PAPER 6: FINANCIAL ACCOUNTING (FA)

(Simplified Material 2023 December CMA Intermediate Examination)

ACCOUNTING FUNDAMENTALS • They streamline the accounting process and

Four Pillars of Accounting Framework enhance the quality of financial reports.
1. Conceptual Framework
• Ultimately, they contribute to the overall
• Defines the goals and principles of financial development of accounting in the country.
reporting.
Accounting Principles, Concepts and
• Guides the recognition, measurement, and Conventions.
presentation of financial information.
Introduction to Accounting Principles
• Emphasizes the quality of financial statements.
• Accounting's main purpose is to provide
2. Legal Framework financial information to users.
• Different types of businesses are governed by • To maintain consistency in recording and
specific laws and regulations. reporting financial data, Generally Accepted
Accounting Principles (GAAP) are used.
• These laws provide rules on resource usage,
financing, and accounting practices. • GAAP consists of universally accepted rules,
conventions, standards, and procedures for
• For instance, the Companies Act, 2013 in India
accounting.
outlines accounting rules for companies.
Accounting Principles
3. Institutional Framework
• Accounting principles are fundamental rules
• Institutions like the Institute of Chartered
for recording business transactions and
Accountants of India issue accounting
maintaining books.
standards.
• They ensure uniformity, reliability, and
• These standards ensure consistency and
understandability.
comparability in financial reporting.
• Principles should be objective, practical,
• There are two sets of accounting standards in
reliable, feasible, and comprehensible.
India, including Ind ASs.
Accounting Concepts (A)
4. Regulatory Framework
1. Entity Concept
• Regulatory bodies oversee various sectors of
the financial market. • Treats the organization as separate from its
owners.
• Their regulations influence how organizations
account for their activities. • Personal transactions of owners are distinct
from the organization's transactions.
• For example, SEBI regulations shape
accounting and reporting for listed companies • All transactions are viewed from the
in India. organization's perspective.
Summary 2. Going Concern Concept
• These four frameworks provide the foundation • Assumes the organization will continue to exist
for accounting in India. indefinitely.

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• Allows assets and liabilities to be carried • Assets are recorded at their historical costs,
forward from one period to the next. including acquisition and installation
expenses.
3. Accounting Period Concept
• Market value is not considered; historical cost
• Divides an organization's infinite life into
is used.
smaller, regular periods (e.g., quarters or
years). Accounting Conventions (B)
• Helps ascertain operating results at specific 1. Convention of Conservatism
intervals.
• Emphasizes caution and records potential
4. Money Measurement Concept losses immediately.
• Requires recording events that can be • Profits are recognized only when certain.
expressed in monetary terms.
2. Convention of Consistency
• Allows different types of transactions to be
• Encourages organizations to maintain
recorded consistently.
consistent accounting practices.
5. Accrual Concept
• Enables reliable comparisons of financial data.
• Recognizes both cash and credit transactions.
3. Convention of Materiality
• Acknowledges that revenues and expenses
• Suggests that only material items need to be
may not always align with cash movements.
disclosed in financial statements.
6. Dual Aspect Concept
• Immaterial items can be omitted to avoid
• Every transaction affects at least two accounts excessive details.
with "Debit" and "Credit" aspects.
4. Convention of Full Disclosure
• Expressed as Assets = Liabilities + Capital.
• Requires complete and transparent disclosure
7. Matching Concept of all significant information.
• States that revenues and expenses should be • Ensures users have access to all relevant data
recorded when incurred. for decision-making.
• Often involves adjustments for items like These principles, concepts, and conventions
prepaid expenses and accrued incomes. form the foundation for accounting practices,
helping organizations maintain consistency
8. Realization Concept
and reliability in their financial reporting.
• Revenue is recognized only when it's certain to
Accounting Conventions
be realized.
1. Convention of Conservatism
• Receiving an order doesn't mean immediate
recognition; actual supply and billing are • Assumes an uncertain future.
crucial.
• Advocates providing for potential losses, not
9. Cost Concept future gains.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

• Results in understating incomes, profits, and CAPITAL AND REVENUE

resources. TRANSACTIONS
2. Convention of Consistency Capital and Revenue Expenditure
• Encourages consistent application of Capital Expenditure
accounting rules.
• Definition: Capital expenditure involves
• Vital for profit and loss calculations and spending on assets or services that provide
performance comparisons. benefits over multiple accounting periods.
• Frequent changes in accounting treatment lead • Nature: Non-recurring and significant.
to inconsistency and unreliable information.
• Accounting Treatment: Capital expenditure
3. Convention of Materiality is not entirely charged against income in the
period of acquisition. Instead, it's recorded as
• Advocates recording and reflecting material
an asset on the balance sheet and gradually
facts.
charged against profits over time. For example,
• Material facts can influence informed the purchase of machinery is a capital
investors' decisions. expenditure, and regular depreciation is a form
of revenue expenditure.
• What's considered material can vary between
organizations and time periods. Revenue Expenditure

4. Convention of Full Disclosure • Definition: Revenue expenditure includes

spending on items that provide benefits within
• Requires disclosing all material information,
the current accounting period.
whether favorable or unfavorable.
• Nature: Recurring in nature, such as regular
• Emphasizes honesty in preparing accounting
operating expenses.
statements.
• Accounting Treatment: Revenue expenditure
• Particularly important for businesses with
is charged as an expense against the profits in
separate ownership and management.
the period when it's incurred.
Conclusion
Distinguishing Capital and Revenue
• Accounting principles, concepts, and Expenditure
conventions promote uniformity in recording
1. Benefit Duration:
transactions.
• Capital Expenditure: Provides benefits over
• Uniformity facilitates reliable comparisons of
multiple accounting periods.
financial results, positions, and cash flows
among different organizations and over time. • Revenue Expenditure: Benefits realized within
the current accounting period.
• Standardizing financial reporting contributes
to transparency and consistency in the 2. Recurrence:
accounting profession.
• Capital Expenditure: Non-recurring.
• Revenue Expenditure: Recurring.

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3. Cash Outlay: existing asset is considered capital

expenditure.
• Capital Expenditure: Involves significant cash
outlay. • Earning Capacity: If an expense improves the
organization's earning capacity, it's treated as
• Revenue Expenditure: Typically involves
capital expenditure.
lower cash outlay.
• Preliminary Expenses: Expenses incurred
4. Accounting Treatment:
before the commencement of business are
• Capital Expenditure: Reflected in the balance considered capital expenditure, such as legal
sheet. charges for drafting company documents.

• Revenue Expenditure: Debited to the income Understanding the distinction between capital
statement. and revenue expenditure is vital for accurate
accounting, as it impacts income, liabilities,
5. Timing of Incurrence:
assets, and financial statements' accuracy.
• Capital Expenditure: May be incurred before
Capital and Revenue Transactions
or after the commencement of operations.
1. Deferred Revenue Expenditures
• Revenue Expenditure: Always incurred after
the commencement of operations. • These are expenses for which payment has
been made or a liability incurred but have long-
6. Effect on Earning Capacity:
term benefits.
• Capital Expenditure: Tends to increase earning
• They are a mix of capital and revenue
capacity or reduce operating expenses.
expenses.
• Revenue Expenditure: Helps in carrying out
• Example: Heavy advertising expenses before
activities in the current accounting period.
launching a new product.
7. Matching against Revenue:
• Accounting Treatment: Part is recorded as an
• Capital Expenditure: A portion can be matched expense, and the remaining as an asset on the
against revenue to determine the operating balance sheet.
result.
2. Capital and Revenue Receipts
• Revenue Expenditure: Entire amount is
• These are categorized based on the source of
matched against revenue to determine the
the receipt.
operating result.
• Capital Receipts come from activities other
Identification of Capital Expenditure
than regular operations and don't affect annual
• Acquiring Long-Term Assets: Capital profits.
expenditure is incurred to acquire long-term
• Example: Funds from additional capital by
assets for use in the organization (not for
owners or proceeds from selling assets.
resale).
• Accounting Treatment: Credited to a capital
• Asset Improvement: Expenditure to improve
account and reflected in the balance sheet.
the condition or working capacity of an

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
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• Revenue Receipts come from regular business • Accounting Treatment: Recorded as expenses
operations, increase profits, and offset on the income statement.
expenses.
ACCOUNTING CYCLE, ANALYSIS OF
• Example: Money from goods sold, fees for
TRANSACTION ETC.
services, or recoveries of bad debts.
Accounting Cycle
• Accounting Treatment: Recognized as income
and credited to the income statement. Definition: The accounting cycle is a series of
tasks performed by accountants to document
3. Capital and Revenue Profits
and report an organization's financial
• Capital Profits arise from non-operating transactions during an accounting period.
activities and are non-recurring.
Stages of the Accounting Cycle:
• Example: Profits from selling assets,
1. Identifying Transactions:
premiums on share issues, or profits from asset
revaluation. • First step in the accounting cycle.
• Accounting Treatment: Typically transferred • Analyze events to determine if they are
to a Capital Reserve Account. financial transactions.
• Revenue Profits stem from regular operating • Transactions are the starting point for the entire
activities and are recurring. cycle.
• Example: Profits from selling products, 2. Recording Transactions in Books of
providing services, or surpluses earned by non- Original Entry:
profit organizations.
• Second step in the cycle.
• Accounting Treatment: Distributed to owners
• Record identified transactions in books like
or transferred to Reserve Accounts.
journals.
4. Capital and Revenue Losses
3. Posting to the Ledger:
• Capital Losses occur outside regular
• After recording in journals, summarize
operations and result from non-routine events.
activities in ledger accounts.
• Example: Losses from asset sales, extra-
• This step is called posting.
ordinary events (e.g., floods, fires), or
liabilities settled above book value. 4. Drafting of Unadjusted Trial Balance:
• Accounting Treatment: Charged against • Optional step.
revenue or recognized as fictitious assets in the
• Prepared at the end of an accounting period to
balance sheet.
identify errors in earlier stages.
• Revenue Losses are associated with day-to-
5. Passing of Adjustment Entries:
day business operations.
• Fifth step in the cycle.
• Example: Discounts offered to customers,
losses due to bad debts. • Identify necessary adjustments and make
adjusting entries.

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6. Drafting of Adjusted Trial Balance: 4. It leads to a change in the organization's

financial position.
• Prepared after all adjusting entries.
Analysis of Transactions:
• Last step before creating financial statements.
• Organizations engage in various transactions
7. Closing of Books:
during their operations, and these transactions
• Ledger accounts are closed and balanced at the alter their financial situation.
end of each accounting period.
• Analyzing transactions means examining how
8. Drafting the Financial Statements: these events affect the organization's financial
position.
• Final stage.
• Changes in financial position involve
• Prepare financial statements, including Income
adjustments to five key elements of
Statement, Statement of Retained Earnings,
accounting: Assets, Liabilities, Capital/Equity,
Balance Sheet, and Statement of Cash Flows.
Expenses, and Revenue..
• Summarize financial data for reporting.
Charts of Accounts and Codification
Events & Transactions in Financial Structure
Accounting Simplified
• Chart of Accounts (COA)
Events:
• Definition: A list of all accounts in the general
• Events are happenings in life, both financial ledger, each with a reference number.
and non-financial.
• Purpose: Provides an organizational tool for
• They include activities like buying a book, financial accounts, breaks them into
taking a taxi, or receiving a check, as well as subcategories.
non-financial activities like going for a
• Foundation of financial reporting.
morning walk.
• Organizes accounts and groups similar ones
• Events can involve multiple people and may be
together.
complete or ongoing.
• Enhances financial management and reporting.
Transactions:
• Codification Structure
• Transactions are a specific type of event that
impacts an organization's finances. • Role: Provides structure for general ledger
accounts.
• To be considered a transaction, an event must
meet certain criteria: • Lists asset, liability, capital, revenue, and
expense accounts.
1. It can be measured in terms of money.
• Elements: Each account has a name,
2. It involves at least two parties (people or
description, and identification code.
entities).
• Ordering: Follows standards (e.g., liquid assets
3. It usually involves exchanging money for
first in balance sheet accounts).
goods or services.

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• Designing: Begins with major account Expanded Equation:

headings, adding detailed descriptions for
• The basic accounting equation (Assets =
future reference.
Liabilities + Equity) can be expanded to
• Account Codification for Small Businesses include more details.
• Typically uses a three-digit account number, • It accounts for additional elements of Equity:
but more digits can accommodate growth. Capital, Revenue, Expenses, and Drawings.
• Logical assignment of account numbers, and • The expanded equation is: Assets + Expenses
compliance with industry standards, is + Drawings = Liabilities + Capital + Revenue.
important.
Foundation of Double-Entry Accounting:
• Complex businesses may require longer
• The accounting equation is the basis for the
account reference numbers.
double-entry accounting system.
Charts of Accounts and codification structures
• It ensures that every transaction recorded
play a crucial role in organizing financial data
maintains the balance of the equation.
for effective financial management and
reporting. They provide a framework for • In simple terms, it means that for every
classifying and identifying accounts in an financial transaction, the equation stays in
organization's general ledger. balance.
Accounting Equation: Double Entry System of Bookkeeping
• The accounting equation is a fundamental • Basic Concept: In accounting, the double-
concept in accounting. entry system recognizes that every transaction
has two sides, or aspects, which are recorded
• It represents the relationship between three key
in the books of accounts.
components: Assets, Liabilities, and Equity.
• Debit and Credit: Transactions are recorded
In Simple Terms:
as either a debit or a credit entry. A debit in one
• Assets are the valuable resources a company account has an opposite effect in another
controls, like cash, inventory, and buildings. account through a credit entry. The total of all
debit accounts must equal the total of credit
• Liabilities are the company's obligations to
accounts.
external parties, such as loans and unpaid bills.
• Accounting Equation: This system is based
• Equity represents the owners' net claim on the
on the accounting equation (Assets =
assets; it's like what's left for the owners after
Liabilities + Equity), and it requires that:
paying off all debts.
1. Every business transaction be recorded in at
Balance Sheet:
least two accounts.
• The balance sheet is where you find all three
2. The total debits for each transaction must equal
components of the accounting equation.
the total credits.
• It shows the financial position of a company at
a specific point in time.

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Rules of Debit and Credit in Double Entry Types of Books of Original Entry
System
• Special Journals (Day Books): These are
• Golden Rules: Transactions are recorded journals specialized for specific types of
following specific rules of debit and credit, transactions.
which can be explained through:
• General Journal: A journal that records
• The "Golden Rules" of Real (Debit what miscellaneous transactions.
comes in, credit what goes out), Personal
Posting in Ledger & Finalization of
(Debit the receiver, credit the giver), and
Accounts
Nominal (Debit expenses and losses, credit
income and gains) accounts. • After transactions are recorded in journals and
subsidiary books, they are posted to respective
• Successive Processes of Double Entry
accounts in the ledger (the book of final entry).
System
At the end of the accounting period, ledger
1. Recording in Books of Original Entry: accounts are balanced and closed.
Transactions are initially recorded in the books
• Nominal accounts (representing incomes,
of original entry, like the journal, in
expenses, gains, and losses) are closed by
chronological order. These are the primary
transferring to the income statement (Trading
records for accounting transactions.
A/c, Profit & Loss A/c for profit-oriented
2. Classification and Ledger Entry: organizations, or Income & Expenditure A/c
Transactions are categorized and then posted for non-profit organizations) to determine
into ledger accounts. The ledger is the book of operating results.
final entry.
• Real and personal accounts' balances are
3. Trial Balance: To ensure accuracy, a trial carried forward to the next period and reflected
balance is drafted to verify that debits and in the Balance Sheet, which shows the
credits are in balance. financial position by listing assets, liabilities,
and equity.
4. Income Statement and Balance Sheet: The
income statement shows the financial results Journal and Ledger
for a specific accounting period, while the
Recording Transactions in a Journal
balance sheet reflects the financial position of
the organization at the end of that period. • Step 1 in the Accounting Cycle: The first step
in the accounting cycle, following the
Books of Original Entry & Subsidiary
identification of transactions, is to record them
Books
in the journal.
• Books of Original Entry (Journals): These
• What Is a Journal?: The journal is the book
are where transactions are first recorded in the
of original entry where financial transactions
accounting system. They are often referred to
are initially recorded. It's done in chronological
as day books because entries are made daily.
order, meaning transactions are entered in the
The information is later summarized and
order they occur.
posted to ledger accounts.
• Journal's Meaning: The term "journal" comes
from the French word "Jour," which means

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"day." This book is often referred to as the • Sales Return Journal (Sales Return Book):
"Book of Prime Entry" or "Books of First Records goods returned by customers.
Entry."
• Bills Receivable Journal (Bills Receivable
• Journalizing: The process of recording Book): Records details of bills of exchange
transactions in the journal is called received from customers.
"journalizing." It is the initial activity
• Bills Payable Journal (Bills Payable Book):
undertaken by a bookkeeper after identifying
Records details of bills of exchange issued to
the transactions that need to be recorded.
suppliers.
• Journal Entry: Each record made in the
2. General Journal:
journal is called a "Journal Entry." These
entries describe specific transactions and are • The general journal is a book of original entry
always accompanied by a brief summary used for transactions for which no specific day
known as "Narration." book (special journal) is maintained.
• Narration: "Narration" is a short explanation • It's a more general ledger where various types
or description of the transaction. Every entry in of transactions are recorded.
the book of original entry must include such a
Cash Journal or Cash Book:
narration.
• This special journal records all transactions
Types of Journals
involving cash, regardless of whether they are
1. Special Journal: of a capital or revenue nature.
• A special journal is a book of primary entry • Entries include transaction date, particulars,
where specific types of transactions like credit voucher number, ledger folio, and the
purchases, credit sales, return inwards, etc., are transaction amount.
initially recorded.
• These transactions can involve both cash
• Special journals are also referred to as inflows and outflows.
subsidiary books and become necessary when
Purchase Journal:
the volume of transactions increases
significantly. • The purchase journal is for recording credit
purchases of goods. It doesn't include cash
• Common types of special journals include:
purchases or purchases of long-term assets on
• Cash Journal or Cash Book: Records all cash credit.
transactions, both inflows and outflows.
• Entries in the purchase journal include the
• Purchase Journal (Purchase Book): Logs purchase date, item particulars, inward invoice
credit purchases of goods during an accounting number, ledger folio, and the purchase amount.
period.
Sales Journal:
• Sales Journal (Sales Book): Records credit
• This special journal records credit sales of
sales transactions of an organization.
goods made by an organization during an
• Purchase Return Journal (Purchase Return accounting period.
Book): Used for recording goods returned to
suppliers.

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• Entries in the sales journal include the date of credit sales, purchase returns, and sales returns,
sale, particulars of items sold, outward invoice are entered here.
number, ledger folio, and the sales amount.
2. Types of Entries:
Purchase Returns Journal:
• Opening Entries: These entries bring forward
• This journal is used for recording returns of balances of asset, liability, and equity accounts
goods purchased on credit from suppliers. It from the previous accounting period.
doesn't include returns related to cash
• Transfer Entries: Used to move an amount
purchases or non-merchandising assets.
from one account to another, often correcting
• Entries include the date of return, particulars of errors or reallocating expenses or revenue.
items returned, supplier's name, debit note
• Closing Entries: Recorded at the end of an
number, ledger folio, and the total return
accounting period to close nominal accounts
amount.
by transferring them to profit-determining
Sales Returns Journal: accounts.
• This journal records returns of goods • Adjustment Entries: Passed during the
previously sold on credit. It doesn't include finalization of accounts to adhere to
returns of cash sales or non-merchandising accounting principles and conventions.
assets.
• Rectification Entries: Made to correct errors
• Entries include the return date, item in recording, posting, casting, balancing, etc.,
particulars, credit note number, ledger folio, in the books of accounts.
and the return amount.
3. Rules of Journalizing:
Bill Receivable Journal:
• Types of Accounts: Entries are categorized
• This journal is used to record bills of exchange into three types of accounts: Personal, Real,
received from customers for goods sold on and Nominal.
credit. It tracks various bill details, including
• Debit and Credit Rules: Transactions are
maturity dates and amounts.
debited or credited based on the type of
Bill Payable Journal: account, following the rules specific to each
account type.
• This journal is for recording bills of exchange
issued to suppliers for goods purchased on • Debit and Credit Rules: Alternatively,
credit. It also includes details like maturity transactions can be debited or credited based
dates and amounts. on the accounting equation, ensuring the
equality of assets and liabilities.
General Journal or Journal Proper
Rules of Debit and Credit Based on Types of
1. Definition and Purpose:
Account:
• General Journal, also known as Journal Proper,
• Personal Account: Debit the receiver, credit
is a primary accounting record where various
the giver.
transactions are recorded.
• Real Account: Debit what comes in, credit
• Transactions not covered by specific
what goes out.
subsidiary journals, such as credit purchases,

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• Nominal Account: Debit all expenses and Advantages of Journal:

losses, credit all incomes and gains.
• Chronological Record: Offers day-to-day
These . provide an overview of the General transaction details and serves as a reference.
Journal or Journal Proper and the different
• Error Minimization: Helps identify the
types of entries and rules used in accounting.
financial impact and nature of each transaction,
Accounting Equation Approach for Debit reducing errors.
and Credit:
• Narrative Explanation: Provides clear,
• Accounting equation states that Assets = immediate transaction explanations.
Liabilities + Equity.
• Account Classification: Forms the basis for
• All financial transactions affect one or more of ledger posting and the Trial Balance.
these elements.
• Legal Evidence: Serves as proof in legal
• Debit and credit rules are based on how proceedings.
transactions impact the equation.
Limitations of Journal:
Steps in Journalizing:
• Unsuitable for High-Volume Transactions: Not
1. Identify the accounts involved in the ideal for organizations with a large number of
transaction. transactions.
2. Classify accounts as 'Nominal, Real, or • Complexity: Journalizing can be intricate.
Personal' or 'Assets, Liabilities, Capital,
• Time-Consuming: Requires time to complete.
Drawings, Expenses, and Revenue.'
• Lacks Internal Control: Does not support
3. Apply debit and credit rules to determine
internal control as transactions are recorded
which account to debit and credit.
chronologically.
4. Record transaction details: date, particulars,
Ledger:
narration, debited and credited amounts.
• A book of accounts where transactions are
5. Include a brief transaction summary
permanently classified.
(narration).
• Transactions are posted from the journal.
Functions of the Journal:
• Ledger accounts are updated chronologically.
• Historical Function: Records transactions in
chronological order for future reference. • Provides a final overview of each account's
position on a specific date.
• Recording Function: Expresses business
transactions according to accounting principles • Used for preparing the Trial Balance.
with clear narrations.
Functions of Ledger:
• Analytical Function: Breaks down transactions
1. Permanent Record: The ledger acts as a
into debit and credit aspects to understand their
permanent repository of a company's financial
financial impact.
transactions, making it readily accessible for
reference.

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2. Summarizes Transactions: It summarizes the Rules for writing up accounts of different types
impact of all business transactions within are as follows:
individual accounts. This summary helps
• Assets: Increases are recorded on the left or
assess the status of each account over time and
debit side, and decreases on the credit side.
determine the account's balance.
• Liabilities and Capital: Increases are
3. Reflects Business Operations: The ledger is
recorded on the credit side, and decreases on
akin to a mirror that reflects the company's
the debit side.
financial state, aiding in the analysis of
business operations and decision-making for • Expenses: Increases are recorded on the debit
future planning. side, and decreases on the credit side.
Subdivisions of Ledger: • Incomes or Gains: Increases are recorded on
the credit side, and decreases on the debit side.
Ledgers can be divided into two main
categories based on the nature of accounts: Concepts of Debit and Credit:
1. Personal Ledger: This ledger contains Debit denotes:
personal accounts of debtors and creditors and
• In the case of a person, that he has received a
is further subdivided into:
benefit for which he has either provided a
• (a) Debtors’/Customers’/Sales ledger: It service or will provide a service in the future
contains accounts of all customers/trade (relating to Personal Account).
debtors.
• In the case of goods or properties, an increase
• (b) Creditors’/Suppliers’/Purchase/Bought in value or stock (relating to Real Accounts).
ledger: It contains accounts of all
• In the case of other accounts like losses or
suppliers/trade creditors.
expenses, that the firm has incurred expenses
2. Impersonal Ledger or General Ledger: This or suffered losses (relating to Nominal
ledger includes accounts other than those Account).
found in the Personal Ledger. Account types in
Credit denotes:
this ledger encompass Real, Nominal, and
Personal (excluding Trade Debtors and Trade • In the case of a person, that he has provided a
Creditors). benefit and is entitled to receive a return
benefit in cash, goods, or services (relating to
Advantages of such subdivisions:
Personal Account).
• Provides detailed information on accounts of
• In the case of goods or properties, a decrease
similar nature in one place.
in value or stock (relating to Real Accounts).
• Offers summarized information by balancing
• In the case of other accounts like interest,
ledger accounts.
dividend, commission received, or discount
Ledger Posting: received, that the firm has made a gain
(relating to Nominal Account).
Ledger posting is the process of transferring
journal entries to the respective ledger
accounts based on double-entry principles.

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Balancing of Ledger Accounts: • Single Column Cash Book: Maintains only

one column on each side for recording liquid
Balancing a ledger account is the process of
cash transactions, typically used by small
determining the net effect of all transactions
organizations.
posted within that account for a specific
period. It involves totaling both the debit and • Double Column Cash Book: Contains two
credit sides of an account and identifying the columns on each side, one for cash transactions
difference between them. and the other for banking transactions. This
helps in consolidating cash and bank activities
• A debit balance occurs when the debit-side
within one book.
total is higher than the credit-side total.
• Unique Contra Entry is used for transactions
• A credit balance occurs when the credit-side
involving both Cash and Bank accounts.
total is higher than the debit-side total.
• Triple Column Cash Book: Has three
• A nil balance is when both sides have the same
columns on each side, specifically for Cash,
total.
Bank, and Discount. The discount columns
This balancing process is crucial for finalizing represent Discount Allowed and Discount
accounts. Received. Cash Discount is recorded here.

Cash Book, Bank Book, Bank • Total discount amounts from the Debit and
Reconciliation Statement Credit side are transferred to Discount Allowed
and Discount Received accounts in the general
Cash Book
ledger.
• A separate book of account for recording cash
• Multi-columnar Cash Book: Customized for
transactions, including cash receipts and
organizations with extensive cash transactions
payments, whether in cash, by cheque, or
under various fixed categories, often used by
through online transfers.
clubs, schools, and colleges.
• Transactions are recorded chronologically in
Petty Cash Book:
this book.
• In organizations with numerous cash
• The Cash Book consists of two sides: Debit
transactions, the workload is divided between
(left) and Credit (right).
petty cash transactions and larger transactions.
• Acts as both a primary and final entry book,
• This results in the use of a specific cash book
making it a journalized ledger.
known as the Petty Cash Book.
• Balances in the Cash Book reflect the available
• The person responsible for maintaining the
cash balance.
Petty Cash Book is called the Petty Cashier,
• It's categorized into Regular Cash Book and while the cashier handling larger transactions
Petty Cash Book. is known as the Principal Cashier or Chief
Cashier.
Regular Cash Book
• Records all cash and, at times, bank-related
transactions.
• Types of Regular Cash Books:

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Two Systems for Handling Petty Cash: • The credit side of the Petty Cash Book in
multi-column format contains pre-specified
1. Ordinary System:
columns for typical expenses incurred by the
• A lump sum of cash is given by the Chief organization.
Cashier to the Petty Cashier.
The Petty Cash Book is an essential tool for
• The Petty Cashier spends this amount on small, managing smaller, routine cash expenditures
routine expenses. efficiently and tracking them accurately.

• When the petty cash is exhausted, the Petty Bank Book (Bank Journal):
Cashier provides details of the expenditures to
• It's a subsidiary book similar to the cash book
the Chief Cashier for reimbursement.
used by organizations to record all receipts and
2. Imprest System: payments made through the bank.

• An estimated amount for petty expenses is • Mainly maintained by big companies with high
determined in advance. volumes of bank transactions.

• This predetermined amount is referred to as • Comprises two sides: receipts (debit) and
Imprest Cash or Imprest Float. payments (credit).

• The Chief Cashier provides the Imprest Cash • Helps streamline bank reconciliation and
to the Petty Cashier. reduce the chances of missing entries or errors.

• The Petty Cashier uses this cash for petty • Separate Bank Books can be kept for each bank
expenses throughout a fixed period. account.

• At the end of the period, the Petty Cashier Bank Reconciliation Statement:
prepares a statement showing the petty
• Created to reconcile the balances in an
expenses and submits it to the Chief Cashier.
organization's cash book (bank column) and
• The Chief Cashier examines the transactions pass book.
and reimburses the Petty Cashier with an
• Prepared at regular intervals to verify the
amount equal to the total petty expenses
accuracy of both books.
incurred.
• Identifies causes of discrepancies between the
• This ensures that at the start of each new
cash book and pass book.
accounting period, the Petty Cashier has the
same amount of Imprest Cash to cover • Discrepancies often arise due to time gaps and
expenses. communication issues between entries by the
organization and the bank.
Petty Cash Book Format:
• Common reasons for discrepancies include
• The format of the Petty Cash Book is similar to
outstanding cheques, deposits not yet
that of a Single Column Cash Book.
collected, bank charges, interest credits,
• Some organizations may use a multi-columnar dishonored cheques, and clerical errors.
format for the Petty Cash Book, especially for
• In the digital age, many causes of disagreement
common expenses.
have been minimized due to electronic
transactions.

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• Preparation methods: Bank Reconciliation • Ensures that accounts are arithmetically

Statement can be created either starting with accurate, with the correct amounts posted.
the balance of the cash book (bank column) or
• Facilitates the preparation of financial
the balance of the pass book. Adjustments are
statements by summarizing ledger balances.
made for items causing discrepancies.
Alternatively, an amended cash book can be • Acts as a link between ledger accounts and
created to establish the correct cash book financial statements.
balance, and then the reconciliation statement
Limitations:
reconciles this balance with the pass book
balance. • Can only be prepared when books follow the
double-entry system.
Trial Balance (Preparation and Scrutiny)
• Agreement is not a conclusive proof of
Trial Balance .
absolute accuracy; certain errors are not
Definition and Purpose: disclosed.
• A Trial Balance is a statement used in • Errors not identified by Trial Balance include
accounting to test the arithmetic accuracy of omission, duplication, commission, principle,
ledger accounts. original entry, and compensating errors.
• Its primary purpose is to identify and correct Methods of Preparation:
arithmetical errors in the accounting process.
• Total Method: Totals of debit and credit sides
Key Features: for each ledger account are collected and
placed in the Trial Balance. Ledger accounts
• It is a columnar statement with five columns:
do not need to be balanced.
Serial number, Name of ledger account,
Ledger Folio (L.F.), Debit amount, and Credit • Balance Method: Trial Balance is prepared
amount. after each ledger account has been balanced, so
only one amount is posted in the Trial Balance
• It's prepared as a separate document and does
for each account.
not form part of the double-entry system.
Trial Balance .
• Drafted for a specific date, not a period.
Usually prepared at the end of the accounting Definition and Purpose:
year before creating financial statements.
• A Trial Balance is a statement used in
• The total of debit balances must equal the total accounting to test the arithmetic accuracy of
of credit balances if the books are ledger accounts.
arithmetically accurate.
• Its primary purpose is to identify and correct
• Its agreement is a prima facie evidence of the arithmetical errors in the accounting process.
arithmetical accuracy but not conclusive proof
Key Features:
of absolute accuracy.
• It is a columnar statement with five columns:
Advantages: Checks that both aspects of each
Serial number, Name of ledger account,
transaction are posted correctly (debit and
Ledger Folio (L.F.), Debit amount, and Credit
credit) in the ledger.
amount.

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• It's prepared as a separate document and does • Balance Method: Trial Balance is prepared
not form part of the double-entry system. only after each ledger account has been
balanced, so only one amount is posted in the
• Drafted for a specific date, not a period.
Trial Balance for each account.
Usually prepared at the end of the accounting
year before creating financial statements. Adjustments and Rectifications
• The total of debit balances must equal the total Depreciation:
of credit balances if the books are
• Depreciation refers to the gradual reduction in
arithmetically accurate.
the value of tangible fixed assets like
• Its agreement is a prima facie evidence of the machinery and equipment.
arithmetical accuracy but not conclusive proof
• It occurs due to factors such as wear and tear,
of absolute accuracy.
obsolescence, and the passage of time.
Advantages:
• The purpose of depreciation is to allocate the
• Checks that both aspects of each transaction cost of fixed assets over their estimated useful
are posted correctly (debit and credit) in the life.
ledger.
• Depreciation is not charged on freehold land
• Ensures that accounts are arithmetically because land has an infinite useful life.
correct, with the correct amounts posted.
• Characteristics of depreciation: it's a
• Facilitates the preparation of financial permanent, gradual, and continuous reduction
statements by summarizing ledger balances. in the book value of assets.
• Acts as a link between ledger accounts and • Depreciation is recorded as an expense in the
financial statements. income statement, reducing the asset's value in
the balance sheet.
Limitations:
Amortization:
• Can only be prepared when books follow the
double-entry system. • Amortization is the gradual write-off of
intangible assets like patents, goodwill, and
• Agreement is not a conclusive proof of
copyrights over their estimated useful life.
absolute accuracy; certain errors are not
disclosed. • Unlike tangible assets, intangible assets are not
subject to wear and tear but still lose value over
• Errors not identified by Trial Balance include
time.
omission, duplication, commission, principle,
original entry, and compensating errors. • The purpose of amortization is to match the
expense of acquiring intangible assets with
Methods of Preparation:
their useful life.
• Total Method: Totals of debit and credit sides
• Amortization is recorded as an expense in the
for each ledger account are collected and
income statement.
placed in the Trial Balance. Ledger accounts
do not need to be balanced.

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(Simplified Material 2023 December CMA Intermediate Examination)

Depletion: • Allocates higher depreciation in the earlier

years and lower in later years.
• Depletion is the reduction in the value of
natural resources like minerals or timber due to • Calculates depreciation as a percentage of the
their extraction. remaining book value.
• It occurs when a wasting asset is extracted 3. Sum of Years’ Digits Method:
from sources like mines or quarries.
• Allocates depreciation based on a fraction of
• Depletion is recorded as an expense in the the sum of the years remaining in the asset's
income statement and reduces the value of the useful life.
resource in the balance sheet.
4. Sinking Fund Method:
Methods of Recording Depreciation:
• Sets aside a specific fund to replace the asset at
1. Depreciation Charged to Asset Account: the end of its useful life.
• Depreciation is credited directly to the asset's 5. Annuity Method:
account.
• Allocates depreciation in a way that it forms an
• Depreciation Account is a nominal account annuity, which is a series of equal payments.
transferred to the Profit and Loss Account at
6. Insurance Policy Method:
the end of each accounting period.
• Allocates depreciation based on the terms of
• Asset's book value is shown in the balance
insurance policies related to the asset's
sheet as cost less accumulated depreciation.
coverage.
2. Provision for Depreciation/Accumulated
These methods provide flexibility in
Depreciation Account Method:
determining how to allocate the cost of assets
• Depreciation is not credited to the asset's over time, and the choice depends on the nature
account but is credited to Provision for of the asset and accounting preferences.
Depreciation or Accumulated Depreciation
Recording Depreciation in Accounting:
Account.
1. Depreciation Methods:
• Asset's cost remains unchanged in the balance
sheet, and the balance in the Provision for • Two main methods for recording depreciation:
Depreciation Account reflects the total
1. Charging depreciation to the Asset Account.
depreciation over time.
2. Maintaining a Provision for
Methods of Calculating Depreciation:
Depreciation/Accumulated Depreciation
1. Straight Line Method (Fixed Installment Account.
Method):
2. Charging Depreciation to the Asset
• Allocates an equal amount of depreciation Account:
each year.
• In this method, depreciation is subtracted
• (Cost - Salvage Value) / Estimated Useful Life. directly from the concerned Asset Account.
2. Reducing Balance Method (Diminishing • A Depreciation Account is used to record this
Balance Method): depreciation as an expense.

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• At the end of each accounting period, the • When transferring depreciation to the Profit
Depreciation Account is transferred to the and Loss Account:
Profit and Loss Account.
1. Debit Profit and Loss Account.
• On the Balance Sheet, the asset is presented at
2. Credit Depreciation Account.
its "written down value," which is the original
cost minus the depreciation incurred to date. Methods of Calculating Depreciation:
3. Journal Entries for Charging Depreciation: 1. Straight Line Method (Fixed Installment
Method):
• When charging depreciation to the Asset
Account: • Depreciation is a fixed portion of the asset's
cost allocated evenly over its expected useful
1. Debit Depreciation Account.
life.
2. Credit Asset Account.
• Formula: Depreciation = (Cost - Residual
• When transferring depreciation to the Profit Value) / Estimated Life.
and Loss Account:
2. Reducing Balance Method (Diminishing
1. Debit Profit and Loss Account. Balance Method):
2. Credit Depreciation Account. • Depreciation is calculated as a fixed
percentage of the asset's original cost in the
4. Maintaining Provision for Depreciation
first year.
Account:
• In subsequent years, it's calculated on the
• In this method, depreciation is not subtracted
reduced book value.
directly from the Asset Account.
• The rate is constant, but the amount allocated
• Instead, it is credited to a Provision for
each year decreases.
Depreciation or Accumulated Depreciation
Account. • Formula: Depreciation in a given year = Book
Value at the beginning of the year ×
• The Asset Account continues to show the
Depreciation Rate.
original cost.
Provision for Depreciation:
• The balance in the Provision for Depreciation
Account reflects the total depreciation over • This is the cumulative value of all past
time. depreciation.
• On the Balance Sheet, the asset is shown at its • It's not directly subtracted from the asset's
cost minus the provision for depreciation. account.
5. Journal Entries for Charging Depreciation • Used to accurately determine the profit or loss
under the Provision Method: when assets are sold.
• When charging depreciation: • Applicable to various methods of depreciation
calculation (straight-line or diminishing
1. Debit Depreciation Account.
balance).
2. Credit Provision for Depreciation Account.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

1. Initial Year Calculation: • The profit or loss on the sale of the asset is
adjusted in the year of the sale in the Profit and
• Depreciation is first calculated at a fixed
Loss Account.
percentage of the asset's original cost in the
first year. Accounting Treatment:
2. Subsequent Years: a. Where no provision for depreciation account
is maintained:
• In the following years, depreciation is still
calculated at the same fixed percentage. • The WDV of the amount sold is transferred to
the 'Assets Disposal Account.'
• However, it is applied to the reduced book
value (written down value) of the asset. b. Alternative Approach:
3. Gradual Reduction: • In such situations, all adjustments are made
directly through the asset's account.
• The method ensures that the depreciation
amount gradually reduces each year over the
expected working life of the asset.
Change of Depreciation Method
4. Constant Rate:
AS-6 suggests that the depreciation method
• The rate of allocation, which is typically a chosen should be used consistently over time.
fixed percentage, remains constant throughout
A change in depreciation method is allowed in
the asset's life.
specific situations:
5. Decreasing Allocation:
(i) To comply with statutory requirements.
• While the rate stays the same, the actual
(ii) To adhere to accounting standards.
depreciation amount allocated each year
decreases due to the declining book value. (iii) To present financial statements more
appropriately.
This method allows for a more significant
depreciation expense in the earlier years of an Procedure for Changing Depreciation
asset's life, reflecting the higher wear and tear, Method:
and a lower expense as the asset gets older. It
(i) Recalculate depreciation using the new
aligns with the principle that assets lose value
method from the asset's acquisition/installation
more rapidly when they are newer.
date to the method change date.
Profit or Loss on Sale of Assets – Method of
(ii) Find the difference between the total
Depreciation Calculation
depreciation under the new method and the
• Sometimes, assets are sold before their accumulated depreciation under the previous
expected useful life due to reasons like method until the change date. This difference
obsolescence. can be a surplus or deficiency.
• If the sale price is less than the Written Down (iii) Credit any surplus to the Profit & Loss
Value (WDV), it results in a loss, and vice Account under "depreciation written Back."
versa.
(iv) Charge any deficiency to the Profit & Loss
Account.

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(v) The journal entries depend on whether the • Example: Unpaid salaries (accrued expenses),
old value is less or more. unbilled revenue (accrued incomes).
- If the old value is less, credit the Profit and • Importance: Adjustment entries are crucial to
Loss Account and debit the Assets Account. ensure the accuracy of financial statements and
are a necessary part of the accounting cycle.
- If the old value is more, debit the Asset
They impact both the income statement and
Account and credit the Profit and Loss
balance sheet.
Account.
• Debtors are individuals or entities who owe
(vi) This change in depreciation method should
money for goods or services received on credit,
be considered a change in accounting policy,
while creditors are those who allow credit to be
and its impact must be disclosed and quantified
paid at a later date.
in financial statements.
• Debts can be categorized as good debts (high
• Adjustment Entries: These are journal entries probability of collection), doubtful debts
made at the end of an accounting period to (uncertain collection), and bad debts
correct the balances in ledger accounts. (uncollectable).
• Purpose: Adjustment entries ensure that the • Good debts require no provision as there's
financial statements accurately reflect the confidence in their collection.
organization's financial position. • Doubtful debts are those where the realization
is uncertain but not certain to be a loss at the
• Timing: These entries are made at the end of time of preparing financial statements. They
an accounting period. are treated as a provision against profit based
• General Journal: Adjustment entries are on past experience.
recorded in the general journal or journal • Bad debts are debts that are confirmed to be
proper. uncollectible and are recognized as a business
loss. The amount of bad debt is charged against
• Compliance: They are made to comply with the profit in the current year to adhere to the
accounting principles and reflect the reality of matching principle.
financial transactions. • Bad debts are recorded by debiting the Bad
• Types of Adjustment Entries: Debts Account and crediting the Debtors
Account in the journal.
1. Pre-payments and Pre-receipts: These • Provision for Doubtful Debts represents the
involve prepaid expenses (payment made in amount set aside to account for potential
advance for expenses not yet incurred) and collection losses from customers. It's reflected
unearned revenues (money received in as a credit balance in the Balance Sheet by
advance but not yet earned). reducing the Debtors' balance.
• Example: Prepaid insurance, advance Provisions for Discount on Debtors
subscriptions.
• Suppliers often offer cash discounts to
2. Accruals: Accrual entries include accrued
customers who promptly settle their bills. To
expenses (expenses that have occurred but not
account for the potential loss due to these
yet paid) and accrued incomes (incomes
discounts, a provision is created. This
earned but not yet recorded or received).
provision, made on Sundry Debtors for the

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

anticipated discounts upon cash receipt within accounting period, this is termed a "Bad Debt
the same accounting period, is known as the Recovery."
Provision for Discount on Debtors. • Bad Debt Recovery is considered as income
for the organization and is therefore credited to
• When customers settle their debts before the the Profit and Loss Account for the year in
due dates, they are eligible to claim discounts. which it is received.
To account for this possibility, a separate • In summary, Bad Debt Recovery is the income
provision is created to estimate the amount of gained when previously written-off bad debts
discounts that may be allowed to debtors for are recovered from debtors. This income is
their prompt payments. recorded in the Profit and Loss Account for the
year in which the recovery occurs.
• The Provision for Discount on Debtors is o Provision for Discount on Creditors
determined based on past experience and is
calculated at an estimated rate on the balance • When a business buys goods or services on
of Sundry Debtors. credit, it means payment will be made at a later
date, and the entities to whom money is owed
• To calculate the provision for discount are referred to as creditors or trade payables.
allowed, a specified rate is applied to the • Suppliers often offer discounts to encourage
amount of net debtors (after deducting bad prompt payment. When customers take
debts and the provision for bad debts). advantage of these discounts, it's considered a
Customers with bad debts are removed from gain for the paying organization.
the list of debtors, and the discount provision • Some organizations create and maintain a
is not applied to them. The remaining balance provision for anticipated discounts received
consists of doubtful debt, and provision for from creditors. This is known as the Provision
doubtful debt is maintained for this amount. for Discount Received or Provision for
Discount on Creditors.
• The provision for discount allowed is then • The provision is typically calculated as a fixed
calculated on this balance of expected-to-be- percentage of the closing balance of creditors.
good debtors who are likely to clear their dues • Accounting for this provision involves
on time. debiting the Provision for Discount Received
Account and crediting the Profit & Loss
o In summary, this provision helps account for Account.
potential cash discounts that may be claimed • In the balance sheet, the Provision for Discount
by customers who make prompt payments, and on Creditors Account is shown on the liabilities
it is created based on the estimated rate applied side as a deduction from the balance of Sundry
to the balance of net debtors. Creditors.
o Recovery of Bad Debts • It's important to note that creating a provision
• Bad debts represent losses and are typically on creditors goes against the principle of
transferred to the current year's Profit and Loss conservatism or prudence in accounting, as it
Account. anticipates income that may or may not be
• If, at any point, the organization manages to realized.
recover an amount from a debtor previously
classified as a bad debt in a subsequent

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BILLS OF EXCHANGE, 4. Drawer's Signature: The Drawer/Maker's

CONSIGNMENT, JOINT VENTURE signature is required.
Accounting for Bills of Exchange 5. Unconditional Order: The order to pay must
be unconditional and imperative.
Negotiable Instrument:
6. Specific Payee: The order must be directed to
• Definition: A negotiable instrument is a
a particular person.
document that entitles a person to a specific
sum of money and can be transferred from 7. Specific Amount: It must specify a certain sum
one person to another by delivery or of money.
endorsement, following the provisions of the
8. Proper Stamp: Proper stamping as required by
Negotiable Instruments Act, 1881.
the law.
• Types: As per Section 13(1) of the Act,
Parties to a Bill of Exchange:
negotiable instruments include promissory
notes, bills of exchange, or cheques, payable • Drawer: The one who issues the bill, often a
either to order or to the bearer. creditor, lender, or seller.
Bills of Exchange: • Drawee: The party ordered to make the
payment, typically a debtor, lendee, or
• Definition: A bill of exchange is a written
purchaser.
instrument that contains an unconditional
order, signed by the maker, directing a certain • Payee: The recipient of the bill, who may be
person to pay a specific sum of money to a the Drawer or another party.
particular person or to the bearer of the
Classification of Bills of Exchange:
instrument.
• Documentary Bill: Supported by documents
• Unconditional Payment: The order to pay
confirming a transaction.
should not depend on uncertain events, and
the sum payable may include future interest or • Demand Bill: Payable when demanded, with
be subject to an indicated rate of exchange. no fixed date.

• Certain Person: The person to whom the • Usance Bill: Requires payment within a
payment is directed can be identified, even if specified time.
they are misnamed or described.
• Inland Bill: Payable within the country, not
Essential Elements of a Bill of Exchange: internationally.

1. In Writing: It must be a written document, • Clean Bill: Doesn't have supporting

regardless of language or format. documents and has higher interest rates.

2. Drawn on a Date: The bill should have a • Foreign Bill: Can be paid outside the country,
specified date. like export or import bills.

3. Three Parties: Involves the Drawer/Maker, • Accommodation Bill: Issued without

Drawee, and Payee. conditions.

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• Trade Bill: Specific to trade transactions. • Maturity Date for On-Demand Bill / At Sight
Bill / On Presentation Bill:
• Supply Bill: Withdrawn by suppliers or
contractors from government departments. • Such bills become due for payment as soon as
they are presented.
Trade Bills vs. Accommodation Bills:
• No specific time for payment is mentioned.
• Objective:
• These bills are not entitled to the days of
• Trade Bills: Drawn to facilitate trade
grace.
transactions, such as buying and selling goods.
• Maturity Date for After Date Bill:
• Accommodation Bills: Drawn to help
someone in need of financial assistance. • Time for payment is mentioned in this type of
bill.
• Consideration:
• Three days of grace are allowed.
• Trade Bills: Involves a definite consideration
for which the bill is accepted. • Maturity Date for After Sight Bill:

• Accommodation Bills: Drawn without any • Payable at a fixed period after sight.
consideration.
• The period begins from the date of accepting
• Extension of Credit: the bill.

• Trade Bills: Serve as a form of credit extension. • Three days of grace are allowed.

• Accommodation Bills: Not a form of credit • Grace Period:

extension.
• When the period of the bill is given in months,
• Proceeds: the maturity date is calculated according to
calendar months, ignoring the number of days
• Trade Bills: When discounted, the proceeds
in a month.
remain with the holder.
• Three days of grace are added.
• Accommodation Bills: When discounted, the
proceeds may be shared by two parties in an • Example: If a bill dated May 4, 2022, is payable
agreed ratio. 3 months after the date, the maturity date will
be August 7, 2022.
• Recovery:
• When Maturity Date Falls on a National
• Trade Bills: If dishonored, the amount can be
Holiday:
easily recovered through the court.
• If the due date of the bill is on a national
• Accommodation Bills: In case of dishonor, the
holiday, the maturity day of the bill shall be the
drawer cannot file a suit against the drawee.
preceding business day.
Maturity Date of a Bill of Exchange and Days
• When the Maturity Date Has Been Declared
of Grace:
as an Emergency Holiday:

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• If the due date of the bill is declared as an • The holder of the bill incurs an expense known
emergency holiday, the due date of the bill as the Noting Fee or Noting Charge, which is
shall be after 1 day from the date of maturity. recovered from the party responsible for the
dishonour.
Concept of Bills Receivable and Bills Payable:
Dishonour due to Insolvency:
• Bills Receivable (B/R):
• Occurs when a bill is dishonoured because the
• Refers to the person who draws the bill and is
drawee or acceptor of the bill becomes
entitled to receive its payment.
insolvent.
• Shown on the assets side of the Balance Sheet
• In this case, either nothing is recovered from
by the drawer of the bill.
the drawee or acceptor, or a partial amount
• Bills Payable (B/P): (referred to as Final Dividend) is recovered as
a settlement.
• Refers to the person who accepts the bill and
is liable to make its payment. • In the drawer's books, the amount is debited
to the Bad Debts Account, while in the
• Shown on the liabilities side of the Balance
drawee's books, it is transferred to the
Sheet by the drawee of the bill.
Deficiency Account.
Dishonour of Bill:
Renewal of a Bill:
• A bill of exchange can be dishonoured in two
o Occurs when the holder of a bill cannot meet
ways: by non-acceptance or by non-payment.
the bill's payment on its due date.
Dishonour by Non-Acceptance: o In this situation, the Drawee (the party
responsible for payment) approaches the
• Occurs when the drawee, or one of several
Drawer (the bill's issuer) with a request for an
drawees (not being partners), fails to accept
extension of time to make the payment.
the bill after being properly requested to do
o If the Drawer agrees to the extension, the old
so.
bill is canceled, and a new bill is drawn with
• No accounting entries are required when a bill revised terms of payment.
is dishonoured by non-acceptance. o This new bill is then duly accepted and
Dishonour by Non-Payment: delivered.
o The process of replacing the old bill with a new
• Happens when the drawee does not make the one with extended payment terms is called
payment to the holder on the due date. the "Renewal of the Bill."
• Accounting entries are necessary in the books o The new bill is typically drawn for a longer time
of the drawer, drawee, and endorsee (if any) period, and interest is charged for the
when a bill is dishonoured by non-payment. extended period to compensate for the delay
in payment.
Noting of a Bill:

• Refers to the recording of the dishonour of a

bill by a Notary Public.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

Accommodation Bill: Accounting for Consignment

• Definition: Accommodation Bills are a type of Consignment Business:

financial instrument that is drawn and
• Definition: Consignment is a business
accepted without any underlying
arrangement where one entity, known as the
consideration or value passing between the
Consignor, sends goods to another entity,
parties involved. Unlike regular bills (known as
known as the Consignee, to sell those goods
Trade Bills), which are drawn for genuine trade
on behalf of the Consignor. The Consignee is
transactions, accommodation bills lack a
typically located in a different town or city.
genuine transactional basis.
• Parties Involved: In a consignment business,
• Parties Involved: These bills typically involve
three parties are involved: the Consignor,
two or more individuals or entities who do not
Consignee, and Buyer.
have a debtor-creditor relationship. They draw
bills on each other without any actual • Consignor: The Consignor is the entity that
exchange of goods, services, or funds. sends the goods to the Consignee for sale. This
party is often the manufacturer or wholesaler
• Intention: The primary purpose behind
of the goods. The Consignor remains the
drawing accommodation bills is not to
owner of the goods until they are sold by the
facilitate a real transaction but rather to create
Consignee.
an appearance of financial activity. The parties
involved often have the intention of • Consignee: The Consignee receives the goods
discounting these bills after acceptance to from the Consignor and sells them on the
obtain immediate funds. Consignor's behalf. The Consignee acts as the
agent in this principal-agent relationship and
• Proceeds: After acceptance, the parties may
is entitled to receive a commission as
agree to share the proceeds of the bill in
compensation.
predetermined proportions. They also
contribute funds in the same agreed • Revenue Recognition: Revenue from
proportions to ensure that the bills are consignment business is recognized by the
honoured when they mature. Consignor when the goods sent by the
Consignee are sold to buyers.
• Nickname: Accommodation bills are
sometimes referred to as "Kite Bills," likely • Documents in Consignment Transactions:
because they involve a form of financial
• Proforma Invoice: This document is issued by
maneuvering akin to flying a kite.
the Consignor to the Consignee when sending
In summary, accommodation bills are the goods. It contains details such as the
essentially financial instruments created for quantity of goods, cost/invoice price,
the purpose of obtaining short-term funds expenses related to the goods, and the
through bill discounting, without any genuine minimum selling price. The Proforma Invoice
trade transaction underlying them. These bills serves as evidence of the goods' dispatch from
are drawn and accepted solely for financial the Consignor to the Consignee.
accommodation among the parties involved.

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In summary, consignment is a business • Recorded in the consignor's books; consignee

arrangement where a Consignor sends goods does not record it.
to a Consignee to sell on the Consignor's
• Adjustment made in consignor's books against
behalf. The Consignor remains the owner of
Purchases or Trading Account.
the goods until they are sold, and revenue is
recognized when the goods are sold to buyers. • Goods can be recorded at Cost Price (CP) or
Important documents in consignment Invoice Price (IP), which includes a margin
transactions include the Proforma Invoice. called the Load.

• What is Account Sales? Advance by Consignee to Consignor:

• Account Sales is a document sent periodically • Consignee usually provides an advance to the
by the consignee to the consignor. consignor.

• Contents of Account Sales: • Advance can be through a bank draft or bill of

exchange.
• It includes details of transactions conducted
by the consignee on behalf of the consignor. • Later adjusted when consignee remits money.

• Information typically found in Account Sales: • Security Deposit/Caution Money may also be
required and retained by the consignor.
• Sale proceeds realized from goods sold.
Expenses on Consignment:
• Consignee's commission earned.
• Expenses incurred in relation to consignment
• Expenses incurred by the consignee related to
can be by the consignor or consignee.
the consignment.
• Consignor's expenses include carriage,
• Amount remitted to the consignor.
packing, loading, export duty, transit
• Any specific communication, such as reports insurance.
of abnormal loss of goods.
• These non-recurring expenses affect the
• Purpose of Account Sales: valuation of unsold stock and goods lost.

• It serves as a post-sales document. • Consignee's expenses are recovered from the

consignor and adjusted in the Account Sales.
• It formally conveys the developments of the
consignment business at the consignee's Types of Expenses:
location to the consignor.
• Recurring expenses are incurred multiple
Consignment-Related Transactions times, e.g., go down rent, insurance,
establishment charges.
Goods Sent on Consignment:
• Non-recurring expenses are one-time, e.g.,
• In consignment, goods are sent by the
unloading, dock charges, customs duty.
consignor to the consignee for selling.
Consignment Sale:
• Ownership, risk, and property of the goods
remain with the consignor.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

• Goods are sold by the consignee on behalf of • These are called Consignment Stock, owned
the consignor. by the consignor.

• Sales can be cash or credit. • Valuation depends on whether the goods

were recorded by the consignor 'at Cost' or 'at
• Credit sales depend on the presence of del-
Invoice Price (IP)'.
credere commission.
• For goods at Cost, consider the cost of the
• Sale proceeds collected by consignee and
goods and adjust for expenses incurred by the
reimbursed to consignor after adjustments.
consignor and non-recurring expenses by the
Commission: consignee.

• The consignee receives commission for acting • For goods at IP, value them at Invoice Price and
as the agent of the consignor. adjust for expenses and load margin.

• It's adjusted by the consignee against the Valuation of Goods-in-Transit:

amount due to the consignor.
• Goods sent by consignor but not yet received
• Three types: Ordinary Commission (on gross by consignee are Goods-in-Transit.
sales), Del-credere Commission (risk of credit
• Ownership lies with the consignor.
sale), Over-riding Commission (extra/special).
• Valued considering expenses incurred by the
Loss of Goods Sent on Consignment:
consignor; consignee's expenses are not
• Two categories: Normal Loss (unavoidable) included.
and Abnormal Loss (avoidable).
Accounting for Consignment - Books of
• Normal Loss is inherent and forms part of the Consignor:
cost of goods sold.
• Consignor maintains several accounts:
• Abnormal Loss is avoidable and not part of the
• Consignment Account: Determines profit/loss
cost of goods sold.
of the consignment business, transferred to
• Abnormal loss can occur in transit or at the P/L Account.
consignee's premises.
• Goods Sent on Consignment Account: Records
• Losses in transit valued considering goods sent and returns from consignee.
consignor's expenses, excluding consignee's
• Consignee’s Account: Tracks transactions with
non-recurring expenses.
the consignee, showing money due.
• Losses at the consignee's premises consider
• Consignment Stock Account: Records unsold
both consignor's and consignee's non-
stock with the consignee.
recurring expenses.
• Consignment Debtors Account: Manages
Valuation of Unsold Stock with Consignee:
credit sales, collections, bad debts, and
• Consignee often has unsold goods at the end discounts when del-credere commission is not
of an accounting period. paid.

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Accounting for Consignment - Books of • Joint ventures are typically short-term and
Consignee: dissolve once the project's purpose is fulfilled.

• Consignee maintains various accounts: • Parties involved in a joint venture are known
as Co-venturers or Joint venturers. It's like a
• Consignor Account: Records transactions
partnership but with a specific termination
related to the consignment, reflects the
date, and the firm name is not commonly
amount due to the consignor.
used. Profits and losses may be shared equally
• Commission Account: Separate accounts for if not specified in the agreement.
different commission types.
Difference Between Joint Venture and
• Consignment Debtors Account: Manages Partnership:
credit sales, collections, bad debts, and
1. Firm Name:
discounts when del-credere commission is
paid. • Partnership always uses a firm name, while
joint ventures do not necessarily require one.
• Consignment Inwards Account: Sometimes
used to record goods received from the 2. Partners vs. Co-venturers:
consignor.
• In a partnership, participants are called
Accounting for Joint Venture partners, while in a joint venture, they are
referred to as co-venturers.
Joint Venture .:
3. Duration:
• A joint venture (JV) is a temporary business
arrangement involving two or more • Partnerships are often long-term
individuals or entities who pool their arrangements, encompassing various
resources to complete a specific project or projects. Joint ventures are formed for specific
task. jobs or projects and have a limited duration.

• Characteristics of a joint venture: 4. Legal Regulation:

• Involves an agreement among participants. • Partnerships are governed by the Partnership

Act, 1932. There is no specific legislation for
• Created for executing a particular business
joint ventures, but they are treated as
plan or project.
partnerships under the law.
• Temporary in nature, often without a firm
5. Number of Participants:
name.
• There is no specific limit to the number of co-
• Profit and loss are shared based on agreed
venturers in a joint venture. In a partnership,
terms or equally if there's no agreement.
the number of partners is limited to 10 for
• Detailed terms are documented in a written banking businesses and 20 for other trades or
agreement covering aspects like duration, businesses.
responsibilities, liabilities, etc.
6. Liability:

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

• In a partnership, partners have unlimited There are two main methods for recording
liability that may extend to their personal joint venture transactions:
assets. In joint ventures, co-venturer liabilities
Method I: When Separate Set of Books are
are limited to the particular project or
Maintained for the Joint Venture:
assignment.
In this method, a separate set of books is
Difference Between Joint Venture and
maintained specifically for the joint venture.
Consignment:
These books are not as comprehensive as
1. Relationship: regular business books because joint ventures
are typically short-term arrangements aimed
• In a joint venture, co-venturers are considered
at determining profits or losses. Here are the
owners of the venture, while in a
key accounts maintained under this method:
consignment, there is an owner (consignor)
and an agent (consignee). 1. Joint Venture Account:

2. Profit Sharing: • Debit side: Records all expenses, whether

capital or revenue, paid personally by the co-
• Joint ventures involve the sharing of profits
venturers or from the joint bank.
among co-venturers based on agreed-upon
ratios. Consignments do not distribute profits; • Credit side: Records all sales, both to outsiders
the consignee receives a commission on sales. and co-venturers.

3. Ownership of Goods: • This account summarizes all transactions

related to the joint venture, resulting in either
• In consignments, ownership of goods remains
a profit or loss.
with the consignor, who transfers possession
to the consignee. In joint ventures, co- 2. Joint Bank Account:
venturers are co-owners of the goods or
• Used to record cash and bank transactions
project.
related to the joint venture.
4. Funds Contribution:
• Functions like a cash book for the joint
• In consignments, the consignor invests funds. venture, often with separate columns for cash
In joint ventures, all co-venturers contribute and bank transactions.
funds in agreed proportions.
• Records initial contributions by co-venturers,
5. Continuity of Business: proceeds from sales, expenses, and the
distribution of net balances among co-
• Joint ventures end when the project is
venturers upon the venture's dissolution.
completed. Consignments can be continuous
if ongoing. • All cash inflows are recorded on the debit side,
while outflows are recorded on the credit side.
. on Accounting for Joint Ventures:
• Final settlements among co-venturers are also
Methods of Recording Joint Venture
included in this account to ensure it balances.
Transactions:
3. Co-Venturers Account:

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• These are personal accounts for each co- These methods help co-venturers keep track
venturer and function similarly to capital of their financial involvement and outcomes in
accounts in a partnership. joint ventures.

• These accounts track transactions specific to Method II: When Separate Set of Books are
each co-venturer. Not Maintained for the Joint Venture

• The balance in these accounts represents the In some cases, co-venturers may decide not to
co-venturer's claim on or contribution to the maintain separate books of account for a joint
joint venture. venture, especially if it is of very short
duration. Here are the key points to
• Settlements among co-venturers are made
understand this method:
through the joint bank account.
1. No Separate Books: Co-venturers choose not
Method II: When Separate Set of Books are
to keep separate books for the joint venture
Not Maintained for the Joint Venture:
when it is a brief undertaking.
In this method, joint venture transactions are
2. No Joint Bank Account: Unlike the first
recorded within the regular books of accounts
method, there is no need to open a Joint Bank
of the co-venturers' respective businesses.
Account. Co-venturers do not contribute cash
Separate books are not maintained specifically
to the venture.
for the joint venture. This method is often
used when the joint venture's activities are 3. Using Own Resources: Co-venturers use their
relatively small or don't significantly impact own stocks or resources to supply goods for
the co-venturers' existing business operations. the venture. Expenses related to the venture
are settled using their individual resources as
Summary:
well.
• Joint venture accounting can be done using
4. Individual Records: Each co-venturer
two main methods, one with separate books
maintains their own records of the joint
for the joint venture and the other without.
venture's transactions in their personal books.
• In the separate books method, key accounts
5. Separate Accounts: In their respective books,
include the Joint Venture Account, Joint Bank
each co-venturer prepares a Joint Venture
Account, and Co-Venturers' Accounts.
Account and an account for the other co-
• The Joint Venture Account summarizes all venturer. This helps them keep track of all
transactions and calculates the profit or loss. transactions.

• The Joint Bank Account records cash and bank 6. Profit or Loss Calculation: Naturally, each co-
transactions related to the joint venture. venturer separately calculates the profit or
loss incurred in the joint venture. They take
• Co-Venturers' Accounts function like capital
into account all transactions, whether carried
accounts, tracking individual co-venturer
out by themselves or their co-venturer.
contributions and claims.
7. Suitable for Small Businesses: This method is
typically used when the joint venture is of

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

small scale, and the co-venturers are • Sometimes, an existing consignment

operating from different, distant locations. arrangement can be transformed into a joint
venture.
In summary, when co-venturers choose not to
• Prior to conversion, standard accounting
maintain separate books, they record and
procedures for consignment are followed.
calculate the results of the joint venture
• After conversion, the remaining consigned
individually in their own accounting records.
stock is moved to the Joint Venture Account.
This approach is practical for smaller ventures
with co-venturers in separate locations. • Accounting subsequently adheres to joint
venture principles.
• Memorandum Method: In this method, co- • When a joint venture continues for more than
venturers can choose to maintain a separate one accounting period, there is a challenge in
'Memorandum Joint Venture Account' in joint calculating the closing stock value.
books. Each co-venturer records their own • The closing stock should be valued based on
transactions related to the joint venture the basic cost plus proportionate non-
against their name in this account. recurring expenses.
• Purpose: The 'Memorandum Joint Venture • In the memorandum joint venture account,
Account' is used to calculate the profit or loss the closing stock value is recorded on the
of the joint venture. To do this, co-venturers credit side at the end of the current year and
also keep a record called "Joint Venture with on the debit side at the beginning of the next
Co-venturer Account," where they note down year.
all the transactions they personally undertake • Other accounts are maintained in the usual
for the joint venture. manner for recording transactions related to
the joint venture.
• Statement Exchange: Co-venturers
• If co-venturers wish to settle their accounts at
periodically exchange statements detailing the
the end of the first year, they should
transactions they've conducted for the joint
contribute their proportionate share of the
venture. This helps in keeping track of the
closing stock value in their respective 'Joint
activities and contributions of each co-
Venture with Co-Venturer Account.'
venturer.
• The share of stock is then carried forward and
• Determining Profit or Loss: After receiving the shown on the debit side of the 'Joint Venture
statements from each co-venturer, they with Co-Venturer Account' for the next year.
independently prepare a 'Memorandum Joint
Venture Account' to calculate the overall profit
or loss from the joint venture. Unlike double-
entry accounts, this account focuses on
summarizing the financial outcome of the
venture.

Conversion of Consignment into Joint

Venture:

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PREPARATION OF FINAL ACCOUNTS • Sales Revenue: Money earned from selling goods
OF COMMERCIAL ORGANISATIONS, or services. Returns are subtracted from this.
NOT-FOR-PROFIT ORGANISATIONS
• Closing Stocks/Inventories: The value of unsold
AND FROM INCOMPLETE RECORDS
goods at the end of the period, usually valued
Preparation of Financial Statements conservatively.

Preparation Financial Statements of Commercial • Gross Loss: If expenses on the debit side are higher
Organisations than sales on the credit side, there's a Gross Loss.

Income Statement So, the Trading Account helps us figure out if a

business is making a profit or loss from selling
• Purpose: The Income Statement helps us figure
goods. If there's a profit, it goes to the Profit & Loss
out if a business made a profit or incurred a loss
Account.
during a specific period and how much it was.
This Income Statement is important for businesses
• Components: For non-corporate commercial
to understand their financial performance, and it's
organizations (like small businesses), the Income
a crucial tool for financial analysis.
Statement typically consists of three parts: Trading
Account, Profit & Loss Account (P/L A/c), and Profit Profit & Loss Account
& Loss Appropriation Account.
Purpose:
Components of Income Statement for Non-
• It's an income statement used to determine an
Corporate Commercial Organizations
organization's Net Profit or Net Loss for a specific
Trading Account: This is the first statement, and it accounting period.
helps determine the gross operating result, which
Steps to Prepare:
is either Gross Profit (making money) or Gross Loss
(losing money). 1. Start with Gross Profit or Gross Loss.

What it does: It compares the cost of goods sold 2. Deduct indirect expenses and losses from Gross
with sales to find out if a business is making money Profit.
from selling its products.
3. Add other indirect incomes.
Items on the Debit Side (Money Spent):
Debit Side (Expenses):
• Opening Stock: The value of goods a business
• Cost of Sales: The cost of goods sold.
already had at the beginning of the accounting
period. • Other Expenses: Expenses not directly related to
the main business activity, such as administrative,
• Purchases: The total amount spent on buying
selling, and distribution expenses.
goods during the year.
• Abnormal Losses: Unusual losses like stock
• Other Direct Expenses: Expenses related to
destroyed by fire or goods lost in transit.
making the goods ready for sale, like
transportation costs and wages. Credit Side (Incomes):

• Gross Profit: If sales are higher than expenses on • Revenue Incomes: Incomes from the regular
the debit side, there's a Gross Profit. business operations, like commission and
discounts received.
Items on the Credit Side (Money Earned):

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(Simplified Material 2023 December CMA Intermediate Examination)

• Other Incomes: Incidental incomes like interest • This means it increases the owner's ownership
received and dividends. stake in the business.

Closing: Note: Sole proprietorships don't need a Profit &

Loss Appropriation Account.
• The Net Profit or Net Loss is transferred to the
owner's Capital Account(s) or shareholders' equity. • It's a way to show how profits are shared among
partners in a partnership.
• In the case of companies, profit is separately
shown in the balance sheet. Balance Sheet

Ownership: Purpose:

• Profits belong to the owners of the business. • Shows the financial position of the organization on
a specific date.
• In companies with widely distributed ownership,
profit figures are detailed in the balance sheet. • Prepared after Income Statements (Trading
Account and Profit & Loss Account).
Note: Accrued expenses should also be included
among expenses. • Reflects assets and liabilities at a given point in
time.
Profit & Loss Appropriation Account
Formats:
Purpose:
• Can be in Horizontal or Vertical format.
• Shows how the net profit is divided among
partners in a partnership business. • Horizontal: Liabilities on the left, Assets on the
right (used by non-corporate businesses).
• Not needed for sole proprietorships.
• Vertical: Liabilities and assets listed top-down.
• Used to track how net profit is distributed, such as
for dividends or reserves. Order of Items (Marshalling):

Distribution of Net Profit: • Assets: Permanent assets at the top, current assets
below.
• Net profit is distributed among partners in a
partnership. • Liabilities: Capital and long-term liabilities above
short-term liabilities.
• Can be used for dividends, creating reserves, or
other purposes. • Reverse order called Liquidity Preference or
Realisability Order.
Not an Expense:
Preparation of Final Accounts:
• Distribution of profits is an appropriation, not an
expense. • Based on ledger balances.

• It's about how the profit is allocated, not money • Ledger accounts posted to Income Statements or
spent. Balance Sheet.

After Distribution: • Adjustments may be needed for accounting

principles or errors.
• Any surplus (remaining amount) is added to the
owner's equity. Important Adjustments:

• Closing stock.

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• Outstanding expenses or Accrued expenses. Features:

• Prepaid expenses. • Governed by elected bodies or trustee boards.

• Accrued income. • No profit motive; focused on social service.

• Income received in advance. • Income mainly from donations and membership

fees.
• Goods sold on approval basis.
• Funds used for societal benefits.
• Goods distributed as free samples.
• Membership is non-transferable.
• Goods used personally.
• Follows the entity concept in accounting.
• Depreciation and Amortisation.
Income and Expenses for Non-profit
• Bad debts.
Organizations
• Provision for doubtful debts.
Income Items:
• Provision for discount on debtors.
• Donations
• Abnormal loss of stock.
• Entrance fees
• Interest on capital and drawings, etc.
• Subscriptions
Order of Preparation:
• Grants received
1. Trading Account shows Gross Profit/Loss.
• Legacy (one-time donations)
2. Profit & Loss Account shows Net Profit/Loss.
• Life membership fees
3. Balance Sheet drafted using ledger balances for
Expense Items:
assets, liabilities, and capital.
• Upkeep of grounds
4. In partnership firms, Profit & Loss Appropriation
Account is prepared before transferring to Capital • Tournament expenses
Account.
• Prizes
Note: Adjustments affect both Income Statements
• Events
and Balance Sheet.
Accounting Treatment:
Preparation of Financial Statements of Not-for-
Profit Organisation • Entrance Fees: Can be capitalized or treated as
revenue.
Non-profit Organizations
• Donations: Used for capital or revenue expenses;
Purpose:
specific-purpose donations credited to a fund.
• Created to provide valuable services to society, not
• Legacy: One-time and goes to the capital fund.
for profit.
• Endowments: Treated as capital receipts.
• Examples: educational institutions, public medical
organizations, social clubs, charitable trusts, trade • Life Membership Fees: Capital receipts with
unions, religious institutions, etc. annual charges to Income & Expenditure Account.

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• Subscriptions: Annual revenue receipts recognized • Records only revenue items (income and
on an accrual basis. expenses).

Financial Statements for Non-profit • Prepared on an accrual basis.

Organizations
• Reflects items for the current period.
Components:
• Shows either a surplus (income > expenses) or
• Receipts & Payments Account deficit (expenses > income).

• Income & Expenditure Account Format:

• Balance Sheet • Debits: Revenue expenses (e.g., maintenance

costs).
Preparation of Receipts and Payments Account
• Credits: Revenue incomes (e.g., donations).
Purpose:
Features:
• Summary of cash and bank transactions.
1. Nominal Account in nature.
• Memorandum account for a specific financial
period. 2. Records only revenue expenses and incomes.

• Real account in nature. 3. Based on accrual basis.

Features: 4. Excludes capital items.

1. Records all Cash and Bank transactions. 5. Includes current year's expenses and incomes.

2. A summary of Cash Book. 6. Handles profit/loss on asset sales and annual

depreciation.
3. Starts with opening balances of Cash and Bank.
7. Surplus added to Capital or General Fund.
4. Contains both capital and revenue items.
8. Deficit deducted from Capital or General Fund.
5. Cash and Bank transactions are recorded on a cash
basis. Balance Sheet

6. Ends with closing Cash and Bank Balances. Purpose:

Proforma: • Prepared as of the last day of the accounting

period.
• Receipts (left side) and Payments (right side).
• Reflects assets and liabilities based on the
• Starts with opening balance and ends with closing
accounting equation.
balance.
• No capital account; uses a capital fund.
Note: No provisions are recorded in this account.
• Surplus/deficit from the Income & Expenditure
Income and Expenditure Account
Account is adjusted in the capital fund.
Purpose:
Fund Accounting Concepts
• The income statement for non-profit
(i) Capital Fund (General Fund or Accumulated
organizations.
Fund):

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• Represents the organization's capital. • Annual subscriptions credited to Income &

Expenditure Account on an accrual basis.
• Calculated as assets minus liabilities.
• Life membership subscriptions usually credited to
• Surplus or deficit for the year added to or
a separate liability account.
deducted from it.
• Annual subscription apportioned out of life
• Donations like capitalised incomes may be added.
membership contributions and credited to Income
(ii) Special Fund: & Expenditure Account.

• Created from special donations, subscriptions, or a • Remaining balance carried forward until
portion of the surplus. exhausted or transferred to Capital Fund upon
member's death.
• Used for specific purposes or asset acquisition.
Note: These principles help in maintaining and
• Investment income or profit/loss from
accounting for funds in non-profit organizations.
investments goes to this fund.
Restaurant Trading and Bar Trading
• When used for expenses or asset purchase, entries
are made accordingly. Purpose:

(iii) Donations: • Some clubs offer Restaurant and Bar services to

members and outsiders.
• Donations for a specific purpose credited to a
Special Fund. • To calculate the profit from these services, a
Restaurant Trading or Bar Trading Account is
• General donation handling follows organization
created.
rules or by-laws.
• Similar to a Trading Account in trading concerns.
• Non-recurring donations credited to Capital Fund;
recurring donations to Income & Expenditure • The profit determined from Restaurant Trading or
Account. Bar Trading is transferred to the Income and
Expenditure Account, similar to how Gross Profit is
• Donations paid by the organization debited to
transferred from the Trading Account to the Profit
Income & Expenditure Account.
and Loss Account in trading concerns.
(iv) Legacy:
Method of Preparation:
• Added directly to Capital Fund after tax deduction.
• Creating a Restaurant or Bar Trading Account
• A donation based on a deceased person's will. follows the same method as preparing a Trading
Account.
(v) Entrance Fees or Admission Fees:
• It helps calculate the profit specifically from the
• Follow organization rules or by-laws.
Restaurant or Bar services.
• If no rules, one-time fees for membership added
• This profit is then transferred to the Income and
to Capital Fund.
Expenditure Account for overall financial
• Small fees covering admission expenses can be reporting.
credited to Income & Expenditure Account.
In summary, Restaurant Trading and Bar Trading
(vi) Subscriptions: Accounts are used to determine the profit
generated from these specific services in clubs,

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

and the resulting profit is included in the Income of Cash and Bank and list all opening fixed assets,
and Expenditure Account for the club's financial closing liabilities, and other funds. Adjustments
records. are made by comparing items from the Receipts
and Payments Account with the Income and
Preparation of Opening Balance Sheet
Expenditure Account.
A. For Opening Balance Sheet:
Preparation of Financial Statements from
1. Start with the opening balance of Cash and Bank Incomplete Records
from the Receipts and Payments Account as
Single Entry System
"Balance b/d."
Definition:
2. Include all opening assets listed as adjustments on
the asset side. • A method of recording transactions that does not
follow the principles of double-entry bookkeeping.
3. Include all opening liabilities on the liabilities side.
• Commonly used by small businesses, semi-skilled
4. The difference between assets and liabilities is
service providers, and workers who cannot
treated as the "Capital Fund."
maintain double-entry records.
Preparation of Closing Balance Sheet
• Often results in incomplete or casual recording of
B. For Closing Balance Sheet: transactions.

1. Begin with the closing balance of Cash and Bank Features:

from the Receipts and Payments Account as
• Unscientific approach to record-keeping.
"Balance c/d."
• Mixes no entry, single entry, and double entry
2. Include all opening fixed assets from the opening
methods.
Balance Sheet (after considering adjustments) if
they were not sold or cost, including any additions. • Mainly used by small businesses and service
providers.
3. List all closing current liabilities, including capital
fund, surplus or deficit (obtained from the Income • Lack of uniformity in recording transactions.
and Expenditure Account), and other funds like
• Usually records only cash and personal accounts.
donations and entrance fees, on the liabilities side.
• Maintains original vouchers for reference but does
4. Compare individual items from the Receipts and
not prepare relevant accounts.
Payments Account with the Income and
Expenditure Account and make necessary Limitations/Defects:
adjustments. Ensure that items credited in the
1. No trial balance, so arithmetical accuracy cannot
Receipts and Payments Account are matched with
be guaranteed.
items debited in the Income and Expenditure
Account, and vice versa. 2. Profit or loss can only be estimated as nominal
accounts are not maintained.
In summary, while preparing the opening Balance
Sheet, you start with the opening balances of Cash 3. No proper balance sheet due to the absence of
and Bank and include all opening assets and real accounts.
liabilities. The difference between assets and
4. Difficult to detect frauds or errors.
liabilities is the "Capital Fund." For the closing
Balance Sheet, you begin with the closing balances 5. Incorrect valuation of assets and liabilities.

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6. External agencies like banks cannot use the • Relies on the balance sheet to determine the
financial information. financial position.

7. Proprietor's business and personal transactions 2. Conversion Approach:

may get mixed.
• Converts single entry records into double entry
Differences from Double Entry System: format.

• Single entry is casual; double entry is scientific. • Helps reconstruct the complete accounting
system.
• Double entry records both debit and credit aspects
of transactions; single entry records only some • Allows for the preparation of comprehensive
aspects. financial statements following the double entry
system.
• In double entry, subsidiary books like sales and
purchases are maintained; single entry mainly In summary, the single entry system is an
uses the cash book. incomplete and casual method of recording
transactions, often used by small entities. It has
• Double entry includes personal, real, and nominal
limitations due to its lack of systematic recording.
accounts in the ledger; single entry has cash and
To prepare financial statements, two recognized
some personal accounts.
approaches are used: the Balance Sheet Approach,
• Double entry allows for the preparation of a trial which estimates profit based on changes in
balance; single entry does not, making accuracy owner's equity, and the Conversion Approach,
uncertain. which converts single entry records into double
entry format for comprehensive financial
• In double entry, proper Trading Account, Profit &
reporting.
Loss Account, and Balance Sheet are prepared;
single entry relies on estimates and produces a Balance Sheet Approach (Net Worth
Statement of Affairs. Approach/Comparison Approach)

• Higher risk of fraud and misappropriation in single Approach Overview:

entry.
• This approach determines an entity's operating
• Double entry is common; single entry is used by result by comparing its net worth (capital) at two
smaller businesses, sole traders, partnerships, and different points in time.
professionals who cannot maintain formal records.
• It involves preparing three statements: Statement
Accounting from Incomplete Records & of Affairs, Statement of Profit & Loss, and Final
Preparation of Final Accounts Statement of Affairs.

Approaches: Statements Prepared:

1. Balance Sheet Approach (Net Worth 1. Statement of Affairs:

Approach/Comparison Approach):
• This statement shows the financial position of the
• Based on the change in the owner's equity entity at the beginning and end of the accounting
(capital) from the beginning to the end of the period.
accounting period.
• It lists the balances of various assets and liabilities
• Calculates the difference between opening and to calculate the opening and closing capital/net
closing owner's equity to estimate profit or loss. worth.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

2. Statement of Profit & Loss: Approach, determines an entity's operating result

by comparing its net worth at different points in
• This statement determines the profit or loss of the
time. Three statements are prepared: Statement
entity.
of Affairs, Statement of Profit & Loss, and Final
• First, it calculates the trading profit or loss by Statement of Affairs. The steps involve preparing
comparing the capital/net worth at the beginning the Statement of Affairs to calculate opening and
and end of the accounting period. closing capital/net worth, and then preparing the
Statement of Profit & Loss to determine trading
• Then, it adjusts for necessary items to arrive at the profit/loss and the net profit/loss for the period.
net profit or loss for the period.
Conversion Approach
3. Final Statement of Affairs (Revised Statement of
Affairs): • This approach is used when an entity records only
some of its transactions and does not follow the
• This statement is prepared at the end of the double entry system.
accounting period.
• It involves converting the single entry system data
• It includes the closing balances of assets and into the double entry system to prepare financial
liabilities, accounting for adjustments like statements.
depreciation and provisions for bad and doubtful
debts. Difference Between Statement of Affairs and
Balance Sheet Statement of Affairs:
Steps for Preparation of Final Accounts under
Balance Sheet/Net Worth/Comparison • Prepared under the single entry system.
Approach: • Determines the Capital or Net Worth at two
Step 1: Preparation of Statement of Affairs: different points in time.

• Prepare a Statement of Affairs at the beginning • Reflects an estimated financial position.

and end of the accounting period. • Information may be less reliable.
• List all assets and their respective balances. • Capital balance is calculated as the excess of assets
• List all liabilities and their respective balances. over liabilities.

• Calculate the opening and closing capital/net • No statutory format.

worth by subtracting liabilities from assets. Balance Sheet:
Step 2: Preparation of Statement of Profit & Loss: • Prepared under the double entry system.
• Prepare a Statement of Profit & Loss to determine • Discloses the true financial position.
the trading profit or loss.
• Information is more reliable.
• Compare the capital/net worth at the beginning
and end of the accounting period to calculate the • Capital balance is obtained from regular
trading profit/loss. accounting records.

• Adjust for necessary items to determine the net • Follows a statutory format specified under various
profit or loss for the period. laws.

In summary, the Balance Sheet Approach, also

known as the Net Worth Approach or Comparison

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Difference Between Statement of Profit & Loss PARTNERSHIP ACCOUNTING

and Profit & Loss Account Statement of Profit &
Admission of Partner
Loss:
Admission of a New Partner:
• Prepared under the single entry system.
• A partnership, as per the Indian Partnership Act, is
• Determines profit/loss by comparing the
an arrangement between two or more people to
capital/net worth at two points in time.
share profits in a business they jointly operate.
• Reflects an estimated profit/loss.
• When a partnership wants to bring in a new
• May not disclose all expenses, losses, incomes, partner, all existing partners must agree, as per
and gains properly. Section 31(1) of the Indian Partnership Act.

• Information may be less reliable. • This admission of a new partner essentially ends
the existing partnership and starts a new one.
Profit & Loss Account:
Accounting Adjustments During Admission:
• Prepared under the double entry system.
1. Computation of New Profit-Sharing Ratio:
• Determines profit/loss by matching
expenses/losses against incomes/gains. • Existing partners usually give up a portion of their
future profits to accommodate the new partner.
• Reflects the true profit/loss.
• The ratio in which they give up their share of profit
• Properly discloses all expenses, losses, incomes,
is called the "Sacrificing Ratio," which is calculated
and gains.
as (Old Ratio - New Ratio).
• Information is reliable.
2. Revaluation of Assets and Liabilities:
In summary, the Conversion Approach is used
• To ensure transparency in the books, the values of
when an entity with incomplete records wants to
assets and liabilities are reevaluated.
prepare financial statements. It involves
converting single entry system data into the • This reveals any hidden gains or losses in the
double entry system. Differences between the business, as profit can result from increased asset
Statement of Affairs and Balance Sheet include values or decreased liability values, and vice versa.
reliability, format, and their purpose. Similarly,
differences between the Statement of Profit & 3. Distribution of Reserves, Accumulated Profits,
Loss and Profit & Loss Account include the method and Losses:
of determining profit/loss and the reliability of the • Any reserves or accumulated profits or losses are
information presented. distributed among the partners based on the new
profit-sharing ratios.

4. Adjustment for Goodwill:

• If there is goodwill in the business, the value of

goodwill needs to be adjusted based on the new
partner's entry.

• The existing partners might have to give some of

their share of goodwill to the new partner.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

5. Adjustments Regarding Capital Contributions: 3. Reverse the Changes in Asset and Liability Values:

• The new partner's capital contribution is recorded, • Undo the adjustments made in the balance sheet
and adjustments are made to the capital accounts values of assets and liabilities, returning them to
of existing partners. their original values.

• The capital of the existing partners may be 4. Calculate the Final Revaluation Profit or Loss:
adjusted to accommodate the new partner's
• After reversing the changes, calculate the overall
capital.
profit or loss resulting from the revaluation.
6. Adjustment for Life Policy:
5. Distribute the Final Revaluation Profit or Loss
• If there is a life insurance policy in place, it may Among All Partners:
need to be adjusted to include the new partner or
• Allocate the profit or loss, after reversal, among all
reallocate benefits accordingly.
partners, including the new partner, based on their
In summary, when a new partner is admitted to a new profit-sharing ratios.
partnership, various accounting adjustments are
In summary, a Memorandum Revaluation Account
necessary to ensure that the new partner's entry
is used when a firm wants to track the effects of
is accounted for correctly, including changes in
revaluation without changing the values of assets
profit-sharing ratios, revaluation of assets and
and liabilities on the balance sheet. The process
liabilities, and adjustments for goodwill, capital,
involves recording changes, sharing profits or
and any existing life insurance policies. These
losses among old partners, reversing adjustments,
adjustments help maintain fairness and
calculating the final profit or loss, and distributing
transparency in the partnership's financial records.
it among all partners, including the new partner,
Memorandum Revaluation Account: according to their new profit-sharing ratios. This
ensures transparency and fairness in accounting
• Sometimes, a firm may choose not to change the
for revaluation.
values of assets and liabilities on the balance sheet
when revaluating them. Adjustment for Goodwill:

• In such cases, a Memorandum Revaluation • Goodwill is the extra value a firm may have due to
Account is opened to keep track of the revaluation its reputation or established customer base, which
effects. can lead to higher profits.

Steps for Preparing Memorandum Revaluation • When a new partner joins, they may share in this
Account: goodwill and need to contribute an extra amount
called "Premium for Goodwill."
1. Record Changes in Asset and Liability Values:
Accounting for Premium for Goodwill:
• Note any increase or decrease in the values of
assets and liabilities due to revaluation. • The Premium for Goodwill brought in by the new
partner is shared among the existing partners in
2. Share Revaluation Profit or Loss Among Old
the Sacrificing Ratio.
Partners:
• Journal Entry:
• Distribute the profit or loss from revaluation
among the existing partners based on their old • Debit Bank Account
profit-sharing ratios.
• Credit Sacrificing Partners' Capital Account

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Handling Failure to Bring Premium for Goodwill: Goodwill Account or by direct adjustment through
the Partners' Capital Accounts. This ensures the
• If the incoming partner fails to bring the Premium,
proper accounting treatment of Goodwill in the
it's assessed whether the failure is temporary or
admission of a new partner.
permanent.
Adjustments for Capital Contribution:
Temporary Failure:
• When a new partner is admitted, they must
• Temporary failures involve accounting with a "New
contribute capital to the firm. The amount is
Partner's Loan Account."
agreed upon by all partners.
• Journal Entry:
• The capital can be in the form of cash or other
• Debit New Partner's Loan Account assets.

• Credit Sacrificing Partners' Capital Account • Adjustments are made in the books for revaluation
profit or loss, distribution of reserves, and
Permanent Failure - Two Methods:
goodwill.
1. Involving Goodwill Account:
• After these adjustments, the capital account
• First, Goodwill account is raised to its full value by balances of all partners are determined and
crediting the old partners. reflected in the Balance Sheet.

• Then, the raised Goodwill is written off among all Maintaining Capital Balances in a Pre-determined
partners, including the new partner. Ratio:

Two journal entries: • Partners may decide to maintain specific closing

balances in their capital accounts based on a
• Debit Goodwill Account and Credit Existing/ Old predetermined ratio.
Partners' Capital Account (in old profit-sharing
ratio). Adjustment for Joint Life Insurance Policy:

• Debit All Partners' Capital Accounts and Credit • A Joint Life Insurance Policy covers the lives of all
Goodwill Account (in the new profit-sharing ratio). partners in the firm, with the firm paying the
premiums.
2. Without Involving Goodwill Account/Capital
Adjustment: • For accounting purposes, the Surrender Value of
the Joint Life Policy as of the admission date is
• In this case, adjustments are made directly considered, not the Maturity Value.
through the Partners' Capital Accounts.
In summary, when a new partner joins a firm, they
Journal Entry: contribute capital, which is recorded in the books.
• Debit New Partner's Capital Account Adjustments are made for various factors like
revaluation, reserves, and goodwill. Partners may
• Credit Sacrificing Partners' Capital Account also choose to maintain specific capital balances
based on a predetermined ratio. In addition, the
In summary, when a new partner is admitted, and
surrender value of a joint life insurance policy, not
there is existing goodwill, they may need to bring
the maturity value, is used for accounting
in a Premium for Goodwill. If they fail to do so, the
purposes.
adjustment can be temporary or permanent.
Temporary failure involves a loan account, while
permanent failure can be handled by involving the

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

Retirement of a Partner: • The Maturity Value is irrelevant.

• Retirement occurs when a partner decides to leave 6. Settlement of Final Balance of the Retiring
the partnership firm. It can happen by mutual Partner:
consent or as per the partnership agreement.
• The amount due to the retiring partner is
• Retirement is a form of reconstitution of the determined and settled as per the partnership
partnership. agreement or mutual decision.

Accounting Adjustments During Retirement: • The retiring partner can be paid immediately or in
installments.
1. Calculation of New Profit Sharing Ratio and
Gaining Ratio: • The retiring partner has the option to claim either
their share in profits or interest at 6% per annum
• The share of the retiring partner's profits is
on the amount due.
distributed among the continuing partners,
leading to a new profit sharing ratio. In summary, when a partner retires from a
partnership, various accounting adjustments are
• The Gaining Ratio represents how the continuing
made to ensure a fair distribution of profits,
partners share the profits forgone by the retiring
revaluation of assets and liabilities, adjustment for
partner and is calculated by the difference
goodwill, and settlement of the retiring partner's
between the old and new profit sharing ratios.
final balance. These adjustments maintain
2. Distribution of Reserves and Accumulated Profits transparency and fairness during the partner's
and Losses: retirement process.

• Reserves and profit/loss balances are distributed Retirement-cum-Admission:

among all partners, including the retiring partner,
• Retirement-cum-Admission occurs when an
based on the Old Profit Sharing Ratio.
existing partner retires from the partnership, and
3. Revaluation of Assets and Liabilities: simultaneously, a new partner joins the firm.

• Assets and liabilities are revalued, similar to • In this scenario, both the retirement of one
admission of a new partner. partner and the admission of another partner are
happening at the same time.
• The resulting revaluation profit or loss is
distributed among all partners based on the Old Accounting for Retirement-cum-Admission:
Profit Sharing Ratio.
• The principles for accounting during retirement
4. Adjustment for Goodwill: and admission are followed.

• Goodwill, which was developed collectively, must • There is no need for separate treatment; instead,
be adjusted. both sets of transactions are incorporated
simultaneously.
• The Gaining Ratio is used to compensate the
retiring partner for their share of goodwill. • This means that the retirement adjustments, such
as calculating the new profit-sharing ratio,
• Goodwill is written off from the balance sheet. revaluing assets and liabilities, adjusting for
5. Adjustment for Joint Life Policy (JLP): goodwill, and settling the retiring partner's final
balance, are handled alongside the admission
• The Surrender Value of a Joint Life Policy is adjustments for the new partner.
considered for accounting purposes.

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In summary, Retirement-cum-Admission involves • The surviving partners need to compensate the

both a partner retiring and a new partner joining deceased partner's estate for their share of
the firm at the same time. The accounting goodwill in the Gaining Ratio.
principles for admission and retirement are
5. Adjustment for Joint Life Policy (JLP):
applied simultaneously, with no need for separate
treatment, to ensure a smooth transition in the • The Surrender Value of the Joint Life Policy is
partnership. considered for accounting purposes in case the
partnership had such a policy.
Death of Partner
• The Maturity Value is not relevant in this context.
Death of a Partner and Accounting Adjustments:
6. Adjustment for Interim Period's Profit/Loss:
1. Calculation of New Profit Sharing Ratio and
Gaining Ratio: • Any profits or losses generated during the interim
period, from the date of the last accounting to the
• The deceased partner's share of profits is
date of the partner's death, are apportioned
redistributed among the surviving partners,
among the partners as per their Old Profit Sharing
leading to a new profit sharing ratio.
Ratio.
• The Gaining Ratio represents how the surviving
7. Settlement of Final Balance to the Deceased
partners share the profits that were previously
Partner's Executor:
allocated to the deceased partner. It is calculated
as the difference between the old and new profit • After considering all adjustments, the final balance
sharing ratios. due to the deceased partner is calculated.
2. Distribution of Reserves and Accumulated Profits • This amount is settled as per the terms of the
and Losses: partnership agreement or mutual decision, usually
paid to the executor of the deceased partner's
• Reserves or undistributed profits (as shown in the
estate.
Profit & Loss Account) are distributed among all
partners, including the executor of the deceased In summary, the death of a partner in a
partner, based on the Old Profit Sharing Ratio. partnership firm requires several accounting
adjustments to distribute profits, revalue assets
3. Revaluation of Assets and Liabilities:
and liabilities, make goodwill adjustments, and
• Assets and liabilities are revalued, similar to the settle the final balance to the deceased partner's
process during the admission of a new partner. executor. These adjustments ensure that the
reconstitution of the partnership is handled fairly
• The resulting revaluation profit or loss is
and transparently.
distributed among all partners, including the
executor of the deceased partner, based on the Adjustment for Joint Life Policy (JLP):
Old Profit Sharing Ratio.
• The accounting treatment of Joint Life Policy (JLP)
4. Adjustment for Goodwill: can vary based on the firm's policy.

• Goodwill in the firm is the result of the collective • JLP can be treated either as an asset or as an
effort of all partners, including the deceased expense in the firm's books.
partner.
• In the case of a partner's death, only the maturity
value of the JLP is considered.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

Adjustment for Interim Period's Profit/Loss: In summary, when a partner dies, adjustments are
made for Joint Life Policy, interim period's profit or
• Unlike planned events like admission or
loss, and settlement of the final balance to the
retirement, a partner's death can happen at any
deceased partner's executor. The accounting
time during the accounting period.
treatment depends on the firm's policies and
• The profit or loss from the beginning of the agreements with the partners, ensuring fairness
accounting period to the date of death, called and transparency in handling the partner's death.
"interim period's profit or loss," needs to be
Treatment of Joint Life Policy
calculated.
Joint Life Insurance Policy (JLP) in Partnership
• A temporary account called "P/L Suspense
Accounting:
Account" is typically opened in the firm's books.
• In partnerships, the death of a partner can create
• Two approaches to estimate interim period's profit
a financial burden as the firm must pay the
or loss are:
deceased partner's dues to their legal
1. On Time Basis: Using the average profit from representatives.
previous periods, which is allocated between the
• To mitigate this, firms often take life insurance
pre-death and post-death periods.
policies covering the lives of partners. These
2. On Sales Basis: Calculating the rate of profit on policies can be individual or joint.
sales from the last year and applying it to the
• The firm pays the premium for these policies, and
interim period's sales.
they are considered assets with proportional
Settlement of Final Balance to Deceased Partner's stakes held by all partners.
Executor:
• Such policies mature upon a partner's death or
• The amount payable to the deceased partner's policy expiry, whichever comes first.
representative (usually called the Executor) can be
Types of Policies:
settled immediately or deferred.
• Individual Life Insurance Policy: Covers the life of
• Accounting procedures are similar to those in
a single partner.
retirement of a partner.
• Joint Life Insurance Policy (JLP): Covers the lives of
• Two common settlement methods are:
all partners. Matures upon the death of any
1. Lump Sum Payment: If the firm has enough funds, partner or policy expiry.
the total amount payable is transferred to the
Accounting for JLP:
Executor's Account and paid promptly.
1. Premium Payment: When the firm pays the
2. Instalment Payment/Loan Payment: If the firm
premium for the JLP, it is treated as an expense and
lacks sufficient funds, the total amount payable is
debited to the Profit & Loss Account. JLP doesn't
transferred to a loan account in the name of the
appear on the Balance Sheet at this point.
Executor.
2. Surrender Value: If the firm decides to surrender
3. The loan is gradually paid off in installments, with
or terminate the JLP before maturity, the
interest calculated on the unpaid balance.
insurance company pays an amount known as the
4. The term "Loan" may or may not be used in the 'Surrender Value.' This value is considered the 'fair
account name, but the gradual payments value' for accounting purposes.
resemble loan repayments.

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3. Methods of JLP Accounting: 3. Death of a Partner (Maturity of JLP):

• Method A (Not Treated as an Asset): Here, the When the JLP matures, and the policy value is
premium is treated as an expense. JLP doesn't received by the firm, it is distributed among all the
appear on the Balance Sheet, and surrender value existing partners based on their old profit-sharing
isn't reflected in the books. ratio.

• Method B (Treated as an Asset): Under this • Debit JLP Receivable Account and Credit Existing
method, the premium is treated as an investment Partners’ Capital Account (in old profit sharing
asset. JLP appears on the Balance Sheet at its ratio).
surrender value.
• Debit Bank Account and Credit JLP Receivable
Summary: Joint Life Insurance Policies are used to Account.
protect partnerships from financial burdens due to
Method B: Treating JLP as an Asset:
the death of a partner. The accounting treatment
varies, with Method A treating premiums as • Under this method, the insurance premium paid
expenses, while Method B treats the policy as an for the JLP is treated as an investment asset on the
asset on the Balance Sheet. Surrender value plays firm's Balance Sheet. It is reflected at its surrender
a significant role in partnership accounting. value.
Accounting Entries for Joint Life Insurance Policy • Since the surrender value is generally lower than
(JLP) in Different Scenarios: the total premium paid over the years, the
difference between the premium paid and the
1. Payment of Premium:
surrender value is written off on the Balance Sheet
When the firm pays the premium for the JLP: date.

• Debit Joint Life Policy Premium Account and Credit • Two recognized methods ensure that JLP Account
Bank Account. and JLP Reserve Account are maintained at their
surrender value:
• Debit Profit & Loss Account and Credit Joint Life
Policy Premium Account. Surrender Value Method:

2. Change in Constitution of the Firm (e.g., Maintains one JLP Account. The excess premium
Admission, Retirement, Change in Profit Sharing paid over the increase in surrender value is
Ratio): debited to the Profit & Loss Account.

• To account for the surrender value of the JLP, there Joint Life Policy Reserve Method:
are two methods:
• Maintains both JLP Account and JLP Reserve
Raising and Writing-off JLP Account: Account. The premium is debited to JLP Account,
and an amount equal to the premium is debited to
• Debit JLP Account and Credit Existing Partners’
the Profit & Loss Appropriation Account.
Capital Account (in old profit sharing ratio).
Summary: The accounting for Joint Life Insurance
• Debit Continuing Partners’ Capital Account and
Policies (JLP) involves various entries, including
Credit JLP Account (in new profit sharing ratio).
premium payments, handling changes in the firm's
Adjusting the Capital Accounts of the Partners: constitution, and accounting for the policy's
maturity value. The treatment of JLP as an asset on
• Debit Gaining Partners’ Capital Account and Credit
Sacrificing Partners’ Capital Account.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

the Balance Sheet has two recognized methods to books at surrender value, no further accounting
maintain its value. treatment is needed.

Approach 1: Surrender Value Method • Under the 'JLP Reserve Method,' both JLP A/c and
JLP Reserve A/c appear in the books at surrender
• In this method, you maintain one ledger account
value, ensuring that their values are already
called Joint Life Policy Account (JLP A/c).
adjusted.
• The insurance premium paid for the joint life policy
On the Event of a Partner's Death:
is recorded in the JLP A/c by debiting JLP A/c and
crediting Bank A/c. • When a partner in a firm passes away, the Joint Life
Policy (JLP) matures.
• To ensure that JLP A/c reflects its 'surrender value'
in the Balance Sheet, you debit the excess • The firm receives the maturity value of the policy.
premium paid over the increase in surrender value
• This maturity value is then distributed among all
to the Profit & Loss A/c. This is done by passing the
the existing partners.
entry: Debit Profit & Loss A/c and Credit JLP A/c.
• The distribution is done based on their old profit
Approach 2: Joint Life Policy Reserve Method
sharing ratio (p.s.r), which means the way they
• In this method, you maintain two ledger accounts: used to share profits and losses before the
Joint Life Policy Account (JLP A/c) and Joint Life partner's death.
Policy Reserve Account (JLP Reserve A/c).
Dissolution of Partnership Firms including
• The insurance premium paid for the joint life policy Piecemeal Distribution
is treated as an investment and is debited to the
Dissolution of a Partnership Firm: Key Points
JLP A/c while crediting Bank A/c.
• When there is a change in the partnership, such as
• Additionally, the insurance premium paid on the
admission, retirement, or death of a partner, the
joint life policy is considered as an 'appropriation
existing partnership is dissolved. However, it can
of profit.' An amount equal to the premium is
continue if the remaining partners agree.
debited to the Profit & Loss Appropriation A/c, and
this amount is credited to the JLP Reserve A/c. Dissolution of a Firm Occurs Under Various
Circumstances:
• Both JLP A/c and JLP Reserve A/c appear in the
firm's Balance Sheet, with JLP A/c on the asset side 1. Mutual Consent or Contract: All partners can
and JLP Reserve A/c on the liabilities side. agree to dissolve the firm, or it can be based on a
contractual agreement (Section 40).
• To ensure that both JLP A/c and JLP Reserve A/c
reflect their 'surrender value' in the Balance Sheet, 2. Notice by a Partner: A partner can give written
you adjust the excess premium paid over the notice to dissolve the partnership if it's an at-will
increase in surrender value between these partnership (Section 43).
accounts by passing the entry: Debit JLP Reserve
3. Specific Events: Dissolution can occur due to
A/c and Credit JLP A/c.
specific events (Section 42):
Change in Constitution of Firm (e.g., Admission,
• Expiry of a fixed-term partnership.
Retirement, Change in Profit Sharing Ratio):
• Completion of the partnership's intended purpose
• Under the 'Surrender Value Method,' since JLP is
or adventure.
treated as an asset and already appears in the
• Death of a partner.

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• Adjudication of a partner as insolvent. • In the process of dissolution, the first step is to

create a Realization Account.
4. Compulsory Dissolution: Can happen when:
• The Realization Account is used to record all
• All partners or all but one are declared insolvent.
transactions related to the realization of assets
• Events make it unlawful to continue the business and the payment of liabilities.
(Section 41).
• It helps in calculating the surplus or deficit, which
5. Dissolution by Court: A court can order dissolution is then distributed among the partners.
based on various grounds (Section 44), including:
• The Realization Account is temporary and serves
• Partner's insanity. as a clearing account during dissolution.

• Permanent incapability of a partner to fulfill Step B: Transferring Assets and Liabilities to the
duties. Realization Account

• Partner's misconduct affecting the business. • All assets, except cash, bank balances, and
fictitious assets, are transferred to the Realization
• Willful or persistent breach of the partnership Account at their book values.
agreement.
• Liabilities are also transferred to the Realization
• Transfer of a partner's shares to a third party or Account.
allowing the shares to be charged.
This process allows for the systematic recording of
• Business can't be carried on without loss. the realization of assets and the payment of
• Other just and equitable grounds. liabilities during the dissolution of the partnership
firm.
Settlement of Accounts on Dissolution (Section
48): Special Considerations for Retiring and Deceased
Partners in Relation to Debts:
• Losses, including deficiencies of capital, are paid
• Debts Due at Retirement/Death: The retiring
first out of profits, then out of capital, and finally
by individual partners as per their profit-sharing partner and the estate of the deceased partner are
ratios (Section 48(1)). liable for the portion of debts owed by the firm at
the date of retirement or death, corresponding to
• Assets are applied in the following order (Section their respective shares in the partnership.
48(2)):
• Debts Incurred After Retirement: If the notice of
1. Paying the firm's debts to third parties. retirement is not properly published as per legal
requirements, the retiring partner may still be held
2. Paying each partner what is due for advances (as
liable for debts contracted by the firm after their
distinct from capital).
retirement.
3. Paying each partner what is due as capital.
• Deceased or Insolvent Partner: The estate of a
4. Distributing any remaining assets among the deceased or bankrupt partner is not responsible
partners according to their profit-sharing ratios. for debts incurred by the firm after the partner's
death or bankruptcy.
Accounting Entries for Dissolution: Realization of
Assets and Payment of Liabilities Applicability of Section 37 of the Partnership Act:
Step A: Preparing the Realization Account

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• Section 37 of the Partnership Act applies in cases • Unless there is a different agreement in place, the
of retirement or death when the dues of the following rules apply:
retiring or deceased partner are not promptly
1. Solvent partners must contribute cash equal to
settled.
their respective shares of the loss on realization.
Rights of the Retired Partner or Executor Under
2. The loss arising from a partner's insolvency is
Section 37:
shared by the solvent partners based on their Last
• The retiring partner or the executor of the Agreed Capitals.
deceased partner is entitled to the maximum of
Calculation of Last Agreed Capitals:
two options:
• In a fixed capital system, the Last Agreed Capitals
1. Interest at a rate of 6% per annum on the unsettled
are represented by the capital balances as per the
amount.
last Balance Sheet.
2. A share of the profits earned corresponding to the
• In a fluctuating capital system, adjustments are
unsettled capital.
necessary, considering reserved profits or losses,
Conditions for the Application of Section 37: Drawings Account, undisclosed liabilities and
assets, to determine the Last Agreed Capitals.
For Section 37 to apply, the following conditions
must be met: Exceptions and Criticisms:

• The surviving or continuing partners must • Exceptions to the Garner vs. Murray principle
continue to operate the firm's business. include situations where a solvent partner has a
debit balance in their capital account, which
• The business must continue without a final
should not bear the insolvent partner's deficiency.
settlement of accounts between the continuing
partners and the outgoing partner or their estate. • The principle does not apply when there are only
two partners.
• There should be no specific contract in place that
contradicts the options provided in Section 37, • It may require solvent partners with credit
such as a different arrangement for profit-sharing balances to bring cash equal to the realization loss,
or interest on unsettled capital. which can be considered impractical.

Insolvency of a Partner: • It may result in a situation where a solvent partner

with more private assets but less capital
• When a partner becomes insolvent and cannot pay
contributes less to cover the insolvent partner's
their debit balance in the Capital Account, the
deficiency compared to another solvent partner
unrecoverable portion becomes a loss that the
with fewer private assets but more capital, which
solvent partners must bear.
may seem unjustified.
Garner vs. Murray Case:
Applicability in India:
• In the case of Garner vs. Murray, it was established
• In India, as per Section 48(b)(ii) of the Indian
that losses resulting from a partner's insolvency
Partnership Act, if a partner becomes insolvent or
should be treated differently from ordinary losses,
incapable of paying their share, the solvent
including realization losses.
partners must share the available assets (including
Implications of Garner vs. Murray: their contribution to capital deficiency)
proportionally to their capital.

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• The solvent partners must make up the realization • The partner paid a premium for goodwill upon
loss (capital deficiency), and the remaining cash is admission.
shared among them based on their capital
• The partnership firm has dissolved.
contributions.
Exceptions:
• This provision aligns with the principles laid out in
the Garner vs. Murray case. • No refund if dissolution is due to the death of a
partner.
Specific Agreement vs. Act Provisions:
• No refund if dissolution is caused by the
• When the Partnership Deed contains specific
misconduct of the partner seeking a refund.
provisions on how to distribute the insolvent
partner's deficiency among solvent partners, • No refund if the dissolution is based on an
those provisions take precedence over the Act's agreement with no provision for premium return.
rules. The Act's provisions apply when there is no
Amount of Refund:
specific agreement in place.
• The refund amount is determined based on
When All Partners Are Insolvent:
admission terms and the elapsed period.
• When all partners of a firm are insolvent, creditors
Liability of Other Partners:
cannot expect to be paid in full.
• The refund is paid by the other partners in their
• In this scenario, Sundry Creditors should not be
profit sharing ratio.
transferred to the Realization Account.
Piecemeal Distribution in Partnership
• Instead, the available cash, proceeds from asset
Dissolution:
sales, and any surplus from the private estates of
partners (after deducting expenses) will be used to • Sometimes, partnership assets are realized
make payments to the creditors. gradually over time, and parties are paid as assets
are realized.
• The remaining balance in the Creditors Account
represents the deficiency that the creditors must Order of Payment:
bear.
1. Realization expenses.
• This deficiency amount is transferred to a
2. Provision for expenses.
Deficiency Account.
3. Preferential creditors (e.g., Income Tax).
• The balances in the Capital Accounts of the
partners are also transferred to the Deficiency 4. Secured creditors (up to the amount realized from
Account to close the books. secured assets).
• Alternatively, the deficiency to be borne by the 5. Unsecured creditors (proportional if multiple).
creditors may be directly adjusted between the
6. Partners' loans (proportional if multiple).
Creditors Account and the Capital Accounts.
7. Partners' capital.
Return of Premium to a Partner on Dissolution
Before Term Expiry: Surplus Capital Method (When All Partners Are
Solvent):
Conditions for Refund:
1. Adjusted capital: Balance in capital accounts
• A partner was admitted for a fixed term.
adjusted for profit, loss, drawings, and reserves.

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2. Base capital: Adjusted capital divided by profit 8. Repeat steps (3) to (7) until the final realization is
sharing ratio. complete.

3. Proportionate capital: Base capital multiplied by Amalgamation of Partnership Firms:

profit sharing ratio.
Scenario A: Two or More Sole Proprietors Form a
4. Surplus capital: Difference between adjusted New Partnership Firm
capital and proportionate capital.
1. Prepare the Balance Sheet of each sole
Note: The process continues until an absolute proprietorship business on the date of dissolution.
surplus is obtained.
2. Open a Realisation Account and transfer all assets
Surplus Capital Method (Proportionate Capital and liabilities (except cash in hand and cash at
Method): bank) to the Realisation Account at their book
values. Cash in hand and cash at bank are
• Compares partners' actual capital on the
transferred to the Realisation Account only if taken
dissolution date with their proportionate capital
over by the new firm.
based on the minimum capital per unit of profit.
3. Transfer all undistributed reserves, profits, or
• Surplus capital is paid first, and any remaining
losses (from the balance sheet) to the respective
balance is distributed according to the profit
Partners' Capital Accounts.
sharing ratio.
4. Calculate the Purchase Consideration based on the
• This method ensures that partners' final balances
agreed-upon terms and conditions. It's usually
reflect their share of realization profit or loss.
determined by the agreed values of assets and
• No further settlements are required at that point.. liabilities taken over by the new firm.

Maximum Loss Method: 5. Credit the Realisation Account with the amount of
Purchase Consideration.
1. Prepare a statement showing the distribution of
cash. 6. Record any unrecorded assets or liabilities.

2. Pay off external liabilities. 7. Transfer the profit or loss on realization (the
balancing figure of the Realisation Account) to the
3. After settling external liabilities, distribute the
Capital Account of the proprietor.
remaining cash to the partners.
8. Ensure that all accounts of the sole proprietor's
4. Determine the maximum loss, which is the
business are closed.
difference between the total due to partners and
the net balance of realization. This process is followed when two or more sole
proprietorship businesses merge to create a new
5. Share the maximum loss among the partners
partnership firm.
based on their profit-sharing ratio, assuming there
will be no further realization. Accounting Entries in the Books of Amalgamating
Sole Proprietors:
6. If any partner's capital becomes negative after step
(4), treat them like an insolvent partner. 1. Transfer of Sundry Assets to Realisation Account:

7. Distribute the insolvent partner's deficiency to the • Debit Realisation Account.

other solvent partners in their capital contribution
ratio, following the Garner vs. Murray Rule.

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• Credit Sundry Assets Account individually (Assets 9. Recording of Unrecorded Liabilities:

transferred at their book values, except Cash and
• Debit Capital Account.
Bank if not taken over by the new firm).
• Credit Liabilities Account (Recording unrecorded
2. Transfer of Sundry Liabilities to Realisation
liabilities).
Account:
10. Payment of Unrecorded Liabilities:
• Debit Liabilities Account individually.
• Debit Liabilities Account.
• Credit Realisation Account (Liabilities transferred
at their book values). • Credit Bank Account (Payment of unrecorded
liabilities).
3. Recording of Purchase Consideration:
11. Liabilities Taken Over by the Proprietor:
• Debit New Firm Account.
• Debit Realisation Account.
• Credit Realisation Account (Purchase
consideration due from the new firm). • Credit Capital Account (Liabilities assumed by the
proprietor).
4. Assets Taken Over by the Proprietor:
12. Realisation Expenses:
• Debit Capital Account.
• Debit Realisation Account.
• Credit Realisation Account (Assets taken over by
the proprietor). • Credit Bank Account (Payment of realisation
expenses).
5. Realisation of Assets Not Taken Over by the New
Firm: 13. Profit on Realisation:

• Debit Bank Account. • Debit Realisation Account.

• Credit Realisation Account (Realisation of assets • Credit Capital Account (Profit on realisation
not taken over by the new firm). transferred to Capital Account).

6. Recording of Unrecorded Assets: 14. Loss on Realisation:

• Debit Assets Account. • Debit Capital Account.

• Credit Capital Account (Recording unrecorded • Credit Realisation Account (Loss on realisation
assets). transferred to Capital Account).

7. Realisation of Unrecorded Assets: 15. Accumulated Profits/Reserves:

• Debit Bank Account. • Debit Reserves Account.

• Credit Assets Account (Realisation of unrecorded • Debit Profit and Loss Account.
assets). • Credit Capital Account (Undrawn profits
8. Payment of Liabilities Not Taken Over: transferred to Capital Account).

• Debit Realisation Account. 16. Accumulated Losses:

• Credit Bank Account (Payment of liabilities not • Debit Capital Account.

taken over by the new firm).

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• Credit Profit and Loss Account (if any) • Credit Partners’ Capital Account [For Purchase
(Accumulated losses transferred to Capital Consideration].
Account).
These entries reflect how the new firm records
17. Settlement of Purchase Consideration by the New assets, liabilities, goodwill, and purchase
Firm: consideration based on the net assets acquired.

• Debit Capital in New Firm Account. When an Existing Partnership Firm Absorbs a Sole
Proprietorship:
• Credit New Firm Account (Settlement of purchase
consideration). • In this scenario, the sole proprietorship business is
dissolved, and the existing partnership firm
18. Final Adjustment:
compensates it by offering a share in the
• Debit Capital Account. partnership.

• Credit Capital in New Firm Account. • The assets and liabilities of the sole proprietorship
are taken over by the partnership firm at agreed-
• Credit Bank Account (if any) (Final adjustment to
upon values.
close the books of account).
• The assets and liabilities of the sole proprietorship
Accounting Entries in the Books of the New Firm:
are added to the existing assets and liabilities of
1. If the net acquired assets are equal to the purchase the partnership.
consideration:
• The new partner (sole proprietorship) contributes
• Debit Assets Account [At Acquired Value]. capital equal to the agreed purchase
consideration.
• Credit Liabilities Account [At Assumed Value].
• Goodwill and Capital Reserve are calculated and
• Credit Partners’ Capital Account [For Purchase
treated as explained in the previous situation (A).
Consideration].
• Before amalgamation, all the assets and liabilities
2. If the net acquired assets are more than the
of the partnership firm may be revalued. Any profit
purchase consideration:
or loss on revaluation is transferred to the
• Debit Assets Account [At Acquired Value]. Partners’ Capital Accounts based on their old
profit-sharing ratio.
• Credit Liabilities Account [At Assumed Value].
• Goodwill of the firm is adjusted by crediting the
• Credit Partners’ Capital Account [For Purchase
Partners’ Capital Accounts in their old profit-
Consideration].
sharing ratio.
• Credit Capital Reserve Account [For Purchase
• The balance of reserves and surpluses of the firm
Consideration - Net Assets].
is also credited to partners’ Capital Accounts in
3. If the net acquired assets are less than the amount their old profit-sharing ratio.
of purchase consideration, representing goodwill:
When One Firm Takes Over Another Firm:
• Debit Assets Account [At Acquired Value].
• When one firm absorbs another firm, the process
• Debit Goodwill Account [For Purchase of closing the books is the same as previously
Consideration - Net Assets]. explained.

• Credit Liabilities Account [At Assumed Value].

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• The assets of the absorbed firm are added to the Accounting Entries in the Books of Selling Firms
assets of the firm that absorbed it. (Partnership Firms):

1. Transfer of different assets to Realisation Account:

When Two or More Partnership Firms Form a • Debit Realisation Account (individual entries for
New Partnership Firm: each asset)

• When multiple partnership firms merge to create • Credit Sundry Assets Account
a new partnership firm, the books of the old firms
2. Transfer of different liabilities to Realisation
are closed.
Account:
• Each old firm opens a Realisation Account in their
• Debit Liabilities Account (individual entries for
books.
each liability)
• The accounting entries for the amalgamating firms
• Credit Realisation Account
are the same as when they were absorbed by
another firm. 3. Recording purchase consideration due from the
purchasing company:
Conversion of Partnership Firm into a
• Debit Purchasing Company Account
Company and Sale of Partnership Firm to a
• Credit Realisation Account
Company
4. Transfer of assets taken over by the proprietor (if
Conversion of Partnership into a Joint Stock
applicable):
Company:
• Debit Capital Account of the Proprietor
• An existing partnership firm may choose to convert
itself into a joint stock company. • Credit Realisation Account

• This process involves the dissolution of the 5. Realisation of assets not taken over by the
partnership, and all the books of account are purchasing company:
closed.
• Debit Bank Account
• The procedure for liquidation is similar to what has
• Credit Realisation Account
been explained earlier for amalgamation of
partnership firms. 6. Recording unrecorded assets:

• The purchase consideration from the company • Debit Assets Account

may be in the form of cash, shares, debentures, or
• Credit Capital Account (for recording previously
a combination of these.
unrecorded assets)
• The shares issued by the company may be equity
7. Realisation of unrecorded assets (if any):
or preference shares and can be at par, at a
premium, or at a discount. • Debit Bank Account

• If there is no specific agreement, the shares • Credit Assets Account

received should be distributed among the partners
8. Payment of liabilities not taken over by the
in the same ratio as profits and losses are shared.
purchasing company:

• Debit Realisation Account

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• Credit Bank Account • Debit Partners’ Current Accounts

9. Recording unrecorded liabilities: • Credit Partners’ Capital Accounts

• Debit Capital Account (for recording previously 18. Settlement of purchase consideration by the
unrecorded liabilities) company:

• Credit Liabilities Account • Debit Shares in Purchasing Company

10. Payment of unrecorded liabilities (if any): • Debit Debentures in Purchasing Company

• Debit Liabilities Account • Debit Cash Account

• Credit Bank Account • Credit Purchasing Company Account

(Note: If unrecorded liabilities are taken over by 19. Final adjustment:

the purchasing company, they are transferred to
• Debit Partners’ Capital Accounts
Realisation Account along with other liabilities.)
• Credit Shares in Purchasing Company Account
11. Transfer of liabilities taken over by the proprietor
(if applicable): • Credit Debentures in Purchasing Company
Account
• Debit Realisation Account
• Credit Cash Account
• Credit Capital Account of the Proprietor
Accounting Entries in the Books of the Purchasing
12. Recording realisation expenses paid:
Company:
• Debit Realisation Account
1. For assets and liabilities taken over (When net
• Credit Bank Account assets taken over are less than the Purchase
consideration):
13. Transfer of profit on realisation:
• Debit Assets Account (at Agreed Value)
• Debit Realisation Account
• Debit Goodwill Account (Balancing figure)
• Credit Capital Account (for profit distribution)
• Credit Liabilities Account (at Agreed Value)
14. Transfer of loss on realisation:
• Credit Firm Account (Purchase Consideration)
• Debit Capital Account (for loss distribution)
(This entry records the acquisition of different
• Credit Realisation Account assets and liabilities)

15. Transfer of accumulated profits/reserves: 2. For assets and liabilities taken over (When net
assets taken over are more than the Purchase
• Debit Reserves Account
consideration):
• Debit Profit and Loss Account
• Debit Assets Account (at Agreed Value)
• Credit Capital Account (for undrawn profits)
• Credit Liabilities Account (at Agreed Value)
16. Reverse entry for loss transfer (if applicable).
• Credit Firm Account (Purchase Consideration)
17. Transfer of partners' current accounts (credit
balances) to capital accounts:

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• Credit Capital Reserve Account (Balancing figure) • There must be at least two designated partners,
(This entry records the acquisition of different with at least one being a resident of India.
assets and liabilities)
• The name of an LLP must end with "limited liability
3. For discharge of Purchase Consideration: partnership" or "LLP."

• Debit Firm Account (Purchase Consideration) Books of Accounts for LLP:

• Credit Share Capital Account (Face value of shares • LLPs must maintain proper books of accounts as
issued) prescribed by the Limited Liability Partnership Act,
2008.
• Credit Securities Premium Account (if any)
• These books should accurately show the financial
• Credit Debentures Account
position of the LLP at any given time.
• Credit Bank Account (This entry represents the
• The books must be kept at the registered office for
settlement of the purchase consideration through
the prescribed period.
the issuance of shares, debentures, or cash)
• They should include records of receipts,
Accounting of Limited Liability Partnership
expenditures, assets, liabilities, purchase
Limited Liability Partnership (LLP): statements, inventories, and other relevant
particulars.
• A Limited Liability Partnership (LLP) is a business
organization that combines features of both • LLPs are required to preserve these books of
partnerships and companies. accounts for eight years from their creation date.

• The partners' liability in an LLP is limited to the Statement of Account and Solvency for LLP:
capital they contribute, similar to a company.
• Every LLP must prepare a Statement of Account
• The Limited Liability Partnership Act, 2008, and Solvency within six months from the end of
governs LLPs in India. each financial year.

• The Indian Partnership Act, 1932, does not apply • This statement should reflect the financial status
to LLPs. of the LLP as of the last day of that financial year.

Nature of LLP: • The designated partners of the LLP are responsible

for signing this statement.
• An LLP is a separate legal entity formed under the
Limited Liability Partnership Act. • The Statement of Account and Solvency must be
filed with the Registrar within the prescribed time
• Changes in partners do not affect the existence,
frame each year.
rights, or liabilities of the LLP.
• It should be submitted in the prescribed format
Features of LLP:
and accompanied by the required fees.
• LLPs are considered a body corporate.
The statement includes:
• They are formed under the Limited Liability
1. Statement of Assets and Liabilities
Partnership Act, 2008.
2. Statement of Income and Expenditure
• Partners can be individuals or corporate bodies.
• These statements help in assessing the financial
• Every LLP must have at least two partners.
health and solvency of the LLP.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

LEASE ACCOUNTING • Unearned Finance Income: The difference

between the gross investment and present value.
1. Lease : Meaning
• Net Investment in the Lease: Gross investment
• A lease is an agreement where the owner of an
minus unearned finance income.
asset (lessor) allows someone else (lessee) to use
the asset for a set time in exchange for payments. • Interest Rate Implicit in the Lease: The rate that
makes present values equal fair value.
2. Types of Leases:
• Lessee's Incremental Borrowing Rate: The rate
• Finance Lease: Transfers most ownership risks and
the lessee would pay for a similar lease or
rewards to the lessee.
borrowing for the asset.
• Operating Lease: Doesn't transfer ownership risks
• Contingent Rent: Part of lease payments based on
and rewards.
factors other than time, like sales or usage.
3. Not Covered by AS 19:
6. Objective of AS 19:
• Leases for natural resources, licenses for movies or
• AS 19 aims to provide guidelines for how to
patents, and land leases are not covered by AS 19.
account for finance and operating leases for both
4. Important Definitions: lessors and lessees.

• Non-cancellable Lease: Can't be canceled easily. 7. Applicability of AS 19:

• Inception of Lease: The lease's start date. • AS 19 should be used for accounting in all leases
except for certain specific types.
• Lease Term: The agreed time plus any optional
extensions. These . should help you understand the key points
about leases and AS 19 in a more straightforward
• Minimum Lease Payments: Payments the lessee
way.
must make during the lease, excluding some costs.
Classification of Leases:
• Fair Value: The asset's value in a fair sale.
• Leases are categorized based on who bears the
• Economic Life: How long the asset can be used.
risks and enjoys the rewards of asset ownership.
• Useful Life: How long the lessee plans to use the
• Risks involve potential losses due to idleness or
asset.
outdated technology, while rewards include profit
• Residual Value: Estimated asset value at the expectations and asset value appreciation.
lease's end.
Two Types of Leases:
• Guaranteed Residual Value: Part of the residual
1. Finance Lease:
value assured by the lessee or a third party.
• Transfers most ownership risks and rewards to the
• Unguaranteed Residual Value: Residual value
lessee.
exceeding the guaranteed portion.
• Ownership may or may not eventually transfer.
5. More Definitions:
2. Operating Lease:
• Gross Investment in the Lease: Total lease
payments plus unguaranteed residual value for the • Doesn't transfer most ownership risks and
lessor. rewards.

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Lease Classification Timing: • Calculate the present value using the interest rate
implicit in the lease or, if not available, the lessee's
• Lease classification is determined at the beginning
borrowing rate.
of the lease agreement.
• Split lease payments into finance charges and
• If the lease terms change, it's considered a new
reducing the outstanding liability.
agreement, except for changes in estimates or
circumstances. • Depreciate the leased asset, considering
ownership by the end of the lease term or its
Finance Lease Details:
useful life if ownership is uncertain.
• A finance lease transfers most ownership risks and
Disclosure of Finance Lease for Lessees:
rewards.
Disclosures include:
• Specific situations that indicate a finance lease:
• Separating leased assets from owned assets.
• Ownership transfers to the lessee at the end of the
lease. • Displaying the net carrying amount of assets.

• Lessee can buy the asset at a significantly lower • Reconciling total minimum lease payments and
price. their present value.
• Lease term covers most of the asset's economic • Showing contingent rent expenses.
life.
• Revealing future sublease payments.
• Minimum lease payments equal most of the
asset's fair value. • Describing significant leasing arrangements,
including payment structures and restrictions.
• The asset is specialized and only the lessee can use
it without major changes. Note for Small and Medium Sized Companies:

• Other indicators of a finance lease: • Small and Medium Sized Companies may have
reduced disclosure requirements.
• If the lessee can cancel, they bear losses.
These . should help you understand the key points
• Gains or losses from asset value changes go to the about lease classification and how finance leases
lessee. are handled in the financial statements of lessees.
• The lessee can extend the lease at a lower rate Finance Lease for Lessor:
than the market.
• Lessor should recognize assets given under a
Treatment of Finance Lease for Lessees: finance lease as a receivable on the balance sheet.
• Finance leases must be shown on the lessee's • Finance income is recognized based on a constant
balance sheet as both an asset and an obligation periodic rate of return on the net investment in the
to pay future lease payments. lease.
• Recognition is based on the fair value of the leased • Disclosures for finance leases include a
asset at the start of the lease. reconciliation of gross investment, unearned
• If the fair value is higher than the present value of finance income, and other financial details.
minimum lease payments, record the latter. Finance Lease for Lessee:

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• Lessee should recognize finance leases in the BRANCH (INCLUDING FOREIGN BRANCH) AND
balance sheet as both assets and obligations. DEPARTMENTAL ACCOUNTS

• Asset and liability recognition should be based on Branch Accounting

the fair value of the leased asset.
Branches in Organizations:
• Lease payments are apportioned between finance
• A branch is an additional location of an
charges and liability reduction.
organization, separate from its head office, where
• Depreciation of leased assets should follow the similar or related business activities are
policy for owned depreciable assets. conducted.

Operating Lease for Lessor: • Organizations open branches for profit-making

purposes to increase visibility and brand exposure,
• The asset given under an operating lease should be
and for non-profit organizations to expand their
presented on the lessor's balance sheet as fixed
outreach.
assets.
• Branches are not separate legal entities; they are
• Lease income from operating leases is recognized
extensions of the organization.
on a straight-line basis over the lease term unless
another systematic basis is more appropriate. • All branches are controlled by the head office,
making them dependent on the head office for
Operating Lease for Lessee:
operations and decision-making.
• Lease payments under operating leases are
• An organization can open branches in the same
recognized as an expense on a straight-line basis
country or in different countries.
unless another systematic basis represents the
benefit's time pattern. Classification of Branches:

• Lessee disclosures include future minimum lease • Branches are classified based on their
payments, sublease payments, and other lease geographical area of operation.
details.
• Domestic Branch: Operates in the same country as
Sale and Leaseback Transactions: the organization's head office (e.g., State Bank of
India branches in India).
• Accounting for sale and leaseback transactions
depends on the type of lease. • Foreign Branch: Operates in a different country
from the organization's head office (e.g., Dubai
• For finance leases, any excess or deficiency of sales
branch of State Bank of India).
proceeds over the carrying amount is deferred and
amortized over the lease term. • Domestic branches can further be categorized into
Dependent Branches (controlled by the head
• For operating leases, profits or losses are
office) and Independent Branches (maintain their
recognized immediately, depending on whether
own accounts).
the sale price is above or below fair value.
Branch Accounting:
• If the fair value is less than the carrying amount for
operating leases, a loss is recognized immediately. • Branch accounting involves recording and
maintaining transactions that occur at a branch to
determine its financial results and position.

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• Dependent branches have their accounting done invoice price require adjustments to ensure
by the head office, while independent branches accurate results.
maintain their own accounts.
• Transactions Not Included in Branch Account:
• Branch accounting follows the 'Responsibility
• (a) Expenses Incurred by Branch: Expenses paid by
Accounting' system, where branches act as both
the branch using cash do not appear in the Branch
'Revenue Centers' and 'Cost Centers.'
Account because they either reduce the cash
• Transactions between branches, the head office, balance or increase liabilities at the end.
and other parties are recorded, and the financial
• (b) Purchase of Goods/Fixed Assets by Branch:
results, such as profit and loss, are ascertained at
Transactions related to the purchase of goods or
the end of each financial period.
fixed assets by the branch are not recorded in the
• Common branch accounting transactions include Branch Account. This is because they increase the
goods sent by the head office, return of goods, book value of goods/fixed assets at the end and
assets sent by the head office, cash remittances for either reduce remittances or increase the amount
branch expenses, branch sales, and sending owed to creditors.
branch proceeds to the head office.
• (c) Sale of Goods/Fixed Assets by Branch: Sales of
Methods of Branch Accounting (for Dependent goods or fixed assets by the branch are not part of
Branches): the Branch Account. This is because they decrease
the book value of goods/fixed assets at the end
• There are several methods for accounting for
and either increase remittances or add to the
dependent branches, including:
amount owed by debtors.
1. Debtors Method or Synthetic Method
• (d) Other Transactions: Transactions such as bad
2. Stock Debtors Method or Analytical Method debts, discounts given, customer returns to the
branch, and cash received from branch debtors are
3. Final Accounts Method (Cost Basis)
also excluded. This is because the debtors'
4. Final Accounts Method (Wholesale Price Basis) balances at the end are adjusted.

• The Debtors Method, also known as the Synthetic • (e) Depreciation and Profit/Loss on Asset Sales:
Method, involves the head office maintaining Depreciation and any profit or loss from selling
separate branch accounts. Branches appear as fixed assets are not recorded in the Branch
'Debtors' in the head office's books, allowing the Account. This is because fixed assets at the end
head office to claim the money generated by the appear at the adjusted value.
branch after covering its expenses.
• (f) Abnormal Losses: Transactions related to
• Two ledger accounts are maintained: Branch Account abnormal losses are not included. This is because
and Goods Sent to Branch Account. the stock value at the end reflects the adjusted
figure.
• The Branch Account records transactions exclusively
between the head office and the branch. • In summary, the Branch Account does not include
transactions that affect cash, purchase or sale of
• Transactions related to the branch are recorded in
goods/fixed assets, adjustments to debtors,
the Branch Account, which is a nominal account
depreciation, abnormal losses, and certain other
used to determine the branch's net profit or loss.
specific transactions.
• Goods sent by the head office to the branch are
accounted for at cost price, while goods sent at

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

Stock-Debtors Method or Analytical Method • Key Features:

Simplified:
• It involves preparing and maintaining two key
• Focus: This method concentrates on tracking two accounts: the Branch Trading and Profit & Loss
key assets of a branch: Stock and Debtors. Account and a separate Branch Account for
branch-related transactions.
• Detailed Recording: All branch transactions are
meticulously recorded through separate ledger • The Branch Trading and Profit & Loss Account
accounts, earning it the name "Analytical calculates both Gross Profit/Loss and Net
Method." Profit/Loss for the branch.

• Key Ledger Accounts: Specific ledger accounts • The Branch Account follows the double-entry
maintained under this method include Branch accounting system and is a personal account.
Stock Account, Branch Debtors Account, Goods
• Purpose: The Branch Trading and Profit & Loss
Sent to Branch Account, Branch Adjustment
Account helps determine the branch's financial
Account, Branch Cash Account, Branch Expenses
performance, including both Gross Profit/Loss and
Account, Branch Profit and Loss Account, and
Net Profit/Loss.
Branch Fixed Assets Account.
In summary, the Final Accounts Method is used for
• Branch Stock Adjustment Account: This account is
all types of branches and involves the preparation
used when goods are sent at Invoice Price (IP) to
of two essential accounts to assess the branch's
remove the 'load factor' associated with IP. It
financial results, including both Gross and Net
records transactions related to stock/goods,
Profit/Loss.
including Opening & Closing Branch Stock, Goods
sent to Branch, Goods Returned to Branch, and Incorporation of Branch Trial Balance in Head
Abnormal Loss. It reflects the gross Profit/Loss of Office Books - First Method
the branch.
• Preparation of Trial Balance: The branch prepares
• Profit Determination: The Stock-Debtors Method its own trial balance, which includes all financial
calculates both the gross profit/loss and net transactions and balances.
profit/loss of a branch.
• Sending to Head Office: The branch sends this trial
• Adoption: This method is typically chosen by balance to the Head Office for further processing.
branches with substantial operations that require
• Incorporation in H.O. Books: At the Head Office,
detailed transaction recording.
the trial balance received from the branch is
In summary, the Stock-Debtors Method, also incorporated into the Head Office's accounting
known as the Analytical Method, is a system.
comprehensive approach to branch accounting
• Treatment of Revenue Items: All revenue items,
that focuses on detailed tracking of stock and
such as income and expenses, are passed through
debtors and provides a clear picture of a branch's
the Branch Trading and Profit & Loss Account.
financial performance, including both gross and
net profits or losses. It is commonly adopted by • Treatment of Assets and Liabilities: Assets and
branches with significant operations. liabilities from the branch's trial balance are also
passed through a Branch Account.
• Applicability: This method is used for all branches,
whether they deal with goods or services. • Purpose: This method is used to prepare a
consolidated Balance Sheet in the Head Office's
books. It allows the Head Office to assess the net

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financial result of the entire organization, including • Features:

the branch.
• This method involves preparing and maintaining
• Consolidation: The financial data from the branch two key accounts: the Branch Trading and Profit &
and the Head Office are combined to create a Loss Account and a separate Branch Account for
comprehensive view of the organization's financial branch-related transactions.
health.
• The Branch Trading and Profit & Loss Account
In summary, the First Method involves integrating determines both Gross Profit/Loss and Net
the branch's trial balance into the Head Office's Profit/Loss.
accounting system to create a consolidated
• The Branch Account follows the double-entry
financial statement for the entire organization.
accounting system and is categorized as a personal
account.

Final Accounts Method (on Wholesale Price In summary, the Final Accounts Method on
basis) Simplified: Wholesale Price basis is used by organizations with
both H.O and Branch sales. It calculates different
• Adoption: This method is used by organizations
profits based on how goods are valued, and it
where both the Head Office (H.O) and Branch sell
involves preparing two main accounts to assess
goods, contributing to the total profit of the
the financial results of the Branch and the overall
organization.
organization.
• Credit Allocation: In this method, the H.O receives
Branch Petty Cash under Imprest System
credit for the profit generated from "Goods sent to
Simplified:
Branch" and "Goods sold to Customers," while the
Branch gets credit only for "Goods sold to • Purpose: Head Offices (H.O) allow branches to
Customers." maintain a small amount of petty cash for small
expenses incurred by the branch. H.O reimburses
• Valuation of Goods: Transactions involving the
the branch for these expenses. This system is
movement of goods are valued differently in the
known as the "Imprest System."
books of the H.O and the Branch:
• Imprest Balance: H.O determines the initial
• At Cost: The price at which the H.O purchased the
Imprest balance for petty cash and sends it to the
goods.
branch at the beginning of the period.
• At Retail Price: The price at which both the H.O
• Expense Handling: Branches use the Imprest
and the Branch sell goods to customers.
balance to cover their petty expenses. This system
• At Wholesale Price: The price at which the H.O ensures that the original Imprest balance is
sends goods to its Branch. maintained.

• Profit Calculation: Accounting for Independent Branch Simplified:

• Retail Profit for H.O: Calculated as Retail Price • Overview: Independent branches with a high
minus Cost. volume of transactions operate autonomously.
They purchase and sell goods independently and
• Retail Profit for Branch: Calculated as Retail Price
may also sell goods sent by H.O. Any profit or loss
minus Wholesale Price.
made by these branches benefits H.O.
• Wholesale Profit for H.O: Calculated as Wholesale
Price minus Cost.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

• Financial Records: Independent branches • Exclusion of Assets and Liabilities: Branch assets
maintain a complete set of financial records, and branch liabilities are not included in the
including Trial Balances, Trading and Profit and Branch Account.
Loss Accounts, and Balance Sheets at the end of
• Balancing the Branch Account: The Branch
the year.
Account will have a balance, which must be equal
• Accounting Entries: Both branches and H.O to the difference between assets and liabilities. In
maintain accounts for transactions, such as cash other words, it represents the net worth of the
remittances and goods transfers, which are passed business.
through these accounts.
• Purpose: This method simplifies branch
• Adjustments: Occasionally, discrepancies may accounting when detailed revenue and expense
arise between branch accounts in H.O.'s books and data is not accessible.
H.O. accounts in branch books. These
In this method, the focus is on the net financial
discrepancies are adjusted, typically involving
result (profit or loss), and the Branch Account
items like Goods-in-Transit or Cash-in-Transit.
serves as a summary of the branch's financial
• Branch Balance Sheet: At the branch level, all position without detailing assets and liabilities.
transactions are recorded in the branch's books,
Domestic Branch
including Cash Books and Subsidiary Books. The
independent branch may prepare its final accounts • Location: Operates within the same country as the
and send them to H.O. organization's Head Office.

• H.O. Transactions: Transactions between branches • Nature: Can be either dependent (controlled by
and H.O. are recorded in H.O.'s books. H.O. H.O) or independent.
maintains separate accounts for each independent
• Currency: Both the H.O and the branch use the
branch, including 'Goods Sent to Branch Account'
same currency for recording transactions and
and 'Branch Account.'
preparing accounts.
In summary, the Imprest System allows branches
Foreign Branch
to maintain petty cash for small expenses, and
independent branches operate autonomously, • Location: Operates in a country different from
maintaining their financial records and where the organization's Head Office is located.
occasionally adjusting for discrepancies in branch
• Nature: Always independent and operates
and H.O. accounts.
autonomously.
Second Method / Abridged Method
• Currency: Transactions and accounting in foreign
• When Applied: This method is used when only net branches are conducted in a different currency
profit or net loss is provided, and detailed than the H.O.
information about all revenue expenses and
Branch Trial Balance in Foreign Branch
income is not available.
• A foreign branch maintains its own books of
• Transfer to Branch Account: Under this method,
accounts.
only the net profit or net loss is transferred to the
Branch Account. • It drafts the trial balance in foreign currency.

• The trial balance is then sent to the Head Office.

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Conversion of Foreign Branch Trial Balance • Branch: Each branch is set up at different
geographical locations.
• Net Investment Method: Converts all items in the
trial balance (except H.O. Account) using the Interrelation:
closing exchange rate. H.O. Account is represented
• Department: A department can never have a
based on how the Branch Account appears in H.O.
branch on its own.
books, with adjustments for goods and cash in
transit. • Branch: A branch may consist of numerous
departments.
• Current and Non-current Method: Different
exchange rates are applied for current assets and Concept of Departmental Accounting:
liabilities, and fixed assets and long-term liabilities.
• Traditional accounting provides the overall
Closing rates are used for current items, while
financial performance of an entity but lacks
historical rates are applied to fixed assets and long-
department-specific insights.
term liabilities.
• Departmental Accounting focuses on assessing the
• Temporal Method: Applied when exchange rates
financial performance of each department within
are fluctuating.
a large organization.
In summary, a key distinction between foreign and
Features of Departmental Accounting:
domestic branches is their location and the
currency they use for transactions and accounting. • Transactions are recorded department-wise,
Domestic branches operate in the same country as separating expenses and incomes.
the Head Office and use the same currency, while
• It follows the Responsibility Accounting system.
foreign branches operate in a different country
and use a foreign currency. • Each department is treated as a Responsibility
Centre.
Departmental Accounting
• It records both external and internal transactions.
Department vs. Branch:
• Provides information to internal stakeholders.
Concept:
• Involves creating Departmental Trading & Profit &
• Department: A segment or unit into which an
Loss Accounts.
entity is rationally divided.
Objectives of Departmental Accounting:
• Branch: Establishment of a large organization that
is located at different places. • Analyze the performance of each department.
Purpose: • Determine the true operating results and
efficiency of each department (profit/loss).
• Department: Enhancement of effective
operations, efficient management, and proper • Compare financial performance among different
control. departments.
• Branch: Primary objective is to boost up the sales • Provide data for management decision-making
revenue of the entity. and policy formulation.
Location: Methods of Maintaining Departmental Accounts:
• Department: Generally, Departments are not
separated geographically.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

1. Maintenance of Same Set of Books (Columnar or • Other financial income items like Dividend
Tabular Method): received, Interest earned on Deposits, and Profit
on sale of fixed assets are credited to the General
• Records expenses and incomes in a tabular or
Profit & Loss Account as they pertain to the
columnar format.
organization as a whole and cannot be allocated to
• Centralized Accounting Department typically specific departments.
maintains records.
Expense Items:
• Cost-effective method.
• Expenses directly related to a specific department
2. Maintenance of Separate Set of Books (Unitary are charged to that department's accounts.
Method):
• Expenses common to multiple departments are
• Each department maintains its own records allocated among them using a rational basis.
independently.
• Common expense items and their allocation bases
• Expensive but often used by large firms. include:

Preparation of Departmental Final Accounts: • Commission to Purchase Manager and Carriage

Inwards: Allocated based on purchases.
• Departmental Trading Account: Helps ascertain
Departmental Gross Profits/Loss for each • Selling expenses, Commission to salesman, bad
department. Direct expenses are debited, and debts, and Discount allowed: Allocated based on
direct incomes are credited. sales.

• Departmental Profit & Loss Account: Determines • Depreciation, Insurance, Repairs and
Departmental Net Profits/Net Loss for each Maintenance: Allocated based on the value of
department. Indirect expenses are debited, and fixed assets.
allocated indirect incomes are credited.
• Rent and rates, Insurance, Heating: Allocated
• General Profit & Loss Account: Calculates Overall based on the floor area occupied.
Net Profit/Net Loss of the entity, considering
• Power: Allocated based on horse power (HP) or HP
departmental results. It contains no department-
× Hours Worked.
specific columns.
• Other general expenses such as General charges,
Income Items:
Sundry charges, MD’s Remuneration, and
• Incomes directly associated with a specific Miscellaneous expenses, as well as financial
department are recorded in that department's expenses like Bank Charges and Interest on
accounts. loan/debentures, are debited to the General Profit
& Loss Account as they relate to the organization
• Incomes that are common to multiple
as a whole and cannot be divided among
departments are distributed among those
departments.
departments using a rational basis.
Inter-Departmental Transfers:
• Common income items include:
• Inter-Departmental Transfer occurs when
• Discount Received: Apportioned based on net
goods/services move from one department
purchases (Purchases minus Returns Outward).
(Transferor Department) to another (Transferee
• Sales Commission: Apportioned based on net sales Department).
(Sales minus Returns Inward).

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• These transfers are treated as "Purchases" for the • It is applied to both closing and subsequent
Transferee Department and "Sales" for the opening stock to adjust for the profit not yet
Transferor Department. realized.

Valuation of Transfers: • The provision is required for goods received at a

higher value than cost from all predecessor
1. At Cost:
departments, not just the immediately preceding
• Goods/services are transferred at the cost to the one.
Transferor Department.
Calculation of Provision for Unrealized Profit:
• No provision for unrealized profit is needed if part
1. Identify the "Value of Transferred Stock" included
of the transferred goods remains in the closing
in the Transferee Department's closing stock.
inventory of the Transferee Department.
2. Determine the Gross Profit Rate (GP Rate) on sales
2. At Cost plus Profit:
of the Transferor Department.
• Transferred at a value higher than cost, including
3. Apply the GP Rate to the "Value of Transferred
an element of profit.
Stock" to calculate the Provision for Unrealized
• Common for departments producing intermediate Profit.
goods/services.
Computation of Gross Profit Ratio
• Provision for unrealized profit is required if part of
• The Gross Profit (GP) Ratio is the same for all
the goods remains unsold in the Transferee
departments.
Department's closing inventory.
• Each department has its Selling Price (SP) for
3. At Normal Selling Price:
products.
• Transferred at the prevailing market price.
• Sale Quantity differs from the Purchase Quantity in
• Common for departments producing marketable each department.
goods/services.
• To determine the Uniform GP Rate, we need to
• Provision for unrealized profit is required if part of compare the Sale Value of Purchase Quantity with
the goods remains unsold in the Transferee the Total Cost of Purchase.
Department's closing inventory.
• Assuming that all purchases are sold, we calculate
Provision for Unrealized Profit: the sale proceeds.

• Departments are often considered "Profit In simpler terms:

Centres," and transfers include an element of
• GP Ratio is consistent across departments.
profit.
• Each department has its own product prices.
• Unrealized profit refers to profit booked but not
earned by the Transferor Department through • The quantity sold differs from the quantity
inter-departmental transfers. purchased in each department.

• A "Provision for Unrealized Profit" is created to • To find the common GP Rate, we compare the Sale
account for this unrealized profit. Value of the purchased quantity with the Total
Cost of Purchase, assuming all purchases are sold.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

INSURANCE CLAIM FOR LOSS OF on Determining Insurance Claim Amount:

STOCK AND LOSS OF PROFIT
1. Estimating Gross Profit Rate:
Accidents and Insurance for Businesses
• To calculate the claim, you need to figure out the
Simplified:
Gross Profit (GP) rate. This is done by looking at the
Accidents can happen at any organization, like last accounting period.
factories, warehouses, or shops, and they can
• GP rate helps estimate the profit made on sales.
damage the things a company uses. These things
are called "fixed assets" (like buildings, machines, • Adjustments might be needed for things like slow-
and furniture) and "stock" (products the business moving items or items that don't earn the same
sells). When accidents occur, businesses need profit.
money to replace the damaged stuff, so they get
2. Salvaged Stock:
insurance to help cover these losses.
• Salvaged stock is what you save from the accident.
Insurance is a way to protect a business. It works
like this: the business pays a fee, called a premium, • You subtract the value of salvaged stock from the
either every year or every few months. If an total value of stock at the time of the accident to
accident happens, the business can ask the find the "value of stock lost."
insurance company for money to help with the
3. Insurance Policy Details:
losses.
• The insurance policy has important information
Common accidents include fires. So, businesses
like the "policy value" and "average clause."
often get fire insurance, which can cover two types
of losses: 1. Loss of Stock and 2. Loss of Profits. • Policy value is the most money you can get from
the insurance company.
Loss of Stock is when the products a business has
in its store or warehouse get damaged or • The average clause says that if you're under-
destroyed. This can be a big problem because it insured (didn't get enough insurance), you have to
affects the business's ability to make money. So, share some of the loss with the insurance
it's important to have insurance to help with this company.
risk.
• Average clause doesn't apply if your policy value is
Figuring out how much insurance money to claim equal to or greater than your loss.
depends on a few things:
• If there's under-insurance, your "Net Claim" (what
1. The value of stock at the time of the accident: you get from the insurance company) is calculated
Sometimes, when an accident happens, the like this: Net Claim × Policy Value / Value of stock
records and stock are lost too. This makes it hard lost on the date of the accident.
to know exactly how much was lost. In such cases,
Special Situations:
the business can estimate the value of the stock by
looking at relevant information and creating • If you have goods in transit or sent to
something called a "Memorandum Trading branches/consignees, you adjust your trading
Account." This account helps figure out the value account.
of the stock on the day of the accident. It's like
• Goods sold but not yet delivered should also be
making a special statement to keep track of the
accounted for.
lost items and their value from the start of the
accounting period to the accident date.

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• For goods sent on approval, you make adjustments estimated value of normal stock to find the total
in your trading account. stock value on that date.

Change in Price Level: • Adjustments for Previous Years: If abnormal items

existed in the last financial year, similar
• If prices change between the loss date and the sale
adjustments might be necessary when preparing
date, you need to adjust for this in the trading
Trading Accounts for those years.
account.
• Alternative Approach: Instead of mixing normal
• The method you use for pricing stock (like FIFO or
and abnormal items, we can create a columnar
LIFO) matters here.
Trading Account that separates normal and
Under-Valued or Over-Valued Stock: abnormal items to maintain clarity.

• If your stock is valued too low or too high, it affects Insurance Claim for Loss of Profit
your GP rate.
• Loss of Profit Policy: This type of insurance helps
• For under-valued stock, you add back the amount organizations cover losses in profit caused by
of under-valuation to get the correct cost. various accidents, both natural and human-
induced.
• For over-valued stock, you deduct the over-valued
amount. • Important Terms:

• When calculating the Gross Claim, consider the • Indemnity Period: The period during which
unsold portion of under/over-valued stock. regular business operations are disrupted.

• Abnormal or Defective Goods: Sometimes, a • Standard Turnover: The turnover from the
business may have goods that can't be sold for the previous year during the indemnity period,
usual profit, either because they are damaged or adjusted for trends.
unpopular.
• Adjusted Annual Turnover: The turnover in the 12
• Treatment in Memorandum Trading Account: months just before the date of damage,
When creating a Memorandum Trading Account considering trends.
for insurance purposes, we need to handle these
• Standing Charges: Fixed expenses that must be
abnormal items in a specific way:
paid even if sales decrease.
1. Deduct from Opening Stock: If some of these
• Calculating Net Claim:
abnormal goods are still in stock and haven't been
fully written off, we subtract their value from the • Step 1: Ascertain Gross Profit (GP) for the
opening stock. previous accounting period:

2. Deduct from Purchases: If abnormal goods were ▪ If there's a Net Profit: GP = Net Profit for Previous
purchased in the current period, we deduct their Accounting Period + Insured Standing Charges.
cost price from the purchases. ▪ If there's a Net Loss: GP = Insured Standing
3. Deduct from Current Sales: If any of these goods Charges - (Net Loss × Insured Standing Charges /
were sold during the current period, we subtract All Standing Charges).
their selling price from the current sales. • Step 2: Determine the GP rate: GP rate = (GP /
4. Add Unsold Abnormal Goods: If there are still Sales) × 100.
unsold abnormal goods on the date of the accident
(like a fire), we add their agreed value to the

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

• Step 3: Calculate Short Sales: Short Sales = HIRE PURCHASE AND INSTALMENT
Standard Turnover – Actual Turnover during the SALE TRANSACTIONS
indemnity period.
• Hire Purchase Concept:
• Step 4: Calculate GP Lost on Short Sales: GP Lost
= Short Sales × GP rate. • In Hire Purchase, a purchaser (Hirer) pays for
• Step 5: Determine admissible additional expenses goods in installments (e.g., monthly, quarterly, or
for insurance claim (choose the least of the yearly) with added interest.
following):
• Possession of the goods is given to the hirer, but
▪ Actual additional expenses. ownership only transfers when the full agreed sum
▪ Sales due to additional expenses × GP rate. (Hire Purchase price) is paid.

• The hirer has the option to terminate the

▪ (Actual additional expenses × Net Profit + Insured
Standing Charges) / (Net Profit + All Standing agreement at any time before full ownership is
Charges). transferred. If they do, they don't need to pay
future installments but can't recover sums already
• Step 6: Calculate Gross Claim: Gross Claim = GP paid, as these are considered hire charges.
Lost + Admissible Expenses for Insurance Claim –
• The hirer must take care of the goods as if they
Savings in Standing Charges.
were their own and can't damage, destroy, pledge,
• Step 7: Insurable value = Adjusted Annual
or sell them during the possession period.
Turnover × GP rate.
• Step 8: Determine the claim to be lodged: • Installment Sale Concept:

• Situation 1: When the average clause is applicable • In Installment Sale, both possession and
(insurable value < policy value): Net Claim = Policy ownership of goods are immediately transferred
Value × Insurable Value / Gross Claim. to the buyer

• Situation 2: When the average clause is not • Sales Method Definition:

applicable (insurable value is > policy value): Net
• Sales method is a practical approach that treats
Claim = Gross Claim.
the hire purchaser as the owner of the asset, even
• Important Points: if technically they aren't yet.
• If additional sales due to additional expenses are
• Under this method, the asset is recorded at its full
not given, assume that the entire sale increase is
cash price, focusing on the substance of the
due to these expenses.
transaction rather than the formal ownership.
• All standing charges include both insured and
uninsured expenses. • Practical Treatment:
• If specific information about standing charges is
• In the sales method, it's practically considered that
lacking, assume that all standing charges are
the hire purchaser already owns the asset, even if
insured.
ownership hasn't formally transferred yet.
• If past year's sales data is provided, you must
determine the sales trend to calculate adjusted • Full Cash Price:
annual turnover.
• The asset is recorded on the books at its full cash
price, reflecting the true value and intention to
purchase the asset.

• Substance over Form:

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• This method prioritizes the actual nature and Partial Repossession:

substance of the transaction (i.e., the intention to
In partial repossession, the hire vendor takes back
buy) rather than just the formal legal ownership.
possession of only a portion of the goods initially
• Appropriateness: provided to the hirer.

• The sales method is suitable because it aligns with Practical Steps for Partial Repossession:
the intention of eventually buying the asset.
Step 1: Calculate the Book Value of Goods
• at the time of the agreement. Repossessed:

• Unlike Hire Purchase, if the buyer stops paying the A. Cost of the goods
dues, they do not have the right to seize the goods.
B. Less: Depreciation up to the date of
repossession

• Types of Repossession: C. Book value of the goods repossessed

• Repossession can be of two types: Step 2: Calculate the Agreed Value of Goods
Repossessed.
1. Complete or Full Repossession
Step 3: Calculate the Loss on Default:
2. Partial Repossession
Loss on default = Book Value - Agreed Value
• Default Definition:
Journal Entries for Partial Repossession:
• Default occurs when a hire purchaser fails to pay
an installment on the agreed date. All entries made until the date of default are
recorded in the usual manner.
• Repossession Meaning:
Debtors Method, Stock-Debtors Method, and
• Repossession is when the hire vendor takes back
Final Accounts Method in Hire Purchase
the possession of the goods due to the hirer's
Transactions
default.
In hire purchase transactions, where the per-unit
• Complete or Full Repossession:
sale price of goods is small, and a large number of
• In this type, the hire vendor takes back possession items are sold, it can be challenging for the hire
of all the goods initially provided to the hirer. vendor to maintain separate accounts for each hire
purchaser. To address this, the hire vendor keeps a
• Journal Entries for Complete Repossession:
Day Book called the Hire Purchase Sales Register.
• All entries until the date of default are recorded as Profit can be determined using various methods,
usual. including the Debtors Method, Stock-Debtors
Method, and Final Accounts Method.
• Partial Repossession:
Debtors Method (Hire Purchase Trading - Stock
• In this type, the hire vendor takes back only some
Approach):
of the goods, not all.
• This method involves maintaining double-entry
• Journal Entries for Partial Repossession:
ledger accounts and memoranda accounts for hire
• Specific accounting entries are made to account purchase transactions.
for partial repossession, typically following the
usual process for entries.

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• Double-entry accounts include H.P. Trading These methods offer flexibility in accounting for
Account, General Trading Account (if applicable), hire purchase transactions, allowing businesses to
Goods sold on H.P. Account. choose the one that best suits their needs based
on the scale and complexity of their operations.
• Memorandum accounts include Memorandum
H.P. Stock Account, Memorandum H.P. Debtors Stock-Debtors Method in Hire Purchase
Account, and Memorandum Shop/Godown Stock Transactions
Account (if applicable).
• Purpose: The Stock-Debtors Method is used to
• No separate accounting is done for the interest maintain complete accounting records for hire
element, and there's no distinction between purchase transactions, particularly when there is a
trading profit and interest charged. need to account for both goods sold and the
interest element.
• The profit or loss from hire purchase transactions
is determined through the H.P. Trading Account. • Double Entry System: This method follows a
double entry accounting system, which means that
Stock-Debtors Method:
every transaction is recorded with corresponding
• In this method, both double-entry ledger accounts debit and credit entries.
and memoranda accounts are maintained.
• Ledger Accounts: Several ledger accounts are
• Double-entry accounts include H.P. Trading maintained under this method, including:
Account, General Trading Account (if applicable),
• H.P. Stock Account: This account tracks the goods
Goods sold on H.P. Account.
held for hire purchase transactions.
• Memorandum accounts include Memorandum
• H.P. Stock Adjustment Account: It helps in
H.P. Stock Account, Memorandum H.P. Debtors
adjusting the value of stock based on hire purchase
Account, and Memorandum Shop/Godown Stock
transactions.
Account (if applicable).
• H.P. Debtors Account: Records the amounts
• This method accounts for the interest element
receivable from hire purchasers.
separately from the trading profit, providing a
clearer picture of the financial aspects of hire • Shop/Godown Stock Account (if applicable):
purchase transactions. Maintains the stock records for any additional
locations.
Final Accounts Method:
• Goods Sold on H.P Account: Tracks the goods that
• This method is suitable for businesses with a small
have been sold under hire purchase agreements.
number of hire purchase transactions.
• Repossession: In case the hire vendor needs to
• It involves preparing the final accounts, including
repossess the goods, a separate account called
the Trading Account, Profit and Loss Account, and
"Repossessed Stock Account" is maintained to
Balance Sheet.
record these transactions.
• The interest income from hire purchase
• Profit/Loss Determination: The profit or loss from
transactions is shown as a separate income in the
hire purchase transactions is determined through
Profit and Loss Account.
the "H.P. Stock Adjustment Account." This account
• This method provides a comprehensive view of the helps calculate the difference between the cost of
financial impact of hire purchase transactions on goods and the agreed value of goods repossessed
the business. or returned.

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• Comprehensive Accounting: The Stock-Debtors • H.P. Sales A/c: Records the value of goods sold on
Method ensures that all financial aspects of hire hire purchase and installments matured during the
purchase transactions, including both goods and period.
interest, are accounted for accurately.
• H.P. Sales Account: This ledger account records:
• Detailed Records: It provides detailed records of
• The value of goods sold on hire purchase.
hire purchase transactions, making it suitable for
businesses with a significant number of such • Installments that have matured during the period.
transactions.
• H.P. Debtors Account: This ledger account records:
• Complete Accounting: This method considers not
• The value of goods sold on hire purchase.
only the goods' physical possession but also their
financial aspects, ensuring a comprehensive view • Collections made from customers.
of hire purchase dealings.
• Closing Balances: The closing balance in the H.P.
• Repossession Handling: In the event of Sales Account reflects the amount of 'Unmatured
repossession of goods, this method keeps a clear installments' - installments that are yet to mature.
record of the changes in stock values and
• Closing Balances in H.P. Debtors Account: The
outstanding debts.
closing balance in the H.P. Debtors Account
• Financial Accuracy: It helps businesses accurately reflects two components:
determine their profit or loss from hire purchase
• 'Matured Installments but not yet received
transactions, considering all relevant factors.
(customers paying)' - installments that have
• Overall, the Stock-Debtors Method offers a matured but are not yet received.
structured approach to hire purchase accounting,
• 'Unmatured Installments' - installments that are
making it useful for businesses with complex hire
yet to mature.
purchase operations. It ensures that all financial
aspects are accounted for, leading to a more The Final Accounts Method ensures
accurate representation of the business's comprehensive double entry accounting for both
financial position. goods sold on hire purchase and the associated
financial transactions with customers.
Final Accounts Method in Hire Purchase
Transactions

• Double Entry Accounting: This method is based on

the principle of complete double entry accounting
for all hire purchase transactions.

• Ledger Accounts Maintained: Under this method,

several double-entry ledger accounts are
maintained, including:

• H.P. Trading A/c: Records all hire purchase

transactions.

• H.P. Debtors A/c: Records the value of goods sold

on hire purchase and collections from customers.

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ACCOUNTING STANDARDS • National-level convergence involves adopting

international standards as national GAAP.
Introduction to Accounting Standards
• In India, convergence efforts aim to align Indian
Accountancy Overview:
Accounting Standards (Ind AS) with International
• Accountancy involves recording, classifying, and Financial Reporting Standards (IFRS).
summarizing financial information.
• Ind AS is formulated to suit India's economic and
• Accountants use their creative skills in this process. legal environment while converging with IFRS.

• Giving complete independence to accountants in In summary, GAAP provides a framework for

choosing accounting practices can lead to lack of accounting, while convergence efforts aim to
consistency and potential manipulation of harmonize accounting standards globally and align
accounts. them with IFRS, especially in India. This ensures
consistency and comparability in financial
Need for GAAP:
reporting.
• Generally Accepted Accounting Principles (GAAP)
Applicability and Scope of Ind AS
provide a framework for recording and reporting
financial transactions. Introduction:

• GAAP includes accounting standards, principles, • Ind AS (Indian Accounting Standards) are India's
and procedures that accountants must follow. version of IFRS (International Financial Reporting
Standards).
• It ensures uniformity and comparability in financial
reporting. • They are harmonized with IFRS to make reporting
by Indian companies more globally accessible.
Accounting Standards (AS):
Timeline of Applicability:
• Accounting Standards are policy documents that
guide how specific accounting transactions are For Companies other than Banks, NBFCs, and
recognized, measured, and treated. Insurance Companies

• They also dictate how information is presented • Phase-I (April 1, 2015, onwards): Voluntary
and disclosed in financial statements. application for all companies with comparatives.

• Professional bodies, governments, or regulatory • Phase-I (April 1, 2016): Mandatory for:

bodies issue these standards.
• Companies listed or in the process of listing with a
• In India, the Institute of Chartered Accountants net worth ≥ ₹500 crores.
issues AS.
• Unlisted companies with a net worth ≥ ₹500
Convergence to Ind AS: crores.

• Convergence means harmonizing accounting • Holding, subsidiary, joint venture, and associate
standards globally. companies of the above.

• International-level convergence aims to create a • Phase-II (April 1, 2017):

single set of high-quality global accounting
• All other listed/unlisted companies not covered in
standards.
Phase-I.

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• Unlisted companies with a net worth ≥ ₹250 crores • Compliance required for both standalone and
but < ₹500 crores. consolidated financial statements.

• Holding, subsidiary, joint venture, and associate Specified Accounting Standards with
companies of the above. Comparative Provisions under Ind AS

• Once a company starts following Ind AS, it must Disclosure of Accounting Policies (AS 1)
continue in subsequent years.
1. Significance of Accounting Policies:
• Applicable to standalone and consolidated
• AS 1 deals with the disclosure of significant
financial statements.
accounting policies used in preparing financial
For Scheduled Commercial Banks, NBFCs, statements.
Insurers, and Insurance Companies
• These policies are the specific accounting
• NBFCs: principles adopted by the enterprise.

• Phase-I (April 1, 2018): Listed/unlisted NBFCs with 2. Importance of Disclosure:

a net worth ≥ ₹500 crores.
• Proper disclosure ensures meaningful
• Phase-II (April 1, 2019): NBFCs with equity or debt comparisons between different enterprises and
securities listed on stock exchanges and unlisted periods.
NBFCs with a net worth ≥ ₹250 crores but < ₹500
• It helps users understand the financial statements
crores.
better.
• Applicable to standalone and consolidated
3. Purpose of Financial Statements:
financial statements.
• Financial statements aim to present a fair
• Banks (Excluding RRBs): Deferred until further
reflection of an enterprise's:
notice.
• Financial position
• Insurance Companies/Insurers:
• Financial performance
• Required to prepare Ind AS-based standalone and
consolidated financial statements from FY 2018-19 • Cash flows
with comparatives of FY 2017-18.
4. Areas Involving Different Policies:
• IRDA (Insurance Regulatory and Development
• Different enterprises may have varying policies in
Authority) mandates compliance with Ind AS and
areas such as:
MCA's implementation roadmap.
• Depreciation methods
Key Points:
• Treatment of construction expenditures
• Ind AS align with IFRS for global reporting.
• Foreign currency conversion
• Phased implementation based on net worth for
companies. • Valuation of inventories, investments, and fixed
assets
• NBFCs and insurance companies have specific
implementation timelines. • Handling of intangible assets, retirement benefits,
and more
• Banks' implementation is deferred until further
notice. 5. Fundamental Accounting Assumptions:

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• Certain basic assumptions are accepted in financial • The effect on financial items due to such changes
statement preparation: should also be disclosed if ascertainable.

• Going Concern: Assumes the business will 10. Not Considered Changes:
continue operating without liquidation or winding
• Changes in accounting policies for events or
up.
transactions differing in substance.
• Consistency: Requires consistent accounting
• Policies related to events or transactions that
policies from one period to another.
didn't occur previously or were immaterial.
• Accrual: Recognizes revenues and costs when
Note: The disclosure of accounting policies
earned or incurred, not just when received or paid.
ensures transparency and helps users make
6. Factors Governing Accounting Policies: informed decisions based on financial statements.

• Prudence: Making estimates when faced with Objective:

uncertainties.
• AS 10 aims to provide guidelines for accounting
• Substance over Form: Accounting for transactions treatment of property, plant, and equipment.
based on their economic reality, not just legal
• It ensures that financial statement users can
form.
understand an enterprise's investments in these
• Materiality: Disclosing items or facts that can assets and changes in those investments.
influence financial decisions based on their
Scope:
significance.
• AS 10 applies to accounting for property, plant,
7. Materiality in Disclosure:
and equipment, except when another standard
• Material items or errors should be disclosed if their allows a different treatment.
omission or misstatement could affect user
• It does not apply to biological assets related to
decisions.
agricultural activities (except bearer plants) or
• Materiality depends on the item's size and its wasting assets like mineral rights.
impact on financial statements.
• However, it applies to property, plant, and
• Materiality is a judgment-based cutoff point. equipment used in developing or maintaining the
excluded assets.
8. Disclosure Requirements (AS 1):
Definitions:
• AS 1 mandates disclosing all "significant"
accounting policies used in financial statement • Agricultural Activity: Management of biological
preparation. assets for sale or conversion into agricultural
produce.
• These policies should be disclosed as a note in one
place (typically Note No. 1). • Agricultural Produce: Harvested products of
biological assets.
9. Changes in Accounting Policies:
• Bearer Plant: A plant used for producing
• Any change in accounting policies with a material
agricultural produce, expected to bear for over
effect in the current or future periods must be
twelve months.
disclosed.
• Biological Asset: A living animal or plant.

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• Carrying Amount: Asset's recognized value after • An asset is initially measured at its cost, including
deducting depreciation and impairment losses. purchase price, costs to bring it to the intended
condition, and initial decommissioning,
• Cost: The amount paid to acquire or construct an
restoration, and similar liabilities.
asset or its fair value when initially recognized.
Measurement after Recognition:
• Depreciable Amount: Asset's cost or equivalent
less its residual value. • An enterprise chooses either the cost model or the
revaluation model for an entire class of property,
• Depreciation: Systematic allocation of an asset's
plant, and equipment.
cost over its useful life.
• Cost Model: Assets are carried at cost, less
• Enterprise-specific Value: Present value of
accumulated depreciation and impairment losses.
expected cash flows from using and disposing of
an asset. • Revaluation Model: Assets can be carried at a
revalued amount (fair value at the revaluation
• Fair Value: Amount an asset could be exchanged
date), less accumulated depreciation and
for between knowledgeable, willing parties.
impairment losses.
• Gross Carrying Amount: Asset's cost in the books
• Revaluations should be made regularly to avoid
without deductions.
material differences from fair value.
• Impairment Loss: Amount when an asset's
Depreciation:
carrying amount exceeds its recoverable amount.
• Property, plant, and equipment should be
• Property, Plant, and Equipment: Tangible items
depreciated separately if their costs are significant
held for use in production, rental, or
within the total cost of the item.
administrative purposes, expected to be used over
twelve months. • The depreciation expense for each period should
be recorded in the Statement of Profit and Loss
• Recoverable Amount: Higher of an asset's net
unless it's already included in the carrying amount
selling price and value in use.
of another asset.
• Residual Value: Estimated amount obtained from
Depreciable Amount and Depreciation Period:
disposing of an asset after deducting disposal
costs. • Depreciable amount should be allocated
systematically over the asset's useful life.
• Useful Life: Period an asset is expected to be
available for use or expected production units. • The residual value and useful life of an asset
should be reviewed annually, and changes should
Recognition:
be treated as changes in accounting estimates.
• An item of property, plant, and equipment is
Depreciation Method:
recognized as an asset if it's likely to bring future
economic benefits and its cost can be reliably • The chosen depreciation method should reflect
measured. how the asset's future economic benefits are
expected to be consumed.
• Costs considered for recognition include those for
acquisition, construction, additions, replacements, • The method should be reviewed annually, and if
or servicing. there's a significant change in the expected
consumption pattern, the method should be
Measurement at Recognition:
adjusted as a change in accounting estimate.

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Changes in Existing Decommissioning Liabilities: • An item of property, plant, and equipment is

derecognized:
• Changes in the cost of property, plant, and
equipment can occur due to changes in liabilities, • When it is disposed of.
price adjustments, etc.
• When there are no expected future economic
• Under the cost model, changes in liabilities are benefits from its use or disposal.
added or deducted from the asset's cost, with
• Gain or loss on derecognition is determined as the
limits on deductions.
difference between net disposal proceeds (if any)
• If an adjustment exceeds the asset's carrying and the carrying amount of the item.
amount, the excess is recognized in the Statement
• Such gains should not be classified as revenue.
of Profit and Loss.
• If an entity routinely sells property, plant, and
• Under the revaluation model, changes in liabilities
equipment held for rental, they should transfer
impact the revaluation surplus or deficit.
these assets to inventory when they are no longer
• Increases in liabilities are recognized in the rented and are held for sale.
Statement of Profit and Loss but can be offset
Disclosure: For each class of property, plant, and
against revaluation surplus.
equipment, the financial statements should
• Decreases are credited to revaluation surplus, disclose:
except when they reverse a prior deficit, in which
• Measurement bases (cost model or revaluation
case they impact the Statement of Profit and Loss.
model) used for determining the gross carrying
• If a decrease in liability exceeds the carrying amount.
amount under the cost model, the excess is
• Depreciation methods used.
recognized in the Statement of Profit and Loss.
• Useful lives or depreciation rates used. Any
• Liabilities changes may trigger revaluation of
deviation from statutory requirements should be
assets to ensure fair value alignment.
mentioned.
Compensation for Impairment:
• Gross carrying amount and accumulated
• Compensation received from third parties for depreciation at the beginning and end of the
impaired, lost, or surrendered property, plant, and period.
equipment should be included in the Statement of
• Reconciliation of carrying amount at the beginning
Profit and Loss when it's expected to be received.
and end of the period.
Retirements:
Additional disclosures should include:
• When property, plant, and equipment are retired
• Restrictions on title and property pledged as
from active use and held for disposal, they should
security.
be stated at the lower of their carrying amount and
net realizable value. • Expenditure recognized in the carrying amount
during construction.
• Any write-downs should be recognized
immediately in the Statement of Profit and Loss. • Contractual commitments for acquisitions.

Derecognition: • Compensation from third parties for impaired,

lost, or given-up items included in the Statement
of Profit and Loss.

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• Amount of assets retired from active use and held Objective:

for disposal.
• AS 11 deals with reporting foreign exchange
If assets are stated at revalued amounts, disclose: transactions in financial statements.

• Effective date of revaluation. • Two ways of foreign exchange involvement:

transactions in foreign currencies and foreign
• Involvement of an independent valuer.
operations.
• Methods and assumptions used in estimating fair
• Transactions should be expressed in the reporting
values.
currency, and financial statements of foreign
• The extent to which fair values were determined. operations must be translated into the reporting
currency.
• Revaluation surplus, indicating changes and any
restrictions on distribution. Scope:

Optional disclosures: • AS 11 covers accounting for foreign currency

transactions, translating financial statements of
• Carrying amount of temporarily idle property,
foreign operations, and accounting for certain
plant, and equipment.
foreign currency transactions involving forward
• Gross carrying amount of fully depreciated exchange contracts.
property still in use.
• It doesn't specify the currency for presenting
• Carrying amount that would have been recognized financial statements, restatement into another
under the cost model for revalued assets. currency, cash flow statement presentation, or
exchange differences from foreign currency
• Carrying amount of retired property, plant, and
borrowings regarded as interest cost adjustments.
equipment not held for disposal.
Definitions:
Transitional Provisions:
• Average rate: Mean exchange rates during a
• Entities may retrospectively include certain project
period.
expenses as part of property, plant, and
equipment cost. • Closing rate: Exchange rate at the balance sheet
date.
• Requirements for initial measurement in exchange
of assets transactions apply prospectively. • Exchange difference: Difference due to reporting
the same foreign currency units at different
• Requirements for separate depreciation of parts of
exchange rates.
an item apply to items on the date this standard
becomes mandatory. • Exchange rate: Ratio for exchanging two
currencies.
• Spare parts previously treated as inventory should
be capitalized at their carrying amounts and • Fair value: Amount for which assets could be
depreciated prospectively. exchanged or liabilities settled between
knowledgeable, willing parties.
• Revaluation model requirements should be
applied prospectively. • Foreign currency: Currency other than the
reporting currency.
• When not adopting the revaluation model, adjust
revaluation reserve amounts against carrying
amounts of revalued assets.

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• Foreign operation: Subsidiary, associate, joint • Exchange differences on monetary items forming
venture, or branch in a country other than the part of net investment in a non-integral foreign
reporting enterprise's country. operation are accumulated in a Foreign Currency
Translation Reserve until disposal.
• Forward exchange contract: Agreement to
exchange currencies at a future rate. Translation of Financial Statements of Foreign
Operations:
• Forward rate: Specified exchange rate for future
currency exchange. • Foreign operations can be integral or non-integral.

• Integral foreign operation: Foreign operation • Integral foreign operations directly affect cash
integral to the reporting enterprise. flow, while non-integral foreign operations
operate mainly in local currency with little impact
• Monetary items: Money held and fixed or
on cash flow.
determinable money assets/liabilities.
• Exchange rate changes affect the reporting
• Net investment in a non-integral foreign
enterprise's net investment in non-integral foreign
operation: Reporting enterprise's share in net
operations.
assets.
Factors Indicating Non-Integral Foreign
• Non-integral foreign operation: Foreign operation
Operation:
operating mostly in its local currency.
• Non-integral foreign operations have a significant
• Non-monetary items: Assets/liabilities other than
degree of autonomy from the reporting
monetary items.
enterprise.
• Reporting currency: Currency used for financial
• Transactions with the reporting enterprise are not
statement presentation.
a major part of the foreign operation's activities.
Foreign Currency Transactions:
• Financing of the foreign operation primarily comes
• Foreign currency transactions include from its own operations or local borrowings.
buying/selling goods or services,
• Costs, like labor and materials, are mainly paid in
borrowing/lending funds, forward exchange
the local currency.
contracts, and asset/liability acquisitions in foreign
currency. • Sales by the foreign operation are mainly in
currencies other than the reporting currency.
• Initial recognition records foreign currency
transactions using the exchange rate at the • Cash flows of the reporting enterprise are not
transaction date. directly impacted by the foreign operation's daily
activities.
• Subsequent balance sheet reporting uses the
closing rate for foreign currency monetary items, • Prices of the foreign operation's products are
historical cost rate for non-monetary items, and influenced more by local factors than exchange
valuation rates for items at fair value. rates.

Recognition of Exchange Differences: • There's an active local market for the foreign
operation's products.
• Exchange differences on monetary item
settlement are recognized as income/expense. Translation of Integral Foreign Operation:

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• Integral foreign operations are treated as an • Disclose exchange differences in net profit or loss
extension of the reporting entity. and net exchange differences in foreign currency
translation reserve.
• For translation purposes: Monetary items and
contingent liabilities use the closing rate; profit • Explain reasons for using a different reporting
and loss items use transaction date or average currency or any change in reporting currency.
rate; non-monetary items, if measured at fair
• When there's a significant change in foreign
value, use the rate at valuation.
operation classification, disclose the nature,
Translation of Non-Integral Foreign Operation: reason, impact on shareholders' funds, and impact
on past periods.
• Assets and liabilities (monetary and non-
monetary) of non-integral foreign operations are Transitional Provisions:
translated at the closing rate.
• If a foreign branch is reclassified as non-integral,
• Income and expenses are translated using apply the prescribed accounting treatment for a
exchange rates at the transaction dates. change in classification.

• Exchange differences are accumulated in a foreign Accounting for Government Grants (AS 12)
currency translation reserve until the net
Definition of Government Grants:
investment is disposed of.
• Government grants are assistance provided by the
Disposal of Non-Integral Foreign Operation:
government to enterprises, either in cash or in-
• When a non-integral foreign operation is disposed kind, for compliance with certain conditions.
of, cumulative exchange differences related to that
• These grants exclude assistance that cannot
operation are recognized as income or expenses.
reasonably be valued or transactions with the
Change in Classification of Foreign Operation: government that are indistinguishable from
normal business activities.
• If there's a change in the classification of a foreign
operation, apply the translation procedures based Recognition of Government Grants:
on the new classification from the date of the
• Government grants should only be recognized
change.
when there is reasonable assurance that:
Forward Exchange Contracts:
1. The enterprise will comply with the attached
• Forward exchange contracts can be used to conditions.
establish the amount of reporting currency
2. The grants will be received.
needed or available at settlement.
Accounting Methods for Government Grants:
• Amortize the premium or discount over the
contract's life. • There are two main approaches:

• Recognize exchange differences when exchange 1. Capital Approach: Treats the grant as part of
rates change. shareholders' funds, suitable for grants similar to
promoters' contributions.
• Gain or loss on contracts without premium or
discount is computed based on the difference 2. Income Approach: Considers the grant as income
between forward rates and contracted rates. over one or more periods, appropriate when
grants are not gratuitous and earned through
Disclosure:
compliance with conditions.

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Non-Monetary Government Grants: 2. Exclusions from AS 16:

• Government grants may include non-monetary • This standard does not apply to the cost of equity
assets like land. or government grants.

• These assets are usually recorded at their • It also doesn't apply to borrowing costs related to
acquisition cost. certain assets measured at fair value or inventories
produced in large quantities.
• If given free of cost, they are recorded at a nominal
value. 3. What is a Qualifying Asset?

Presentation in Financial Statements: • A qualifying asset is an asset that takes a

substantial period of time to get ready for use or
• Specific Fixed Assets Grants: Presented by
sale.
deducting the grant from the gross value of the
asset, reducing depreciation expenses. 4. Determining "Substantial Period of Time":

• Revenue-Related Grants: Shown as income in the • The time considered substantial depends on each
profit and loss statement or deducted from the case but is often around 12 months.
related expense.
• It depends on the technological and commercial
• Promoters' Contribution-Like Grants: Treated as time it takes to prepare the asset.
capital reserve, not for dividend distribution or
5. Examples of Qualifying Assets:
deferred income.
• Qualifying assets include manufacturing plants,
Refund of Government Grants:
power generation facilities, and inventories
• Refunds are treated differently based on grant requiring substantial time to become saleable.
nature:
• Assets ready for use when acquired are not
• Promoters' Contribution-Like Grants: Reduced qualifying assets.
from capital reserve.
6. Components of Borrowing Costs:
• Revenue-Related Grants: Applied against any
• Borrowing costs may include interest,
unamortized deferred credit and then charged to
commitment charges, amortization of discounts,
the profit and loss statement.
ancillary costs, finance charges for finance leases,
• Specific Fixed Asset Grants: Increase the asset's and relevant exchange differences.
book value or reduce capital reserve/deferred
7. Treatment of Exchange Differences:
income. Depreciation adjusted if needed.
• Exchange differences on foreign currency
Disclosure:
borrowings are considered borrowing costs only to
• Financial statements should disclose: the extent of the difference between local and
foreign currency interest rates.
1. The accounting policy used for government grants.
8. Recognition of Borrowing Costs:
2. The nature and extent of government grants
recognized, including non-monetary assets. • Borrowing costs directly attributable to acquiring,
constructing, or producing a qualifying asset are
1. Definition of Borrowing Costs:
capitalized.
• Borrowing costs include interest and other
expenses incurred when an entity borrows funds.

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 MASTERS PROFESSIONAL ACADEMY
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• Others are recognized as expenses in the period or savings related to taxes on income and
incurred. disclosing them in financial statements.

9. Capitalization of Borrowing Costs: • Income taxes encompass all domestic and foreign
taxes based on taxable profits.
• Borrowing costs are capitalized when they are
likely to provide future economic benefits and can • Income taxes also include taxes like withholding
be reliably measured. taxes, which are payable when a subsidiary,
associate, or joint arrangement distributes profits
• Two types: Specific Borrowing and General
to the reporting entity.
Borrowing.
• However, it doesn't specify how to account for
10. Specific Borrowing: - Borrowing costs directly
taxes payable on dividends and other distributions
linked to obtaining a qualifying asset are
made by the enterprise.
capitalized. - Calculated as actual borrowing costs
minus income from temporary investment of Definitions:
borrowings.
• Accounting Income (Loss): The profit or loss
11. General Borrowing: - When funds are reported in the income statement before income
borrowed generally for qualifying assets, apply a tax.
capitalization rate to asset expenditure. - The rate
• Taxable Income (Loss): The income (loss)
is the weighted average of borrowing costs on
determined according to tax laws, which
outstanding borrowings, excluding those for the
determines the income tax payable (recoverable).
asset. - Capitalized costs shouldn't exceed actual
borrowing costs incurred. • Tax Expense (Tax Saving): The sum of current tax
and deferred tax charged or credited in the income
12. Commencement, Suspension, and Cessation:
statement.
- Capitalization of borrowing costs begins when
expenditure, borrowing costs, and necessary asset • Current Tax: The income tax amount payable or
preparation activities are ongoing. - It is suspended recoverable for a period.
during extended inactive periods but not
• Deferred Tax: The tax effect of timing differences.
temporary delays. - Capitalization ceases when
substantially all activities to prepare the asset are • Timing Differences: Differences between taxable
complete. income and accounting income for a period that
can reverse in later periods.
13. Disclosure in Financial Statements: - Disclose
the accounting policy for borrowing costs. - Show • Permanent Differences: Differences between
the amount of borrowing costs capitalized during taxable income and accounting income for a
the period. period that don't reverse.

Objective of AS 22: Recognition:

• AS 22, Accounting for Taxes on Income, helps in • Tax expenses for the period, including current and
accounting for the differences between deferred tax, are part of the net profit or loss.
accounting income and taxable income.
• Tax expenses are matched with revenues and
Scope: expenses.

• This standard is used to account for taxes on • Timing differences result in deferred tax assets or
income, which includes calculating the expenses liabilities.

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 PAPER 6: FINANCIAL ACCOUNTING (FA)
(Simplified Material 2023 December CMA Intermediate Examination)

Recognition of Deferred Tax Assets: Transitional Provisions:

• Deferred tax assets are recognized and carried • When adopting this standard, any deferred tax
forward when there's reasonable certainty of balance accumulated earlier should be recognized
sufficient future taxable income to use them. in the financial statements as a deferred tax
asset/liability, subject to prudence.
• Unabsorbed depreciation or carry forward of
losses under tax laws should have virtual certainty • The amount credited/charged should be the same
supported by convincing evidence. as if this standard had been in effect from the
beginning.
• The evidence should be concrete and available at
the reporting date.

Re-assessment of Unrecognized Deferred Tax

Assets:

• Deferred tax assets should be re-assessed at each

balance sheet date.

• Write-downs of deferred tax assets should be

reversed if there's reasonable certainty of
sufficient future taxable income.

Measurement:

• Current tax is measured using applicable tax rates

and tax laws.

• Deferred tax assets and liabilities are measured

using enacted or substantively enacted tax rates
and laws.

• They are not discounted to present value.

Presentation and Disclosure:

• Current tax assets and liabilities can be offset if

there's a legally enforceable right to set off and the
intention to settle them net.

• Deferred tax assets and liabilities can be offset if

they relate to taxes on income levied by the same
taxation laws.

• Deferred tax items should be shown separately on

the balance sheet.

• Details of major components of deferred tax assets

and liabilities should be in the notes to accounts.

• Evidence supporting the recognition of deferred

tax assets should be disclosed.

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