Ref Book Account
Ref Book Account
Ref Book Account
Revision
Intermediate Course Paper-1:
Accounting
A compendium of subject-wise capsules published in the
monthly journal “The Chartered Accountant Student”
Board of Studies
(Academic)
ICAI
INDEX
Page Edition of Students’
Topics
No. Journal
1-3 October 2017 Introduction to Accounting Standards
Preparation of Financial Statements of
4-6 October 2017
Companies
7-8 October 2017 Cash Flow Statement
9 October 2017 Profit or Loss Pre and Post Incorporation
10-11 October 2017 Accounting for Bonus Issue and Right Issue
12-13 October 2017 Investment Accounts
Insurance Claims for Loss of Stock and Loss of
14-15 October 2017
Profit
16-19 October 2017 Hire Purchase and Instalment Sale Transactions
19-21 October 2017 Accounts from Incomplete Records
22-23 July 2019 AS 1
23-26 July 2019 AS 2
26-30 July 2019 AS 3
31-38 July 2019 AS 10
38-42 July 2019 AS 11
43-44 July 2019 AS 12
45-46 May 2020 AS 13
47-48 May 2020 AS 16
Framework for Preparation and Presentation of
49-51 May 2020, July 2020
Financial Statements
52-54 July 2020 Redemption of Preference Shares
55-57 July 2020 Redemption of Debentures
58-59 July 2020 Departmental Accounts
Accounting for Branches (including Foreign
60-67 August 2022
Branches)
ACCOUNTING
Accounting - A Capsule for Quick Revision
Accounting constitutes a significant area of core competence for Chartered Accountancy students. The
significance of this subject can be judged from the fact that we have a paper on Accounting at every level of
CA course. Accounting papers at Intermediate level under Chartered Accountancy curriculum concentrate on
conceptual understanding of the crucial aspects of accounting and acquaint students with the basic concepts,
theories and accounting techniques followed by different entities. The objective of Paper 1 “Accounting” at
Intermediate level is to acquire the ability to apply specific accounting standards and legislations to different
transactions and events and in preparation and presentation of financial statements of various business entities.
It has always been the endeavour of Board of Studies to provide quality academic inputs to the students.
Keeping in mind this objective, it has been decided to bring forth a crisp and concise capsule for Intermediate
Paper 1 ‘Accounting’. Chapter overview has been provided to present a broad outline of the topic coverage in each
chapter. The significant points of the topics have been presented through pictorial presentations in this capsule
which will help the students in grasping the intricate practical aspects of each topic. This will facilitate the
students to recapitulate the whole concepts within minimum time and efforts in the later stages of preparation.
Although, the capsule has been prepared keeping in view the new and revised scheme of Education and Training
of ICAI, the students of earlier scheme may also be benefitted from it.
This capsule, though, facilitates the students in undergoing quick revision, under no circumstances, such
revisions can substitute the detailed study of the material provided by the BoS.
Government
ICAI
e.g. (MCA) for corporate
for non corporate entities
entities in consultation
with NFRA Benefits
Comparability of Enhanced
of financial Accounting disclosures
statements Standards
Accounting Standards - Benefits
Reduced
Comments received on exposure draft (E.D.) operational Significance Comparability
challenges of Global of financial
Standards statements
Modification of the draft
Issuance of AS
Greater Elimination
transparency of costly
requirements
List of Accounting Standards Enhanced
1 Disclosure of Accounting Policies
accountability
2 Valuation of Inventories
3 Cash Flow Statement
4 Contingencies and Events Occurring after the Balance Sheet Date
5 Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies
International Financial Reporting
7 Construction Contracts Standards (IFRS)
9 Revenue Recognition
10 Property, Plant and Equipment
11 The Effects of Changes in Foreign Exchange Rates IFRS issued by Interpretations on IAS/IFRS
IASB issued by IFRS Interpretations
12 Accounting for Government Grants Committee
13 Accounting for Investments
14 Accounting for Amalgamations
15 Employee Benefits IAS issued Interpretations
16 Borrowing Costs by IASC and on IAS issued
adopted by IASB
17 Segment Reporting IFRS by SIC
18 Related Party Disclosures
19 Leases
20 Earnings Per Share
21 Consolidated Financial Statements
22 Accounting for Taxes on Income
23 Accounting for Investments in Associates in Consolidated
Financial Statements
24 Discontinuing Operations International Financial Reporting
25 Interim Financial Reporting
Standards (IFRSs) as Global Standards
26 Intangible Assets
Enhanced
27 Financial Reporting of Interests in Joint Ventures Principle transparency Emergence
IFRSs based set of and as Global
28 Impairment of Assets comparability of
standards Standards
29 Provisions, Contingent Liabilities and Contingent Assets financial
statements
2
ACCOUNTING
Convergence to IFRS in India
Deviation from
corresponding IFRS, if
Indian Accounting
Application of IFRS in required
Convergence Standards (Ind AS)
to IFRS; India considering legal
ICAI
not adoption and other conditions
prevailing in India Decision to have two
sets of Accounting Accounting Standards
standards (AS)
Removal of options in
Deviation from the
accounting principles and
accounting principles
practices in Ind AS vis-a-
stated in IFRS
vis IFRS
Implem
The Chartered Accountant Student October 2017
3
ACCOUNTING
CHAPTER 4: FINANCIAL STATEMENTS OF COMPANIES
Unit 1: Preparation of Financial Statements of Companies
Unit Overview
Meaning of Company
and maintenance of Preparation of Requisites of financial Managerial remuneration
books of accounts financial statements statements of managers
Company Under any Different types on accrual basis and according to double entry system
incorporated previous company of companies as of accounting
under the law (e.g., the defined in the
Companies Act, Companies Act, Companies Act, for every financial year
2013 1956) 2013
giving a true and fair view of the state of the affairs.
Schedule
III to the
Statement
Companies
of Profit and
Act, 2013
loss
Cash Flow
Balance Statement
sheet Accounting
Financial
Statements Statutory Financial Standards
as per Section requirements Statements notified by
2(40) MCA
Statement
of changes
in Equity (if
Notes applicable)
and other
statements Guidance
Notes
4
ACCOUNTING
Managerial Remuneration Schedule V
Managerial
Remuneration (MR) Part I Part II Part III Part IV
Adequacy of profits
Lays down Deals with Specifies the Deals with
conditions to remuneration provisions Central
Calculated as Total MR* < 11% Total MR > 11% of be fulfilled payable to applicable Government’s
Profit % as per of the net profits the net profits as for the managerial to parts 1 power to
Sec. 198 as per Sec. 198 per Sec. 198 appointment person by and 2 of this relax any
of a companies schedule requirements
As per Schedule managing or having profits in this
with the whole-time and also by Schedule.
V and sections As per approval of
under the Section 197 director or companies
the Central a manager having no
Companies Act, Govt.
2013. without the profits or
approval of inadequate
the Central profits.
*Total managerial remuneration payable Subject to Govt.
includes payable to Directors + Managing Schedule V.
director + Whole-time director+ Manager
Distribution of
Divisible Profits divisible profit as per
number of shares
The availability of Divisible Profits (available held by share holder
A r m ea s
for distribution) depends on a number of
di ay e o
o rel
st n f
rib ot as
d
ut en set
id
io ta s
iv
n il
D
m a
ay
made out of them in priority, etc.
Declaration of a dividend presupposes that there is a trading profit or a surplus available for distribution,
arrived at after providing for depreciation on assets, not only for the year in which the profits were earned
but also for any arrears of depreciation of the past years. Board of Directors of a company may declare
interim dividend during any financial year out of the surplus in the profit and loss account and out of profits
of the financial year in which such interim dividend is sought to be declared.
(a) Current (b) Previous financial Both (a) and Central State
financial year years (b) Government Government
Transfer to Reserves
Appropriation of a part of Profit
6
ACCOUNTING
Unit 2: Cash Flow Statement
Unit Overview Cash and Cash Equivalents for the Purpose
of Cash Flow Statement
‘Cash’ include: Cash, Bank balances
Meaning of Difference
Definition &
Cash & cash between Preparation
Significance
equivalents operating, of cash flow
of cash flow
and Cash investing and statement as
statement
flow financing per AS 3.
activities.
and
Cash equivalents
Gross cash receipts and gross cash payments Net profit or loss is adjusted instead of
individual items of P & L A/c
Cash received from sale of goods xxx Closing balance of Profit & Loss Account xxx
Cash received from Trade receivables xxx Less: Opening balance of Profit & Loss Account xxx
Cash received from sale of services xxx xxx xxx
Less: Payment for Cash Purchases xxx Reversal of the effects of Profit & Loss Appropriation xxx
Account
Payment to Trade payables xxx
Net Profit after tax xxx
Payment for Operating Expenses xxx
Add: Provision for Income Tax xxx
e.g. power, rent, electricity
Payment for wages & salaries xxx Net Profit Before Tax and Extraordinary Items xxx
Payment for Income Tax xxx xxx Reversal of the effects of non-cash and non-operating items xxx
xxx Effects for changes in Working Capital except cash & xxx
cash equivalent
Adjustment for Extraordinary Items xxx
xxx
Net Cash Flow from Operating Activities xxx
Less : Payment of Income Tax xxx xxx
8
ACCOUNTING
Apportionment of Items of Incomes and Expenses in Pre and Post Incorporation Periods
Gross Profit or Gross Loss Sales Ratio or Cost of goods (i)For Company’s Audit under Charge to Post-incorporation
sold Ratio or Time Ratio the Companies Act period
Expenses exclusively relating to (i) For the period from the date
Charge to Pre-incorporation Charge to Pre-incorporation
pre-Incorporation period [e.g. of acquisition of, business to
period period
Interest on Vendor’s Capital] date of incorporation
Chapter Overview
Accounting
Value of treatment
Right
Right Issue
& its Effects
Provisions of the
Companies Act,
2013
Definition of Bonus
Shares & its Effects
Authorised
by its articles
Partly paid-up
shares, if any Authorised
Definition of Bonus issue outstanding in the general
meeting of the
are made fully
paid-up company
Issue of shares Conditions
at no cost Based upon That the for issue of
to current the number shareholder bonus shares
shareholders in of shares already owns
a company Company not
Company not defaulted in
defaulted for payment of interest
payment of / principal of fixed
statutory dues of deposits/ debt
Provisions of the Companies Act the employees securities issued
by it
Free reserves
Effects of Bonus Issue
Securities premium
Increase in share capital
Capital redemption reserve Reduction in EPS and other
per share values
Favourable act considered by
markets
Adjustment in market price
Out of
Can’t be reserves in lieu of
Bonus shares Reduction in accumulated
issued created by dividend
profits
revaluation
of assets
10
ACCOUNTING
Accounting Entries Effects of Right Issue
Upon the sanction of an issue of bonus shares Maintenance of existing
Dilution in the value of share.
shareholders’ proportional
● Debit Capital Redemption Reserve Account holding in company and retain
● Debit Securities Premium Account their financial and governance
rights
● Debit General Reserve Account
● Debit Profit & Loss Account Effects
● Credit Bonus to Shareholders Account. of Right
issue
Upon issue of bonus shares
Image enhancement Convenience in handling
● Debit Bonus to Shareholders Account issue
● Credit Share Capital Account.
Upon the sanction of bonus by converting partly paid shares
into fully paid shares
Conditions for right issue as per the
● Debit General Reserve Account Companies Act
● Debit Profit & Loss Account
● Credit Bonus to Shareholders Account.
On making the final call due After the expiry of
the time specified
● Debit Share Final Call Account Notice specifying Offer to include a in notice or on
● Credit Share Capital Account. the number of right exercisable receipt of earlier
shares offered and by the person intimation from
On adjustment of final call
limiting a time not concerned to person that he
● Debit Bonus to Shareholders Account being < 15 days and renounce the declines to accept the
● Credit Share Final Call Account. not > 30 days from shares offered to shares offered, BoD
the date of the offer him unless articles may dispose of them
provide otherwise in a manner which is
not disadvantageous
to shareholders and
Definition of Right Issue; Value of Right and company
Right of Renunciation
The existing shareholders have a right to subscribe to any
fresh issue of shares by the company in proportion to their
existing holding for shares.
Situations when Right shares are offered
Categories of
Investment on the
Definition basis of Income
Cost &
Disposal Carrying
amount
Fixed income Variable income
bearing scrips bearing scrips
Investment
Accounts
Classification Accounting
Securities having Securities having
& for
fixed return of variable return of
Reclassification purchase
income income
and sale
Accounting
for Right
& Bonus e.g. Government
securities; debentures e.g. Equity shares
Shares
or bonds
for earning income for capital appreciation or Payment Cash price including charges such as
for other benefits in Cash/ bank brokerages, fees and duties
Dividend
By Issue of shares/ Fair value of securities issued
other securities
Assets held as Stock-in-
Interest trade are not ‘Investments’.
Fair value of asset given up or
In exchange for fair value of investment acquired,
another asset whichever is more clearly evident
Rentals
Current Investments
(readily realisable and intended Carried at lower of cost and
to be held for not more than fair value
Classification of one year)
Investments as per
AS 13
12
ACCOUNTING
Accounting in the Books at the Time of Accounting for Income on Investments
Purchase and Sale of Investments
Particulars Value in ‘capital’ column of Investment Accounting of
Account Interest accrued/Dividend Declared
Purchase Sale
Transaction Purchase price of Entire sale proceeds i.e.,
on ex-interest investment, i.e., no no impact of accrued
basis impact of interest interest (from the date Pre-acquisition period Post-acquisition period
accrued up to the date of last payment to the
of transaction date of sale)
Transaction Purchase price of Sale proceeds, net of
Deducted Recognized as
on cum- investment less accrued interest (from from cost of an income
interest basis accrued interest up to the date of last payment investment
the date of transaction to the date of sale)
Long-term to Current to
Subscribed Not subscribed, No amount is Current Long-term
Cost of shares but sold entered in the
added to carrying Sale proceeds capital column of
amount taken to P&L A/c investment account.
Disposal of Investments
CHAPTER 10: INSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS OF PROFIT
Actual loss
Loss
Contract of
of stock indemnity
Total Loss Partial Loss
Insurance
claims
Restricted Without With Average
Loss of Loss due to the policy Average clause Clause
profit to fire, amount
flood, theft, Loss of stock x
earthquake Actual loss Or
Sum insured sum insured /
etc. Insurable amount
whichever is lower
(Total cost)
Important Points
Meaning of Fire
Spontaneous fomentation Stock records are Value of the stock as at the date of the fire
or heating or any process maintained can be easily arrived.
involving application
Fire not occasioned of heat
or happening through Stock records are Trading Account is prepared. After allowing
not available or are for the usual gross profit, closing stock
Earthquake, riot, civil destroyed by fire ascertained as balancing item.
commotion, war, etc.
Trading Account preparation is difficult.
Books of account Information is obtained from the customers
Lightning
are destroyed and suppliers to ascertain the amount of sales
Fire
and purchases.
Boilers used for domestic
purposes only Damaged stocks are subrogated to the
Insurance company insurance company. Subrogation is the right
makes payment of an insurer to legally pursue a third party
Any other boilers on the
Explosion not that caused an insurance loss to the insured.
premises
occasioned or
happening through
In a building, not being Cost of such stock credited to the Trading
any gas works or gas Salvaged stock is Account and debited to a salvaged stock
for domestic purposes made saleable after account. The expenses on reconditioning
or used for lighting or it is reconditioned debited and sales credited to this account, final
heating balance being transferred to the P & L A/c
14
ACCOUNTING
Particulars Amount Claim for Loss The Loss of Profit Policy normally covers
of Profit the following items:
Value of stock on the date of fire xxx (1) Loss of net profit
Less:- Value of Salvaged stock xxx (2) Any increased cost of working
Amount of loss of stock xxx Gross Profit Net profit +Insured Standing charges
OR
Insured Standing charges – [Net Trading
Particulars Amount Loss (If any) X Insured Standing charges/
All standing charges of business]
Value of salvaged stock xxx
Add: Expenses on re-conditioning xxx Net Profit The net trading profit (exclusive of all
capital receipts and accretion and all
Less: Sales xxx outlay properly chargeable to capital)
resulting from the business of the Insured
Profit/(loss) xxx
at the premises after due provision has
been made for all standing and other
charges including depreciation.
Business is interrupted e.g., Renting of temporary Annual The turnover during the twelve months
due to damage of premises premises Turnover immediately before the damage.
(adjusted)
Standard The turnover during that period (in the
(i)Reduction in Turnover twelve months immediately before the
turnover, and date of damage) which corresponds with
loss of the Indemnity Period.
Insurance limited gross
for Loss of to profit due
Profit to Indemnity The period beginning with the occurrence
Period of the damage and ending not later than
(ii) Increase
in the cost of twelve months.
working
16
ACCOUNTING
Journal Entries To Asset Account
Cash Price Method For closing interest and depreciation account
Profit and Loss Account Dr.
At the time of entering into the agreement
To Interest Account
Asset Account Dr. [Full cash price]
To Depreciation Account
To Hire Vendor Account
When down payment is made
Hire Vendor Account Dr. [Down payment] Books of Hire Vendor
To Cash/Bank Account
When an instalment becomes due
Interest Account Dr. [Interest on outstanding balance]
To Hire Vendor Account
Accounting for
When an instalment is paid Hire-Purchase
in the books
Hire Vendor Account Dr. [Amount of instalment] of Hire Vendor
(Seller)
To Bank Account
When depreciation is charged on the asset
Methods
Depreciation Account Dr. [Calculated on cash price]
To Asset Account
For closing interest and depreciation account Interest Suspense
Sales Method Method
Profit and Loss Account Dr.
To Interest Account
To Depreciation Account Hire purchase sale is Hire purchaser is
treated as a credit sale, debited with full cash
subject to payment in price and total interest
instalments included in the selling
price.
Interest suspense method
When the asset is acquired onhire purchase Journal Entries
Asset Account Dr. [Full cash price] Sales Method
To Hire Vendor Account When Goods are sold and delivered
For total interest payment Hire Purchaser Account Dr. [Full cash price]
H.P. Interest Suspense Account Dr. [Total interest] To H.P. Sales Account
When the down payment is received
To Hire Vendor Account
Bank Account Dr.
When down payment is made
To Hire Purchaser Account
Hire Vendor Account Dr. When an instalment becomes due
To Bank Account Hire Purchaser Account Dr.
For Interest of the relevant period To Interest Account
When the amount of instalment is received
Interest Account Dr. [Interest of the relevant
period] Bank Account Dr.
REPOSSESSION
I COULDN’T PAY
THE INSTALMENT THEY
REPOSSESSD
MY ASSET
Repossession
Loss on surrender
If the repossessed value For remaining portion of asset
is < book value
18
ACCOUNTING
Differences Between Sales Under Hire Purchase And Instalment System
Basis of Distinction Hire Purchase Instalment System
Governing Act It is governed by Hire Purchase Act,1972. It is governed by the Sale of Goods Act, 1930.
Nature of Contract It is an agreement of hiring. It is an agreement of sale.
Passing of Title (ownership) The title to goods passes on last payment. The title to goods passes immediately as in the
case of usual sales.
Right to Return goods The hirer may return goods without further payment Unless seller defaults, goods are not returnable.
except for accrued instalments.
Seller’s right to repossess The seller may take possession of the goods if hirer The seller can sue for price if the buyer is in
is in default. default. He cannot take possession of the goods.
Right of Disposal Hirer cannot hire out, sell, pledge or assign entitling The buyer may dispose of the goods and give
transferee to retain possession as against the hire vendor. good title to the purchaser.
Responsibility for Risk of Loss. The hirer is not responsible for risk of loss of goods The buyer is responsible for risk of loss of goods
if he has taken reasonable precaution because the because ownership has transferred.
ownership has not yet transferred.
Name of Parties involved The parties involved are called Hirer and Hire vendor. The parties involved are called buyer and seller.
Component other than cash price. Component other than Cash Price included in Component other than Cash Price included in
instalment is called Hire charges. Instalment is called Interest.
Net Worth
method or Less
Statement
Profit/ Loss
of Affairs
Method. Opening
Capital
Bank pass
book for Distinction between Statement of Affairs
bank and Balance Sheet
balance
Basis Statement of affairs Balance sheet
It is prepared on the basis of It is based on
List of fixed transactions partly recorded transactions recorded
assets for
statement of Personal Reliability on the basis of double entry strictly on the basis
Sources ledger for book keeping and partly on of double entry book
affairs utilized by debtors, the basis of single entry. keeping.
accountant creditors In this statement, capital is Capital is derived from
merely a balancing figure the capital account in
being excess of assets over the ledger and total of
Capital
capital. Hence assets need assets side will always
not be equal to liabilities. be equal to the total of
Cash book Inventory liabilities side.
for cash by actual Since this statement is All items are properly
balance counting, prepared on basis of recorded. It is easy to
valuation. incomplete records, it is locate missing items
Omission
difficult to locate assets and since the balance sheet
liabilities, if they are omitted will not agree.
from the books.
The valuation of assets is The valuation of assets
{
Sources utilized by Basis of generally done in an arbitrary is done on scientific
Collection of necessary Valuation manner; no method of basis. Method of
Accountant information about assets and
liabilities valuation is disclosed. valuation is disclosed.
The object of preparing this The object of preparing
statement in the calculation the balance sheet is to
Derivation of
opening and
closing capitals
{ Statement of Affairs
different points of time
at Objective of capital figures in beginning
and at end of accounting
period respectively.
ascertain the financial
position on a date.
20
ACCOUNTING
Techniques of Obtaining Complete Accounting Information
Preparation
Incomplete Completion Preparation of
books of of double Accounting of Trial Financial
accounts entry in all process Balance Statements
transactions
General
Techniques
Fresh
Investment
by
proprietors/
partners
Techniques Derivation of
of obtaining Information
complete from Cash
accounting Book
information
Distinction
between
Business
Expenses and
Drawings Analysis of
Sales Ledger,
Purchase Ledger
and Nominal
accounts
Fundamental Accounting Assumptions Provision is made for all known liabilities and losses even though
the amount cannot be determined with certainty and represents
only a best estimate in the light of available information.
22
ACCOUNTING
Accountant has to make decisions from various permitted Disclosure of Accounting Policies
alternative methods for recording or disclosing various items in
the books of accounts for example: All significant accounting policies adopted in the preparation and
presentation of financial statements should be disclosed.
Items to be disclosed Method of disclosure or valuation
Depreciation Straight Line Method, Reducing Disclosure of accounting policies or of changes therein cannot
remedy a wrong or inappropriate treatment of the item in the
Balance Method, Units of accounts.
Production Method etc.
This list is not exhaustive. Disclosure of Changes in Accounting Policies
Change in Accounting Policy
Considerations in Selection of Accounting
Policies
Having material effect in Having non-material effect in
True and fair view of the state current period current period but expected
of affairs of the enterprise as to have material effect in later
at the balance sheet date; periods
Amount Not
Selection of ascertained ascertained
Accounting Policies
must ensure Fact of such change to be
disclosed in current period.
Correct determination of Amount to be Fact to be
profit or loss for the period. disclosed disclosed
AS 2 “VALUATION OF INVENTORIES”
Introduction Definition of Inventories
AS 2 (Revised) ‘Valuation of Inventories’, provides complete
guidance for determining the value at which inventories, are
carried in the financial statements until related revenues are Inventories are assets
recognised. It also provides guidance on the cost formulas that
are used to assign costs to inventories and any write-down
thereof to net realisable value. Held for In the
sale in process of In the form of
the production
Scope of AS 2 ordinary for such
materials* or supplies*
to be consumed in
course sale
Applicability of AS 2 in accounting of business
for inventories other than
When the cost of conversion When the cost of conversion When the by-product is When the by-product is
of each product is separately of each product is not immaterial material
identifiable separately identifiable
24
ACCOUNTING
Conversion Cost
Costs excluded from • Abnormal amounts of wasted materials, labour, or other production costs;
the cost of inventories • Storage costs, unless the production process requires such storage;
and recognised as • Administrative overheads that do not contribute to bringing the inventories
expenses to their present location and condition;
• Selling and distribution costs.
Cost Formulas
Inventory Valuation
Technique
Stock-in-trade
Raw Materials Finished Goods and (in respect of
Work in progress goods acquired
for trading),
Finished goods, Stores and spares,
At cost (if Lower of
finished goods
are sold at or Work in progress, Loose tools,
above cost),
otherwise at Cost Net Realisable Common
Value Classifications of
replacement cost Raw materials and inventories Others.
components,
Objectives of AS 3
To assess To require
26
ACCOUNTING
Presentation of a statement of cash flows
Classified as
Operating activities Investing activities Financing activities Cash and cash equivalents
These are the principal Investing activities are the Financing activities are Cash Cash equivalents
revenue-producing acquisition and disposal of activities that result in
activities of the entity long-term assets and other changes in the size and are short-
other than investing or investments not included composition of the owner’s term, highly
financing activities It comprises
in cash equivalents capital and borrowings of cash on liquid
the entity hand & investments
demand
Reporting deposits
An entity shall report separately major classes with banks are readily
of gross cash receipts and gross cash payments convertible
arising from investing and financing activities to known
amounts of
Under direct Under indirect cash
method method
are subject
Profit or loss is adjusted for to an
Major classes insignificant
of gross cash • non-cash transactions
• any deferrals or accruals of past or future risk of
receipts and changes in
gross cash operating cash receipts or payments
• items of income or expense associated with value
payments are
disclosed investing or financing cash flows
are not for
investment
purposes
Entities are encouraged to follow the direct method. The
direct method provides information which may be useful has a short
in estimating future cash flows and which is not available Exception maturity of,
under the indirect method. say, 3 months
or less from
Investments in shares are excluded the date of
from cash equivalents acquisition
(a) cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalised research and
development costs and self-constructed fixed assets;
(b) cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
(c) cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for
those instruments considered to be cash equivalents or those held for dealing or trading purposes);
(d) cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those
instruments considered to be cash equivalents and those held for dealing or trading purposes);
(e) cash advances and loans made to other parties (other than advances and loans made by a financial institution);
(f ) cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial
institution);
(g) cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held
for dealing or trading purposes, or the payments are classified as financing activities; and
(h) cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held
for dealing or trading purposes, or the receipts are classified as financing activities.
Note: When a contract is accounted for as a hedge of an identifiable position the cash flows of the contract are classified in the
same manner as the cash flows of the position being hedged.
Cash flows arising from operating, investing or financing activities Cash flows arising from each of the
following activities of a financial
institution may be reported on a net basis:
Cash receipts and payments on behalf Cash receipts and payments for items in (a) Cash receipts and payments for
of customers when the cash flows which the turnover is quick, the amounts the acceptance and repayment of
reflect the activities of the customer are large, and the maturities are short deposits with a fixed maturity date;
rather than those of the entity (b) The placement of deposits with
and withdrawal of deposits from
other financial institutions; and
Examples are: Examples are advances made for, and the (c) Cash advances and loans made
(a) The acceptance and repayment of repayment of: to customers and the repayment
demand deposits of a bank; (a) Principal amounts relating to credit of those advances and loans.
(b) Funds held for customers by an card customers;
investment entity; and (b) The purchase and sale of investments;
and
(c) Rents collected on behalf of,
(c) Other short-term borrowings, for
and paid over to, the owners of example, those which have a maturity
properties period of three months or less.
28
ACCOUNTING
• Cash flows denominated in a foreign currency are reported in a manner consistent with AS 11.
• Weighted average exchange rate for a period may be used for recording foreign currency transactions.
Important Points
1. Unrealised gains and losses arising from are not cash flows.
changes in foreign currency exchange rates
2. The effect of exchange rate changes on cash is reported in the statement of cash flows in order to reconcile cash and
and cash equivalents held or due in a foreign cash equivalents at the beginning and the end of the period.
currency is presented separately from cash flows from operating, investing and
financing activities and includes the differences, if any, had those cash
flows been reported at end of period exchange rates.
Cash flows from interest and dividends received and paid shall
each be disclosed separately.
Interest paid Interest and dividends Interest paid Interest and dividends
received Dividends paid Dividends paid received
Cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating
activities unless they can be specifically identified with financing and investing activities.
Shall be classified as Shall be presented Shall disclose, in aggregate, during the period
investing activities separately
The total purchase or disposal The portion of the purchase or disposal consideration
consideration discharged by means of cash and cash equivalents.
30
ACCOUNTING
AS 10 “PROPERTY, PLANT AND EQUIPMENT”
Introduction PPE are tangible items that:
The objective of this Standard is to prescribe accounting Use in Production or
treatment for Property, Plant and Equipment (PPE). Supply of Goods or
Services
Condition 1:
Held for
PPE For Rental to others
AS 10 (Revised)
(Tangible
Items)
Condition 2: For Administrative
Expected purposes
to be
Help the Users of Used for more than
Financial Statements to 12 months
understand
Determination Depreciation Items of PPE may also be acquired for safety or environmental
of their carrying charge reasons.
amounts The acquisition of such PPE, although not directly increasing the
future economic benefits of any particular existing item of PPE,
may be necessary for an enterprise to obtain the future economic
benefits from its other assets.
Impairment Such items of PPE qualify for recognition as assets because they
Recognition losses to be
of PPE enable an enterprise to derive future economic benefits from
recognised related assets in excess of what could be derived had those items
Principle Issues in relation to not been acquired.
in Accounting them.
of PPE
Other definitions
1. Biological Asset: Till the time, the Accounting Standard on
“Agriculture” is issued, accounting for livestock meeting the
Scope of Standard definition of PPE, will be covered as per AS 10 (Revised).
As a general principle, AS 10 (Revised) should be applied in AS 10 (Revised)
accounting for PPE. Except when another Accounting Standard does not apply if
requires or permits a different accounting treatment. definition of PPE
Living not met
AS 10 (Revised) Animal
Not Applicable to
Biological
Asset
AS 10 (Revised)
Wasting Assets including Plant applies to Bearer
Biological Assets* Plants
(other than Bearer Mineral rights, Expenditure
Plants) related to on the exploration for and
agricultural activity extraction of minerals, oil,
natural gas and similar non- 2. Bearer Plant: Is a plant that (satisfies all 3 conditions):
regenerative resources
Is used in the Of Agricultural
*AS 10 (Revised) applies to Bearer Plants but it does not apply to production or supply produce
the produce on Bearer Plants.
31
ACCOUNTING
Note: When bearer plants are no longer used to bear produce they When to apply the above criteria for Recognition?
might be cut down and sold as scrap. For example - use as firewood. An enterprise evaluates under this recognition principle all its costs
Such incidental scrap sales would not prevent the plant from on PPE at the time they are incurred.
satisfying the definition of a Bearer Plant. These costs include costs incurred:
To acquire or
Following are not Situation I
"Bearer Plants" construct an item
Initially
of PPE
Cost
Incurred
Plants cultivated Plants cultivated to Annual Crops Situation II To add to, replace
to be harvested Produce part of, or service
as Agricultural Agricultural Subsequently
produce produce it
and
Harvest and Treatment of Spare Parts, Stand by Equipment and Servicing
sell the plant Equipment
as Agricultural Case I If they meet the definition of PPE as per AS 10 (Revised):
produce
Recognised as PPE as per AS 10 (Revised)
Case II If they do not meet the definition of PPE as per AS 10
(Revised):
Such items are classified as Inventory as per AS 2 (Revised)
Trees which are
Trees grown for cultivated both Maize and Treatment of Subsequent Costs
use as lumber for their fruit and wheat Cost of day-to-day servicing
their lumber Costs of day-to-day servicing are primarily the costs of labour and
consumables, and may include the cost of small parts. The purpose
of such expenditures is often described as for the ‘Repairs and
Maintenance’ of the item of PPE.
Agricultural Produce is the harvested product of Biological An enterprise does not recognise in the carrying amount of an item
Assets of the enterprise. of PPE the costs of the day-to-day servicing of the item. Rather, these
3. Agricultural Activity: is the management by an Enterprise of: costs are recognised in the Statement of Profit and Loss as incurred.
• Biological transformation and Harvest of Biological Assets Replacement of Parts of PPE
Parts of some items of PPE may require replacement at regular
Agricultural Activity intervals.
An enterprise recognises in the carrying amount of an item of PPE
the cost of replacing part of such an item when that cost is incurred if
Management the recognition criteria are met.
(a) It is probable that future economic benefits associated with the Cost Model
item will flow to the enterprise, and
(b) The cost of the item can be measured reliably.
After Revaluation
Notes: Recognition Model
1. It may be appropriate to aggregate individually insignificant
items, such as moulds, tools and dies and to apply the criteria
to the aggregate value. Measurement at Recognition
2. An enterprise may decide to expense an item which could An item of PPE that qualifies for recognition as an asset should
otherwise have been included as PPE, because the amount of be measured at its cost.
the expenditure is not material. What are the elements of Cost?
Cost of an item of PPE comprises:
The Chartered Accountant Student July 2019 19
32
ACCOUNTING
Cost of an Item of PPE
Measurement of Cost
Cost of an item of PPE is the cash price equivalent at the
recognition date.
Includes Excludes
Cost of an item of PPE
Purchase Price
Costs of opening a new facility or
Any Directly business (Such as, Inauguration
Attributable Costs costs)
Costs of introducing a new PPE acquired in Exchange for a
product or service (including costs If payment is deferred
beyond normal credit Non-Monetary Asset or Assets
Decommissioning, of advertising and promotional or combination of Monetary and
Restoration and activities) terms
Non-monetary Assets
similar Liabilities Costs of conducting business in a
new location or with a new class of
customer (including costs of staff
training)
Administration and other general
overhead costs Total payment minus Cost of such an item of PPE is
Cash price equivalent measured at fair value unless
Recognition of costs in the carrying amount of an item of PPE
ceases when the item is in the location and condition necessary
for it to be capable of operating in the manner intended by
management.
is recognised unless such Exchange Fair value
The following costs are not included in the carrying amount of an as an interest is transaction of neither
item of PPE: interest capitalised lacks the asset(s)
1. Costs incurred while an item capable of operating in the manner expense over in commercial received nor
intended by management has yet to be brought into use or is the period of accordance substance; Or the asset(s)
operated at less than full capacity. credit with AS 16 given up
is reliably
2. Initial operating losses, such as those incurred while demand for measurable.
the output of an item builds up. And
3. Costs of relocating or reorganising part or all of the operations of
an enterprise.
Note:
Note: Some operations occur in connection with the construction
or development of an item of PPE, but are not necessary to bring 1. The acquired item(s) is/are measured in this manner even if an
the item to the location and condition necessary for it to be enterprise cannot immediately derecognise the asset given up.
capable of operating in the manner intended by management.
These incidental operations may occur before or during the 2. If the acquired item(s) is/are not measured at fair value, its/their
construction or development activities. cost is measured at the carrying amount of the asset(s) given up.
3. An enterprise determines whether an exchange transaction
Decommissioning, Restoration and similar Liabilities: has commercial substance by considering the extent to which
The cost of an item of PPE comprises initial estimate of the costs of its future cash flows are expected to change as a result of the
dismantling, removing the item and restoring the site on which it transaction. An exchange transaction has commercial substance
is located, referred to as ‘Decommissioning, Restoration and similar if:
Liabilities’, the obligation for which an enterprise incurs either
when the item is acquired or as a consequence of having used the (a) the configuration (risk, timing and amount) of the cash flows
item during a particular period for purposes other than to produce of the asset received differs from the configuration of the
inventories during that period. cash flows of the asset transferred; or
Exception: An enterprise applies AS 2 (Revised) “Valuation of (b) the enterprise-specific value of the portion of the operations
Inventories”, to the costs of obligations for dismantling, removing
and restoring the site on which an item is located that are incurred of the enterprise affected by the transaction changes as a
during a particular period as a consequence of having used the item result of the exchange;
to produce inventories during that period.
(c) and the difference in (a) or (b) is significant relative to the
Same as a the cost of fair value of the assets exchanged.
Cost of a Self-
constructed Asset constructing an similar asset PPE purchased for a Consolidated Price
for sale
Where several items of PPE are purchased for a consolidated price,
the consideration is apportioned to the various items on the basis of
Eliminate Include Not included their respective fair values at the date of acquisition.
PPE held by a lessee under a Finance Lease
Internal Borrowing Costs Abnormal amounts
profits as per AS 16 of wasted material, The cost of an item of PPE held by a lessee under a finance lease is
labour, or other determined in accordance with AS 19 (Leases).
resources
Government Grant related to PPE
Bearer plants are accounted for in the same way as self-constructed
items of PPE before they are in the location and condition necessary The carrying amount of an item of PPE may be reduced by
to be capable of operating in the manner intended by management. government grants in accordance with AS 12 (Accounting for
Government Grants).
20 July 2019 The Chartered Accountant Student
33
ACCOUNTING
If there is no market-based evidence of fair value because of the
Measurement after Recognition specialised nature of the item of PPE and the item is rarely sold,
except as part of a continuing business, an enterprise may need
to estimate fair value using an income approach or a depreciated
replacement cost approach.
Cost model Revaluation Model Accounting Treatment of Revaluations
When an item of PPE is revalued, the carrying amount of that asset is
adjusted to the revalued amount.
PPE carried at a At the date of the revaluation, the asset is treated in one of the
PPE carried at following ways:
revalued amount.
Technique 1: Gross carrying amount is adjusted in a manner that is
consistent with the revaluation of the carrying amount of the asset.
Cost Less Any Whose fair value Gross carrying amount
Accumulated can be measured
Depreciation and reliably. • May be restated by reference to observable market data, or
Any Accumulated • May be restated proportionately to the change in the carrying
Impairment losses
amount.
Accumulated depreciation at the date of the revaluation is
Revaluation for entire class of PPE
• Adjusted to equal the difference between the gross carrying
If an item of PPE is revalued, the entire class of PPE to which that amount and the carrying amount of the asset after taking into
asset belongs should be revalued. account accumulated impairment losses
Reason:
Technique 2: Accumulated depreciation is eliminated against the
The items within a class of PPE are revalued simultaneously to avoid Gross Carrying amount of the asset
selective revaluation of assets and the reporting of amounts in the
Financial Statements that are a mixture of costs and values as at
different dates.
Revaluation - Increase or Decrease
Class of PPE is
Frequency of Revaluations
Revaluations should be made with sufficient regularity to ensure Credited directly Charged to the
to owners’ interests Statement of profit
that the carrying amount does not differ materially from that which under the heading of and loss
would be determined using Fair value at the Balance Sheet date. Revaluation surplus
The frequency of revaluations depends upon the changes in fair
values of the items of PPE being revalued.
Exception: Exception:
When the fair value of a revalued asset differs materially from its When it is subsequently When it is subsequently
carrying amount, a further revaluation is required. Increased (Initially Decreased (Initially
Decreased) Increased)
Frequency of Revaluations
(Sufficient Regularity) Recognised in the Decrease should be debited
Statement of profit and loss directly to owners’ interests
to the extent that it reverses under the heading of
a revaluation decrease of Revaluation surplus to the
the same asset previously extent of any credit balance
Items of PPE Items of PPE with recognised in the Statement existing in the Revaluation
experience significant only insignificant of profit and loss. surplus in respect of that asset.
and volatile changes changes in Fair
in Fair value value
Treatment of Revaluation Surplus
The revaluation surplus included in owners’ interests in respect of
Annual revaluation Revalue the item only an item of PPE may be transferred to the Revenue Reserves when the
every 3 or 5 years asset is derecognised.
Case I : When whole surplus is transferred:
If the asset is:
Determination of Fair Value • Retired; Or
Fair value of items of PPE is usually determined from market-based • Disposed of.
evidence by appraisal that is normally undertaken by professionally Case II : Some of the surplus may be transferred as the asset is
qualified valuers. used by an enterprise:
35
ACCOUNTING
Changes in Existing Decommissioning, If the related asset is measured using the
Restoration and Other Liabilities Revaluation model
Changes in the liability alter the revaluation surplus or deficit
previously recognised on that asset, so that:
(i) Decrease in the liability credited directly to revaluation
Changes in surplus in the owners’ interest
Liabilities
Exception:
It should be recognised in the Statement of Profit and Loss to
the extent that it reverses a revaluation deficit on the asset that
was previously recognised in the Statement of Profit and Loss.
Similar Price
factors The cost of PPE Adjustments
may undergo Note: In the event that a decrease in the liability exceeds the
changes carrying amount that would have been recognised had the
subsequent to asset been carried under the cost model, the excess should be
its acquisition or recognised immediately in the Statement of Profit and Loss.
construction on
account of:
(ii) Increase in the liability should be recognised in the
Statement of Profit and Loss
Changes in Exception:
initial estimates It should be debited directly to Revaluation surplus in the
of amounts Changes in owners’ interest to the extent of any credit balance existing
provided for Duties
Dismantling, in the Revaluation surplus in respect of that asset
Removing,
Restoration, Caution:
and A change in the liability is an indication that the asset may
have to be revalued in order to ensure that the carrying
amount does not differ materially from that which would be
Accounting for the above changes: determined using fair value at the balance sheet date.
What happens if the related asset has reached the end of its
Related Asset is useful life?
measured using Cost
Model All subsequent changes in the liability should be recognised in the
Statement of Profit and Loss as they occur. This applies under both
the cost model and the revaluation model.
Accounitng
(Depends upon)
Situations and Its Accounting
Related Asset is
measured using
Revaluation Model
Impairments De- Compensation Cost of
of items of recognition from third items of PPE
If the related asset is measured using the Cost PPE of items of parties for restored,
items of PPE purchased or
model PPE retired
that were constructed
or disposed impaired, lost as
Changes in the Liability should be added to, or deducted from, of or given up replacements
the cost of the related asset in the current period
Note: Amount deducted from the cost of the asset should not
exceed its carrying amount. If a decrease in the liability exceeds Recognised Determined Is included in Is
the carrying amount of the asset, the excess should be recognised in accordance in determining determined
with AS 28 accordance profit or in
immediately in the Statement of Profit and Loss. with AS 10 loss when accordance
(Revised) it becomes with AS 10
receivable (Revised)
If the adjustment results in an addition to the cost of an asset
• Enterprise should consider whether this is an indication that the
new carrying amount of the asset may not be fully recoverable. Retirements
Items of PPE retired from active use and held for disposal should be
stated at the lower of:
Note: If it is such an indication, the enterprise should test the
• Carrying Amount, and
asset for impairment by estimating its recoverable amount, and • Net Realisable Value
should account for any impairment loss, in accordance with
applicable Accounting standards. Note: Any write-down in this regard should be recognised
immediately in the Statement of Profit and Loss.
Exception: The amount of assets retired from active use and held for disposal;
An enterprise that in the course of its ordinary activities, routinely
sells items of PPE that it had held for rental to others should transfer The amount of contractual commitments for the acquisition of
such assets to inventories at their carrying amount when they cease property, plant and equipment;
to be rented and become held for sale.
The proceeds from the sale of such assets should be recognised in
revenue in accordance with AS 9 on Revenue Recognition. If amount of contractual commitments is not disclosed separately
on the face of the statement of profit and loss, the amount of
Determining the date of disposal of an item: compensation from third parties for items of property, plant and
equipment that were impaired, lost or given up that is included in the
An enterprise applies the criteria in AS 9 for recognising revenue statement of profit and loss.
from the sale of goods.
37
ACCOUNTING
Transitional Provisions the requirements of this Standard, should be capitalised at their
respective carrying amounts.
Previously Recognised Revenue Expenditure
Where an entity has in past recognised an expenditure in the Note: The spare parts so capitalised should be depreciated over
Statement of Profit and Loss which is eligible to be included as a part their remaining useful lives prospectively as per the requirements
of the cost of a project for construction of PPE in accordance with the of this Standard.
requirements of this standard:
• It may do so retrospectively for such a project.
Revaluations
Note: The effect of such retrospective application, should be The requirements of AS 10 (Revised) regarding the revaluation
recognised net-of-tax in Revenue reserves. model should be applied prospectively.
In case, on the date of this Standard becoming mandatory, an
PPE acquired in Exchange of Assets enterprise does not adopt the revaluation model as its accounting
policy but the carrying amount of items of PPE reflects any
The requirements of AS 10 (Revised) regarding the initial previous revaluation it should adjust the amount outstanding in the
measurement of an item of PPE acquired in an exchange of assets Revaluation reserve against the carrying amount of that item.
transaction should be applied prospectively only to transactions
entered into after this Standard becomes mandatory.
Note: The carrying amount of that item should never be less
Spare parts
than residual value. Any excess of the amount outstanding
On the date of this Standard becoming mandatory, the spare as Revaluation reserve over the carrying amount of that item
parts, which hitherto were being treated as inventory under AS 2 should be adjusted in Revenue reserves.
(Revised), and are now required to be capitalised in accordance with
Important points/disclosures
AS 11
(a) Specifying the currency in which an enterprise presents its financial statements. However, an
(a) In accounting enterprise normally uses the currency of the country in which it is domiciled. If it uses a different
for transactions in currency, the Standard requires disclosure of the reasons for using that currency. The Standard also
foreign currencies. requires disclosure of the reason for any change in the reporting currency.
(b) In translating (b) Presentation in a cash flow statement of cash flows arising from transactions in a foreign
the financial currency and the translation of cash flows of a foreign operation, which are addressed in AS 3
statements of ‘Cash flow statement’.
foreign operations.
(c) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as
an adjustment to interest costs.
(c) Accounting for
foreign currency
transactions in the
nature of forward (d) Restatement of an enterprise’s financial statements from its reporting currency into another currency
exchange contracts. for the convenience of users accustomed to that currency or for similar purposes.
A foreign currency
transaction is a Borrows or lends Otherwise acquires
transaction which is Buys or sells goods or Becomes a party to an or disposes of
services whose price funds when the unperformed forward
denominated in or amounts payable assets, or incurs or
requires settlement is denominated in a exchange contract or settles liabilities,
foreign currency or receivable are
in a foreign currency, denominated in a denominated in a
including transactions or foreign currency.
foreign currency or
arising when an
enterprise either:
Initial Recognition
A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency
amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.
Reporting at each Balance Sheet Date •When the transaction is settled in a subsequent accounting
period, exchange difference recognised in each intervening
period up to the period of settlement is determined by the
Foreign currency
change in exchange rates during that period.
items • Alternatively, exchange differences arising on reporting of
long-term foreign currency monetary items at rates different from
those at which they were initially recorded during the period, or
reported in previous financial statements, insofar as they relate
to the acquisition of a depreciable capital asset, can be added to
Monetary Non-monetary or deducted from the cost of the asset and should be depreciated
over the balance life of the asset;
•In other cases, can be accumulated in the Foreign Currency
Reported Monetary Item Translation Difference (FCMITD) Account
using the and (amortised over the balance period of such long term
closing rate. assets or liability, by recognition as income or expense in each
of such periods)
Carried in Carried at •Such option is irrevocable and should be applied to all such
terms of fair value or Contingent foreign currency monetary items.
historical other similar liability
cost
denominated
valuation
denominated
denominated
in foreign
Classification of Foreign Operations as
in a foreign in a foreign currency Integral or Non-Integral
currency currency
The method used to translate the financial statements of
a foreign operation
Reported Reported
using the using the Disclosed depends on the way in which it is financed
exchange exchange by using the
rate at the rates that closing rate.
date of the existed and operates in relation to the reporting enterprise.
transaction. when the
values were
determined.
foreign operations are classified as either ‘integral foreign
operations’ or ‘non-integral foreign operations’.
Recognition of Exchange Differences
•Exchange differences arising on the settlement of monetary
Translation of Integral Foreign Operations (IFO)
items or on reporting an enterprise’s monetary items at rates The individual items in The cost and depreciation of
different from those at which they were initially recorded the financial statements tangible fixed assets is translated
during the period, or reported in previous financial statements, of the foreign operation using the exchange rate at the
should be recognized as income or as expenses in the period are translated as if all date of purchase of the asset or,
in which they arise. its transactions had if the asset is carried at fair value
been entered into by the or other similar valuation, using
•An exchange difference results when there is a change in reporting enterprise itself. the rate that existed on the date
the exchange rate between the transaction date and the date of the valuation.
of settlement of any monetary items arising from a foreign
currency transaction. The recoverable amount or
The cost of inventories is realisable value of an asset is
•When the transaction is settled within the same accounting translated at the exchange translated using the exchange
period as that in which it occurred, all the exchange difference rates that existed when rate that existed when the
is recognised in that period. those costs were incurred. recoverable amount or net
realisable value was determined.
39
ACCOUNTING
Translation of Non-Integral Foreign Operations (NFO)
The translation of the financial statements of a non-integral foreign operation is done using the following procedure:
Translation
Assets and Income and Resulting exchange Any goodwill or A contingent liability disclosed in
Liabilities Expense Items differences capital reserve the financial statements
For practical reasons, a rate that approximates the actual exchange rates, for example an average rate for the period is often used to
translate income and expense items of a foreign operation.
Incorporation of the financial statements of a non-integral foreign operation in those of the reporting enterprise follows normal
consolidation procedures, such as the elimination of intra-group balances and intra-group transactions of a subsidiary.
When the financial statements of a non-integral foreign operation are drawn up to a different reporting date from that of
the reporting enterprise, the non-integral foreign operation often prepares, for purposes of incorporation in the financial
statements of the reporting enterprise, statements as at the same date as the reporting enterprise.
The exchange differences are not recognised as income or expenses for the period because the changes in the exchange rates have
little or no direct effect on the present and future cash flows from operations of either the non-integral foreign operation or the
reporting enterprise.
When a non-integral foreign operation is consolidated, but is not wholly owned, accumulated exchange differences arising
from translation and attributable to minority interests are allocated to, and reported as part of, the minority interest in the
consolidated balance sheet.
An enterprise may dispose of its interest in a non-integral foreign operation through sale, liquidation, repayment of share capital,
or abandomnent of all, or part ot: that operation. The payment of a dividend forms part of a disposal only when it constitutes a
return of the investment. Remittance from a non-integral foreign operation by way of repatriation of accumulated profits does not
form part of a disposal unless it constitutes return of the investment. In the case of a partial disposal, only the proportionate share
of the related accumulated exchange differences is included in the gain or loss. A write-down of the carrying amount of a non-
integral foreign operation does not constitute a partial disposal. Accordingly, no part of the deferred foreign exchange gain or loss
is recognised at the time of a write-down.
Control RE may control the FOA of the FO are carried out with a significant degree of autonomy from those of the RE
Finance FOA are financed mainly from its own operations or local borrowings rather than from RE
Costs of labour, material and other components of the FO’S products or services are primarily paid or
Cost settled in the local currency rather than in the RE currency
Indications
Sales FO's sales are mainly in currencies other than the RE currency
RE cash flows are insulated from the day-to-day activities of the FO rather than being directly affected
Cash Flows by the FOA
Sales prices for the FO’S products are not primarily responsive on a short-term basis to changes in
Sales prices exchange rates but are determined more by local competition or local government regulation.
Local sales There is an active local sales market for the FO’S products, although there also might be significant amounts
market of exports.
RE - Reporting Enterprise
FO- Foreign Operation
FOA - Foreign Operation Activities
Reclassfication of
Foreign operation
Translated amounts
Exchange for non-monetary Exchange
differences items at the date of differences
the change
41
ACCOUNTING
Tax Effects of Exchange Differences
Accounted for in Gains and losses on foreign currency transactions and exchange differences arising on the translation of the
accordance with AS 22. financial statements of foreign operations may have associated tax effects.
Cancellation
Premium or Exchange or renewal of Premium or Contract Value Gain or loss
discount differences contract discount
Marked to its
Amortised as Recognised in Ignored current market
expense or income the statement of Recognised.
value at each
over the life of the profit and loss balance sheet
contract in the reporting date
period in which
the exchange rates
change.
Recognised as
income or as
expense for the
period.
Disclosure
as a separate
Included in the net profit or loss for the period component of
shareholders’
Exchange funds, and a
differences Amount reconciliation of
Accumulated in foreign currency translation reserve
the amount of
such exchange
Reason for using a different currency (in which the differences at the
enterprise is domiciled) beginning and end
Reporting currency of the period.
Reason for any change in the reporting currency
Disclosure
Nature of the change in classification
wit dition
en
go stanc
con
hc
si
ver
ert s
As
ain
by
43
ACCOUNTING
Presentation of Grants
Presentation of Grants
is applied first against any is recorded by increasing the book Refundable, in part or in full, to
unamortised deferred credit value of the asset or by reducing the government on non-fulfilment
remaining in respect of the grant the deferred income balance, of some specified conditions, the
as appropriate, by the amount relevant amount recoverable by the
To the extent that the amount refundable. government is
refundable exceeds any such deferred
credit, or where no deferred credit
exists, In the first alternative, i.e., where the
book value of the asset is increased,
depreciation on the revised book Reduced from the capital reserve.
the amount is charged immediately value is provided prospectively over
to profit and loss statement. the residual useful life of the asset.
Disclosure
The accounting policy adopted
for government grants,
including the methods of The nature and extent of government
presentation in the financial grants recognised in the financial
statements statements, including grants of
non-monetary assets given at a
concessional rate or free of cost.
AS 13 does not
deal with Mutual funds, venture By nature readily realisable;
Investments on capital funds and/ Other than
retirement benefit or the related asset
intended to be held for not more a current
plans and life insurance management companies, banks than one year from the date on investment
enterprises and public financial institutions which such investment is made.
formed under a Central or State
Government Act or so declared
under the Companies Act, 2013
Type of Cost of
DEFINITION OF INVESTMENTS acquisition investments
Investments are assets
held by an enterprise
Cash price including charges such
In Cash/ bank
as brokerages, fees and duties
Accounting for
Interest accrued/Dividend declared
• Amount for which an asset could be exchanged
between a knowledgeable, willing buyer and a
knowledgeable, willing seller in an arm’s length
Fair value transaction. Pre-acquisition Post-acquisition
• Under appropriate circumstances, market value period period
or net realisable value provides an evidence of
fair value.
45
INTERMEDIATE - ACCOUNTING STANDARDS AND FRAMEWORK
Subscribed
Right shares Cost of shares added
to carrying amount If acquired on cum-right
basis & the market value of
investments immediately
after their becoming ex-
Not subscribed, but sold right is lower than the
Accounting for
Sale proceeds taken to cost for which they were
P&L A/c acquired, apply the sale
proceeds of rights to reduce
the carrying amount of
No amount is entered such investments to the
Bonus market value.
in the capital column of
investment account.
Carrying Amount
Necessarily takes a Amount of exchange difference not exceeding the difference between
substantial period of interest on local currency borrowings and interest on foreign
time to get ready for Is ready for use
currency borrowings is considered as borrowing cost to be accounted
its intended use or sale for under this Standard and the remaining exchange difference, if
any, is accounted for under AS 11, ‘The Effects of Changes in Foreign
Exchange Rates’.
*or that could have been avoided if the expenditure on qualifying assets
had not been made.
22 May 2020 The Chartered Accountant Student
47
INTERMEDIATE - ACCOUNTING STANDARDS AND FRAMEWORK
Thus, borrowing costs are capitalised as part of the cost of a qualifying asset when it is probable that they will result in future economic benefits to the
enterprise and the costs can be measured reliably. Other borrowing costs are recognised as an expense in the period in which they are incurred.
Borrowings
The activities necessary to prepare the asset for its intended use Disclosure
or sale encompass more than the physical construction of the The financial statements should disclose:
asset. They include technical and administrative work prior to the
commencement of physical construction. However, such activities
exclude the holding of an asset when no production or development The accounting
that changes the asset’s condition is taking place. For example, policy adopted for
borrowing costs incurred while land is under development are borrowing costs; The amount of
capitalised during the period in which activities related to the and borrowing costs
development are being undertaken. However, borrowing costs capitalised during
incurred while land acquired for building purposes is held without any the period.
associated development activity do not qualify for capitalisation.
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.
*The concepts of capital, capital maintenance and determination of profit will be discussed in next issue of Students' Journal.
Financial statements are normally According to AS-1 Revenues and It is assumed that accounting policies are
prepared on the assumption that an costs are accrued, that is, recognised consistent from one period to another.
enterprise will continue in operation as they are earned or incurred (and The consistency improves comparability of
in the foreseeable future and neither not as money is received or paid) and financial statements through time. According
there is an intention, nor there is a recorded in the financial statements to Accounting Standards, an accounting
need to materially curtail the scale of of the periods to which they relate. policy can be changed if the change is required
operations. by statute or by an AS or for more appropriate
presentation of financial statements.
True and Fair View of Financial Statements In preparation of financial statements, all or any of the measurement
Financial statements are required to show a true and fair view of basis can be used in varying combinations to assign money values
the performance, financial position and cash flows of an enterprise. to financial items, subject to the requirement under the Accounting
The framework does not deal directly with this concept of true and Standards.
fair view, yet application of the principal qualitative characteristics
(understandability, relevance, reliability and comparability) and 1. Historical Cost: Historical cost means acquisition price.
appropriate accounting standards normally results in financial
statements portraying true and fair view of information about an
According to this, assets are recorded at an amount
enterprise. of cash or cash equivalent paid or the fair value of the
asset at the time of acquisition. Liabilities are recorded
Elements of Financial Statements
at the amount of proceeds received in exchange for the
The framework classifies items of financial statements in five broad obligation. In some circumstances a liability is recorded
groups depending on their economic characteristics.
at the amount of cash or cash equivalent expected to be
Elements of Financial Statements paid to satisfy it in the normal course of business.
50
accounting
accounting: A Capsule for Quick Recap
It has always been the endeavour of Board of Studies to provide quality academic inputs to the students. Considering this
objective in mind, it has been decided to bring forth a crisp and concise capsule for Paper 1 ‘Accounting’ at Intermediate level.
The topics of “Framework for Preparation and Presentation of Financial Statements” (in continuation of the matter given in
May, 2020 issue of Students’ Journal); “Redemption of Preference Shares and Debentures” and “Departmental Accounts”
have been covered in this Capsule. The significant points of these topics have been presented through pictorial presentations
in this capsule which will help the students in grasping the intricate practical aspects of each topic. This will facilitate the
students to recapitulate the whole concepts within minimum time and efforts in the later stages of preparation. Although,
the capsule has been prepared keeping in view the new and revised scheme of Education and Training of ICAI, the students
of earlier scheme may also be benefitted from it. This capsule, though, facilitates the students in undergoing quick revision,
under no circumstances, such revisions can substitute the detailed study of the material provided by the Board of Studies.
The principal areas covered by the framework, status and Financial capital Financial capital Physical capital
maintenance at maintenance at maintenance at
scope of Framework, components of financial statements, current purchasing
historical cost: current costs:
objectives and users of financial statements, fundamental power:
accounting assumptions, true and fair view of financial
statements and measurement of elements of financial Under this Under this Under this
convention, opening convention, opening convention, the
statements have already been discussed in the Capsule and closing equity at historical costs of
published in May, 2020 issue of Students' Journal. Continuing and closing
historical costs are opening and closing
assets are stated assets are restated
this, the concepts of capital maintenance and determination restated at closing
at respective prices using average at closing prices
of profit are being discussed below:
historical costs to price indices. A using specific price
ascertain opening positive retained indices applicable
Capital Maintenance and closing equity. profit by this method to each asset.
If retained profit means the business The liabilities are
has enough funds also restated at a
Capital refers to net is greater than or
to replace its assets value of economic
assets of a business. It equal to zero, the resources to be
The point is explained below at average closing
is important for any capital is said to sacrificed to settle
as: price. This may not
business to maintain be maintained at serve the purpose the obligation at
its net assets in • P = (CA – CL) – historical costs. closing date. The
because prices of all
such a way, as to (OA – OL) – C + D This means the assets do not change opening and closing
ensure continued • Where: Profit = P business will have at average rate in equity at closing
current costs are
operations, at least • Opening Assets = OA and enough funds to real situations.
For example, price obtained as an
at the same level, Opening Liabilities = OL replace its assets
excess of aggregate
year after year. at historical costs. of a machine can
• Closing Assets = CA and increase by 30%
of current cost
In other words, Closing Liabilities = CL This is quite right values of assets
while the average
dividends should as long as prices do over aggregate of
• Introduction of capital = C increase is 20%.
not exceed profit not rise. current cost values
and Drawings / Dividends = D of liabilities. A
after appropriate
provisions for • Retained Profit = P – D = (CA positive retained
– CL) – (OA – OL) – C profit by this
replacement of method ensures
assets consumed in retention of funds
operations. for replacement
of each asset at
respective closing
prices.
A business must ensure that Retained Profit (RP) is not negative,
i.e. closing equity should not be less than capital to be maintained,
which is sum of opening equity and capital introduced. The The selection of the appropriate concept of capital by
value of retained profit depends on the valuation of assets and an enterprise should be based on the needs of the users of its
liabilities. financial statements. Thus, a financial concept of capital should
The concept of capital maintenance is concerned with how an be adopted if the users of financial statements are primarily
enterprise defines the capital that it seeks to maintain. It provides concerned with the maintenance of nominal invested capital or
the linkage between the concepts of capital and the concepts of the purchasing power of invested capital. If, however, the main
profit because it provides the point of reference by which profit concern of users is with the operating capability of the enterprise,
is measured. It is a prerequisite for distinguishing between an a physical concept of capital should be used. The concept chosen
enterprise's return on capital and its return of capital; only inflows indicates the goal to be attained in determining profit, even
of assets in excess of amounts needed to maintain capital can be though there may be some measurement difficulties in making
regarded as profit and therefore as a return on capital. the concept operational. The selection of the measurement bases
In order to check maintenance of capital, i.e. whether or not and concept of capital maintenance will determine the accounting
retained profit is negative, we can use any of these bases: model used in the preparation of the financial statements.
The Chartered Accountant Student July 2020 19
51
accounting
CHAPTER 7 REDEMPTION OF PREFERENCE SHARES
Introduction (d) where any such shares are proposed to be redeemed
Redemption is the process of repaying an obligation, at out of the profits of the company, there shall, out of
prearranged amounts and timings. It is a contract giving the right profits which would otherwise have been available for
to redeem preference shares within or at the end of a given time dividends, be transferred to a reserve account to be
period at an agreed price. The redeemable shares are issued on called Capital Redemption Reserve Account, a sum equal
the terms that shareholders will at a future date be repaid the to the nominal amount of the shares redeemed; and the
amount which they invested in the company (along with frequent provisions of the Act relating to the reduction of the
payment of a specified amount as return on investment during share capital of a company shall, except as provided in
the tenure of the preference shares).
the Companies Act, apply as if the Capital Redemption
Purpose of Issuing Redeemable Reserve (CRR) Account were the paid-up share capital of
Preference Shares the company.
A company may issue redeemable preference shares because of
the following: The utilisation of CRR Account is further restricted to
issuance of fully paid-up bonus shares only.
1. A company may face difficulty in On the redemption of redeemable preference shares out of
raising share capital, if its shares are accumulated profits it will be necessary to transfer to the Capital
not traded on the stock exchange.
Potential investors, hesitant in putting Redemption Reserve Account an amount equal to the amount
money into shares that cannot easily be repaid on the redemption of preference shares on account of
sold, may be encouraged to invest if the face value less proceeds of a fresh issue of capital made for the
shares are redeemable by the company.
purpose of redemption.
Section 55 of the Companies Act, 2013, deals with provisions
2. The preference shares may be
relating to redemption of preference shares. It ensures that there
redeemed when there is a surplus of
capital and the surplus funds cannot be is no reduction in shareholders’ funds due to redemption and,
utilised in the business for profitable thus, the interest of outsiders is not affected. For this, it requires
use. In India, the issue and redemption
that either fresh issue of shares is made or distributable profits
of preference shares is governed by the
Companies Act, 2013. are retained and transferred to ‘Capital Redemption Reserve
Account’.
52
accounting
The proceeds from issue of debentures cannot be utilised Advantages and Disadvantages of
for the purpose. Redemption of Preference Shares by Issue
of Fresh Equity Shares
(a) Towards issue of un-issued shares of
Redemption of
the company to be issued to members preference shares by
of the company as fully paid bonus issue of fresh equity
securities shares
No change in the
percentage of equity There may be a
reduction in liquidity.
Accounting Entries for Redemption of
share-holding of the
company;
Preference Shares
When preference shares are redeemed at par
Surplus funds can be
Redeemable Preference Share Capital Account Dr.
used.
To Preference Shareholders Account
54
accounting
Chapter 8 REDEMPTION OF DEBENTURES
Redemption by paying off the debt on account of An issue of secured debentures may be made, provided the date
debentures issued can be done by one of these methods: of its redemption shall not exceed ten years from the date of issue:
Provided that in case of a non-banking financial company, the (3) The company should pay interest and redeem
charge or mortgage under sub-clause (i) may be created on any the debentures in accordance with the terms and
movable property.
conditions of their issue.
Note: Provided further that in case of any issue of debentures by a
Government company which is fully secured by the guarantee given
by the Central Government or one or more State Government or by (4) Where a company fails to redeem the debentures
both, the requirement for creation of charge under this sub-rule shall on the date of maturity or fails to pay the interest on
not apply.
Provided also that in case of any loan taken by a subsidiary debentures when they fall due, the Tribunal may, on
company from any bank or financial institution the charge or the application of any or all the holders of debentures
mortgage under this sub-rule may also be created on the properties or debenture trustee and, after hearing the parties
or assets of the holding company
concerned, direct, by order, the company to redeem
the debentures forthwith by the payment of principal
Debenture Redemption Reserve
and interest due thereon.
56
accounting
S. Debentures issued by Adequacy of Debenture The amount deposited or invested, as the case may be, above
No Redemption Reserve should not be utilised for any purpose other than for the
redemption of debentures maturing during the year referred
(DRR) to above.
Dependent Independent
Inter-department transfers
Accounts of all Separate set of books (forming part of closing inventory)
departments are kept in are kept for each
one book only department
58
accounting
The situation of unrealised profit will arise only if the transfers Journal Entry
are made at market price which is more than cost or when the
goods are transferred at cost plus percentage of profit. At the end of the accounting • Profit and Loss
year, this journal entry will Account Dr.
be passed for elimination of To Stock Reserve
Stock Reserve unrealised profit (creation of • (Being a provision
stock reserve): made for unrealised
Unrealised profit included in unsold stock at the end profit included in
of accounting period is eliminated by creating an closing stock)
appropriate stock reserve by debiting the combined Profit
In the beginning of the • Stock Reserve Dr.
and Loss Account. The amount of stock reserve will be next accounting year, the To Profit and Loss
calculated as: aforesaid journal entry will Account
be reversed as : • (Being provision for
Transfer price of unsold stock ×Profit included in transfer price unrealised profit
reversed.)
Transfer price
59
Accounting
ca Intermediate - Paper 1 - Accounting
In a pursuit to provide quality academic inputs to the students to help them in grasping the intricate aspects of the
subject, Board of Studies has decided to bring forth a crisp and concise capsule on Paper 1 ‘Accounting’ at Intermediate
level. The significant points of the topic “Accounting for Branches Including Foreign Branches” has been covered in this
Capsule through pictorial presentations. This capsule, though, facilitates the students in undergoing quick revision,
under no circumstances, such revisions can substitute the detailed study of the material provided by the Board of Studies.
On this basis, a Branch Account is stated in the head office books Dependent Branches Independent
to which the price of goods or services provided or expenses paid for which whole Branches which
out are debited and correspondingly, the value of benefits and cash accounting records are maintain independent
received from the branch are credited. kept at Head Office accounting records
60
Accounting
Accounting in the case of first two types is simple. Only a record of If the branch is allowed to make small purchases of goods locally as
expenses incurred at the branch has to be maintained. well as to incur expenses out of its cash receipts, it will be necessary
But however, a retail branch is essentially a sale agency that for the branch to supply to the head office a copy of the Cash Account,
principally sells goods supplied by the head office for cash and, if showing details of cash collections and disbursements.
so authorised, also on credit to approved customers. To illustrate the various entries which are made in the Branch
Account, the proforma of a Branch Account is shown below:
Generally, cash collected is deposited into a local bank to the credit
of the head office and the head office issues cheques or transfers Proforma Branch Account
funds thereon for meeting the expenses of the branch. To Balance b/d By Bank A/c (Cash remitted)
In addition, the Branch Manager is provided with a ‘float’ for petty Cash By Return to H.O.
expenses which is replenished from time to time on an imprest Stock
basis. Debtors By Balance c/d
If, however, the branch also sells certain lines of goods, directly Petty Cash Cash
purchased by it, the branch retains a part of the sale proceeds to Fixed Assets Stock
pay for the goods so purchased. Prepaid Expenses Debtors
To Goods sent to Branch Petty Cash
To Bank A/c Fixed Assets
Methods of Charging Goods to Branches Salaries Prepaid Expenses
Rent By Profit and Loss A/c—Loss
Goods may be invoiced to branches Sundry Expenses (if debit side is larger)
To Profit & Loss A/c—Profit
(if credit side is larger)
In case of retail
At cost At selling price branches, at
wholesale price Note
In this way, greater control can Having credited The accuracy of the trading results
Where the Suitable for be exercised over the working the Branch Account as disclosed by the Branch Account,
goods would dealers in of a branch in as much as that by the actual cash so maintained, if considered
be sold at a tea, petrol, the branch balance in the head received from necessary, can be proved by
fixed price by ghee, etc. office books would always debtors, it would be preparing a Memorandum Branch
the branch. be composed of the value of incorrect to debit the Trading and Profit & Loss Account,
unsold stock at the branch and Branch Account, in in the usual way, from the balances
remittances or goods in transit. respect of discount of various items of income and
or allowances to expenses contained in the Branch
debtors. Account.
Accounting for Dependent Branches
Dependent branch does not maintain a complete record of its (ii) Stock and Debtors method:
transactions. The Head office may maintain accounts of dependent
branches by any of the following methods: The accounts
of the branch
Methods of maintaining accounts of • to exercise a more detailed control
are maintained
Dependent Branches over the working of a branch.
under this
method
Other Steps Entries in these accounts will be made in the following manner:
Balance Balance The balance The credit balance Transaction Account debited Account credited
of Branch of Branch in the in the Goods sent
Stock Expenses Branch P&L to Branch Account (a) Goods sent to Branch Branch A/c Goods Sent to
Account Account A/c will be is afterwards at selling price Branch A/c
will be will be transferred transferred to (b) ‘Loading being the Goods Sent to Branch A/c
transferred transferred to the (H.O.) the Head Office difference between Branch A/c
to the to the debit Profit & Loss Purchase Account selling price and cost
Branch of Branch Account. or Trading of goods
Profit Profit & Loss Account (in case (c) Returns to H.O. at Goods Sent to Branch A/c
and Loss Account. of manufacturing selling price Branch A/c
Account. concerns), it being
(d) ‘Loading’ in respect Branch A/c Goods Sent to
the value of goods
of goods returned Branch A/c
transferred to the
to H.O.
Branch.
(e) ‘Loading’ included in Stock Reserve Branch A/c
(iii) Trading and Profit and Loss Account (Final Accounts the opening stock to A/c
Method) reduce it
Trading and It is merely a (f ) Closing stock at Branch Stock Branch A/c
Profit and Loss The main memorandum selling price A/c
accounts are advantage account and (g) ‘Loading’ included Branch A/c Stock Reserve
prepared therefore, in closing stock to A/c
reduce it to cost
considering It is easy to the entries
each branch prepare and made do not Hence, the Branch Account will not correctly show the trading profit
as a separate understand. have double of the Branch unless these amounts are adjusted to cost. Such an
entity. entry effect. adjustment is affected by making contra entries in ‘Goods Sent to
It also gives Branch A/c’ and ‘Stock Reserve Account’.
complete In respect of closing stock at branch for the purpose of disclosure in
information of the Balance Sheet, the credit balance in the ‘Stock Reserve Account’
all transactions at the end of the year will be deducted from the value of the closing
which are stock, so as to reduce it to its cost; it will be carried forward as a
ignored in the separate balance to the following year, for being transferred to the
other methods. credit of the Branch Account.
62
Accounting
(ii) Stock and Debtors Method The discrepancy in the amount of balance in the Branch Stock
Account and the value of stock actually in hand, valued at sale
One additional account i.e. ‘Branch Adjustment account’ price, may be the result of one or more of the under-mentioned
is also prepared factors:
An error Goods A Physical Errors in
in applying having Commission loss of Stock-
in addition to all the accounts which are maintained under stock the been sold to adjust stock due taking.
and debtors method on cost basis. percentage either returns or to natural
of loading. below or allowances. causes or
above the pilferage.
Journal Entries established
Transaction Account debited Account credited selling
price.
(a) Sale price of Branch Stock A/c (i) Goods sent to
the goods (at selling price) Branch A/c at
sent from cost. Rebates and allowances
H.O. to the (ii) Branch Adjust-
Branch ment A/c (with
the loading i.e., Rebates and allowances allowed to customers
difference be- debited to P&L A/c & credited to debtors A/c.
tween the selling
price and cost In the Goods Sent to Branch Account, the cost
price). of the goods sent out to a branch for sale is
(b) Return of (i) Goods sent Branch Stock A/c credited by debiting Branch Stock Account.
goods to Branch
A/c (with the Conversely, the cost of goods returned by the
by the Branch branch is debited to this account. As such the
cost of goods
to H.O. balance in the account at the end of the year will
returned).
be the cost of goods sent to the branch; therefore,
(ii) Branch Adjust- it will be transferred either to the Trading Account
ment A/c (with or to Purchases Account of the head office.
the loading)
(c) Cash sales at Branch Cash/Bank Branch Stock A/c The amount of profit anticipated on sale of goods
the Branch A/c sent to the branch is credited to the Branch
(d) Credit Sales Branch Debtors Branch Stock A/c Adjustment Account and conversely, the amount of
at the Branch A/c profit not realised in respect of goods returned by
the branch to head office or that in respect to stock
(e) Goods Branch Stock A/c Branch Debtors A/c
remaining unsold with the branch at the close of
returned to (at selling price) the year is debited to Branch Adjustment Account.
Branch by
customers
The balance in this account, at the end of year
(f ) Goods lost (i) Goods Lost in Branch Stock A/c thus will consist of the amount of Gross Profit
in transit or Transit A/c or earned on sale by the branch.
stolen Goods Stolen
A/c (with cost
of the goods) On that account, it will be transferred to the
Branch Profit and Loss Account.
(ii) Branch Adjust-
ment A/c (with
the loading) Elimination of unrealised profit in the closing stock
Closing Stock
The balance in the Branch Stock account would be at the
sale price; therefore, it would be necessary to eliminate
The balance in the Branch Stock Account at the close of the the element of profit included in such closing stock.
year normally should be equal to the unsold stock at the Branch
valued at sale price. This is done by creating a reserve against unrealised
profit, by debiting the Branch Adjustment Account and
crediting Stock Reserve Account with an amount equal to
the difference in the cost and selling price of unsold stock.
But quite often the value of stock actually held at the branch is
either more or less than the balance of the Branch Stock Account. Sometimes instead of opening a separate account in
respect of the reserve, the amount of the difference
is credited to Branch Stock Account. In that case, the
credited balance of such a reserve is also carried forward
In that event balance in the Branch Stock Account is increased or separately, along with the debit balance in the Branch
reduced by debit or credit to Goods Lost Account (at cost price Stock Account; the difference between the two would
of goods) and Branch Adjustment Account (with the loading). be the value of stock at cost. In either case, the credit
balance will be deducted out of the value of closing
stock for the purpose of disclosure in the balance sheet,
so that the stock is shown at cost.
The Stock Account at selling price, thus reveals loss of stock
(or surplus) and serves as a check on the branch in this respect.
(iii) Trading and Profit and Loss Account (Final Accounts) Method:
• Branch maintains its entire books of account under double entry system.
• Branch opens in its books a Head Office account to record all transactions
that take place between Head Office and branch. The Head Office maintains a
Branch account to record these transactions.
• Branch prepares its Trial Balance, Trading and profit and loss Account at the
end of the accounting period and sends copies of these statements to Head
Office for incorporation.
• After receiving the final statements from branch, Head Office reconciles between
the two – Branch account in Head Office books and Head Office account in
Branch books.
• Head office passes necessary journal entries to incorporate branch trial balance
in its books.
64
Accounting
The Head Office Account in branch books and Branch Account in head office books is maintained respectively.
(i) Dispatch of goods to branch by H.O. Branch A/c Dr. Goods received from H.O. A/c Dr.
To Good sent to Branch A/c To Head Office A/c
(ii) When goods are returned by the Goods sent to Branch A/c Dr. Head Office A/c Dr.
Branch to H.O. To Branch A/c To Goods received from H.O. A/c
(iii) Branch Expenses are paid by the No Entry Expenses A/c Dr.
Branch To Bank or Cash A/c
(iv) Branch Expenses paid by H.O. Branch A/c Dr. Expenses A/c Dr.
To Bank or Cash A/c To Head Office A/c
(v) Outside purchases made by the Branch No Entry Purchases A/c Dr.
To Bank (or) Creditors A/c
(vi) Sales effected by the Branch No Entry Cash or Debtors A/c Dr.
To Sales
(vii) Collection from Debtors of the Branch Cash or Bank A/c Dr. Head office A/c Dr.
recd. by H.O. To Branch A/c To Sundry Debtors A/c
(viii) Payment by H.O. for purchase made by Branch A/c Dr. Purchases (or) Sundry Creditors A/c Dr.
Branch To Bank A/c To Head Office
(ix) Purchase of Asset by Branch No Entry Sundry Assets Dr.
To Bank (or) Liability
(x) Asset purchased by the Branch but Branch Asset A/c Dr. Head office Dr.
Asset A/c retained at H.O. books To Branch A/c To Bank (or) Liability
(xi) Depreciation on (x) above Branch A/c Dr. Depreciation A/c Dr.
To Branch Asset A/c To Head Office A/c
(xii) Remittance of funds by H.O. to Branch Branch A/c Dr. Bank A/c Dr.
To Bank A/c To Head Office A/c
(xiii) Remittance of funds by Branch to H.O. Reverse entry of (xii) above i.e. Reverse entry of (xii) above
(xiv) Transfer of goods from one Branch to (Recipient) Branch A/c Dr. Supplying Branch
another branch To (Supplying) Branch A/c
H.O. A/c Dr.
To Goods sent to H.O. A/c
Recipient Branch
Goods Received from H.O. A/c Dr.
To Head Office A/c
The final result of these adjustments will be that so far as the Head Office is concerned, the branch will be looked upon either as a debtor or
creditor, as a debtor if the amount of its assets is in excess of its liabilities and as a creditor if the position is reverse.
A debit balance in the Branch Account should always be equal to the net assets at the branch.
The Branch Balance Sheet would show the amount On that basis, supplemented by the record of transactions
advanced by H.O. to it as 'Capital'. maintained at the head office, it will be possible to construct the
Trading and Profit & Loss Account of the branch.
In H.O. Books, such amount would be shown as
"Advance to Branch" FOREIGN BRANCHES
Foreign branches generally maintain independent and complete
Method II: Prepare a consolidated Profit & Loss Account record of business transacted by them in currency of the country in
and Balance Sheet which they operate.
Amount of net profit or loss of the branch having been This is because exchange rate of Indian rupee is not stable in relation
transferred since it would be composed of the balances that to foreign currencies due to international demand and supply effects
have been transferred. on various currencies.
In case it is also desired that consolidated balance sheet of the The accounting principles which apply to inland branches also apply
branch and the head office should be prepared, it will also be to a foreign branch after converting the trial balance of the foreign
necessary to transfer the balance of assets and liabilities of the branch in the Indian currency.
branch to the head office.
66
Accounting
ACCOUNTING FOR FOREIGN BRANCHES These are only indicators and not decisive/conclusive factors to
classify the foreign operations as non-integral, much will depend on
For the purpose of accounting, AS 11 (revised 2003) classifies the factual information, situations of the particular case and, therefore,
foreign branches may be classified into two types: judgment is necessary to determine the appropriate classification.
• Integral Foreign Operation;
• Non- Integral Foreign Operation. TECHNIQUES FOR FOREIGN CURRENCY
TRANSLATION
Two types of foreign branches
Items Integral Foreign Non-Integral
• Integral Foreign Operation (IFO) Operations Foreign
It is a foreign operation, the activities of which are an integral Operations
part of those of the reporting enterprise. The business of
IFO is carried on as if it were an extension of the reporting Monetary Items Closing rate Closing rate
enterprise’s operations. For example, sale of goods imported (Cash, Bank
from the reporting enterprise and remittance of proceeds to Balance, Debtor,
the reporting enterprise. Creditor, Loans,
• Non-Integral Foreign Operation (NFO) Bills receivable,
It is a foreign operation that is not an Integral Foreign Bills Payable)
Operation. The business of a NFO is carried on in a substantially N o n - M o n e t a r y Rate on date of Closing rate
independent way by accumulating cash and other monetary Items (Fixed purchase
items, incurring expenses, generating income and arranging Assets)
borrowing in its local currency. An NFO may also enter into
transactions in foreign currencies, including transactions in Inventory Generally, closing Closing rate
the reporting currency. An example of NFO may be production rate (but if rate on
in a foreign currency out of the resources available in such the date of purchase
country independent of the reporting enterprise. of inventory is
available, then that
The following are the indicators of Non- Integral Foreign Operation- rate)
Profit and Loss Average rate Average rate
• Control by reporting enterprises - While the reporting items (revenue (but if rate on the (but if rate on the
enterprise may control the foreign operation, the activities items) date of transaction date of transaction
of foreign operation are carried independently without is available, then that is available, then
much dependence on reporting enterprise. rate) that rate)
Exchange Charge to P&L Accumulated in
Difference account. Foreign Currency
• Transactions with the reporting enterprises are not a high
Translation reserve.
proportion of the foreign operation’s activities.