IMPORTANT SHORT NOTES

Write A Short Note On Accrual Basis Of Accounting

1. Accrual Basis of Accounting is a method of recording transactions by which Revenue,
Costs, Assets and Liabilities are recognised during the accounting period in which they
accrue.
2. This basis includes consideration relating to deferrals, allocations, depreciation and
amortisation.
3. This basis is also known as Mercantile basis of accounting.
4. Under the Companies Act 2013, all companies are required to maintain the books of
accounts according to accrual basis of accounting.

Write A Short Note On Cash Basis Of Accounting

Cash Basis of Accounting is a method of recording transactions by which Revenues, Costs,
Assets and Liabilities are recognised during the accounting period in which Actual Receipts
and Actual Payments take place.

Write A Short Note On Hybrid Basis Of Accounting

It is a combination of both Cash Basis of Accounting and Accrual Basis of Accounting.
Under the hybrid basis of accounting, Incomes are recorded on Cash basis (i.e., during the
accounting period in which they are received irrespective of when they accrue) and
Expenses are recorded on Accrual Basis, (i.e., during the accounting period in which they
arise irrespective of when they are paid).

Write A Short Note On Limitations Of Accounting

[NOV. 2003]
a) Ignores the Qualitative Elements — Since the accounting is confined to the monetary
matters only, the qualitative elements like quality of management, quality of labour force,
public relations are ignored.
b) Not Free from Bias — In many situations, the accountant has to make a choice out of
various alternatives available, eg., choice in the method of depreciation (e.g., Straight
Line or Written down), choice in the method of inventory valuation (e g., FIFO, LIFO
etc.). Since the subjectivity is inherent in personal judgement, the financial statements
are therefore not free from bias. As a result, the analysis of financial statements also
cannot be said to be free from bias.
c) Ignores the Price Level Changes in case of Financial Statements Prepared on
Historical Costs — In case of financial statements prepared on historical costs, the
Fixed Assets are shown in the Balance Sheet at historical costs less depreciation and
not at the replacement value which is often far higher than the value stated in the

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Balance Sheet. The analysis of such financial statements will not yield strictly
comparable results unless the price-level changes are taken into account.
d) Estimated Position and not Real Position — Since the financial statements are
prepared on a going concern basis as against liquidation basis, they report only the
estimated periodic results and not the true results since the true results can be
ascertained only on the liquidation of an enterprise.
e) Danger of Window Dressing — When the management decides to enter wrong figures
to artificially inflate or deflate the figure of Profits, Assets and Liabilities, the Income
Statement fails to provide true and fair view of the Financial Performance and Balance
Sheet fails to provide true and fair view of the Financial Position of the enterprise.

Write A Short Note On Qualitative Characteristics of Accounting

[NOV. 2003]
The qualitative characteristics are attributes that improve the usefulness of information
provided in financial statements. The framework suggests that the financial statements
should observe and maintain the following four qualitative characteristics as far as possible
within limits of reasonable cost/benefit.
1. Understandability The financial statements should present information in a manner
as to be readily understandable by the users with reasonable
knowledge of business and economic activities. It is not right to
think that more one discloses better it is. A mass of irrelevant
information creates confusion and can be even more harmful than
non-disclosure. No relevant information can be however withheld
on the grounds of complexity.
2. Relevance The financial statements should contain relevant information only.
Information, which is likely to influence the economic decisions by
the users, is said to be relevant. Such information may help the
users to evaluate past, present or future events or may help in
confirming or correcting past evaluations. The relevance of a piece
of information should be judged by its materiality. A piece of
information is said to be material if its omission or misstatement
can influence economic decisions of a user.

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3. Reliability To be useful, the information must be reliable; that is to say, they
must be free from material error and bias. The information provided
are not likely to be reliable unless:
(a) Transactions and events reported are faithfully represented.
(b) Transactions and events are reported in terms of their
substance and economic reality not merely on the basis of their
legal form. This principle is called the principle of ‘substance over
form’.
(c) The reporting of transactions and events are neutral, i.e. free
from bias.
(d) Prudence is exercised in reporting uncertain outcome of
transactions or events.
4. Comparability Comparison of financial statements is one of the most frequently
used and most effective tools of financial analysis. The financial
statements should permit both inter-firm and intra-firm comparison.
One essential requirement of comparability is disclosure of
financial effect of change in accounting policies.
5. True and Fair View Financial statements are required to show a true and fair view of
the performance, financial position and cash flows of an enterprise.
The conceptual framework does not deal directly with this concept
of true and fair view, yet the application of the principal qualitative
characteristics and of appropriate accounting standards normally
results in financial statements portraying true and fair view of
information about an enterprise.

Write A Short Note On Double Entry System Of Book-Keeping

[MAY 1999]
a) Double Entry System of Book-keeping refers to a system of accounting under which both
the aspects (i.e., Debit or Credit) of every transaction are recorded in the accounts
involved.
b) Dual Aspect — Two fold aspect of a transaction is called dual aspect or duality of a
transaction. This duality is the basis of double entry records.
c) As the name implies, the entry made for each transaction is composed of two parts, one
for debit and another for credit. The double entry system may be compared with the
Newton’s law of motion, viz to every action there is always an equal and contrary
reaction.
d) Every debit has equal amount of credit. So the total of all debits must be equal to the
total of all credits.
e) The terms debit and credit used today have their origin from the terms — Debito and
Credito as used by Luca fra Pacioli in his book.
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f) Account — The individual record of a person or thing or an item of income or an expense
is called an account.
Advantages Of Double Entry System
a) It facilitates the accuracy of ledger accounts through the device of trial balance.
b) It facilitates the ascertainment of Financial Performance.
c) It facilitates the ascertainment of Financial Position.
d) It facilitates the comparability of Financial Statements.

Write A Short Note On Classification Of Accounts [NOV.

1999, NOV. 2002, DEC. 1993]
Types of Accounts Meaning Examples
(a) Personal Accounts These accounts relate to Natural-Ram’s A/c Artificial-
natural persons, artificial Ram & Co.’s etc
persons and representative Representative-Outstanding
persons. Salary A/c, Prepaid Insurance
(b) Impersonal Accounts These accounts relate to the Tangible-Land A/c Intangible-
(i) Real Accounts tangible or intangible real Goodwill A/c
assets.
(ii) Nominal Accounts These accounts relate to Expenses-Purchases A/c Loss-
losses, profit & gains. Loss by fire A/c Profits & Gains-
Sales A/c, Discount Received
A/c

Write A Short Note On Deferred Revenue Expenditure

[JUNE 1994, MAY 2004]
1. Meaning According to the Guidance note on 'Terms used in Financial
Statements’, issued by ICAI ‘Deferred revenue expenditure is
the expenditure for which payment has been made ora liability
has been incurred but which is carried forward on the
presumption that it will be of benefit over a subsequent period
or periods’. In short, it refers to that expenditure which is, for the
time being, deferred from being charged to income. Such
suspension of ‘charging off operation may be due to the nature
of expenses and the benefit expected therefrom.
2. Examples Heavy advertising to launch a new product is a deferred
revenue expenditure since the benefit from it will be availed over
the next 3 to 5 years.

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3. Accounting Treatment Normally such expenditure should be written off over a period
of 3 to 5 years. The written off portion is debited to P&L Account
and unwritten off portion is shown on the Assets Side of Balance
Sheet.
4. Disclosure in Financial Statements
Dr. INCOME STATEMENT FOR THE PERIOD ENDED ON.... Cr.
Particulars ` Particulars `
To Deferred Revenue ...........
Expenditure w/o
BALANCE SHEET AS AT ....
Liabilities ` Assets `
Deferred Revenue Expenditure ..........
(Unwritten off portion)

Write A Short Note On Contingent Asset

 Meaning Of Contingent Asset
According to Accounting Standard 29, "a contingent asset is a possible asset that arises
from past events the existence of which will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly within the control of the
enterprise. It usually arises from unplanned or unexpected events that give rise to the
possibility of an inflow of economic benefits to the enterprise."
 Example Of Contingent Liability
A claim that an enterprise is pursuing through lega! process, where the outcome is
uncertain, is a contingent asset.
 No Recognition In Financial Statements
As per the concept of prudence as well as the present accounting standards, an enterprise
should not recognize a contingent asset. It is possible that recognition of contingent assets
may result in recognition of income that may never be realized. However, when the
realisation of income is virtually certain, then the related asset no longer remains as
contingent asset.
 No Disclosure Of Contingent Asset
A contingent asset need not be disclosed in the financial statements. A contingent asset is
usually disclosed in the report of the approving authority (i.e., Board of Directors in the case
of a company, and the corresponding approving authority in the case of any other
enterprise), if an inflow of economic benefits is probable.
 When Recognised

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Contingent assets are assessed continually and if it has become virtuality certain that an
inflow of economic benefits will arise, the asset and the related income are recognised in
the financial statements of the period in which the change occurs.

Write A Short Note On Contingent Liabilities [MAY

1998, MAY 2005]
According to Accounting Standard 29, ‘Contingent liability’ is
a) a possible obligation that arises from past events the existence of which will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the enterprise; or
b) a present obligation that arises from past events but is not recognised because:
c) it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
d) a reliable estimate of the amount of the obligation cannot be made.
Where,
• Possible Obligation - An obligation is a possible obligation if, based on the evidence
available, its existence at the balance sheet date is considered not probable.
• Present Obligation - An obligation is a present obligation if, based on the evidence
available, its existence at the balance sheet date is considered probable, i.e., more likely
than not.
 No Recognition Of Contingent Liability
An enterprise should not recognise a contingent liability.
 Disclosure Of Contingent Liability By Way Of Note To The Balance Sheet
A Contingent liability is required to be disclosed by way of Note to the Balance Sheet unless
possibility of outflow of a resource embodying economic benefits is remote.
 When Recognised
Contingent liabilities are assessed continually to determine whether an outflow of resources
embodying economic benefits has become probable. If it becomes probable that an outflow
or future economic benefits will be required for an item previously dealt with as a contingent
liability, a provision is recognised in financial statements of the period in which the change
in probability occurs except in the extremely rare circumstances where no reliable estimate
can be made.

Write A Short Note On Provision

Provision means “any amount written off or retained by way of providing for depreciation,
renewal or diminution in the value of assets or retained by way of providing for any known
liability of which the amount cannot be determined with substantial accuracy."
As per AS 29,A provision is a liability which can be measured only by using a substantial
degree of estimation.
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 Conditions For Recognition Of Provision
A provision should be recognised when:
a) An enterprise has a present obligation as a result of a past event.
b) It is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation, and
c) a reliable estimate can be made of the amount of the obligation.

Write A Short Note On Fundamental Accounting Assumptions

[MAY 1996, MAY 1999, MAY 2003, MAY 2004, MAY 2006]
As per Accounting Standard (AS-1) ‘Disclosure of Accounting Policies’ issued by Institute
of Chartered Accountants of India (ICAI), there are three Fundamental Accounting
Assumptions:Going Concern 2. Consistency 3. Accrual
Disclosure Requirements
a) If all the Fundamental Accounting Assumptions are followed in financial statements,
specific disclosure is not required.
b) If any fundamental accounting assumption is not followed, the fact should be disclosed.

Write A Short Note On Going Concern Assumption

a) The enterprise is normally viewed as a going concern, i.e. as continuing operations for
the foreseeable future.
b) It is assumed that the enterprise has neither the intention nor the necessity of liquidation
or curtailing materially its scale of operations.
c) If an enterprise is not a going concern, valuation of its assets and liabilities on historical
cost becomes irrelevant and as a consequence its profit/loss may not give reliable
information.
 Implications Of Going Concern Assumption
It is because of the Going Concern Assumption:
a) That the assets are classified as Current Assets and Fixed Assets.
b) That the liabilities are classified as Short-term Liabilities and Long-term liabilities.
c) That the unused resources are shown as unutilised costs (or unexpired costs) as against
the break-up values as in case of liquidating enterprise. Accordingly, the earning power
and not the break-up value evaluates the continuing enterprise.
 Disclosure Of Going Concern Assumption
According to Accounting Standard (1) issued by the Institute of Chartered Accountants of
India, if this fundamental assumption is followed, this fact need not be disclosed in the
financial statements since its acceptance and use are assumed. In case this concept is not
followed, the fact should be disclosed in the financial statement together with reasons.

Write A Short Note On Consistency Assumption

a) It is assumed that accounting policies are consistent from one period to another.
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b) This adds the virtue of comparability to accounting data.
c) If comparability is lost, the relevance of accounting data for users’ judgement and
decision making is gone.
d) According to Consistency Assumption, whatever accounting practices (whether logical
or not) are selected for a given category of transactions, they should be followed on a
horizontal basis from one accounting period to another to achieve compatability.
 Need For Consistency Assumption
The consistency principle is applied when alternative methods of accounting are equally
acceptable.
 Examples Of Consistency Assumption
a) If the inventory is valued on LIFO basis, this basis should be followed year after year.
b) If a particular asset is depreciated according to WDV method, this method should be
followed year after year.
 Effect Of Not Observing Consistency
If Consistency Assumption is not followed, the intra-firm comparison (i.e., comparison of
actual figures of one period with those of another period for the same firm), Inter-firm
comparison (i.e. comparison of actual figures of one firm with those of another firm
belonging to the same industry) and Pattern comparison (i.e., comparison of actual figures
of one firm with those of industry to which the firm belongs) cannot be made.
 Consistency Differs From Unifomity
The consistency should not be confused with mere uniformity or inflexibility and should not
be allowed to become an impediment to the introduction of improved accounting standards.
It is not appropriate for an enterprise to leave its accounting policies unchanged when more
relevant and reliable alternatives exist.

Write A Short Note On Accrual Assumption

a) Revenues and Costs are accrued, that is, recognised as they are earned or incurred
(and not as money is received or paid) and recorded in the financial statements of the
periods to which they relate.
b) This assumption is the core of accrual accounting system.
c) For companies it is mandatory to keep accounts on accrual basis under the Companies
Act, 2013.
 Meaning Of Revenue
Revenue is the gross inflow of cash, receivables or other considerations arising in the
course of ordinary activities of an enterprise from the sale of goods, rendering of services
and use of enterprise resources by others yielding interests, royalties and dividends. It
excludes the amount collected on behalf of third parties such as certain taxes. In an agency
relationship, the revenue is the amount of commission and not the gross inflow of cash,
receivables or other considerations.

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Write A Short Note On Materiality Principle
a) According to the Materiality Principle, all relatively relevant items, the knowledge of
which might influence the decision of the users of the financial statements, should be
disclosed in the financial statements.
b) Which information is more relevant than others is largely a matter of judgement. For
instance, accounting and recording of a small calculator as an asset in the balance sheet
may not be justified due to the excess of cost of recording over the benefits in terms of
usefulness of recording and the accounting of calculators as assets.
 What Is Materiality?
a) The materiality depends not only upon the amount of item but also upon the size of
business, level and nature of information, level of the person/department who makes the
judgement about materiality, for instance a worker reporting to his foreman about the
production in grams (e.g. part of kilogram), a foreman to his supervisor in kilograms, a
supervisor to his production manager in quintals and the production manager to the top
management in tonnes, may be justified with regard to the circumstances. It hardly
makes any difference if the production manager reports to the top management that the
production is 1,99,000.90 kilograms or simply 200 tonnes (nearly).
b) It is desirable to establish and follow uniform policies governing material or non-material
items so that while measuring income for an accounting period, the non-material items
can be ignored on uniform basis.
 Exception To The Full Disclosure Principle
a) This Principle is basically an exception to the Full Disclosure Principle.
b) The full disclosure principle requires that all facts necessary to ensure that the financial
statements are not misleading, must be disclosed, whereas the materiality principle
requires that the items or events having an insignificant economic effect or not being
relevant to the user's need not be disclosed.

Write A Short Note On Prudence Principle (Or Conservatism Principle)

a) According to Prudence Principle, the principle of ‘Anticipate no profit but provide for
all probable losses’ should be applied.
b) In other words, the Prudence Principle requires that in the situation of uncertainty and
doubt, the business transactions should be recorded in such a manner that the Profits
and Assets are not overstated and the Losses and Liabilities are not understated.
Note: Prudence Principle should be applied rationally only in circumstances in which great
uncertainty and doubt exists as the over-conservatism may result in misrepresentation.
 Examples Of Applications Of Prudence Principle
a) Valuation of Stock-in-trade at a lower of Cost or Net Realisable Value.
b) Making the Provisions for Doubtful Debts and Discount on Debtors.
 Conflicts With Consistency

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When the Stock is valued at Cost in one accounting period and at a lower of Cost or Net
Realisable Value in another accounting period, this Principle conflicts with the Principle of
Consistency.
 Conflicts With Full Disclosure
When excessive Provisions for Doubtful Debts and Depreciation are charged, it leads to the
creation of Secret Reserves, and thus, this Principle conflicts with the Full Disclosure
Principle.
 Conflicts With Objectivity
1. The estimation of probable losses is a subjective judgment and thus, this principle
conflicts with the Principle of Objectivity.
2. The practice of making provisions for doubtful debts and the like implies lesser charges
in the following accounting periods.
3. It reduces the current income and raises the future income and thus it conflicts with the
matching principle.

Write A Short Note On Meaning Of Accounting Policies

Accounting policies refer to the specific accounting principles and methods of applying
those principles adopted by the enterprise in the preparation and presentation of financial
statements. There is no single list of accounting policies which are applicable to all
enterprises in all circumstances. The management of each enterprise has to select
appropriate accounting policies having regard to the nature and circumstances of the
enterprise.

Write A Short Note On Examples Of Accounting Policies

Following are the examples of some of the areas in which different accounting policies may
be adopted by different enterprises:
a) Methods of depreciation, depletion and amortisations
b) Treatment of expenditure during construction
c) Conversion or translation of foreign currency items
d) Valuation of inventories
e) Treatment of goodwill
f) Valuation of investments
g) Treatment of retirement benefits
h) Recognition of profit on long-term contracts
i) Valuation of fixed assets
j) Treatment of contingent liabilities

Write A Short Note On Major Considerations In The Selection Of Accounting Policies

The primary considerations in the selection of accounting policies should be to prepare and
present financial statements in a way that they represent a true and fair view of the state of
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affairs of the enterprise as at the Balance Sheet date and of the Profit & Loss Account for
the period ended on that date. The major considerations governing the selection and
application of accounting policies are as under:
a) Prudence Uncertainties inevitably surround many transactions. This should be
recognized by exercising prudence in preparing financial statements. Prudence does
not, however, justify the creation of secret or hidden reserves.
b) Substance over form Transactions and other events should be accounted for and
presented in accordance with their substance and financial reality and not merely with
their legal form.
c) Materiality Financial Statements should disclose all material items, that is, items, the
knowledge of which might influence the decision of the users of the financial statements.

Write A Short Note On Disclosure Of Accounting Policies

According to AS-1 issued by the Institute of Chartered Accountants of India—
a) All significant accounting policies adopted in the preparation and presentations of
financial statements should be disclosed.
b) The disclosure of the significant accounting policies as such should form a part of the
financial statements and the significant accounting policies should normally be disclosed
in one place.

Write A Short Note On Change In Accounting Policy

 When The Change In Accounting Policy Is Recommended
The change in Accounting Policy is recommended only in the following circumstances:
a) If it is required by statute for compliance with an accounting standard.
b) If it is considered that the change would result in a more appropriate presentation of the
financial statements of an enterprise.
 Disclosure Requirements In Case Of Change In Accounting Policy
The disclosure requirements are as follows:
Case Disclosure Requirements
1. If change has a material effect in current The amount of change should be
period and the effect of change is ascertainable. disclosed.
2. If change has a material effect in current The fact should be disclosed.
period and the effect of change is not
ascertainable, wholly or in part.
3 .If change has no material effect in current The fact of such change should be
period but which is reasonably expected to have appropriately disclosed.
a material effect in later periods

 Example Of Change In Accounting Policy

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X Ltd. changed the method of depreciation from WDV to SLM, with effect from 1.4.2017.
The depreciation has been recomputed from the date of commissioning of these assets at
SLM rates applicable to those years. Consequent to this there has been an additional
charge for depreciation during the year of ` 100 crore due to said change which relates to
the previous years and an equal amount has been withdrawn from the General Reserve
and credited to Profit & Loss Account. Had there been no change in the method of
depreciation, the charge for the year would have been lower by ` 10 crore excluding the
charge relating to the previous years. Consequently, the Net Block of Fixed Assets and
Reserves and Surplus are lower by ` 110 Crore.

Write A Short Note On Accounting As A Measurement Discipline

1. Accounting is not an exact measurement discipline because accounting measures
information mostly in money terms which is —
a) not a stable scale
b) not having universal applicability
c) not stable in dimension for comparison over the time.
2. Though measurement is an important part of accounting discipline but a set of theorems
which govern the measurement system (such as Going Concern, Consistency and
Accrual) should be carefully understood to know how the cogs of the accounting - wheel
work.
3. Although quantitative information is also required in many cases but such information is
only supplementary to monetary information.

Write A Short Note On Valuation Principles Or Measurement Bases

There are four generally accepted valuation principles or measurement bases.
 Historical Cost Base
As per Historical Cost base —
a) the assets are recorded at the amount of cash or cash equivalent paid or incurred or fair
value of the asset at the time of acquisition.
b) Liabilities are recorded at the amount of proceeds received in exchange for the
obligation.
 Current Cost Base
As per Current Cost base —
a) the assets are recorded at the amount of cash or cash equivalent that would have to be
paid if the same or an equivalent asset was acquired currently.
b) Liabilities are recorded at the undiscounted amount of cash or cash equivalents that
would be required to settle the obligation currently.
 Realizable Value Base
As per Realizable Value base —

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a) The assets are recorded at the amount of cash or cash equivalent that could currently
be obtained by selling the assets in an orderly disposal.
b) Liabilities are recorded at the undiscounted amount of cash or cash equivalents
expressed to be paid to satisfy the liabilities in the normal course of business.
 Present Value Base
As per Present Value Base—
a) An asset is recorded at the present discounted value of the future net cash inflows that
the item is expected to generate in the normal course of business.
b) Liabilities are recorded at the present discounted value of future net cash outflows that
are expected to be required to settle the liabilities in the normal course of business.
Example:
XLtd. purchased a machine for ` 1,00,000 on 1.4.2014 on 31st March 2018—
(a) The similar machine could be purchased for ` 1,20,000.
(b) The same machine could be disposed off for ` 80,000.
(c) The present discounted value of the future net cash inflows that the machinery was
expected to generate in the normal course of business is calculated at ` 1,50,000.
In the above case —
(a) Historical Cost is ` 1,00,000
(b) Current Cost is ` 1,20,000
(c) Realizable Value is ` 80,000
(d) Present Value is ` 1,50,000

Write A Short Note On Measurement And Valuation

a) In economics, the value of an object, ability or idea is the utility (i.e. satisfaction) of an
economic resource to the person contemplating or enjoying its use. Economists use
ordinal scale to indicate the level of satisfaction.
b) In accounting, the value of an object, ability or idea is always measured in terms of
money. Accountants use only cardinal scales.

Write A Short Note On Accounting Estimates

 When Required
Accounting estimates are required when many items of financial statements can not be
measured with precision due to uncertainties inherent in business activities. The estimation
process involves judgement based on the latest information available.
 Examples Of Accounting Estimates

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Accounting estimates are required in respect of:
a) Doubtful debts
b) Useful lives of Depreciable Assets
c) Residual Value
d) Inventory Obsolescence
e) Employees Retirement Benefit Obligations
f) Provision for Unseen Contingencies while using percentage of Completion Method is
long term contract.
 Meaning Of Change In Accounting Estimates
Change in Accounting Estimate means differences arising between certain parameters
estimated earlier and
a) re-estimated during the current period, or
b) actual results achieved during the current period.
 When An Accounting Estimate Requires Revision
An accounting estimate may require revision —
a) if changes occur regarding circumstances on which the estimate was based, or
b) as a result of new information, more experience or subsequent developments
 Examples Of Change In Accounting Estimate Include
a) Change in the amount of doubtful debts
b) Change in the estimated useful life of the depreciable asset
c) Change in the estimated residual value of the depreciable asset.
 No Retrospective Effect
Change in accounting estimates can not be given a retrospective effect.
 Requirements Of AS 5
1. The effect of change in an accounting estimate should be included in the determination
of net profit or loss —
a) in the period of the change if the change affects the period only (e.g. change in the
estimated amount of doubtful debts)
b) in the period of change and future periods if the change affects both (e.g. change in
the estimated useful life of a depreciable asset)
2. The effect of a change in an accounting estimate should be classified using the same
classification in the statement of profit and loss as was used previously for the estimate.
(For example, previously included as an extraordinary item should be reported as an
extraordinary item)
3. The nature and the amount of change in an accounting estimate which has a material
effect in the current period, or which is expected to have a material effect in subsequent
periods should be disclosed. If it is impracticable to quantify the amount, this fact should
be disclosed.

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Write A Short Note On Advantages Of Setting Accounting Standards
[NOV. 2003]
Reduction in Standards reduce to a reasonable extent or eliminate altogether confusing
Variations variations in the accounting treatments used to prepare financial
statements.
Disclosure There are certain areas where important information is not statutorily
Beyond that required to be disclosed. Standards may call for disclosure beyond that
Required by required by law.
Law
Facilitates The application of accounting standards would, to a limited extent, facilitate
Comparison comparison of financial statements of companies situated in different parts
of the world and also of different companies situated in the same country.
However, it should be noted in this respect that differences in the institutions,
traditions and legal systems from one country to another give rise to
differences in accounting standards practised in different countries.

Write A Short Note On Compensating Errors

These errors arise when two or more errors are committed in such a way that the net effect
of these errors on the debits and credits of accounts involved is nil. In other words,
compensating errors refer to such a group of errors wherein the effect of one error is
compensated by the effect of other error or errors.
 Effects Of Compensating Errors
These errors do not affect the agreement of the trial balance but may or may not affect
the figure of net profit.
 Examples Of Compensating Errors
Example 1. If the total of Purchases Book is posted in the ledger as ` 1,000 instead of ` 100
and at the same time Ram’s A/c is credited in the ledger as ` 1,000 instead of ` 100, as a
result of these errors, there is an excess credit of ` 900 in Ram's Account and an excess
debit of ` 900 in Purchases Account. Thus, these two errors nullify the effects of each other.
The first error will increase the figure of Purchases and consequently will reduce the figure
of Profit.
Example 2. If the total of Bills Receivable Book is posted in the ledger as ` 1,000 instead
of ` 100 and at the same time total of Bills Payable Book is posted as ` 1,000 instead of `
100, as a result of these errors, there is excess credit of ` 900 in Bills Payable Account and
an excess debit of ` 900 in Bills Receivable Account. These two errors will nullify the effect
of each other. These errors will not affect the figure of profit in anyway.

Write A Short Note On Error Of Principle

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This error arises when the transaction is recorded ignoring the distinction between the
capital item and revenue item. In other words, this error involves an incorrect allocation of
expenditure or receipt between Capital and Revenue. The correct allocation between
Capital and Revenue is of paramount importance because any incorrect allocation would
disturb the final results as disclosed by the Financial Statements.
 Effect Of Error Of Principle
It may lead to under/over stating of Incomes or Expenses of Assets or Liabilities. This error
does not affect the trial balance.
 Example Of Error Of Principle
Error: Freight paid for bringing a new machinery is debited to Freight A/c Effects:
1. On Revenve Expenditure (i.e., Freight) - Overstated
2. On Capital Expenditure (i.e., Cost of Machinery) - Understated
3. On Depreciation on Machinery - Undercharged
4. On Net Profit-Understated by the Net Effect (i.e., the difference between the amount of
Freight and amount of Depreciation).
Note: The costs incurred on the acquisition, installation and commissioning of a fixed asset
up to the point the fixed asset is ready for use represent capital expenditures.

Write A Short Note On Suspense Account [NOV 1997]

A Suspense Account is an account in which the amount of difference in the trial balance is
put till such time that errors are located and rectified.
 Preparation Of Suspense Account
The difference in the trial balance is transferred on the credit side of the Suspense Account
(if the debit side of the trial balance exceeds the credit side) or on the debit side of the
Suspense Account (if the credit side of the trial balance exceeds the debit side). Thus, the
difference is put on the shorter side.
 Utility Of Suspense Account
The rationale behind the opening of a Suspense Account is to avoid delay in the preparation
of financial statements.
 Disposal Of Balance Of Suspense Account
When the errors affecting the Suspense Account are located, they are rectified with the help
of the Suspense Account. When all the errors affecting the trial balance are located and
rectified, the Suspense Account automatically stands balanced.
 Treatment Of Balance Of Suspense Account
1. The balance of Suspense Account represents the net effect of errors affecting the trial
balance which are still to be located and rectified.
2. Its Debit Balance will be shown on the assets side of the Balance Sheet.
3. Its Credit Balance will be shown on the liabilities side of the Balance Sheet.

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Write A Short Note On Depletion Unit/Production Method Of Depreciation
[NOV. 1995, NOV. 1998]
Meaning of Depletion: Depletion refers to the physical deterioration by the exhausation of
natural resources (ore deposits in mines, oil wells, quarries, timber stands etc.)
Meaning of Depletion Method: It is the method under which (a) the life of the asset is
estimated in terms of output which could be raised during its life and (b) depreciation is
related to the quantity taken out (amount of depletion) and not the passage of time. This
method when applied to wasting assets like mines, quarries etc. is known as Depletion
Method because wasting assets cannot be depreciated but can be gradually depleted.
Usefulness: It is used for depreciating natural resources like ore-deposit, oil-deposit etc.
Rate of Depreciation per unit = Original cost less Residual Value/Useful Life in terms of
Productive Output
Amount of Depreciation = Actual Output (in units) x Rate of Depreciation per Unit
Suitability: This method is suitable where (a) the life of the asset can be estimated in terms
of output (b) the utility of the asset is directly related to its productive life (c) Obsolescence
is not a primary factor.
Practical Example: Cost of acquiring a mine = ` 1,00,000,Estimated Qty of coal in the mine
= 20,000 tonnes,Actual output in the year 2018 = 1,000 tonnes
Here,
Rate of Depreciation = ` 1,00,000/20,000 = ` 5 per tonne Amount of Depreciation for 2018
= 1,000 tonnes x ` 5 = ` 5,000

Write A Short Note On Renewal And Retirement Of Bill [MAY

1996, NOV. 2003]
 Renewal of Bill- Cancellation of the original bill and drawing a fresh bill for another
period on a request from the drawee, is called renewal of a bill. In such a case, the
interest for the extended period is either paid in cash or is included in the amount of the
new bill.
 Retirement of Bill:
a) Meaning: Making the payment of a bill before the date of maturity is called retirment
of a bill.
b) Rebate: Usually the holder of the bill allows at an agreed rate of interest for the
unexpired period of the bill as a consideration for premature payment.
c) Nature of Rebate: Such rebate on retirement of a bill is an income for the drawee
and is an expense for the payee.

Write A Short Note On Noting Charges And Protest [May 2003]

Noting is the recording of the fact of dishonour by a Notary Public. Such noting must be
made within a reasonable time after dishonour.

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Contents of Noting—Noting must specify (a) the date of dishonour, (b) the reason, if any,
assigned for such dishonour (c) Noting Charges—The fee charged by Notary Public for
noting is known as noting charges.
Recovery—The amount of noting charges charged is recoverable from the party who is
responsible for dishonour.
Treatment in the books of the Drawer—The Drawee’s Account is always debited with the
total amount, i.e., the amount of the dishonoured bill plus the amount of noting charges (if
any, incurred).
Treatment in the books of the Drawee—The Drawer’s Account is always credited with
the total amount, i.e., the amount of the dishonoured bill plus the amount of noting charges
(if any, incurred).
Protest—Protest is the formal certificate given by the Notary Public. This certificate is
based on the noting.

Write A Short Note On Accommodation Bill [JUNE 1994, MAY 2005]

Meaning—Accommodation Bills refer to those bills which are drawn, accepted or endorsed
without any consideration.
Purpose—Such bills are drawn and accepted to meet the financial needs of the
drawer/drawee/ both temporarily.
Sharing of Proceeds of the Bill—On discounting of such bills, proceeds may be shared
by drawer and drawee in an agreed ratio.
Sharing of Discount—The party bears the discounts in the proportion in which it shares
the proceeds of the bill unless otherwise agreed.
Recovery in case of Dishonour—On dishonour of such bill, drawer cannot file suit against
the drawee because drawee is not liable to drawer.
Accounting Entries—The accounting entries are made in the usual manner as in case of
trade bills.

Write A Short Note On Receipts And Expenditure Account [MAY

1999, NOV. 2003]
Meaning:
a) Receipts and Expenditure Account is an income statement which is prepared by
professionals (like Chartered Accountants) or professional firms to ascertain the final
results of their professional activities during an accounting period.
b) In Receipts and Expenditure Account, all expenses are recognised on accrual basis and
all incomes are recognised on cash basis. In other words, all outstanding expenses are
considered but all outstanding fees and charges or work-in-progress are not considered.
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Reason for non-recognition of Outstanding Fees:
The reason for non-recognition of outstanding fees is that professionals consider it
imprudent and risky to recognize the outstanding fees.
Reason for difference between the profit as shown by the Income & Expenditure
Account and Receipts and Expenditure account.
Such difference arises because of non-recognition of outstanding fees and charges and
work-in- progress in Receipts & Expenditure Account.

Write A Short Note On Guarantee Of Minimum Profit To A Partner

Guarantee to a Partner It means assurance to give a minimum amount of Profit to a
Partner.
Guaranteed Partner A partner to whom guarantee of minimum profit has been provided
is called 'Guaranteed Partner’.
Guaranteeing The partner(s) who has (have) given guarantee of minimum profit
Partners is (are) called ‘Guaranteeing Partners’.
Guaranteed Amount The minimum amountfor which guarantee is given is called
‘Guaranteed Amount’.
Who can provide The guarantee may be provided by one or some or all of the
Guarantee and in what partners in an existing profit sharing ratio or in some other agreed
ratio? ratio.
Personal Guarantee When guarantee is given by one or some or all of the partners in
a ratio different from existing profit sharing ratio, such guarantee
is said to be personal guarantee.
Firm Guarantee When guarantee is given by all the partners in an existing profit
sharing ratio, such guarantee is said to be firm guarantee.
Effect of Guarantee If in any year, the actual Share of Profit of a Guaranteed Partner
is less than the Guaranteed Amount, then the deficiency (i.e.,
excess of Guaranteed Amount over actual Share of Profit) is
borne by the Guaranteeing Partners in their agreed ratio.

Write A Short Note On Limited Liability Partnership

a) It is an entity registered under The Limited Liability Partnership Act, 2008’
b) It has separate legal entity.
c) It is created by Law.
d) It has perpetual succession. The death, insolvency or unsoundness of its members does
not affect its existence. Members may come and go but LLP goes forever.
e) Its Name to contain ‘Limited Liability Partnership’ or ‘LLP’ as suffix.

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f) Minimum number of partners required is 2 but their is no limit on maximum number of
partners.
g) Liability of its Partner is limited, to the extent their contribution towards LLP, except in
case of intentional fraud or wrongful act of omission or commission by the partner.
h) Partners act as agents of LLP and not of other partners.
i) Minor can not be admitted to the benefits of LLP.
j) Foreign National can become a Partner in a LLP.
k) It must have at least 2 individuals as Designated Partners, of whom at least one must
be resident in India

Write A Short Note On Designated Partners

a) LLP must have at least 2 two individuals as Designated Partners, of whom at least one
must be resident in India. Each Designated Partner is required to have a DPIN before
appointment.
b) At least one Designated Partner must have Digital Signatures since e forms are filled
electronically.
c) Only Designated Partners are liable for Legal Compliance.

Write A Short Note On Personal Liability Of A Partner

For his own Wrongful Act or Omission A partner is personally liable.
For the Wrongful Act or Omission of any A partner is not personally liable.
other Partner of the LLP
For any Other Act A partner is not personally liable.

Write A Short Note On Methods Of Valuation Of Goodwill

 Average Profit Method: Goodwill under this method is ascertained by multiplying the
Average Future Maintainable Profit by a certain number of years’ purchases.
Goodwill = Average profits x No. of years’ Purchases

 Super Profit Method: Goodwill under this method is ascertained by multiplying the
Super Profits by certain number of year’s purchase.
Goodwill = Super profits x No. of years' Purchases
 Capitalisation of Super Profit: The goodwill under this method is ascertained by
capitalising the super profits on the basis of Normal Rate of Return.
Goodwill = Super Profits x 100/Normal Rate of Return
 Capitalization of Average Profits:

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The goodwill under this method is ascertained by deducting the actual capital employed
(i.e. Net Assets as on the date of Valuation) in business from the Capitalised Value of the
average profits on the basis of Normal Rate of Return.
Goodwill = Capitalised Value - Net Assets
Where, Capitalised Value = Average Profit /Normal Rate of Returnx 100
Net Assets = All Assets (other than goodwill, fictitious assets and non-trade investments) at
their current values less Outsiders’ Liabilities

Write A Short Note On Limitations Of Financial Statements

The major limitations of financial statements are as follows:
1. Ignores the Financial statements ignore the qualitative elements like quality
qualitative elements of management, quality of labour force, public relations.
2. Not free from personal Financial statements are not free from personal bias since the
bias subjectivity is inherent in personal judgments involved in making
decision regarding method of depreciation, method of inventory
valuation, materiality, provision for doubtful debt etc.
3. Ignores the Price Level Financial statements prepared on historical basis ignore the
Changes price level changes since the financial statements are prepared
on historical cost basis and not on current cost basis.
4. Relates to past and not Financial statements relate to the past and not to the future.
to future

Write A Short Note On Private Placement Of Shares

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Meaning (a) According to Section 42 private placement of shares implies issue
and allotment of shares to a selected group of persons. In other words, an
issue, which is not a public issue but offered to a select group of persons,
is called 'Private Placement of Shares'.
(b) All SEBI Guidelines concerning preferential issue are applicable to
private placement of shares as well.
(c) In order to make of shares through the private placement route, a
company must pass a special resolution to this effect. Where no special
resolution is passed, the company must pass ordinary resolution and
obtain the consent of the Central Government stating that the proposal is
most beneficial to the company.
Accounting Accounting entries relating to the private placement of securities are
Treatment similar to those discussed at the time of application and allotment.

Write a Short Note On Right Shares

Meaning As per Sec. 62 in case of further issue of shares, further shares must be
offered to the existing shareholders in proportion to their existing
shareholdings at that date. Such shares are called 'Rights Shares'.
When Such right is available when it is proposed to increase the subscribed
Available capital of the company by allotment of further shares at any time after the
expiry of 2 years from the formation of a company or after the expiry of 1
year from the first allotment of shares, whichever is earlier.
Option The existing shareholder to whom the offer is made, may:
available 1. Accept the offer in full or in part
2. Reject the offer in full
3. Renounce the right in full or in part
Value of Right The computation of Value of Right consists of the following two steps:
Step 1: Calculate A verage Price of a share
Market Price of the Existing Shares + Issue Price of proportionate Right
Shares /No. of Existing Shares + No. of Rights Shares Step 2: Calculate
Value of Right
Value of Right = Market Price of a Share — Average Price of a Share
Accounting Accounting treatment of right issue of shares is similar to the treatment
Treatment discussed under application and allotment.

Write A Short Note On Preferential Allotment

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Meaning A preferential allotment is one that is made at a pre-determined price to
the pre-identified people who wish to take a strategic stake in the company
such as promoters, venture capitalists, financial institutions, buyers of
companies’ products or its suppliers.
Guidelines Some of the guidelines in this regard are as follows:
1. Lock-in-Period—The allottees will not sell their securities in the open
market for a minimum period of three years from the date of allotment.
This period is known as the lock in period. This period is applicable in case
of promoters’ contribution. However in case of pre-issue of share capital
of an unlisted company, the lock-in-period is one year from the date of
commencement of commercial production or the date of allotment in the
public issue, whichever is earlier.
2. Special Resolution—The preferential allotment can take place only
if three-fourths of the shareholders agree to the issue on preferential
basis.
3. Minimum Issue Price— The minimum price of such an issue has to
be an average of highs and lows of the 26 weeks preceding the date
on which the board resolves to make the preferential allotment.
4. Open Offer—If the preferential allotments are made over and above
15 per cent of the equity, an open offer is mandated by the SEBI.

Write A Short Note On Sweat Equity Shares

Meaning Sweat equity shares means equity shares issued by the company to
employees ordirectors at a discount or for consideration other than cash
for providing knowhow or making available right in the nature of intellectual
property rights or value additions, by whatever name called. [Sec. 2 (88)]

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Five According to Section 54, a company may issue Sweat Equity Shares if the
Conditions following conditions are fulfilled, namely:
a) the shares must belong to a class of shares already issued;
b) the issue must be authorised by a special resolution passed by the
company in the general meeting.
c) the resolution must specify the number of shares, current market price,
consideration, if any, and the class or classes of directors or employees
to whom such equity shares are to be issued.
d) at least 1 year must have completed since the date on which the
company was entitled to commence business;
e) the sweat equity shares of a company whose equity shares are listed
on a recognised stock exchange must be issued as per the regulations
made by the SEBI.
Provided that in the case of a company whose equity shares are not listed
on any recognised stock exchange, the Sweat Equity Shares are issued
as per the guidelines prescribed.

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