Syllabus | FINANCIAL ACCOUNTING BCH : DSC-1.3 ‘Theoretical Framework and Accounting Process: (2 Weeks) (A) Conceptual Framework (i) Accounting as an information system, the users of financial accounting information and their needs. An overview of Artificial Intelligence and Data Analytics in Accounting. (ii) Qualitative characteristics of accounting information. Functions, advan- tages and limitations of accounting. Branches of accounting. Basis of accounting: cash basis and accrual basis. Capital and revenue expenditures andreceipts, Events occurring after the balance sheet date, Extraordinary Items, Prior Period Items, Accounting Estimate. Accounting Policies, Fair Value, Meaning, Recognition and Disclosure Requirements of Provision, Contingent Liability and Contingent Asset. (ii?) Financial Accounting Principles: Meaning and need; Generally Accepted Accounting Principles (GAAP): Entity, Money Measurement, Going Concern, Cost, Revenue Recognition, Realization, Fundamental Accounting Assumptions, Accruals, Periodicity, Full Disclosure, Consistency, Materiality, and Prudence (Conservatism). Fundamental Accounting Assumptions as per AS 1. (iv) Accounting Standards: Concept, benefits, and Process of formulation of Accounting Standards including Ind AS (IFRS converged standards) and _IFRSs; convergence vs adoption; Application of accounting standards (AS and Ind AS) on various entities in India. International Financial Accounting Standards (IFRS) - meaning, need and scope. 1-13114 SYLLABUS. (B) Accounting Process From the recording of a business transaction to the preparation of trial b, nd closing entries. Application of General -Juding adjustment, transfe cepted Accounting Principles in recording financial transactions and pre tements and accounting treatment of GST. arin, financial s' —_——— UNIT 2 Business Income, Accounting for Property, Plant and Valuation of Inventory: (3 Weeks) at (a) Businessincome: Concept of Revenueand Business Income, Measureme of business income; relevance of accounting period, continuity doctan and matching concept in the measurement of business income: Objective of measurement of Business income ‘ = (b) Revenue recognition with reference to AS 9. (c) Accounting for Property, Plant and Equipment with reference to AS 10 Impact of Depreciation on measurement of business income. Accounting for Intangible Assets with reference to AS 26. > (d) Valuation of Inventory with reference to AS 2. Impact of inventory val- uation on measurement of business income by using FIFO, LIFO, and Weighted Average Method. UNIT 3 Financial Statements of Sole Proprietorship and Not-for-Profit Organisa- tions: (3 Weeks) Preparation of Financial Statements of Sole Proprietorship and Not-for-Profit Organisations. nec UNIT 4 Accounting for Inland Branches, Departments and Leases: (4 Weeks) (a) Accounting for Inland Branches: Concept of Dependent branches, Branch Accounting as per- Debtors System, Stock and Debtors’ Sys‘ (6) Accounting for Departments (excluding Mark-up Account). (c) Accounting for Leases with reference to AS 19. mecca UN | T 5 sree Computerised Accounting Systems: (3 Weeks) Computerised Accounting Systems: Computerised Accounts by using any pop” lar accounting software Creating a Company; Configure and Features settings: Creati Vouch Trial } Select Note: 1 Prac TheSYLLABUS 1-15 creating Accounting Ledgers and Groups; Creating Stock Items and Groups: Vouchers Entry including GST; Generating Reports- Cash Book, Ledger Accounts, Trial Balance, Profit and Loss Account, Balance Sheet, Cash Flow Statement jecting and shutting a Company; Backup, and Restore data of a Company. Notes? 1, The relevant Accounting Standards (both AS and Ind-AS) for all of the above topies should be covered 2. Any revision of the relevant Indian Accounting Standard/Accounting Standard would become applicable after it is included in the guidelines issued by the Department of Commerce. Practical Exercises: The learners are required to: Download Framework for the Preparation and Presentation of Financial Statements from the websites of the Institute of Chartered Accountants of India (ICAT) to analyse the qualitative characteristics of accounting information provided therein. 2. Collectand examine the balance sheets of business Organisations to study how these are prepared. 3. Examine the accounting policies and revenue recognition policies by collecting necessary data from small business firms. 4, Prepare Trading and Profit & Loss Account and Balance Sheet collecting necessary data from small business firms. 5. Prepare financial statements manually and using appropriate software. 6. Prepare accounts of Inland Branches. 7. Collect data from your college and prepare a Receiptand Payment Account, Income and Expenditure Account and Balance Sheet.a | { 4 INVENTORY VALUATION mie | naa ce swaing chapter, the learners will be able to understand : jon of Inventory co c siegy , pefinit Sub sonificance of Inventory Valuation | cost of Inventori ible ag ~ sqventory Record Systems : Periodic and Perpetual | sethods of Inventory Valuation | , Choice of Method YW < a 5 Lowerof-Cost or Market Value Rule > Difference between AS 2 and Ind AS 2 > Miscellaneous Hlustrations | > Salient Features of AS 2 | juading concern purchases goods for sale in the ordinary course ofits business. manufacturing concern purchases raw materials and after processing them, «ls the finished goods. AS-2 deals with inventory valuations. Iwas issued in 1981 and revised in 1999. 4S.2 (Revised) defines inventories as follows “Inventories are assets (a) held for sale in ordinary course of business; () in the process of production for such sale; or (0) in the form of materials or supplies to be consumed in the production process or in the rendering of services. The definition of inventory in Ind AS-2 is also the same. Atrading or merchandise concern merely buys goods and sells them, barring some repacking. For example, merchandise purchased by a retailer and held forresale, The criteria for determining inventory is ownership of the goods and Not the possession of the goods. The goods held as consignee or on approval iar menad asatock obflie consianon anid that of the seller respectively. 14.1 ae TAXMANN® $$ $$ $_ $$¥y VALUATION INVENTOR 2 ae rnses raw materials and COnVET the a A manufacturing conce™D purchi" include finished goods produced. avers ished goods. Therefore [ventric ee gaterials, maintenan so of the progressbeing produ , by the enterP «in the production proce Il profits consumables and loose tools awaiting eee erie ore the items that a Raw materials : Row mitt Sie raw material for ee oy Dee! ufacturing proc or exam Te Tata Motors; & fina” steel and paint are raw maler ils Esse for Indian Oil Corporation- é Sot 8 Baan = (or work in proc’ ) : Work in progress means the Woe ere uticel into the manufact\ring rag but are @ ae completed. F example partly ass embled trucks and Ou! es 18 WOKK in fy aia for Tata Motors. ad Finished goods : Finished goods are the goods produced but which have, a vet been sold to the customers: For example, fully finished trucks and buses fina finished goods for Tata Motors. « Other items: Besides raw materials, work in progress and finished goods, moy manufacturing concerns also keep an inventory of maintenance supplies, su ( as cleaning materials, mobil oil, machinery spares etc. which are classified as “stores and spares”. However, those inventories do not include machinery spares ay which can be used only in connection with an item of PPE and whose we Fe expected to be irregular. Such machinery sparrs are accounted for in accort: <7? Accounting Standard-10: Property, Plantand Equipment. Amanufacts tay concern may maintain a separate inventory ‘of manufacturing tools under ze title “Loose Tools". Similarly separate inventory of packing materials may t Gac ‘maintained particularly where their value is significant. 2 AS-2(R SIGNIFICANCE OF INVENTORY VALUATION purchas Inventorvisone ofthelargest assets of many enterprises and pulkof the wort tothe capital is locked up in this, It generally constitutes the second largest ite™ @ ¢ tomaintail , proces fluctuatio® as follows fixed assetsin case of most manufacturing concerns. Inventory has fs thers is time lag between purchase and sale of goods. Similar! oe hs i a of manufacturing concerns. Further there are and supply. The significance of inventory valuation is (1 Meerinaton of incom, Asortng to ACPA «me Ss through the eae valuations the proper determination oe Profitelequal toils fmatchingappropriatecostagainstreve™™™ is equal to openi sales minus cost of goods sold; and cost of gos de ing stock. ee cies purchases and direct expenses nino Renee = coi with the amount of il ye ies the opening stock of th eR lie igsy VALUATION pe INVENTOR) j y materials and conver a TF A manufacturing concen purchases finished vat oie ing anor ished goods Thorens rete and materials, mainten fe rk of the saree beiing produced: INSTT ge in the Pre sction proche eroit consumables and loose too! p ae perio Raw materials: Raw materials AT the tems thatareyet tobe usedin he, ses facturing process. For ex ple, iron ore aoe ie rie for Tata ge @ rae steel and paint are Taw rarerials fot, THUR oe vil isa raw ma a for Indian Oil Corporation. mr ere not £ york in progress (or work process) + Work in PrOBTeSs Mea the Fa that have been {introduced into the ms nufacturing, rece but are yet ty 3) 1 completed. For example part supted trucks and buses is Work in pro anal for Tata Motors. ati Finished goods : Finished goods are the goods produced but which haves (a) 607 vet been sold to the customers. For ortample, fully finished trucks and buses fina finished goods for Tata Motors. ( Other items : Besidesraw materials, workin progress and finished goods, manufacturing concerns also keep an inventory of maintenance supplies, ( ree caning matexials)smrobll Ol MeChimeny eu etc. which are classifieds a ical spares’, However, thoseinventories do not include machinery spa E woth can be used only in connection with a7 ifem of PPE and whose use expected tobe irregular. Such machinery spares ar= ‘accounted for in accordan be with Accounting Standard-10: Property, Plant and Equipment. A manufactur ic concern may maintain a separate inventory ‘of manufacturing tools under ae cole “Loose Tools”, Similarly separate inventory of packing materials may vi ntained particularly where their value is significant. Cost 0 AS2(R SIGNIFICANCE OF INVENTORY VALUATION purcha: Inventoryisone ofthe largest assets of many enterprises and bulkof the wot i) capil is ae aa generally constitutes the second largestitem sf! 22 thereat ere Tan st manufacturing concerns. Inventory has to maintain 2 ee and sale of goods. Similarly, pro in‘demeta and manufacturing concerns, Further there are fluctua! ne ni | supply The significance of inventory valuation is 4 follows Peters of Income. According to AICPA, a major object through the aa valuation isthe proper determination im Profit is equal to =e matchingappropriate costagainstreven" “ isctjual toonehing isc aati of goodsisold; and cost of °° a ing stock, Trading, stock plus purchases and direct expenses ™""\, 2 snes Tading Accounts eedited with th of sits ck of a year become: ee nest ye s the opening stock of the seats wees aINVENTORY VA LUATION 143 Trading Account is debited with ; the-ovenfagists d alued it in pening stock. If the stock and ce ‘eases the current ye: ee b nt year profits and decreases the profit of the next year. Similarly, if the stock is under valued it de: ses th profits of the current period and inet 3 period es the profits of the succeeding {g) Determination of Financial Position. The financial position of the enterprise. Inventory i current assets. If inventory is not properly valu not give a true and fai alance Sheet shows the ery important item of 1, the Balance Sheet will position of the enterprise. {@) Analysis of Financial Statement. Inv is of financial statements. For e: jo and stock turnover ratio inventory tory figures are required for mple, for calculating current gures are needed (4) Compliance with rules and statutes. AS-2 (Revised) requires that the financial statements should disclose : (@) theaccounting policies adopted in measuring inventories, including the cost formula used; and (b) the total carrying amount of inventories and its classification ap- propriate to the enterprise. The Companies Act, 2013 requires that each class of inventory should be disclosed separately alongwith mode of valuation of raw materials, work in progress and finished goods, etc. Thereare some other disclosure requirements. Cost of Inventories AS-2 (Revised) states that the cost of inventories should comprise all costs of purchase, cost of conversionand other costs incurred in bringing the inventories totheir present location and condition. These are explained below: (i) Cost of purchase. Cost of purchase consists ofthe purchase price includ- ing duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expen- diture directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the cost of purchase. (i) Cost of conversion. Cost of conversion of inventories include costs directly related to the units of production, such as direct Jabour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. The allocation of fixed overheads for the purpose of their inclusion in the costs of conversion is based on the normal capacity of the productionATION Nv srecognisedas 4 sgheadsarerecoenised aS3N expe, :nallocat det Ten tual level of production 1. 1t"¢he ithe pcurmty. Variable production overhead. Pt js norms he basis of actual use of the non t of th , ve productio f the prog facilities. Example j 1,00,000 units Normal production 7 Fixed production overheads %5,00,000 cual production Actual prod 1,00,000 units Sea 80,000 units case 2 1,25,000 units Case 3 Calculate fixed overhead rate Per unit in the three cases. SOLUTION : Case 1 and 2: 5,00,000/1,00,000 = 5; Case 3: Case 5,00,000/1,25,000 = 2 4 (iii) Other costs. Cost of inventories also include other costs incurred esent location and condition, such. bringing the inventory to their pré costs incurred in designing custome} RY RECORD SYSTEMS = PERIODIC AND PERPETUAL The value of stock is taken in two ways, namely (1) Periodi 5 riodic y Syste an) Perpetual Inventory System. Both Fae have ee eriail tebe keeping in mind the merchandise concerns : a (1) Periodic Inventory $1 : ' beistidlaep Bait pe : Under this system value of stock or inver a kev ecron's yy physically counting all the inventory items at the Reece nod sone other regular intervals. Thus, the inventor’ at the end of the eae ee Be physical count at periodic intervalsot counted or weighed or ting period. Items of stock are either physical After determining the Bae ed depending on the nature of the item final figure of inventory. ty of the items, they are priced to st Incase ofm : ofmerchandise c asa residual figure : oncerns cost of goods sold is calculated#s follow’ Opening Inver ntory + Purchases —Closing Inventory = Cost of Goodss# Evaluation i of periodic j; im lodi P fiver ystems RACER orate advantage of Pam Physic oe Ties rhe and less expensive than the if Count of; r, there are certain limitati s< gystet™ id can ise ere ne of wit accouml 1 specific products. INVENTO!Sin INVENTORY VALUATION 14.5 th 4 May tbe, a Say bey ory control is not feasible, (b) As the cost of goods sold is calculated Ne ny agg Sy inver™sidual figure, it includes the loss of goods during the period. (c) “Ody ety as veislack of up: to-date information about inventory levels. (d) Physical tis, vec taking affects normal operations of the business particularly when stom o be done more frequently as in case of listed companies which are juired to report quarterly results of its operations. periodic inventory system is suitable for small stores run by a sole pro- stor or by partnership firm. prie P » perpetual Inventory system. Under this system, inventory balance is ©" continuously updated with each receipt/purchase and issue/sale trans- action. This is done by maintaining a Stock Ledger or Stores Ledger. In this system closing stock is calculated as a residual figure. The performa of Stock or Stores Ledger is given below : Stores Ledger Name of Item. Maximum Level : curred ‘a Code No. Minimum Level : OD, such, as Location : Bin No. : Reorder Level : Economic Order Quantity : Balance Rate_| Amount eS Feed Date Receipts Qty. | Rate | Amount Oe Purchases are entered in the “Receipts” column and sales or issues to production department at cost are entered in the “Issues” column. Evaluation. The perpetual inventory system overcomes the problems of the pe- riodic inventory system : (a) Under this system, an enterprise maintains record of the merchandise and inventory on hand is always available on daily basis. With this information, an enterprise can calculate the cost of goods sold and the amount of profit on each sale. (6) Physical count of goods on hand can be compared with the perpetual inventory record and thus the perpetual inventory system has a built-in check which is not possible under the periodic inventory system. (c) Detailed record kept for each item of inventory is useful in deciding When to order the goods and how much to order ete. However, as the records are kept for each item of inventory, it requires addi- tional record keeping and thus is expensive. However, with the availability of Computers at relatively low costs, many firms which were earlier maintaining tecords of inventory by periodic inventory system are switching from periodic Inventory system to perpetual inventory system. That is why retail stores of big companies keep inventory records by perpetual inventory system, This system, $$ 2000 __ 4a INVENTOR 14.6 is particularly suitable for tho cost items, jodie and pe i the periodic and perpetual Recording accounting entries unde! VENI, system ¢ system, the opening balance of stock r¢. ‘ting period. When the go, hp ¢ periodic inventory © ‘Q throughout the curt” purchas .d, Purchases Account 1S then goods are SO] credited; and w! Sales Account is er edited. Thus W account is not adjusted, and no ent Stock (or Opening to the debit side o} Sales are t nsferred to the cre (or Closing Inventory iting Closing Stock Account accounting period. Under the perpetu: each purchase and s Inventory Account. For purchase Cash/Bank/Creditor, Accountis cre is debited and Cash Account is credited. purchases and freight. For purchase re! debited and Inventory ‘Account is debited ant Under th una ‘Account more entry is passed debiting Cost of Goods sold ‘Account. For sales returns, Inve is debited and Debtor ‘Account or Cash Account is credited. In addition to this one moreentryis passed debiting Inventory. a Sere ‘At the end of the accounting period Trading Accou! ae ss of Goods Sold Account and Sales Returns ‘Account are credited ant ccount is debited and Trading Account is credited. sold) and crediting the Inventory For better understanding entries are given below : se enterprises debited and Id Cash/Bank/Debtor Account is debited yen the good rr ry is passe nt and Pure] t at the end al inventory system, I ale, Opening inventory of goods, dited. For freightexpenses Inventory Account ‘Thus Inventory Account is debited for ‘urns Creditor Account or Cash Accounts ‘Account is credited. For sale of goods, Cash/Bank/Debtor d Sales Account is credited. In addition to this entry one sy VALUATION w dit side of the » is determined by physics t and Crediting Tra is fi s d for cost of mventory Account is updated afte; Account and crediting hich sell small number, Cash/Bank/Creditor Acc, are purchased or sold, inv goods sold. Open.” hases ACCOUNt are transfer of the accounting per ‘Trading Account. Closing si al count and is recorded by ia ding Account at the end of shown as the opening balance of inventory Account is debited a ‘Account (at cost price: ‘of goods tory Ace Cost of Goods int is debit 7 ee 1 s pee der of inventory For aah aR : surchase Alc 5 of inventory Dr. | Inve De To Credi ntory Al iy a 0 CreditoniCash Account To Png : . | For freight paid Creditor/Cash Accoum Carriage Inwards Ale For freight paid ig To Cash Ale . | Inventory Alc [EE TOiCesh e109 MMM Ao ae TAXMANN®creditor Ac ‘To Purchases Returns A/c or sale of inventory INVENTORY VALUATION Dr For purchase 14.7 Perpetual Inventory System Creditor A/c Dr To Inventory Account For sale of inventory pebtor Alc/Cash Alc Dr. | (i Debtor A/c/Cash Alc Dr. To Sales A/c | To Sales A/c Entry for cost of goods sold | (ii) Cost of Goods Sold Ale Dr. not passed To Inventory A/c | For sales return For sales returns (a) Sales Returns A/e Dr. | Sales Returns A/c Dr. To Debtor A/c/Cash A/c To Debtor A/e/Cash A/c (b) Entry for cost of goods sold Inventory Alc not passed To Cost of Goods Sold A/c ny Artheendoftheaccountingperiod _| Attheendoftheaccounting period d ang |@ Trading A/c Dr. | Trading A/c Dr Coun, | To Inventory (opening) Ale To Cost of Goods Sold Ale od for | To Purchases A/c To Sales Returns Ale anti To Sales Returns A/e a | Te Caraee teenie a | @) Sales Ale Dr. | Sales Ale Dr nt | Purchases Returns Ale Dr. |_To Trading Ale this | Inventory (closing) Ale Dr. ods | To Trading Ale ‘ = ad tory system Distinction between periodic inventory and perpetual inven- The following are the points of difference between the two : Basis 1. Basis of ascer- taining inven- tory I —_ Ns Periodic Inventory — System Closing inventory is ascer- tained by physical count. Pe a = Closing inventory is ascer- tained from accounting records. —_— en EEE