (C) 1,00,000 By Salaries 40,000
To Debtors 7,50,000 By Creditors 20,000 7,00,000
To Laxman's Loan 1,00,000 By Drawings 80,000
By Business expenses 1,20,000
By Balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000

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4. Calculation of Ram's Capital on 1 st
April, 2010
Balance Sheet as at 01.04.2010
Liabilities Amount Assets Amount
Ram's Capital (Bal. Fig.) 3,00,000 Cash in hand 10,000
Bank Overdraft 50,000 Sundry Debtors 1,00,000
Sundry Creditors 40,000 Stock in trade 2,80,000
3,90,000 3,90,000

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Question 16—
A sole trader requests you to prepare his Trading and Profit & Loss Account for the year ended 31st
March, 2013 and Balance Sheet as at that date. He provides you the following information:
Statement of Affairs as at 31st March, 2012
Liabilities Assets
Bank Overdraft 4,270 Furniture 96,000
Outstanding Expenses Computer 24,300
Salaries 8,000 Mobile Phone 8,000
Rent 6,000 14,000 Stock 89,500
Bills Payable 22,500 Trade Debtors 55,000
Trade Creditors 52,500 Bills Receivable 15,000
Capital (balancing figure) 1,97,430 Unexpired Insurance 2,400
Stock of Stationery 200
. Cash in Hand 300
Total 2,90,700 Total 2,90,700
He informs you that there has been no addition to or sale of Furniture, Computer and Mobile Phone during the
accounting year 2012-13. The other assets and liabilities on 31st March, 2013 are as follows:
Stock 95,400
Trade Debtors 65,000
Bills Receivable 20,000
Unexpired Insurance 2,500
Cash at Bank 18,000
Cash at Hand 7,230
Salaries Outstanding 8,300
Rent Outstanding 6,000
Bills Payable 26,500
Trade Creditors 76,000
He also provides you the following summary of his cash transactions:
Receipts Payments
Cash Sales 5,09,800 Trade Creditors 3,06,000
Trade Debtors 1,51,900 Bills Payable 80,000
Bills Receivable 65,000 Salaries 99,000
Rent 72,000
Insurance Premium 10,000
Stationery 1,500
Mobile Phone Expenses 9,000
Drawings 1,20,000
It is found prudent to depreciate Furniture @ 5%, Computer @ 10% and Mobile Phone @ 25%. A provision
for bad debts @ 5% on Trade Debtors is also considered desirable.

Mobile : 93514-68666 Phone : 7821821250-53
Answer—
To Purchases (W. N. 3) 4,13,500 Credit (W.N. 1) 2,31,900
To Gross profit c/d (Bal. Fig.) 3,34,100 Cash 5,09,800 7,41,700
By Closing stock 95,400
8,37,100 8,37,100
To Insurance (W.N. 5) 9,900 By Gross profit b/d 3,34,100
To Salaries (W. N. 6) 99,300
To Rent (W.N. 7) 72,000
To Stationery (W.N. 8) 1,450
To Mobile Phone expenses 9,000
To Provision for doubtful 3,250
To debts (5% of 65,000)
To Depreciation:
Furniture 4,800
Computer 2,430
Mobile Phone 2,000 9,230
3,34,100 3,34,100
Balance Sheet as on 31st March, 2013
Liabilities Assets
Capital A/c: Furniture 96,000
Opening Balance 1,97,430 Less: Depreciation (4,800) 91,200
Less: Drawings (1,20,000) Computer 24,300
77,430 Less: Depreciation (2,430) 21,870
Add: Net Profit 1,29,970 2,07,400 Mobile Phone 8,000
Bills Payable 26,500 Less: Depreciation (2,000) 6,000
Trade Creditors 76,000 Trade Debtors 65,000
Outstanding Expenses: Less: Provision for
Salaries 8,300 doubtful debts (3,250) 61,750
Rent 6,000 Bills Receivables 20,000
Closing Stock 95,400
Unexpired Insurance 2,500
Cash at Bank 18,000
. Cash in hand 7,230
3,24,200 3,24,200

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Working Notes:
1. Trade Debtors Account
To Balance b/d 55,000 By Cash /Bank 1,51,900

To Credit Sales (bal. fig.) 2,31,900 By Bills Receivable A/c (W.N.2) 70,000
By Balance c/d (given) 65,000
2,86,900 2,86,900
2. Bills Receivable Account
To Balance b/d 15,000 By Cash/Bank 65,000

To Sundry Debtors (bal. fig.) 70,000 By Bal. c/d (given) 20,000
85,000 85,000
3. Trade Creditors Account
To Bank/Cash 3,06,000 By Bal.b/d 52,500

To Bills Payable A/c 84,000 By Credit Purchases (Bal. Fig.) 4,13,500
To Balance c/d (given) 76,000 .
4,66,000 4,66,000
4. Bills Payable Account
To Cash/Bank A/c 80,000 By Bal. b/d 22,500

To Bal. c/d (given) 26,500 By Sundry Creditors (bal. fig.) 84,000
1,06,500 1,06,500
5. Insurance expenses for the year 2012–2013
Insurance paid during the year 10,000

Add: Unexpired Insurance as on 1.4.2012 2,400
Less: Unexpired insurance as on 31.3.2013 (2,500)
9,900
6. Salaries for the year 2012–2013
Salaries paid during the year 99,000

Add: Salaries outstnding as on 31.03.2013 8,300
Less: Salaries outstanding as on 1.4.2012 1,07,300
Less: Salaries outstanding as on 1.4.2012 8,000
99,300

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7. Rent expenses for the year 2012–2013
Rent paid during the year 72,000

Add: Rent outstanding as on 31.03.2013 6,000
78,000
Less: Rent outstanding as on 1.04.2012 (6,000)
72,000
8. Stationery Expenses for the year 2012–2013
Stock of stationery as on 1.4.2012 200

Add: Stationery purchased during the year 1,500
1,700
Less: Stock of stationery as on 31.3.2013 (250)
1,450
********************

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CA INTERMEDIATE

Unit II OVERVIEW OF ACCOUNTING 3.9– 3.58 50

Chapter 6 ACCOUNTING FOR BONUS ISSUE 6.1 - 6.4 4

Chapter 7 REDEMPTION OF PREFERENCE 7.1 - 7.3 3

Chapter 8 REDEMPTION OF DEBENTURES 8.1 - 8.6 6

Chapter 9 INVESTMENT ACCOUNTS 9.1 – 9.18 18

Chapter 10 INSURANCE CLAIMS FOR LOSS OF 10.1 – 10.22 22

No Option Different Options are Available

3. FACTORS EFFECTING SELECTION OF ACCOUNTING POLICY (MPS)

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5. CHANGE IN ACCOUNTING POLICIES

Selected Policy Need to follow consistently

Change in accounting policies

Only When Disclosures for changes in accounting

1. Required by AS 1. Reason of change

6. FUNDAMENTAL ACCOUNTING ASSUMPTION [CAG]

CONSISTENCY ACCRUAL GOING CONCERN

If followed than no disclosure is required If not followed than disclosure is required

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AS 2 VALUATION OF INVENTORIES (REVISED)

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4. COST OF FINISHED GOODS

Purchase Cost Conversion Cost Any other cost to bring

Fixed Overhead Variable Overhead

Actual production × Fixed overhead recovery rate

Taken on the basis of overhead recovery rate

If actual production is up to normal capacity If actual production is more than normal

Fixed overhead recovery rate Fixed overhead recovery rate

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Note 2 Other Costs

5. METHOD OF COST OR NRV WHICHEVER IS LOWER

Groping Method Individual Item wise basis Method

6. EXCLUSION FROM COST —

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8. VALUATION OF RAW MATERIAL (RM)

In NRV of finished goods is more In NRV of finished goods is less

Raw material is to be valued as Raw material is to be valued at

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AS 3 CASH FLOW STATEMENT

3. LOANS/ADVANCES GIVEN AND INTERESTS EARNED

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5. INVESTMENTS MADE AND DIVIDENDS EARNED

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11. INTEREST AND DIVIDENDS

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AS 10 PROPERTY PLANT & EQUIPMENT (REVISED)

AS 6 Accounting for Depreciation AS 10 Accounting for Fixed Asset (Old)

Introduced AS 10 (revised) Property, Plant and Equipment (PPE)

To bring uniformity with lnd. AS 16 and IFRS

Note 1 Biological asset include living animal and plant

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Cost of day to day servicing Replacement of Parts Regular Major

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Initial Recognition Subsequent

Revise the value of

If Purchased If Self Constructed Under Exchange

It includes all the cost It includes: (i) If transaction is under

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Note 5 INCLUSIONS IN COST OF PPE (Other expenses)

Note7 EXCLUSIONS FROM COST OF PPE

9. ACCOUNTING OF REVALUATION OF PPE

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