A COMPILATION OF ILLUSTRATIVE PROBLEMS IN

FINANCIAL
ACCOUNTING

FOR STUDENTS OF BIAF101-1

1ST SEMESTER, BACHELOR OF COMMERCE
(INTERNATIONAL ACCOUNTANCY AND FINANCE)
DEPARTMENT OF PROFESSIONAL STUDIES
CHRIST (DEEMED TO BE UNIVERSITY)

NAME: ___________________________________

REG. NO.: _______________ 1BCom-IAF ______

This compilation has been put together solely for the purpose of discussion and
illustrative problem-solving in the classroom, and should not be considered exhaustive
material for the purpose of preparation for examinations. Learners are advised to
consult reference books for additional problems, and solve them for thorough practice
for each topic under study.
 SYLLABUS
UNIT TOPIC PAGES
Unit 1 Overview of Accounting Principles and Procedure….....……………………….... 1 – 12
(i) Introduction to accounting; double-entry system; Ind AS 1: Financial
statements, purpose, general features (true and fair view, going concern,
accrual basis, materiality and aggregation, offsetting, frequency of
reporting, comparative information, consistency); other assumptions and
conventions (business entity, money measurement, conservatism)
(ii) Basic accounting procedure: journal entries, ledgers, cash book, capital and
revenue expenditure/ receipts, rectification of errors, trial balance,
preparation of Statement of Profit and Loss and Balance Sheet: structure,
contents; problems based on trial balance and adjustments
Unit 2 Preparation of Financial Statements for Companies...……………...………..….. 13 – 23
(i) Meaning of financial statements; form and contents of Statement of Profit
and Loss and Balance Sheet as per Schedule III to the Companies Act,
2013; general instructions for their preparation along with Notes to
Accounts; problems based on Trial Balance and common year-end
adjustments/ rectifications
(ii) Treatment of taxes deducted at source, advance payment of tax, and
provision for taxation
(iii) Treatment of interim and final dividend, and corporate dividend tax;
meaning of capital and revenue reserves; rules for declaration of dividend
out of reserves; simple problems
(iv) Computation and treatment of managerial remuneration, including
computation of net profit under Section 198 of the Companies Act, 2013
Unit 3 Liquidation of Companies...…………………………………………...………..….. 24 – 29
Meaning of liquidation, types of liquidation, secured creditors (fixed/ floating
charge); order of payment, computation of liquidator’s remuneration, preferential
creditors, pro-rata settlement, preparation of Liquidator’s Final Statement of
Account, treatment of capital surplus, return of capital to shareholders with
different paid-up capitals, meaning of contributory, ‘B’ List of contributories
Unit 4 Valuation of Goodwill and Shares………...…………...…………………………... 30 – 37
(i) Valuation of goodwill: meaning; circumstances for valuation of goodwill;
factors influencing the value of goodwill; methods of valuation—average
profit method, super profit method, capitalisation of average profit method,
capitalisation of super profit method, annuity method
(ii) Valuation of shares: meaning; need for valuation; factors affecting
valuation; methods of valuation—intrinsic value method, yield method,
earning capacity method, fair value of shares
(iii) Rights issue and valuation of rights issue
Unit 5 Fundamental International Acc. Standards and Recent Trends in Accounting 38 – 55
HR accounting, inflation accounting, green accounting, carbon accounting,
forensic accounting, IASB—conceptual framework and regulatory framework,
IAS-1: Presentation of Financial Statements, IAS-2: Inventories,
IAS-16: Property, Plant and Equipment, IAS-38: Intangible Assets,
IAS-15: Revenue from Contracts with Customers (Five step model),
IAS-8: Accounting Policies, Changes in Accounting Estimates, and Errors,
IAS-23: Borrowing Costs, IAS-36: Impairment of Assets
Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 1: Overview of Accounting Principles and Procedure

Introduction to Accounting

Financial accounting is a specific branch of accounting involving a process of recording,

summarising, and reporting the myriad of transactions resulting from business operations
over a period of time. These transactions are summarised in the preparation of financial
statements—including the balance sheet, income statement, and cash flow statement—that
record a company’s operating performance over a specified period.

Companies engage in financial accounting for a number of important reasons:

a) Encouraging transparency: By setting rules and requirements, financial accounting
forces companies to disclose certain information on how operations are going, and what
risks the company is facing, painting an accurate picture of financial performance
regardless of how well or poorly the company is doing.
b) Enabling comparability: By delineating a standard set of rules for preparing financial
statements, financial accounting creates consistency across reporting periods and
different companies, thereby facilitating meaningful comparison.
c) Decreasing risk: Financial accounting does this by increasing accountability. Lenders,
regulatory bodies, tax authorities, and other external parties rely on financial
information; financial accounting ensures that reports are prepared using acceptable
methods that hold companies accountable for their performance.
d) Aiding management: Though other methods such as managerial accounting may
provide better insights, financial accounting can drive strategic concepts when a
company analyses its financial results and makes investment decisions accordingly.
e) Promoting trust: Independent governing bodies oversee the rules of financial
accounting, making the basis of reporting independent of management and a highly
reliable source of accurate information.

Financial statements are used by a variety of groups and often required as part of
agreements with the preparing company. In addition to management using financial
accounting to gain information on operations, the following groups use such reporting:
a) Investors: Before putting their money into a company, investors often seek reports
prepared using financial accounting to understand how the company has been doing
and set expectations about the company’s future.
b) Auditors: Companies may be required to present their financial position to auditors, who
analyse the financial statements and ensure that proper financial accounting guidance
has been used and the reports are free from material misstatements.
c) Regulatory agencies: Public companies are required to submit financial statements to
governing bodies. These financial statements must be prepared in accordance with
financial accounting rules, and companies face fines or exchange delisting if they do not
comply with reporting requirements.

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Unit 1: Overview of Accounting Principles and Procedure

d) Suppliers: Vendors or suppliers may ask for financial statements as part of their credit
application process. Suppliers may require a credit history or evidence of profitability
before issuing or increasing credit to a requested amount.
e) Banks: Lenders and other similar financial institutions will almost always require
financial statements as part of the business loan process. Lenders will need to see
verifiable proof via financial accounting that a company is in good operational health
prior to issuing a loan. The statements may also be used for determining the cost,
lending terms, or interest rate of the loan.

Double-Entry System

Double entry is a bookkeeping and accounting method, which states that every financial
transaction has equal and opposite effects in at least two different accounts. It is used to
satisfy the accounting equation: Assets = Liabilities + Equity. With a double-entry system,
credits are offset by debits in a general ledger or T-account.

In the double-entry accounting system, transactions are recorded in terms of debits and
credits. A credit is an entry that increases a liability account or decreases an asset account.
A debit is the opposite—it is an entry that increases an asset account or decreases a liability
account. Since a debit in one account offsets a credit in another, the sum of all debits must
equal the sum of all credits.

Essentially, the representation equates all uses of capital (assets) to all sources of capital
(where debt capital leads to liabilities and equity capital leads to shareholders’ equity). For a
company to keep accurate accounts, every single business transaction will be represented in
at least two of the accounts. Because there are two or more accounts affected by every
transaction carried out by a company, the accounting system is referred to as double-entry
accounting. This practice ensures that the accounting equation always remains balanced;
that is, the left side value of the equation will always match the right side value.

The double-entry system of bookkeeping standardises the accounting process and improves
the accuracy of prepared financial statements, allowing for improved detection of errors.

Indian Accounting Standard (Ind AS) 1 — Presentation of Financial Statements

Purpose of financial statements

Financial statements are a structured representation of the financial position and financial
performance of an entity. The objective of financial statements is to provide information
about the financial position, financial performance, and cash flows of an entity that is useful
to a wide range of users in making economic decisions. Financial statements also show the
results of the management’s stewardship of the resources entrusted to it.

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To meet this objective, financial statements provide information about an entity’s assets;
liabilities; equity; income and expenses, including gains and losses; contributions by and
distributions to owners in their capacity as owners; and cash flows. This information, along
with other information in the notes, assists users of financial statements in predicting the
entity’s future cash flows and, in particular, their timing and certainty.

A complete set of financial statements comprises:

a) a balance sheet as at the end of the period;
b) a statement of profit and loss for the period;
c) a statement of changes in equity for the period;
d) a statement of cash flows for the period;
e) notes, comprising a summary of significant accounting policies and other explanatory
information; and
f) comparative information in respect of the preceding period.

General features

a) True and fair view: Ind AS 1 requires entities to present financial statements fairly, which
means that the financial statements must be free from material misstatements and
errors. Fair presentation also requires entities to provide adequate disclosures in the
notes to the financial statements, which helps to ensure that users have a complete
understanding of the financial statements.

b) Going concern: An entity shall prepare financial statements on a going concern basis,
i.e. on the assumption that the entity will continue to operate for the foreseeable future
(unless the management intends to liquidate the entity or to cease trading, or has no
realistic alternative but to do so). This allows financial statements to be prepared on a
basis that assumes the entity will continue to operate, which is important for making
meaningful financial projections and evaluating an entity’s long-term viability.

c) Accrual basis of accounting: An entity shall prepare its financial statements, except for
cash flow information, using the accrual basis of accounting. Accrual accounting
recognises revenues and expenses when they are earned or incurred, regardless of
when cash is received or paid. This provides a more accurate picture of an entity’s
financial performance and position.

d) Materiality and aggregation: An entity shall present each material class of similar items
separately. An entity shall present items of a dissimilar nature or function separately
unless they are immaterial. Further, if a line item in the financial statements is not
individually material, it is aggregated with other items either in those statements or in
the notes. An item is material if its omission or misstatement could individually or
collectively influence the economic decisions that users make on the basis of the

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Unit 1: Overview of Accounting Principles and Procedure

financial statements. This principle ensures that financial statements focus on

information that is relevant and useful to users.

e) Offsetting: An entity shall not offset assets and liabilities or income and expenses,
unless required or permitted by an Ind AS. An entity reports separately both assets and
liabilities, and income and expenses. Offsetting in the statement of profit and loss or
balance sheet, except when offsetting reflects the substance of the transaction or other
event, detracts from the ability of users both to understand the transactions, other
events and conditions that have occurred, and to assess the entity’s future cash flows.

f) Frequency of reporting: An entity shall present a complete set of financial statements

(including comparative information) at least annually. When an entity changes the end
of its reporting period and presents financial statements for a period longer or shorter
than one year, an entity shall disclose, in addition to the period covered by the financial
statements: (i) the reason for using a longer or shorter period, and (ii) the fact that
amounts presented in the financial statements are not entirely comparable.

g) Comparative information: An entity shall present comparative information in respect of

the preceding period for all amounts reported in the current period’s financial
statements, except when Ind ASs permit or require otherwise. An entity shall include
comparative information for narrative and descriptive information if it is relevant to
understanding the current period’s financial statements. An entity shall present, as a
minimum, two balance sheets, two statements of profit and loss, two statements of cash
flows, and two statements of changes in equity, and related notes.

h) Consistency: An entity shall retain the presentation and classification of items in the
financial statements from one period to the next unless (i) it is apparent, following a
significant change in the nature of the entity’s operations or a review of its financial
statements, that another presentation or classification would be more appropriate
having regard to the criteria for the selection and application of accounting policies; or
(ii) an Ind AS requires a change in presentation.

Other concepts and conventions

a) Business entity concept: According to this concept, business is treated as a separate
entity from its owners. The business records only those transactions which are not
personal in nature. All the transactions are recorded in the books of accounts from the
point of view of the business. For example, when capital is provided by the owner, the
accounting record will show the business as having received so much money and as
owing to the owner. Be it sole proprietorship, partnership, or joint stock company, the
business is treated as a separate entity.

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Unit 1: Overview of Accounting Principles and Procedure

b) Money measurement concept: This accounting concept states that only financial
transactions will find a place in accounting. So only those business activities that can
be expressed in monetary terms will be recorded in accounting. Any other transaction,
no matter how significant, will not find a place in financial accounting.

c) Convention of conservatism: This accounting concept promotes prudence in

accounting. It states that profit should not be included until it is actually realised.
However, losses, even those not realised but likely to occur, should be recognised in the
financial statements. In other words, the accountant should not anticipate future profits
but provide for all possible future losses. The prime objective of this convention is to
ensure that profit is not overstated. A higher disclosure of profit may lead to distribution
of dividend, which leads to reduction of capital. This convention helps ascertaining the
profit actually realised, and in conserving the entity’s capital.

Basic Accounting Procedure

The basic accounting procedure involves several steps to record and track financial
transactions within a business. These steps include journal entries, ledgers, and the use of
a cash book. Here’s an overview of each component:

Journal entries
Journal entries are the first step in the accounting process. They are used to record
individual transactions in chronological order. Each journal entry consists of at least two
parts: a debit entry and a credit entry. To decide which accounts to debit and credit in a
transaction, consider the following basic rules:

a) Increases in assets are debits; decreases are credits.

b) Increases in liabilities are credits; decreases are debits.
c) Increases in owner’s capital are credits; decreases are debits.
d) Expenses and losses are debits; incomes and gains are credits.

Ledgers

After recording the journal entries, the next step is to transfer the information to the
respective ledger accounts. A ledger is a collection of accounts that categorise and
summarise similar transactions. Common ledger accounts include Cash/Bank, Trade
Receivables, Trade Payables, Inventory, and various expense and revenue accounts. Each
account in the ledger maintains a running balance of its respective transactions, which at
any given point may be a net debit balance or a net credit balance. The ledger helps
organise and present the financial information in a structured manner.

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 1: Overview of Accounting Principles and Procedure

Cash book
The cash book is a specialised ledger that focuses on recording cash transactions. It serves
as a central repository for all cash inflows and outflows. Cash receipts from sales, loans,
investments, or other sources are recorded as debit entries in the cash book, while cash
payments for expenses, purchases, and other outflows are recorded as credit entries. The
cash book provides an up-to-date record of the company’s cash position and helps reconcile
cash balances with bank statements.

Capital and revenue expenditure/ receipts

Capital expenditure refers to the funds spent by a business to acquire, improve, or extend its
capital assets. These assets are typically long-term in nature and provide benefits to the
company over an extended period of time, beyond the current accounting period. Capital
expenditures are not immediately consumed or exhausted, but rather they contribute to the
long-term growth and operational efficiency of the business. Examples of capital
expenditures include purchase of property, plant, and equipment; major repairs and
improvements; and acquisition of intangible assets.

Capital receipts represent funds received by a business that affect its capital structure or
increase its long-term liabilities or equity. These receipts are not related to the regular
operations of the business and have a long-term impact. Capital receipts are typically
generated from activities such as issue of share capital and long-term loans.

Revenue expenditure refers to the expenses incurred by a business in its day-to-day

operations to generate revenue and maintain its ongoing activities. These expenses are
typically short-term in nature and are consumed or exhausted within the current accounting
period. Revenue expenditures are necessary to sustain the regular operations of the
business and do not result in the acquisition of long-term assets. Examples of revenue
expenditures include salaries and wages, rent and utilities, advertising and marketing
expenses, and cost of goods sold.

Revenue receipts represent funds received by a business as a result of its regular

operations or activities. These receipts are generated from the core revenue-generating
activities of the business. Examples of revenue receipts include sales revenue, rental
income, and interest income.

Understanding the distinction between capital and revenue expenditures and receipts is
crucial for proper classification in accounting and financial reporting. Capital expenditures
and receipts are related to long-term investments and changes in the capital structure, while
revenue expenditures and receipts are associated with day-to-day operational expenses and
revenue generation.

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Unit 1: Overview of Accounting Principles and Procedure

Trial balance
A trial balance is a statement that lists the balances of all the ledger accounts of a company
at a specific point in time. It is prepared as a part of the accounting cycle and serves as a
preliminary step before the preparation of financial statements. The trial balance
summarises the debit and credit balances of each account to ensure that the accounting
equation (Assets = Liabilities + Equity) is in balance.

It's important to note that while a balanced trial balance indicates that the total debits equal
the total credits, it does not guarantee that the financial statements are error-free or
accurate. In other words, the trial balance is a useful tool for initial verification but is not a
definitive proof of accuracy.

Rectification of errors
While recording transactions and events, various errors may be committed by an accountant
unintentionally. Some of these errors affect the trial balance, and some of these do not have
any impact on the trial balance although such errors may affect the determination of profit or
loss or assets and liabilities of the business. There are two types of errors:
a) Errors of principle: When a transaction is recorded in contravention of accounting
principles, such as treating purchase of an asset as an expense, it is an error of
principle. In this case, there is no effect on the trial balance since the amounts are
placed on the correct side, though in a wrong account.
b) Clerical errors: These errors arise because of mistakes committed in the ordinary
course of accounting work. These are of three types:
- Errors of omission: where a transaction is completely or partially omitted from the
books of account, e.g. not recording a credit purchase of furniture or not posting
an entry into the ledger.
- Errors of commission: where an amount is posted in the wrong account, or is
written on the wrong side, or the totals are wrong, or a wrong balance is struck.
- Compensating errors: where the effect of the errors committed cancel out.
Even if there is only a very small difference in the trial balance, the errors leading to it must
be located and rectified. This should ideally be done before the final accounts are drawn.

Preparation of Statement of Profit and Loss and Balance Sheet

Final accounts are prepared to show the periodic performance of a business entity and its
financial position at the end of such period. Profit and Loss Account and Balance Sheet are
generally prepared for such purposes. In some cases, the Profit and Loss Account is sub-
divided into various parts: Trading Account, Profit and Loss Account, and Profit and Loss
Appropriation Account.

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 1: Overview of Accounting Principles and Procedure

Question 1.1
Journalise the following transactions in the books of Mohan’s business:
(a) Mohan commences a business with cash of ₹5,00,000.
(b) Out of the above, ₹50,000 is deposited in the bank.
(c) Furniture is purchased for cash of ₹20,000.
(d) Goods are purchased for cash of ₹40,000.
(e) Goods of ₹1,00,000 are purchased on credit from M/s Ram Narain Bros.
(f) Goods are sold to M/s Iqbal & Co. for cash of ₹60,000.
(g) Goods are sold to Stephen on credit for ₹30,000.
(h) Cash of ₹30,000 is received from Stephen.
(i) Cash of ₹1,00,000 is paid to M/s Ram Narain Bros.
(j) Rent of ₹10,000 is paid in cash.
(k) ₹20,000 is paid towards the clerk’s salary.
(l) Interest of ₹2,000 is credited to the bank account.

Question 1.2
Journalise the following transactions for April 2024 in the books of Mr. Singh’s business, and
thereafter post them to the respective ledgers:
April ₹
1 Mr. Singh commences a business with cash 10,000
2 Paid into bank 7,000
3 Bought goods for cash 500
5 Drew cash from bank 100
13 Sold goods to Kaveri on credit 150
20 Bought from Salma goods on credit 225
24 Received from Kaveri 145
Allowed her discount 5
28 Paid Salma cash 215
Discount received 10
30 Cash sales for the month 800
Rent paid in cash 50
Salary paid in cash 100

Question 1.3
M/s Wise and Active have carried on business activities for a few weeks without maintaining
any books of account. Record their position on 1 January 2024 and then journalise the
following transactions during the month, and thereafter prepare the necessary ledger
accounts and a trial balance as on 31 January 2024:

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Jan. ₹
1 Assets: Cash in hand ₹200; Cash at bank ₹6,800; Stock of
goods ₹4,000; Machinery ₹10,000; Furniture ₹1,000;
M/s Nandini owe ₹1,500; M/s K.B. Bose owe ₹2,500
Liabilities: Loan ₹5,000; Owed to Jacob Ltd. ₹2,000
2 Bought goods on credit from Samuel & Co. 1,000
3 Sold goods for cash to Dhiraj & Co. 400
4 Sold goods to M/s Nandini on credit 1,000
5 Received from M/s Nandini in full settlement of dues on 1.1.2024 1,450
6 Payment made to Jacob Ltd. by cheque 975
They allowed discount 25
9 Old furniture sold for cash 100
10 Bought goods for cash 750
11 M/s K.B. Bose paid cheque deposited in bank 2,500
Paid in cash for repairs to machinery 100
13 Bought goods from Jacob Ltd. on credit 1,000
Paid cartage on these goods 50
16 Cheque received from M/s Nandini deposited in bank 950
Discount allowed 50
17 Paid cheque to Jacob Ltd. 1,000
18 Bank intimates that M/s Nandini’s cheque is returned unpaid
19 Sold goods for cash to M/s Kay Bros. 600
21 Cash deposited in bank 500
24 Paid municipal taxes in cash 100
25 Borrowed from Urania Investment Co. Ltd. for erecting own
premises; money deposited with bank for time being 10,000
26 Old newspapers sold 20
28 Paid for advertisements 100
31 Paid rent by cheque 150
Paid salaries for the month 300
Drew out of bank for private use 250
M/s Nandini became insolvent; 50% of dues received
Recovered towards ₹2,000 earlier written off as bad debts 150
Closing stock of goods is ₹8,000

Question 1.4
Pass necessary journal entries to rectify the following errors found in M/s Junaid’s books.

(a) ₹500 paid for furniture purchased has been charged to ordinary Purchases A/c.
(b) Repairs made were debited to Building A/c for ₹50 (not depreciated since).
(c) ₹100 drawn by the proprietor for personal use was debited to Trade Expenses A/c.
(d) ₹100 paid for rent was debited to Landlord’s A/c.

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(e) Salary of ₹125 paid to a clerk was debited to his personal account.
(f) ₹100 received from Shah & Co. was wrongly entered as from Shaw & Co.
(g) ₹700 paid in cash for a typewriter was charged to Office Expenses A/c.

Question 1.5
Pass necessary journal entries to rectify the following errors:
(a) ₹150 for purchase of goods on credit from Cyrus was recorded as a credit sale.
(b) Credit sale of ₹120 to Jaspreet was recorded as a credit purchase.
(c) No entry was passed for goods of ₹300 returned by Jenny and taken in stock.
(d) ₹200 due from Mahesh Chand, which has been written off as bad debts in a previous
year, was unexpectedly recovered, but was posted to his personal account.
(e) A cheque of ₹200 received from Ramesh was dishonoured and posted to the debit of
Sales Returns A/c.

Question 1.6
From the following trial balance, prepare Trading and Profit and Loss Account for the year
ended 31 March 2024 and a Balance Sheet as on that date.

Debit balances ₹ Credit balances ₹

Sundry debtors 1,500 Capital 25,000
Stock on 1 April 2023 5,000 Interest 600
Land and buildings 10,000 Sundry creditors 7,000
Cash in hand 1,600 Sales 17,000
Cash at bank 4,000 Bills payable 4,000
Wages 3,000
Bills receivable 2,000
Interest 200
Bad debts 500
Repairs 300
Furniture and fixtures 1,500
Depreciation 1,000
Rent, rates, and taxes 800
Salaries 2,000
Drawings 2,000
Purchases 10,000
Office expenses 2,500
Plant and machinery 5,700
53,600 53,600

On 31 March 2024, stock was valued at ₹10,000.

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Question 1.7
Following is the trial balance of K as on 31 March 2024.

Debit balances ₹ Credit balances ₹

Purchases 15,000 Interest earned 400
Debtors 20,000 Sales 32,100
Salaries 3,000 Purchase returns 500
Wages 2,000 Creditors 12,000
Rent 1,500 Capital 10,000
Sales returns 1,000 Provision for doubtful debts 600
Bad debts written off 700 Provision for depreciation 200
Drawings 2,400
Printing and stationery 800
Insurance 1,200
Opening stock 5,000
Office expenses 1,200
Furniture and fittings 2,000
55,800 55,800

Prepare a Trading and Profit and Loss Account for the year ended 31 March 2024 and a
Balance Sheet as on that date after making the following adjustments:
(a) Depreciate Furniture and fittings by 10% on original cost.
(b) Provision for doubtful debts is to be maintained at 5% of debtors.
(c) Salaries for the month of March amounting to ₹300 were unpaid, which must be
provided for. The balance in the account included ₹200 paid in advance.
(d) Insurance is prepaid to the extent of ₹200.
(e) Office expenses of ₹800, which were incurred but remain unpaid, have not been
accounted for yet.
(f) Stock of ₹600, which was put by K to her personal use, remains unaccounted.
(g) Closing stock was valued at ₹6,000.

(This space has been intentionally left blank.)

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Question 1.8
The following balances were extracted from the books of Madan Lal as on 31 March 2024.

₹ ₹
Plant and machinery 40,500 Bad debts 2,200
Furniture and fittings 15,250 Bad debts recovered 1,250
Bank overdraft 1,60,000 Salaries 32,650
Capital account 1,15,000 Salaries outstanding 5,350
Drawings 15,000 Prepaid rent 500
Purchases 2,30,500 Rent 6,500
Opening stock 1,32,250 Carriage inward 2,350
Wages 22,325 Carriage outward 3,250
Provision for doubtful debts 5,700 Sales 2,90,600
Provision for discount on debtors 1,375 Advertisement expenses 6,750
Sundry debtors 1,52,500 Printing and stationery 2,200
Sundry creditors 77,500 Cash in hand 2,300
Cash in bank 7,250

Prepare a Trading and Profit and Loss Account for the year ended 31 March 2024 and a
Balance Sheet as on that date after considering the following additional information:
(a) Bank overdraft is secured against hypothecation of stock. The bank overdraft
outstanding as on 31 March 2024 accounted for 80% of the drawing power. The total
drawing power is ascertained by deducting a 20% margin from the value of stock as
on that date.
(b) Purchases include sales return of ₹5,500. Sales include purchase returns of ₹4,750.
(c) Goods of ₹7,500 withdrawn by Madan Lal for own consumption remain unaccounted
for.
(d) Wages of ₹750 paid for installation of Plant and machinery were included in Wages.
(e) Depreciation is to be provided on Plant and machinery @ 15% p.a. and on Furniture
and fittings @ 10 p.a.
(f) ₹2,500 paid as an advance to a supplier was included in the list of Sundry debtors
due to the debit balance.
(g) Provision for doubtful debts is to be maintained @ 5% and Provision for discount on
debtors @ 2.5%.
(h) Free samples of ₹1,250 distributed for publicity have not been accounted for.
(i) The difference in the trial balance after rectification of errors, if any, can be taken as
miscellaneous expenses or miscellaneous income.

◼◼◼

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 2: Preparation of Financial Statements for Companies

PART I — BALANCE SHEET

Name of the Company…………………….
Balance Sheet as at ………………………
(Rupees in………)

Particulars Note Figures as at the Figures as at the

No. end of current end of the previous
reporting period reporting period
1 2 3 4
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital
(b) Reserves and surplus
(c) Money received against share
warrants
(2) Share application money pending
allotment
(3) Non-current liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities (net)
(c) Other Long term liabilities
(d) Long-term provisions
(4) Current liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
TOTAL

II. ASSETS
(1) Non-current assets
(a) (i) Property, plant, and equipment
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under
development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 2: Preparation of Financial Statements for Companies

(2) Current assets

(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
TOTAL

PART II – STATEMENT OF PROFIT AND LOSS

Name of the Company…………………….
Profit and loss statement for the year ended ………………………
(Rupees in…………)

Particulars Note Figures as at Figures as at the

the end of end of the
No. current previous
reporting period reporting period
1 2 3 4
I. Revenue from operations Xxx Xxx
II. Other income Xxx Xxx
III. Total Revenue (I + II) Xxx Xxx
IV. Expenses:
Cost of materials consumed Xxx Xxx
Purchases of stock-in-trade Xxx Xxx
Changes in inventories of finished
goods, work-in-progress and
stock-in-trade Xxx Xxx
Employee benefits expense Xxx Xxx
Finance costs Xxx Xxx
Depreciation and amortisation
expense Xxx Xxx
Other expenses Xxx___________ Xxx____________
Total expenses Xxx Xxx
V. Profit before exceptional and Xxx Xxx
extraordinary items and tax (III - IV)
VI. Exceptional and extraordinary items Xxx Xxx
VII. Profit before tax (V - VI) Xxx Xxx
VIII. Tax expense Xxx Xxx
IX. Profit (Loss) for the period (VII - VIII) Xxx Xxx

Page 14 of 55
Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 2: Preparation of Financial Statements for Companies

Question 2.1
You are required to prepare the Balance Sheet and Statement of Profit and Loss from the
following Trial Balance of Haria Chemicals Ltd. for the year ended 31 March 2024.

Debit balances ₹ Credit balances ₹

Inventory 6,80,000 Equity capital (₹10 each) 25,00,000
Furniture 2,00,000 11% debentures 5,00,000
Discount 40,000 Bank loans 6,45,000
Loan to directors 80,000 Trade payables 2,81,000
Advertisement 20,000 Sales 42,68,000
Bad debts 35,000 Rent received 46,000
Commission 1,20,000 Transfer fees 10,000
Purchases 23,19,000 Profit and loss account 1,39,000
Plant and machinery 8,60,000 Provision for depreciation
Rentals 25,000 - Machinery 1,46,000
Current account 45,000
Cash 8,000
Interest on bank loans 1,16,000
Preliminary expenses 10,000
Fixtures 3,00,000
Wages 9,00,000
Consumables 84,000
Freehold land 15,46,000
Tools and equipment 2,45,000
Goodwill 2,65,000
Trade receivables 4,40,000
Dealer aids 21,000
Transit insurance 30,000
Trade expenses 72,000
Distribution freight 54,000
Debenture interest 20,000
85,35,000 85,35,000

Closing inventory on 31 March 2024 was valued at ₹8,23,000.

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 2: Preparation of Financial Statements for Companies

Question 2.2
Prepare a Statement of Profit and Loss and Balance Sheet from the following Trial Balance
extracted from the books of the International Hotels Ltd. on 31 March 2024.

Debit balances ₹ Credit balances ₹

Purchases Authorised capital
- Wines, cigarettes, cigars 45,800 - 6% pref. shares (₹100 each) 5,00,000
- Foodstuff 36,200 - Equity shares (₹100 each) 10,00,000
Wages and salaries 28,300 Subscribed capital
Rent, rates, and taxes 8,900 - 6% pref. shares (₹100 each) 5,00,000
Laundry 750 - Equity shares (₹100 each) 8,05,000
Coal and firewood 3,290 Sales
Carriage 810 - Wines, cigarettes, cigars 68,400
Sundry expenses 5,840 - Food 57,600
Advertising 8,360 Rent of rooms 48,000
Repairs 4,250 Billiards 5,700
Land and building 8,50,000 Miscellaneous receipts 2,800
Furniture and fittings 86,300 Discount received 3,300
Inventory on 1 April 2023 Transfer fees 700
- Wines, cigarettes, cigars 12,800 6% debentures (₹100 each) 2,00,000
- Foodstuff 5,260 Profit and loss account 41,500
Cash in hand 2,200 Trade payables 42,000
Cash at bank 76,380 General reserve 2,00,000
Preliminary expenses 8,000
Trade receivables 19,260
Investments 2,72,300
Goodwill 5,00,000
19,75,000 19,75,000

Additional information:
(a) Wages and salaries of ₹1,280 are outstanding on 31 March 2024.
(b) Inventory on 31 March 2024: Wines, cigarettes, cigars ₹22,500; Foodstuff ₹16,400
(c) Depreciation: Furniture and Fittings @ 5% p.a.; Land and building @ 2% p.a.
(d) The equity capital on 1 April 2023 stood at ₹7,20,000, that is 6,000 shares fully paid
and 2,000 shares ₹60 paid. The directors made a call of ₹40 per share on
1 October 2023. A shareholder could not pay the call on 100 shares and his shares
were then forfeited and reissued @ ₹90 per share as fully paid.

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 2: Preparation of Financial Statements for Companies

Question 2.3
The following is the Trial Balance of Omega Limited as on 31 March 2024:

Debit balances ₹ ‘000 Credit balances ₹ ‘000

Land at cost 220 Equity capital (₹10 each) 300
Plant and machinery at cost 770 10% debentures 200
Trade receivables 96 General reserve 130
Inventories (31 March 2024) 86 Profit and loss account 72
Bank 20 Securities premium 40
Purchases (adjusted) 320 Sales 700
Factory expenses 60 Trade payables 52
Administration expenses 30 Provision for depreciation 172
Selling expenses 30 Suspense account 4
Debenture interest 20
Interim dividend paid (incl. DDT) 18
1,670 1,670

Additional information:

(a) The authorised capital of the company is 40,000 shares of ₹10 each.
(b) On the advice of an independent valuer, the land is to be revalued at ₹3,60,000.
(c) Proposed final dividend @ 10%.
(d) Suspense account of ₹4,000 represents cash received for the sale of machinery on
1 April 2023. The cost of the machinery was ₹10,000 and the accumulated
depreciation thereon was ₹8,000.
(e) Depreciation is to be provided on plant and machinery at 10% on cost.
You are required to prepare Omega Ltd.’s Balance Sheet and Statement of Profit and Loss
as on 31 March 2024. Assume Dividend Distribution Tax applicable @ 20%.

Question 2.4
For the year ended 31 March 2023, a provision for income-tax was made for ₹30,00,000.
Advance payment of tax for that year amounted to ₹28,00,000 and tax deducted at source
on income earned by the company amounted to ₹23,000. On 10 December 2023, the
assessment was completed and tax liability was determined at ₹35,45,000. Advance
payment of tax for the year 2023-24 was ₹34,00,000. Show the necessary accounts for the
year ending 31 March 2024 assuming a provision for income-tax at ₹38,00,000 for the year
ending 31 March 2024.

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 2: Preparation of Financial Statements for Companies

Question 2.5
The Trial Balance of Complex Ltd. as at 31 March 2024 shows the following items:
Dr. (₹) Cr. (₹)
Advance payment of income-tax 2,20,000 —
Provision for income-tax for the year ended 31 March 2023 — 1,20,000

The following additional information is provided to you:

(a) Advance payment of income-tax includes ₹1,40,000 for FY 2022-23.
(b) ₹1,52,000, the actual tax liability for FY 2022-23, has not been accounted for yet.
(c) Provision for income-tax has to be made for 2023-24 for ₹1,60,000.
You are required to prepare the following accounts and also show how they will appear in
the company’s Balance Sheet and Statement of Profit and Loss:
(a) Provision for income-tax account
(b) Advance payment of income-tax account
(c) Liability for taxation account

Declaration of Dividend out of Reserves

In the event of inadequacy or absence of profits in any year, a company may declare
dividend out of General Reserve subject to the fulfilment of the following conditions:
1. Maximum dividend rate = average rate of dividend declared in the three preceding years
(not applicable if no dividend declared during all three preceding years)
2. Maximum amount drawn = 10% of paid-up share capital and free reserves*
3. Amount drawn to be first used to set off current year loss before declaration of dividend
4. Balance of reserves after withdrawal cannot fall below 15% of paid-up share capital*
* as per the latest audited financial statements

Question 2.6
Due to inadequacy of profits during the year ended 31 March 2024, XYZ Ltd. proposes to
declare 10% dividend out of general reserves. From the following particulars, ascertain the
amount that can be utilised from general reserves.
₹
17,500 9% preference shares of ₹100 each, fully paid-up 17,50,000
8,00,000 equity shares of ₹10 each, fully paid-up 80,00,000
General reserves as on 1 April 2023 25,00,000
Capital reserves as on 1 April 2023 3,00,000
Revaluation reserves as on 1 April 2023 3,50,000
Net profit for the year ended 31 March 2024 3,00,000

Average rate of dividend declared during the preceding five years was 12%.

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 2: Preparation of Financial Statements for Companies

Managerial remuneration payable by public companies having adequate profits

Such net profit is calculated as per Section 198 of the Companies Act, 2013 (see next page)

Managerial remuneration payable by public companies having no profit or inadequate

profits (Without approval of the Central Government, under normal circumstances)

Where the effective capital** is (₹) Limit of yearly remuneration

payable shall not exceed* (₹)
(i) Negative or less than 5 crores 60 lakhs
(ii) 5 crores and above but less than 100 crores 84 lakhs
(iii) 100 crores and above but less than 250 crores 120 lakhs
(iv) 250 crores and above 120 lakhs plus 0.01% of the
effective capital in excess of ₹250
crores
* Remuneration above these limits may be paid if shareholders pass a special resolution

** Effective capital means:

Paid-up share capital (excluding share application money or advances against shares)
(+) Share premium account
(+) Reserves and surplus (excluding revaluation reserve)
(+) Long-term loans/ deposits repayable after one year (excluding working capital
loans, overdrafts, interest on loans, bank guarantee, other short-term arrangements)

(-) Investments (except in case of an investment company)

(-) Accumulated losses and preliminary expenses not written off

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 2: Preparation of Financial Statements for Companies

Question 2.7
The following extract of the Balance Sheet of X Ltd. for the year ended 2024 was obtained:
Authorised capital: ₹
20,000 14% preference shares of ₹100 each 20,00,000
2,00,000 equity shares of ₹100 each 2,00,00,000
2,20,00,000
Issued and subscribed capital:
15,000 14% preference shares of ₹100 each full paid-up 15,00,000
1,20,000 equity shares of ₹100 each, ₹80 paid-up 96,00,000
Share suspense account 20,00,000
Capital reserves (₹1,50,000 is Revaluation reserve) 1,95,000
Securities premium 50,000
15% debentures (secured) 65,00,000
Public deposits (unsecured) 3,70,000
Cash credit loan from SBI (short-term) 4,65,000
Trade payables 3,45,000

Assets:
Investment in shares, debentures, etc. 75,00,000
Profit and loss account 15,25,000
Share suspense account represents application money received on shares, the allotment of
which is not yet made.
You are required to determine the maximum managerial remuneration payable by the
company assuming:
(a) X Ltd. is not an investment company
(b) X Ltd. is an investment company

Computation of Net Profit under Section 198

GROSS PROFIT

ADD: Credit allowed

(+) bounties and subsidies received from any Government
(+) profit on sale of depreciable asset limited to original cost less WDV

Credits not allowed

(x) capital profit (e.g. profit on sale of undertaking, profit on sale of investment)
(x) revaluation profit
(x) premium on issue or sale of shares/ debentures
(x) profit on sale of forfeited shares

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 2: Preparation of Financial Statements for Companies

LESS: Debits allowed

(-) usual working charges
(-) directors’ sitting fee
(-) bonus/ commission to company staff
(-) interest on debentures, mortgages, loans and advances
(-) repairs to property (excluding repairs of a capital nature)
(-) loss on sale of depreciable assets limited to WDV less sale proceeds
(-) charitable contribution (as allowed under Section 181)
(-) depreciation (to the extent specified under Schedule II)
(-) compensation/ damages as per law (excludes voluntary/ ex-gratia compensation)
(-) insurance premium/ charges for meeting any legal liability
(-) bad debts written off/ adjusted
(-) prior period losses not yet deducted

Debits not allowed

(x) income-tax paid/ payable
(x) managerial remuneration
(x) provisions (e.g. tax provision, provision for doubtful debts, proposed dividend)
(x) revaluation loss
(x) capital loss (e.g. loss on sale of undertaking, loss on sale of investment, scientific
research capital expenditure, preliminary expenses)

Question 2.8
From the following particulars of Ganga Limited, you are required to calculate the maximum
managerial remuneration payable in the following situations:
(a) There is only one whole time director
(b) There are two whole time directors
(c) There are two whole time directors, a part time director and a manager
₹
Net profit before provision for income-tax and managerial
remuneration, but after depreciation and provision for repairs 8,70,410
Depreciation provided in the books 3,10,000
Provision for repairs of machinery during the year 25,000
Depreciation allowable under Schedule II 2,60,000
Actual expenditure incurred on repairs during the year 15,000

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 2: Preparation of Financial Statements for Companies

Question 2.9
Following is the draft Profit and Loss A/c of Mudra Ltd. for the year ended 31 March 2024:

₹ ₹
To Administrative, selling, and By Balance b/d 5,72,350
distribution expenses 8,22,542 By Balance from Trading A/c 40,25,365
To Directors’ fees 1,34,780 By Govt. subsidies received 2,73,925
To Interest on debentures 31,240
To Managerial remuneration 2,85,350
To Depreciation 5,22,543
To Provision for taxation 12,42,500
To General Reserve 4,00,000
To Investment reval. reserve 12,500
To Balance c/d 14,20,185
48,71,640 48,71,640

Depreciation on fixed assets as per Schedule II was ₹5,75,345. You are required to
determine if the managerial remuneration charged by the company is within the legally
permissible limit.

Question 2.10
From the following information given by Swatantra Ltd. for the year ended 31 March 2024,
calculate the commission payable to the Managing Director and the other directors of the
company, fixed @ 5% and 2%, respectively, on the profit of the company before charging
their commission.

₹ ₹
Salaries and wages 20,00,000 Gross profit 51,00,000
Rent, rates and taxes 4,50,000 Govt. bounties and subsidies 1,00,000
Repairs and renewals 60,000 Profit on sale of fixed assets 80,000
Miscellaneous expenses 1,40,000 Premium on issue of shares 20,000
Workmen compensation (incl. Profit on sale of forfeited
₹10,000 legal compensation) 25,000 shares 10,000
Interest on bank overdraft 40,000
Interest on debentures 50,000
Directors’ fees 18,000
Donation 35,000
Depreciation 1,00,000
Loss on sale of investments 25,000
Development rebate reserve 1,00,000
Provision for taxation 10,00,000

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 2: Preparation of Financial Statements for Companies

Transfer to general reserve 1,50,000

Balance c/d 11,17,000
53,10,000 53,10,000

Additional information:
₹
Original cost of the fixed assets sold 1,90,000
Sale proceeds of the fixed assets sold 2,20,000
Donation allowable under Section 181 25,000
Depreciation allowable under Schedule II 80,000

◼◼◼

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 3: Liquidation of Companies

Liquidator’s Final Statement of Account

Receipts Payments (in prescribed order)

(i) Amount realised on sale of assets, (i) Secured creditors
including surplus from securities (ii) Legal charges/ liquidation expenses
pledged in favour of secured (iii) Liquidator’s remuneration
creditors (iv) Creditors having floating charge on the
(ii) Amount from delinquent directors/ assets [typically debentures, including
other officers interest up to:
(iii) Calls-in-arrears - Date of winding up (if insolvent)
(iv) Uncalled equity capital - Date of payment (if solvent)]
(v) Uncalled preference capital (v) Preferential creditors (unsecured)*
(vi) ‘B’ List contributories’ contribution (vi) Other unsecured creditors
(see page 28) (vii) Calls-in-advance on preference shares
(vii) Trading receipts, net of: (viii) Arrears of preference dividend
- Cost of redemption of securities (ix) Preference share capital
- Cost of execution (x) Calls-in-advance on equity shares
- Trading payments (xi) Equity share capital

* Preferential creditors
(a) Taxes, cesses/ rates payable to Govt. or local authority within 12 months before the
date of winding up
(b) Employee’s wages, salaries & commission for 4 months’ service within above
12-month period (excludes director, manager, secretary, assistant secretary, etc.)
(c) Accrued holiday remuneration payable to employees
(d) Contributions under Employees’ State Insurance Act within the 12-month period
(e) Compensation due under Workmen’s Compensation Act
(f) Sums due to employees from a provident/ pension/ gratuity/ other welfare fund
(g) Expenses of any investigation payable by the company

Question 3.1
From the following particulars of creditors other than secured creditors of a company in
liquidation, calculate the amount of unsecured and preferential creditors:
₹ ₹
Trade creditors 4,26,600 Peon’s salary for 4 months 18,000
Workers’ PF 33,000 Director’s fee for 4 months 24,000
Gas board for gas supplied 1,260 Income-tax due 30,000
Local taxes (city corporation) 30,000 Compensation under
Clerk’s salary for 6 months 90,000 Workmen’s Compensation Act 27,000

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 3: Liquidation of Companies

Liquidator’s remuneration as a % of amount paid to unsecured creditors

(i) If amount available is sufficient to make full payment of unsecured creditors

Liquidator’s remuneration = Amount due to unsecured creditors x Commission %

100

(ii) If amount available is not sufficient to make full payment of unsecured creditors

Liquidator’s remuneration = Amount available for unsecured creditors x Commission %

100 + Commission %
For the purpose of computing such commission, preferential creditors are also regarded as
unsecured creditors, unless otherwise specified.

Question 3.2
The Liquidator of a company is entitled to remuneration of 2% on assets realised and 3% on
the amount distributed to unsecured creditors. The assets realised ₹10,00,000. Amount
available for distribution to unsecured creditors before paying Liquidator’s remuneration is
₹2,06,000. Calculate Liquidator’s remuneration, and also specify the pro-rata payment
percentage to unsecured creditors (where applicable), if:
(a) The aggregate unsecured creditors amount to ₹1,60,000.
(b) The aggregate unsecured creditors amount to ₹5,00,000.

Question 3.3
A Liquidator is entitled to receive remuneration at 2% on the assets realised, and 3% on the
amount distributed among unsecured creditors. The assets realised ₹70,00,000 against
which payment was made as follows:
(a) Liquidation expenses ₹50,000
(b) Preferential creditors ₹1,50,000
(c) Secured creditors ₹40,00,000
Amount due to other unsecured creditors was ₹30,00,000. Calculate the total remuneration
payable to the Liquidator and specify how payment to unsecured creditors will be made.

Question 3.4
A limited company went into voluntary liquidation with the following liabilities:

₹
Trade creditors 12,000
Bank overdraft 20,000

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 3: Liquidation of Companies

10,000 preference shares of ₹10 each, ₹7 called-up 70,000

10,000 equity shares of ₹10 each, ₹9 called-up 90,000
Less: Calls-in-arrears (2,000) 88,000
Calls-in-advance on preference shares 24,000
Calls-in-advance on equity shares 4,000 28,000

The assets realised ₹2,00,000 and the calls-in-arrears were collected in full. Expenses of
liquidation amounted to ₹2,000 and Liquidator’s remuneration was ₹3,000. Prepare the
Liquidator’s Final Statement of Account and indicate the amount payable on each share.

Question 3.5

The following particulars relate to a limited company which has gone into voluntary
liquidation. You are required to prepare the Liquidator’s Final Statement of Account allowing
for his remuneration @ 2% on the amount realised on assets and 2% on the amount
distributed to unsecured creditors other than preferential creditors.

Particulars ₹
Preferential creditors 70,000
Other unsecured creditors 2,24,000
Debentures 75,000

The assets realised the following sums: ₹

Cash in hand 20,000
Land and buildings 1,30,000
Plant and machinery 1,10,500
Fixtures and fittings 7,500

The liquidation expenses amounted to ₹2,000. A call of ₹2 per share on the partly paid
10,000 equity shares was made and duly received except in case of one shareholder owning
500 shares.

Question 3.6
Following are the ledger balances of Unfortunate Limited as on 31 December 2023:

Credit balances ₹ Debit balances ₹

4,000 6% Pref. shares of ₹100 each 4,00,000 Land and buildings 2,00,000
2,000 shares of ₹100 each, ₹75 paid-up 1,50,000 Plant and machinery 5,00,000
6,000 shares of ₹100 each, ₹60 paid-up 3,60,000 Patents 3,20,000
5% Debentures (floating charge) 2,00,000 Stock 1,10,000
Interest outstanding (floating charge) 10,000 Sundry debtors 2,20,000
Creditors 2,90,000 Cash at bank 60,000

14,10,000 14,10,000

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 3: Liquidation of Companies

The company went into liquidation on that date. The dividends on preference shares were in
arrears for two years, which are payable on liquidation. Creditors include a loan of
₹1,00,000 with mortgage on land and building. The assets realised as under:

₹
Land and buildings 2,40,000
Plant and machinery 4,00,000
Patents 60,000
Stock 1,20,000
Debtors 1,60,000

The expenses of liquidation amounted to ₹21,800. The Liquidator is entitled to a

commission of 3% on all assets realised (except cash at bank) and 2% on the amount
distributed among unsecured creditors. Preferential creditors amount to ₹30,000. All
payments were made on 30 June 2024.
Prepare the Liquidator’s Final Statement of Account.

Question 3.7

Following are the ledger balances of Asco Limited as on 31 March 2024:

Credit balances ₹ Debit balances ₹
1,000 6% Pref. shares of ₹100 each 1,00,000 Machinery 4,90,000
2,000 shares of ₹100 each, fully paid 2,00,000 Furniture 10,000
2,000 shares of ₹100 each, ₹75 paid-up 1,50,000 Stock 1,20,000
Bank loan (secured on stock) 1,00,000 Debtors 2,40,000
Creditors 3,50,000 Cash at Bank 50,000
Income-tax payable 10,000

9,10,000 9,10,000

The company went into liquidation on 1 April 2024. The assets realised as under:

₹
Machinery 1,66,000
Furniture 8,000
Stock 1,10,000
Debtors 2,30,000

The expenses of liquidation amounted to ₹4,000. The Liquidator is entitled to a commission

of 2% on the amount paid to unsecured creditors excluding preferential creditors. Calls on
partly paid shares were made based on the expectation of full receipts except on 200 shares
belonging to a shareholder who is no longer traceable.
Prepare the Liquidator’s Final Statement of Account.

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 3: Liquidation of Companies

Question 3.8
Bekar Ltd. went into voluntary liquidation. It has the following equity share capital:
(a) Class A—2,000 shares of ₹100 each, ₹75 paid-up
(b) Class B—1,600 shares of ₹100 each, ₹60 paid-up
(c) Class C—1,400 shares of ₹100 each, ₹50 paid-up
The amount available for equity shareholders after payment of preference share capital and
other dues is only ₹61,000. Compute the amount receivable or returnable per equity share.

Question 3.9
A company went into liquidation with the following details.
Assets realised ₹7,00,000; Liquidation expenses ₹12,600; Creditors (including salaries of
staff ₹8,400) ₹95,200; Share capital consists of 7,000 6% preference shares of ₹30 each
(one year dividends are in arrears) ₹2,10,000; 14,000 equity shares of ₹10 each, ₹9 called
up and paid up, ₹1,26,000; Commission is 3% on assets realised and 2% on amount paid to
shareholders. Under the articles, in addition to arrears of dividend, preference shareholders
are entitled to receive one-third of the surplus remaining after repaying the equity capital.
Prepare the Liquidator’s Final Statement of Account.

Contributory: every person liable to contribute to the assets of a company in the event
of its being wound up, and includes a holder of fully paid-up shares (included for
procedural/ documentation purposes only; financial liability is nil).
‘A’ List of contributories includes present members.
‘B’ List of contributories includes shareholders who transferred partly paid shares
(otherwise than by operation of law or by death) within one year prior to the date of
winding up, who may be called upon to pay an amount (not exceeding the amount not
called up when the shares were transferred) to pay off such creditors as existed on
the date of transfer of shares. Their liability will crystallise only:
(a) When the existing assets available with the liquidator are not sufficient to cover the
liabilities; and
(b) When the existing shareholders fail to pay the amount due on the shares to the
liquidator.

Question 3.10
Pessimistic Ltd. went into liquidation on 10 May 2024. The details of members who have
ceased to be members within the year ended 31 March 2024 are given below. The debts
that could not be paid out of realisation of assets and contribution from present members
(‘A’ contributories) are also given with their date-wise break up.

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Unit 3: Liquidation of Companies

Name of No of Date of transferor Creditors

transferor shares ceasing to be a remaining unpaid
shareholder transferred member & outstanding* (₹)
P 1,000 20 April 2023 3,000
Q 1,200 15 May 2023 5,000
R 1,500 18 September 2023 9,200
S 800 24 December 2023 10,500
T 500 12 March 2024 11,000
* At the time of the transferor ceasing to be a member
Shares are of ₹10 each, ₹6 per share paid up. You are required to determine the amount
realisable from each person.

Question 3.11
Liquidation of YZ Ltd. commenced on 2 April 2024. Certain creditors could not receive
payments out of the realisation of assets and out of the contributions from ‘A’ List
contributories. Following are details of certain transfers which took place in 2023 and 2024:

Name of No of Date of transferor Creditors

transferor shares ceasing to be a remaining unpaid
shareholder transferred member & outstanding* (₹)
A 2,000 1 March 2023 5,000
B 1,500 1 May 2023 3,300
C 1,000 1 October 2023 4,300
D 500 1 November 2023 4,600
E 300 1 February 2024 6,000
* At the time of the transferor ceasing to be a member
All the shares were of ₹10 each, ₹8 per share paid-up. You are required to determine the
amount realisable from each person.

◼◼◼

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 4: Valuation of Goodwill and Shares

Goodwill
Goodwill is an intangible asset that represents the present value of a firm’s anticipated
excess earnings. In the words of Spices and Pegler, “Goodwill may be said to be that
element arising from the reputation, connection, or other advantages possessed by a
business which enables it to earn greater profits than the return normally to be expected on
the capital represented by the net tangible assets employed in the business.” The two
common circumstances in which the valuation of goodwill takes place are:
a) Acquisition of a business: When one company purchases another company, any
excess payment made over the fair value of the acquired company’s identifiable net
assets is recognised as goodwill; and
b) Consolidation of subsidiaries: When a parent company owns controlling interest in
one or more subsidiaries, the value of the subsidiaries' net assets is consolidated; if
the consolidated value exceeds the price paid for acquiring the subsidiaries, the
excess is recognised as goodwill.

Since goodwill of a business represents its capacity to earn above normal profits, all
factors that contribute to such profits influence the value of goodwill. Key factors include:
a) Favourable location;
b) Brand recognition (a strong and recognisable brand that commands customer loyalty);
c) Customer relationships (a loyal customer base and long-term customer relationships);
d) Ownership of intellectual property (patents, copyrights, trademarks, or proprietary
technology that provide a competitive advantage);
e) Experienced and efficient management, talented and skilled workforce;
f) Record of past profits;
g) Other factors such as favourable market position, industry trends, overall economic
climate, political stability, government policies, trade cycle, future prospects, etc.

Goodwill—Average Profit Method

a) Adjusted profits* of agreed no. of pre-valuation years are averaged (simple/ weighted)
b) Goodwill = ‘x’ years’ purchase of average profit (multiplication)
(‘x’ represents no. of years’ benefit from past association expected to be derived)

* Computation of adjusted/ future/ maintainable profit

Profits xxx
(+) Abnormal losses/ expenses not likely to recur xx
(+) Likely future profits, e.g. from new line of business xx
(-) Expenses not provided earlier but to be incurred in the future (xx)
(-) Profits not likely to recur (xx)_
Adjusted profit xxx_

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Unit 4: Valuation of Goodwill and Shares

Question 4.1
P Ltd. proposed to purchase the business carried on by Mr. R. For this purpose, goodwill is
agreed to be valued at three years’ purchase of the (i) simple average profits and
(ii) weighted average profits of the past four years. The appropriate weights to be used are:
2021—1 2022—2 2023—3 2024—4
The profits (in ₹) for these years are:
2021—1,01,000 2022—1,24,000 2023—1,00,000 2024—1,50,000

On a scrutiny of the accounts, the following observations were made:

(a) On 1 September 2023, a major repair of ₹30,000 was made to the plant, the amount
being charged to revenue. Plant is depreciated at 10% using the WDV method.
(b) The closing stock for 2022 was over-valued by ₹12,000.
(c) Additional management cost of ₹24,000 p.a. is expected to be incurred from 2025.
Compute the value of goodwill of Mr. R’s firm.

Goodwill—Capitalisation of Average Profit Method

a) Ascertain average adjusted/ future/ maintainable profit
b) Capitalise this profit at the suitable rate of return for the business under consideration
c) Compute net tangible assets (assets, excluding fictitious assets, less outside liabilities)
d) Goodwill = difference between (b) and (c)

Question 4.2

Ascertain the value of goodwill of Q Ltd. carrying on business as retail traders from the
following information (as on 31 December 2023) according to capitalisation method:

Credit balances ₹ Debit balances ₹

Equity shares (₹100 each) 2,50,000 Goodwill 25,000
Surplus account 56,650 Land and building 1,10,000
Bank overdraft 58,350 Plant and machinery 1,00,000
Sundry creditors 90,500 Stock 1,50,000
Provision for taxation 19,500 Book debts 90,000
4,75,000 4,75,000

The company’s profits before tax (in ₹) were as follows:

2019: 61,000 2020: 64,000 2021: 71,500 2022: 78,000 2023: 85,000
You may assume that income-tax at the rate of 50% was payable on these profits. The
average dividend paid by the company for the four years is 10%, which is considered a
reasonable return on the capital invested in the business.

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Unit 4: Valuation of Goodwill and Shares

Goodwill—Super Profit Method

a) Capital employed
= Fixed assets + Trade investments + Current assets – Debentures – Current liabilities
= Paid-up capital + Reserves and surplus – Fictitious assets – Non-trading investments
b) Average capital employed
= 1/2 (capital employed at the beginning + capital employed at the end of the year)
= Capital employed at the end of the year – 1/2 (current year’s profit after tax)
= Capital employed at the beginning of the year + 1/2 (current year’s profit after tax)
c) Normal profit = Normal rate of return x Capital employed or Average capital employed
d) Super profit = Average profit – Normal profit
e) Goodwill = ‘x’ years’ purchase of super profit (multiplication)

Question 4.3
Compute the average capital employed from the following information as on 31 March 2024:

Credit balances ₹ lakhs Debit balances ₹ lakhs

Equity shares (₹10 each) 50.00 Land and building 25.00
9% preference shares 10.00 Plant and machinery 80.25
General reserve 12.00 Furniture and fixtures 5.50
Surplus account 20.00 Vehicles 5.00
16% debentures 5.00 Investments 10.00
16% term loan 18.00 Stock 6.75
Cash credit 13.30 Debtors 4.90
Sundry creditors 2.70 Cash and bank 10.40
Provision for taxation 6.40 Preliminary expenses 0.50
Proposed dividend 10.90
148.30 148.30
Non-trade investments were 20% of the total investments. Balances as on 1 April 2023 were
as follows: Surplus account—₹8.70 lakhs; General reserve—₹6.50 lakhs

Question 4.4

Following particulars are available in respect of the business carried on by a trader:

(a) Profits earned for three years (in ₹):
2021-22: 2,00,000 2022-23: 2,40,000 2023-24: 2,20,000

(b) Normal rate of return = 10%

(c) Capital employed = ₹12,00,000
(d) Profit of 2022-23 included non-recurring income of ₹6,000.
(e) Profit of 2021-22 was reduced by ₹10,000 due to stock destroyed by fire.
(f) Profit of 2023-24 includes income of ₹4,000 from non-trading investment.
(g) During 2022-23, closing stock was under-valued by ₹10,000.

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Unit 4: Valuation of Goodwill and Shares

(h) The stock is not insured and it is thought prudent to insure the stock in future at an
annual premium of ₹3,000.
Compute the value of goodwill at five years’ purchase of super profits.

Question 4.5
From the following particulars as on 31 March 2024, compute the value of goodwill on the
basis of three years’ purchase of super profits:

Credit balances ₹ Debit balances ₹

Equity shares (₹10 each) 2,50,000 Buildings 1,50,000
10% preference shares 50,000 Plant and machinery 2,00,000
Surplus account (1.4.2023) 30,000 Investment @ 8% p.a. 50,000
Profit for FY 22-23 (before tax) 1,70,000 Stock 40,000
Creditors 20,000 Debtors 60,000
Cash 20,000
5,20,000 5,20,000

(a) The building is worth ₹3,00,000.

(b) Profits before tax for the last three years have shown an increase of ₹30,000 annually.
(c) Investments are non-trading in nature.
(d) Normal rate of return is 12.5% p.a.
(e) Taxation may be assumed at 40%.

Question 4.6
Negotiations are on for transfer of X Ltd. on the basis of its Balance Sheet as on
31 March 2024 and the additional information that follows:

Credit balances ₹ Debit balances ₹

Equity Shares (₹10 each) 10,00,000 Goodwill 1,00,000
Reserves and surplus 4,00,000 Land and building 3,00,000
Creditors 3,00,000 Plant and machinery 8,00,000
Investment 1,00,000
Stock 2,00,000
Debtors 1,50,000
Cash and bank 50,000
17,00,000 17,00,000

Profit before tax for 2023-24 was ₹6,00,000 including ₹10,000 as interest on non-trading
investment. Henceforth, an additional amount of ₹50,000 p.a. shall be required to be spent
for smooth running of the business.
Market values of Land and buildings and Plant and machinery are estimated at ₹9,00,000
and ₹10,00,000 respectively. In order to match the above figures, further depreciation to the

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Unit 4: Valuation of Goodwill and Shares

extent of ₹40,000 should be taken into consideration. Income-tax rate may be taken at 50%.
Return on capital at the rate of 20% before tax may be considered normal for this business
at the present stage.
It has been agreed that four years’ purchase of super profit shall be taken as the value of
goodwill for the purpose of the deal. Compute the goodwill of the company.

Goodwill—Capitalisation of Super Profit Method

Goodwill = ____Super Profit_____ x 100
Normal Rate of Return

Goodwill—Annuity Method
Goodwill = Super profit x Present value of an annuity of Re. 1 for ‘x’ no. of years
at the normal rate of return

Question 4.7
Consider question 4.4 and re-compute goodwill under the following methods:
(a) Capitalisation of super profit method
(b) Annuity method
It is provided that the present value of an annuity of ₹1 for five years at 10% is 3.78.

Valuation of Shares
There are many circumstances in which a valuation of shares (other than par value) may
be required, especially when such shares are not quoted on a stock exchange, such as:
a) When amalgamation or absorption of companies takes place;
b) When a private company decides to offer its shares to the public for the first time;
c) When a company establishes a plan to provide stock ownership to its employees;
d) When one class of shares is converted into another class;
e) When a company is nationalised or privatised;
f) When shares are to be provided as security for loans and advances;
g) For shareholder disputes or legal proceedings involving shares;
h) When a block of shares is purchased or sold; or
i) For tax computation or regulatory reporting purposes.

Valuation of shares is influenced by various factors that can vary depending on the specific
company and market conditions. General factors include profitability, revenue growth,
earnings stability, future cash flows, dividend policy, industry factors (market demand,
competition, regulatory environment, and economic trend), management reputation, risk
factors (volatility, debt, and operational risks), investor sentiment, and market perception.

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Unit 4: Valuation of Goodwill and Shares

Shares—Intrinsic Value Method

a) Intrinsic value of equity share = Net value of assets available for equity shareholders
Number of equity shares
b) Net value of assets available for equity shareholders = Net value of assets available to
shareholders – Amounts payable to preference shareholders
c) Net value of assets available to shareholders = Market value of assets – external
liabilities (excludes fictitious assets)

Question 4.8
On 31 March 2024, ledger balances taken from the books of Menon Ltd. were as follows:

Credit balances ₹ Debit balances ₹

Equity capital (₹100 each) 5,00,000 Land and buildings 2,20,000
Surplus account 1,03,000 Plant and machinery 95,000
Bank overdraft 20,000 Stock 3,50,000
Creditors 77,000 Sundry debtors 1,55,000
Provision for taxation 45,000
Proposed dividend 75,000
8,20,000 8,20,000

In view of the nature of the business, it is considered that 10% is a reasonable return on
tangible capital. However, the net profits of the company after taxation were as under:
2019-20: 85,000 2020-21: 96,000 2021-22: 90,000
2022-23: 1,00,000 2023-24: 95,000
On 31 March 2024, Land and building was valued at ₹2,50,000 and Plant and machinery at
₹1,50,000. After considering goodwill based on five years’ purchase of the super profits,
value the shares of the company.

Question 4.9

Your client intends to invest not more than ₹15,000 in equity shares of Iron Foundry Ltd. and
wants you to advise him the maximum number of shares he can expect to acquire with the
said amount on the basis of the following information available with him:
₹
6% preference shares of ₹100 each 5,00,000
Equity shares of ₹10 each 3,00,000
The average net profit of the business is ₹57,000. Expected normal yield is 7% in case of
such equity shares.
Total tangible assets (other than goodwill) are ₹9,49,000 and total outside liabilities are
₹95,000. Goodwill is calculated at five years’ purchase of the super profits, if any.

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Unit 4: Valuation of Goodwill and Shares

Shares—Yield Method/ Earnings Capacity Method

a) Value of share = Expected/ possible rate of return x Paid-up value of share
Normal rate of return
b) Rate of return could be the rate of dividend (suitable for acquiring a non-controlling
portion of shares) or the rate of earning (for acquiring a controlling portion of shares) =
Profit available for equity shareholders x 100
Paid-up equity capital

Shares—Fair Value Method

Value of share = Value of share on net asset basis + Value of share on earnings basis
2

Question 4.10
Compute the value of an equity share of each of the following companies: (a) when a few
shares are sold and (b) when controlling interest is sold. Following information is furnished:
Company A (₹) Company B (₹)
Profit after tax 10,00,000 10,00,000
12% Preference Shares of ₹100 each 10,00,000 20,00,000
Equity shares of ₹10 each 50,00,000 40,00,000
Assume that market expectation is 15%, and 80% of profits are distributed.

Question 4.11
Following are the liabilities and assets of Desai Pvt. Ltd. as on 31 December 2023:

Credit balances ₹ Debit balances ₹

Equity capital (₹10 each) 1,00,000 Land and buildings 70,000
General reserve 50,000 Plant and machinery 70,000
Surplus account 30,000 Trademarks 20,000
Provision for taxation 20,000 Stock 20,000
Workmen’s compensation fund 20,000 Debtors 48,000
Creditors 40,000 Cash 25,000
Preliminary expenses 7,000
2,60,000 2,60,000

The Plant and machinery is worth ₹60,000 and Land and buildings are worth ₹1,30,000 as
valued by an independent valuer. ₹5,000 of the debtors is taken to be bad. The profits of
the company were:
2021: 50,000 2022: 60,000 2023: 70,000
It is the practice of the company to transfer 20% of the profits to reserve.

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Unit 4: Valuation of Goodwill and Shares

Compute the value of the company’s shares under the fair value method if shares of similar
companies quoted in the stock exchange yield a return of 12%. Goodwill of the company
may be taken at ₹1,00,000.

Right Issue
Right issue means offering shares to existing members in proportion to their existing
shareholding. The objective of a right issue is to ensure equitable distribution of shares.
Shares under a right issue are usually offered at a price lower than the prevalent market
price. A shareholder who is short of funds can renounce his right to a specified number of
shares by selling his right to a third-party subscriber of shares.

Value of Right = Cum-right market price – Issue price of new share__

No. of existing shares required for one right share + 1
Value of Ex-Right Share = (Cum-right market price x No. of shares required) + Issue price
No. of existing shares required for one right share + 1
= Cum-right market price – Value of right

Question 4.12
A company offers to its shareholders the right to buy one share of ₹20 each at ₹41 for every
two shares held. The company declared a dividend of ₹3 for the last year. After the
declaration of dividend and recommendation of the right, the shares are quoted at a price of
₹53 cum-dividend and cum-right. Calculate the value of the right.

Question 4.13
Nitin Ltd. decided to make a right issue in the proportion of one new share of ₹200 each at a
premium of ₹50 each to the shareholders for every three existing shares. The market value
of the shares at the time of announcement of right issue is ₹500 each. Calculate the value
of right and ex-right value of a share.

◼◼◼

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Financial Accounting (BIAF101-1) – 1st Semester B.Com. (International Accountancy and Finance)

Unit 5: Fundamental International Accounting Standards and Recent Trends

Regulatory Framework
The International Accounting Standards Board (IASB) is responsible for the development
and publication of international accounting standards. In 1999, the then board of the
International Accounting Standards Committee recommended and later adopted a new
constitution and structure. As a result, the IASB was established in 2001. The main
objectives of the IASB are:
a) To develop a single set of understandable and enforceable global accounting standards
which of are high quality.
b) To require high quality, transparent and comparable information in financial statements
to help users in making economic decisions.
c) To promote the use and application of these standards.
d) To bring about convergence of national accounting standards and international
accounting standards.

The IASC Foundation, the IASB, and the accountancy profession itself together do not have
the power to enforce compliance with the International Financial Reporting
Standards (IFRSs). However, some countries do adopt the IFRSs as their local standards,
with others ensuring that there is no significant difference between their standards and IFRs.
Over the last decade or so, the profile and status of the IASB has increased with the result
being a commensurate increase in the persuasive force of the IFRSs globally.

Accounting standards by themselves would not be a sufficient regulatory framework. Legal

and market regulations are also required to ensure the full regulation of both the preparation
and publication of financial statements. A regulatory framework is desirable because:
a) Financial statements are based on principles and rules that can vary significantly from
country to country. There is also a wide range of users of these financial statements
(for example, investors, lenders, customers, government). Preparation of accounts
based on different principles makes it difficult, if not impossible, for investors to analyse
and interpret the information. A regulatory framework would ensure consistency in
financial reporting.
b) The information needs to be comparable, as without this quality the credibility of the
financial reports would be undermined. This could have a negative impact on
investment. A regulatory framework would increase the users’ understanding of and
confidence in the financial statements.
c) Increasingly, globalisation has resulted in trans-national financing, foreign direct
investment, and securities trading. Thus, a single set of rules for the measurement and
recognition of assets, liabilities, income, and expenses is required.
d) A regulatory framework would also regulate the behaviour of companies towards their
investors, protecting the users of the financial statements. It would help ensure that the
financial statements give a true and fair view of the company’s financial performance
and position.

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Unit 5: Fundamental International Accounting Standards and Recent Trends

Conceptual Framework
A conceptual framework can be defined as a coherent system of interrelated objectives and
fundamental principles. It is framework which prescribes the nature, function, and limits of
financial accounting and financial statements. It can be thought of as an outline of the
generally accepted principles which form the theoretical foundation for financial reporting.

The IASB follows a principles-based approach to financial reporting as opposed to a

rules-based approach. These principles provide the basis for both the development of new
accounting standards and an appraisal of the standards already in issue.

There are a number of arguments in favour of having a conceptual framework:

a) It allows both accounting standards and generally accepted accounting practice (GAAP)
to be developed in line with agreed principles. It would be extremely difficult to attempt
to address all technical issues that would satisfy the needs of every user.
b) It helps avoid a situation where accounting standards are developed in an ad hoc and
piecemeal fashion, as a kneejerk response to specific problems and/or abuses. This
sort of “fire-fighting” can lead to inconsistencies between different accounting standards.
c) The conceptual framework enables critical issues to be addressed. For example, until
relatively recently, no accounting standard contained a definition of basic terms such as
“asset” or “liability”.
d) With certain types of transactions becoming more complex over the years, a conceptual
framework aids accountants and auditors to deal with transactions not covered per se
by an accounting standard. It can give guidance of the general principles on how
transactions should be recorded and presented in the financial statements.
e) Where a conceptual framework exists, an issue not yet covered by an accounting
standard can be dealt with temporarily by providing an interim approach until a specific
standard is issued.
f) It is believed that standards that are based on principles are more difficult to circumvent
than a rules-based approach (the “cookbook” approach).
g) It makes it less likely that the standard setting process can be influenced or even
hijacked by vested interests, for example large corporations or business sectors. This
enhances the credibility of the IFRSs and the accounting profession.

The “Framework for the Preparation and presentation of Financial Information” is a

conceptual accounting framework that sets out the concepts and principles that underpin the
preparation and presentation of financial statements for external users. It applies to the
financial statements of both private and public entities. It comprises of: the objective of
financial statements, underlying assumptions, the qualitative characteristics of financial
statements, the elements of financial statements, recognition of the elements of financial
statements, measurement of the elements of financial statements, and concepts of capital
and capital maintenance.

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Unit 5: Fundamental International Accounting Standards and Recent Trends

IAS 1 — Presentation of Financial Statements

Objective
The objective of IAS 1 is to prescribe the basis for presentation of general purpose financial
statements, to ensure comparability both with the entity’s financial statements of previous
periods and with the financial statements of other entities. IAS 1 sets out the overall
requirements for the presentation of financial statements, guidelines for their structure and
minimum requirements for their content.

Objective of financial statements

The objective of general purpose financial statements is to provide information about the
financial position, financial performance, and cash flows of an entity that is useful to a wide
range of users in making economic decisions. To meet that objective, financial statements
provide information about an entity’s assets; liabilities; equity; income and expenses,
including gains and losses; contributions by and distributions to owners (in their capacity as
owners); and cash flows. That information, along with other information in the notes, assists
users of financial statements in predicting the entity’s future cash flows and, in particular,
their timing and certainty.

Components of financial statements

A complete set of financial statements includes:
a) a statement of financial position (balance sheet) at the end of the period
b) a statement of profit or loss and other comprehensive income for the period (presented
as a single statement, or by presenting the profit or loss section in a separate statement
of profit or loss, immediately followed by a statement presenting comprehensive income
beginning with profit or loss)
c) a statement of changes in equity for the period
d) a statement of cash flows for the period
e) notes, comprising a summary of significant accounting policies, other explanatory notes
f) comparative information prescribed by the standard

Fair presentation and compliance with International Financial Reporting Standards (IFRSs)
The financial statements must “present fairly” the financial position, financial performance,
and cash flows of an entity. Fair presentation requires the faithful representation of the
effects of transactions, other events, and conditions in accordance with the definitions and
recognition criteria for assets, liabilities, income, and expenses set out in the Conceptual
Framework for Financial Reporting. The application of IFRSs, with additional disclosure
when necessary, is presumed to result in financial statements that achieve a fair
presentation.

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IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that
compliance with an IFRS requirement would be so misleading that it would conflict with the
objective of financial statements set out in the Framework. In such a case, the entity is
required to depart from the IFRS requirement, with detailed disclosure of the nature,
reasons, and impact of the departure.

Going concern
The Conceptual Framework notes that financial statements are normally prepared assuming
the entity is a going concern and will continue in operation for the foreseeable future. IAS 1
requires management to make an assessment of an entity’s ability to continue as a going
concern. If management has significant concerns about the entity’s ability to continue as a
going concern, the uncertainties must be disclosed. If management concludes that the entity
is not a going concern, the financial statements should not be prepared on a going concern
basis, in which case IAS 1 requires a series of disclosures.

Accrual basis of accounting

IAS 1 requires that an entity prepare its financial statements, except for cash flow
information, using the accrual basis of accounting.

Consistency of presentation
The presentation and classification of items in the financial statements shall be retained from
one period to the next unless a change is justified either by a change in circumstances or a
requirement of a new IFRS.

Materiality and aggregation

Information is material if omitting, misstating, or obscuring it could reasonably be expected to

influence decisions that the primary users of general purpose financial statements make on
the basis of those financial statements, which provide financial information about a specific
reporting entity. Each material class of similar items must be presented separately in the
financial statements. Dissimilar items may be aggregated only if they are individually
immaterial. However, information should not be obscured by aggregating or by providing
immaterial information. Materiality considerations apply to the all parts of the financial
statements, and even when a standard requires a specific disclosure, materiality
considerations do apply.

Offsetting
Assets and liabilities, and income and expenses, may not be offset unless required or
permitted by an IFRS.

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Unit 5: Fundamental International Accounting Standards and Recent Trends

Comparative information
IAS 1 requires that comparative information to be disclosed in respect of the previous period
for all amounts reported in the financial statements, both on the face of the financial
statements and in the notes, unless another Standard requires otherwise. Comparative
information is provided for narrative and descriptive where it is relevant to understanding the
financial statements of the current period.

Reporting period
There is a presumption that financial statements will be prepared at least annually. If the
annual reporting period changes and financial statements are prepared for a different period,
the entity must disclose the reason for the change and state that amounts are not entirely
comparable.

IAS 2 — Inventories

Objective
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides
guidance for determining the cost of inventories and for subsequently recognising an
expense, including any write-down to net realisable value. It also provides guidance on the
cost formulas that are used to assign costs to inventories.

Scope
Inventories include assets held for sale in the ordinary course of business (finished goods),
assets in the production process for sale in the ordinary course of business (work in
process), and materials and supplies that are consumed in production (raw materials).
However, IAS 2 excludes certain inventories from its scope: work in process arising under
construction contracts, financial instruments, and biological assets related to agricultural
activity and agricultural produce at the point of harvest.

Fundamental principle of IAS 2

Inventories are required to be stated at the lower of cost and net realisable value (NRV).

Measurement of inventories

Cost should include: all costs of purchase (including taxes, transport, and handling) net of
trade discounts; costs of conversion (including fixed and variable manufacturing overheads);
and other costs incurred in bringing the inventories to their present location and condition.

Inventory cost should not include: abnormal waste, storage costs, administrative overheads
unrelated to production, selling costs, foreign exchange differences arising directly on the

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recent acquisition of inventories invoiced in a foreign currency, or interest cost when

inventories are purchased with deferred settlement terms.

For inventory items that are not interchangeable, specific costs are attributed to the specific
individual items of inventory. For items that are interchangeable, IAS 2 allows the FIFO or
weighted average cost formulas. The same cost formula should be used for all inventories
with similar characteristics as to their nature and use to the entity. For groups of inventories
that have different characteristics, different cost formulas may be justified.

Write-down to NRV

NRV is the estimated selling price in the ordinary course of business, less the estimated cost
of completion and the estimated costs necessary to make the sale. Any write-down to NRV
should be recognised as an expense in the period in which the write-down occurs. Reversal
should be recognised in the income statement in the period in which the reversal occurs.

IAS 16 — Property, Plant, and Equipment

Objective
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and
equipment. The principal issues are the recognition of assets, the determination of their
carrying amounts, and the depreciation charges and impairment losses to be recognised in
relation to them.

Recognition

Items of property, plant, and equipment should be recognised as assets when it is probable
that the future economic benefits associated with the asset will flow to the entity, and the
cost of the asset can be measured reliably. This recognition principle is applied to all
property, plant, and equipment costs at the time they are incurred. These costs include
costs incurred initially to acquire or construct an item of property, plant, and equipment, and
costs incurred subsequently to add to, replace part of, or service it.

Initial measurement
An item of property, plant, and equipment should initially be recorded at cost. Cost includes
all costs necessary to bring the asset to working condition for its intended use. This would
include not only its original purchase price but also costs of site preparation, delivery, and
handling, installation, related professional fees for architects and engineers, and the
estimated cost of dismantling and removing the asset and restoring the site.

If payment for an item of property, plant, and equipment is deferred, interest at a market rate
must be recognised or imputed. If an asset is acquired in exchange for another asset, the

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cost will be measured at the fair value. If the acquired item is not measured at fair value, its
cost is measured at the carrying amount of the asset given up.

Measurement subsequent to initial recognition

IAS 16 permits two accounting models:
a) Cost model: The asset is carried at cost less accumulated depreciation and impairment.
b) Revaluation model: The asset is carried at a revalued amount, being its fair value at the
date of revaluation less subsequent depreciation and impairment, provided that fair
value can be measured reliably.

Under the revaluation model, revaluations should be carried out regularly, so that the
carrying amount of an asset does not differ materially from its fair value at the balance sheet
date. Revalued assets are depreciated in the same way as under the cost model.

If a revaluation results in an increase in value, it should be accumulated in equity unless it

represents the reversal of a revaluation decrease of the same asset previously recognised
as an expense, in which case it should be recognised in profit or loss. A decrease arising as
a result of a revaluation should be recognised as an expense to the extent that it exceeds
any amount previously credited to the revaluation surplus relating to the same asset. When
a revalued asset is disposed of, any revaluation surplus may be transferred directly to
retained earnings (not through profit or loss), or it may be left in equity.

Depreciation
Depreciation should be charged to profit or loss. It begins when the asset is available for
use and continues until the asset is derecognised, even if it is idle.

For all depreciable assets, the depreciable amount (cost less residual value) should be
allocated on a systematic basis over the asset’s useful life. The depreciation method used
should reflect the pattern in which the asset’s economic benefits are consumed by the entity.

The residual value, useful life, and depreciation method should be reviewed at least at each
financial year-end and, if expectations differ from previous estimates, any change is
accounted for prospectively as a change in estimate.

Derecognition (retirements and disposals)

An asset should be removed from the statement of financial position on disposal or when it is
withdrawn from use and no future economic benefits are expected from its disposal. The
gain or loss on disposal is the difference between the proceeds and the carrying amount and
should be recognised in profit and loss.

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IAS 38 — Intangible Assets

Objective
The objective of IAS 38 is to prescribe the accounting treatment for intangible assets not
dealt with specifically in another IFRS. The Standard requires an entity to recognise an
intangible asset only if certain criteria are met. It also specifies how to measure the carrying
amount of intangible assets and requires certain disclosures regarding them.

Definition of an intangible asset

Intangible asset is an identifiable non-monetary asset without physical substance. An asset
is a resource that is controlled by the entity as a result of past events (such as purchase or
self-creation) and from which future economic benefits (inflows of cash or other assets) are
expected. Thus, the three critical attributes of an intangible asset are: identifiability (capable
of being separated), control (power to obtain benefits from the asset), and future economic
benefits (such as revenues or reduced future costs).

Examples of intangible assets: patented technology, computer software, databases and

trade secrets; trademarks, newspaper mastheads, internet domains; video and audiovisual
material (e.g. motion pictures, television programmes); customer lists; licensing and royalty
agreements; import quotas; franchise agreements. Intangibles can be acquired by separate
purchase, as part of a business combination, by a government grant, by exchange of assets,
or by self-creation (internal generation).

Recognition
IAS 38 requires an entity to recognise an intangible asset, whether purchased or self-created
(at cost) only if it is probable that the future economic benefits attributable to the asset will
flow to the entity, and the cost of the asset can be measured reliably. This requirement
applies whether an intangible asset is acquired externally or generated internally. The
Standard prohibits an entity from subsequently reinstating as an intangible asset, at a later
date, an expenditure that was originally charged to expense.

IAS 38 includes additional recognition criteria for internally generated intangible assets. For
example, R&D costs or costs for internally developed computer software are capitalised only
after technical and commercial feasibility of the asset for sale or use have been established.

Measurement
Intangible assets are initially measured at cost. Subsequent to acquisition, an entity must
choose either the cost model or the revaluation model for each class of intangible asset.

An intangible asset with an indefinite useful life should not be amortised. The cost less
residual value of an intangible asset with a finite useful life should be amortised on a

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systematic basis over that life. The amortisation method should reflect the pattern of
benefits, and if the pattern cannot be determined reliably, amortise by the straight-line
method. The amortisation period should be reviewed at least annually. The amortisation
charge is recognised in profit or loss.

IFRS 15 — Revenue from Contracts with Customers

Objective
The objective of IFRS 15 is to establish the principles that an entity shall apply to report
useful information to users of financial statements about the nature, amount, timing, and
uncertainty of revenue and cash flows arising from a contract with a customer. IFRS 15
applies to all contracts with customers except for leases, financial instruments, insurance
contracts, and non-monetary exchanges between entities in the same line of business to
facilitate sales to customers or potential customers.

The five-step model framework

The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. This core
principle is delivered in a five-step model framework:
a) Identify the contract(s) with a customer;
b) Identify the performance obligations in the contract;
c) Determine the transaction price;
d) Allocate the transaction price to the performance obligations in the contract; and
e) Recognise revenue when (or as) the entity satisfies a performance obligation.

Step 1: Identify the contract with the customer

A contract with a customer is within the scope of IFRS 15 if the following conditions are met:
a) the contract has been approved by the parties to the contract;
b) each party’s rights in relation to the goods or services to be transferred can be
identified;
c) the payment terms for the goods or services to be transferred can be identified;
d) the contract has commercial substance; and
e) it is probable that the consideration to which the entity is entitled to in exchange for the
goods or services will be collected.

Step 2: Identify the performance obligations in the contract

At the inception of the contract, the entity should assess the goods or services that have
been promised to the customer, and identify as a performance obligation: a good or service

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(or bundle of goods or services) that is distinct; or a series of distinct goods or services that
are substantially the same and that have the same pattern of transfer to the customer.

Step 3: Determine the transaction price

The transaction price is the amount to which an entity expects to be entitled in exchange for
the transfer of goods and services. When making this determination, an entity will consider
past customary business practices.

Where a contract contains elements of variable consideration, the entity will estimate the
amount of variable consideration to which it will be entitled under the contract. Variable
consideration is only included in the transaction price if, and to the extent that, it is highly
probable that its inclusion will not result in a significant revenue reversal in the future when
the uncertainty has been subsequently resolved. Sales or usage-based royalty revenue
arising from licences of intellectual property is recognised only when the underlying sales or
usage occur.

Step 4: Allocate the transaction price to the performance obligations in the contracts
Where a contract has multiple performance obligations, an entity will allocate the transaction
price to the performance obligations in the contract by reference to their relative standalone
selling prices. If a standalone selling price is not directly observable, the entity will need to
estimate it.

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Revenue is recognised as control is passed, either over time or at a point in time. Control of
an asset is defined as the ability to direct the use of and obtain substantially all of the
remaining benefits from the asset. This includes the ability to prevent others from directing
the use of and obtaining the benefits from the asset. The benefits related to the asset are
the potential cash flows that may be obtained directly or indirectly.

Factors that may indicate the point in time at which control passes include, but are not
limited to: the entity has a present right to payment for the asset; the customer has legal title
to the asset; the entity has transferred physical possession of the asset; the customer has
the significant risks and rewards related to the ownership of the asset; and the customer has
accepted the asset.

Presentation in financial statements

Contracts with customers will be presented in an entity’s statement of financial position as a
contract liability, a contract asset, or a receivable, depending on the relationship between the
entity’s performance and the customer’s payment. A contract liability is presented in the
statement of financial position where a customer has paid an amount of consideration prior
to the entity performing by transferring the related good or service to the customer.

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Where the entity has performed by transferring a good or service to the customer and the
customer has not yet paid the related consideration, a contract asset or a receivable is
presented in the statement of financial position, depending on the nature of the entity’s right
to consideration. A contract asset is recognised when the entity’s right to consideration is
conditional on something other than the passage of time, for example future performance of
the entity. A receivable is recognised when the entity’s right to consideration is unconditional
except for the passage of time.

IAS 8 — Accounting Policies, Changes in Accounting Estimates, and Errors

Selection and consistency of accounting policies

In the absence of a Standard or an Interpretation that specifically applies to a transaction,
other event, or condition, management must use its judgement in developing and applying
an accounting policy that results in information that is relevant and reliable. An entity shall
select and apply its accounting policies consistently for similar transactions, other events,
and conditions, unless a Standard or an Interpretation specifically requires or permits
categorisation of items for which different policies may be appropriate.

Changes in accounting policies

An entity is permitted to change an accounting policy only if the change is required by a
standard or interpretation, or results in the financial statements providing reliable and more
relevant information about the effects of transactions, other events, or conditions on the
entity’s financial position, financial performance, or cash flows.

Changes in accounting estimates

The effect of a change in an accounting estimate shall be recognised prospectively by
including it in profit or loss in the period of the change, if the change affects that period only,
or the period of the change and future periods, if the change affects both. However, to the
extent that a change in an accounting estimate gives rise to changes in assets and liabilities,
or relates to an item of equity, it is recognised by adjusting the carrying amount of the related
asset, liability, or equity item in the period of the change.

Errors

An entity must correct all material prior period errors retrospectively in the first set of financial
statements authorised for issue after their discovery by restating the comparative amounts
for the prior period(s) presented in which the error occurred, or if the error occurred before
the earliest prior period presented, restating the opening balances of assets, liabilities, and
equity for the earliest prior period presented.

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IAS 23 — Borrowing Costs

Objective
The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs.
Borrowing costs include interest on bank overdrafts and borrowings, finance charges on
finance leases, and exchange differences on foreign currency borrowings where they are
regarded as an adjustment to interest costs.

Recognition
Borrowing costs directly attributable to the acquisition, construction, or production of a
qualifying asset form part of the cost of that asset and, therefore, should be capitalised.
Other borrowing costs are recognised as an expense. A qualifying asset is an asset that
takes a substantial period of time to get ready for its intended use or sale. That could be
property, plant, and equipment, or investment property during the construction period,
intangible assets during the development period, or "made-to-order" inventories.

Measurement
Where funds are borrowed specifically, costs eligible for capitalisation are the actual costs
incurred less any income earned on the temporary investment of such borrowings. Where
funds are part of a general pool, the eligible amount is determined by applying a
capitalisation rate to the expenditure on that asset. The capitalisation rate will be the
weighted average of the borrowing costs applicable to the general pool.

Capitalisation should commence when expenditures are being incurred, borrowing costs are
being incurred, and activities that are necessary to prepare the asset for its intended use or
sale are in progress (may include some activities prior to commencement of physical
production). Capitalisation should be suspended during periods in which active development
is interrupted. Capitalisation should cease when substantially all of the activities necessary
to prepare the asset for its intended use or sale are complete.

IAS 36 — Impairment of Assets

Objective

The objective of IAS 36 is to ensure that assets are carried at no more than their recoverable
amount, and to define how recoverable amount is determined. IAS 36 applies to (among
other assets) land, buildings, machinery and equipment, investment property carried at cost,
intangible assets, and goodwill.

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Identifying an asset that may be impaired

At the end of each reporting period, an entity is required to assess whether there is any
indication that an asset may be impaired (i.e. its carrying amount may be higher than its
recoverable amount). If there is an indication that an asset may be impaired, then the
asset’s recoverable amount must be calculated.

External indicators of impairment include market value declines; negative changes in

technology, markets, economy, or laws; increases in market interest rates; and net assets of
the company higher than market capitalisation. Internal indicators include obsolescence or
physical damage; asset is idle, part of a restructuring, or held for disposal; and worse
economic performance than expected. An indication that an asset may be impaired may
indicate that the asset’s useful life, depreciation method, or residual value may need to be
reviewed and adjusted.

Impairment loss
Impairment loss is the amount by which the carrying amount of an asset or cash-generating
unit exceeds its recoverable amount. Carrying amount is the amount at which an asset is
recognised in the balance sheet after deducting accumulated depreciation and accumulated
impairment losses.

Recoverable amount is the higher of an asset’s fair value less costs of disposal (sometimes
called net selling price) and its value in use. Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Value in use is the present value of the future cash
flows expected to be derived from an asset.

Recognition
An impairment loss is recognised whenever recoverable amount is below carrying amount.
The impairment loss is recognised as an expense (unless it relates to a revalued asset
where the impairment loss is treated as a revaluation decrease). Depreciation on an
impaired asset is adjusted for future periods.

Reversal of impairment loss

Assess at each balance sheet date whether there is an indication that an impairment loss
may have decreased. If so, calculate recoverable amount. The increased carrying amount
due to reversal should not be more than what the depreciated historical cost would have
been if the impairment had not been recognised. Reversal of an impairment loss is
recognised in the profit or loss unless it relates to a revalued asset. Depreciation for future
periods is adjusted accordingly.

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Human Resource Accounting (HRA)

Human resource accounting is a specialised branch of accounting that focuses on
quantifying and reporting the value of human resources within an organisation. It recognises
that employees and their skills, knowledge, and capabilities are valuable assets that
contribute to the overall success and competitiveness of a business.

The primary objective of human resource accounting is to provide a more comprehensive

understanding of the organisation’s human capital and its impact on financial performance.
It involves the measurement, analysis, and reporting of the value of human resources in
financial terms. By assigning a monetary value to human capital, human resource
accounting aims to facilitate better decision-making, resource allocation, and strategic
planning.

There are various methods and approaches used in human resource accounting. One
commonly used method is the cost-based approach, which involves tracking and reporting
the costs associated with recruiting, training, and developing employees. These costs can
include recruitment expenses, salaries and wages, training costs, and other expenses
related to employee acquisition and development. By quantifying these costs, organisations
can assess the investment made in human resources and evaluate the return on that
investment.

Another approach is the economic value-added approach, which seeks to estimate the
economic value contributed by employees. This approach takes into account factors such
as employee productivity, contribution to revenue generation, and cost savings resulting from
their work. It goes beyond the traditional cost-based approach and provides a broader view
of the value created by human resources.

Human resource accounting also recognises the importance of employee retention and
turnover. It considers the costs associated with employee turnover, such as recruitment and
training expenses for new hires, as well as the potential loss of knowledge and productivity.
By quantifying these costs, organisations can identify areas for improvement in employee
retention strategies and develop initiatives to reduce turnover and enhance organisational
performance.

While human resource accounting provides valuable insights into the value of human capital,
it also faces challenges and limitations. Assigning a monetary value to intangible assets like
human resources can be subjective and complex. Different valuation methods and
assumptions can lead to varying results, making it important for organisations to use
consistent and transparent methodologies. Additionally, there is a need to integrate human
resource accounting with traditional financial accounting to provide a comprehensive view of
the organisation’s overall value.

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Inflation Accounting
Inflation accounting is a special technique used to factor in the impact that soaring or
plummeting costs of goods in some regions of the world have on the reported figures of
international companies. Financial statements are adjusted according to price indexes,
rather than relying solely on a cost accounting basis, to paint a clearer picture of a firm’s
financial position in inflationary environments. This method is also sometimes referred to as
price level accounting.

When a company operates in a country where there is a significant amount of price inflation
or deflation, historical information on financial statements is no longer relevant. To counter
this issue, in certain cases, companies are permitted to use inflation-adjusted figures,
restating numbers to reflect current economic values.

IAS 29 adopted by the IFRS is the guide for entities whose functional currency is the
currency of a hyperinflationary economy. IFRS defines hyperinflation as prices, interest, and
wages linked to a price index rising 100% or more cumulatively over three years.
Companies that fall under this category may be required to update their statements
periodically in order to make them relevant to current economic and financial conditions,
supplementing cost-based financial statements with regular price-level adjusted statements.

There are two main methods used in inflation accounting—current purchasing power (CPP)
and current cost accounting (CCA). Under the CPP method, monetary items and
nonmonetary items are separated. The accounting adjustment for monetary items (assets or
liabilities carrying a fixed monetary value that will not change in the future) is subject to the
recording of a net gain or loss. Nonmonetary items (those that do not carry a fixed value)
are updated into figures with an inflation conversion factor equivalent to the consumer price
index (CPI) at the end of the period divided by CPI at the date of transaction.

The CCA approach values assets at their fair market value (FMV) rather than historical cost,
the price incurred during the purchase of the fixed asset. Under the CCA method, both
monetary and nonmonetary items are restated to current values.

Inflation accounting comes with many benefits. Chief among them, matching current
revenues with current costs provides a much more realistic breakdown of profitability.

On the flip side, providing adjusted figures can confuse investors and give companies the
opportunity to flag numbers that shine it in a better light. The process of adjusting accounts
to factor in price changes can result in financial statements being constantly restated and
altered.

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Green Accounting
Green accounting, also known as environmental accounting or sustainability accounting, is
an approach that integrates environmental and social factors into traditional accounting
practices. It aims to provide a more comprehensive and accurate representation of the
economic impact of businesses and society on the environment.

The concept of green accounting emerged as a response to the growing recognition of the
need for sustainable development. Traditional accounting methods primarily focus on
financial performance and do not account for the ecological and social costs associated with
economic activities. Green accounting seeks to fill this gap by incorporating environmental
and social data into the accounting framework.

One of the key aspects of green accounting is the measurement and valuation of natural
resources and environmental impacts. Natural resources such as forests, water, and
minerals have traditionally been considered as externalities and not assigned any economic
value. Green accounting attempts to assign an economic value to these resources, often
through techniques like environmental cost-benefit analysis and ecosystem valuation. By
assigning a monetary value to natural resources, policymakers and businesses can better
understand the true costs and benefits of their activities.

Another important element of green accounting is the inclusion of environmental costs and
liabilities. This involves accounting for the environmental impacts and damages caused by
economic activities, such as pollution, resource depletion, and greenhouse gas emissions.
By internalising these costs, companies can better assess their environmental performance
and make informed decisions regarding resource allocation and investment.

Green accounting is not limited to businesses; it also extends to national and international
levels. Governments and international organisations have adopted green accounting
frameworks to measure and monitor the environmental performance of countries and track
progress towards sustainable development goals. This allows policymakers to develop
evidence-based policies and strategies for promoting sustainability and mitigating
environmental impacts.

Despite its benefits, green accounting faces challenges in implementation. The valuation of
natural resources and environmental impacts can be complex and subjective. There is also
a need for standardised methodologies and metrics to ensure comparability and consistency
across organisations and sectors. Additionally, green accounting requires the cooperation
and commitment of businesses, governments, and other stakeholders to effectively integrate
sustainability considerations into decision-making processes.

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Carbon Accounting
Carbon accounting, also known as carbon footprinting or carbon accounting and reporting, is
a method of measuring and quantifying the greenhouse gas (GHG) emissions associated
with an organisation’s activities. It aims to provide a comprehensive assessment of the
carbon emissions resulting from various sources, such as energy consumption,
transportation, manufacturing processes, and waste management.

The primary goal of carbon accounting is to understand and manage an organisation’s

contribution to climate change. It involves calculating and reporting the emissions of
different GHGs, with carbon dioxide (CO2) being the most commonly measured gas. Other
significant greenhouse gases, such as methane (CH4) and nitrous oxide (N2O), are also
considered in the calculations.

The process of carbon accounting typically involves several steps. First, organisations
identify and categorise their emission sources, both direct and indirect. Direct emissions,
known as Scope 1 emissions, refer to emissions from sources owned or controlled by the
organisation, such as on-site combustion of fossil fuels. Indirect emissions, known as Scope
2/3 emissions, arise from sources outside the organisation’s direct control but are associated
with its activities, such as purchased electricity, business travel, and supply chain emissions.

After calculating the emissions, organisations often report their carbon footprint in the form of
a carbon inventory or greenhouse gas inventory. This inventory provides a snapshot of the
organisation’s emissions profile and serves as a baseline for setting reduction targets and
tracking progress over time. The inventory may also include other relevant information, such
as the financial costs associated with emissions and the organisation’s efforts to mitigate
and offset its carbon footprint.

Carbon accounting is not only undertaken by businesses but also by governments,

institutions, and individuals. It plays a crucial role in informing decision-making,
sustainability strategies, and climate action plans. Carbon accounting enables organisations
to identify emission hotspots, prioritise reduction efforts, and evaluate the effectiveness of
mitigation measures. It also helps stakeholders, including investors, customers, and
regulators, assess an organisation’s environmental performance and support the transition
to a low-carbon economy.

However, carbon accounting does have its challenges. It requires accurate data collection,
which can be complex and time-consuming, especially for large organisations with diverse
operations. The availability of reliable emission factors for different activities and regions
can also pose challenges. Furthermore, carbon accounting methodologies and reporting
standards continue to evolve, making it important for organisations to stay updated on best
practices and ensure consistency and comparability in their reporting.

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Forensic Accounting
Forensic accounting utilises accounting, auditing, and investigative skills to examine the
finances of an individual or business. Forensic accountants look for evidence of crimes and
commonly work for insurance companies, financial institutions, and law enforcement
agencies. They analyse financial records and accounts that may be used as legal evidence
and often testify in court cases as expert witnesses. They may work on cases such as fraud
and embezzlement and explain the nature of a financial crime in court.

A forensic accountant’s tasks include tracing funds, asset identification, asset recovery, and
due diligence reviews. Forensic accountants may also train in alternative dispute resolution
due to their high level of involvement in legal issues and familiarity with the judicial system.

Forensic accounting is utilised in litigation when quantification of damages is needed.

Parties involved in legal disputes use the findings of a forensic accountant to resolve
disputes via settlements or court decisions, such as compensation disputes. The forensic
accountant may be utilised as an expert witness if the dispute escalates to a court decision.

In criminal investigations, forensic accountants analyse whether a crime occurred and

assess the likelihood of criminal intent. Such crimes may include employee theft, securities
fraud, falsification of financial statement information, identity theft, or insurance fraud. The
scope and mechanics of Ponzi schemes in the past are understood today because forensic
accountants dissect such schemes and make it understandable for court cases. Forensic
accountants search for hidden assets in divorce cases and investigate breaches of
contracts, tort, or disagreements relating to company acquisitions like breaches of warranty,
or business valuation disputes.

Forensic accountants may investigate construction claims, expropriations, product liability

claims, or trademark or patent infringements or determine the economic results of the breach
of a nondisclosure or non-compete agreement.

Forensic accounting is routinely used by the insurance industry. A forensic accountant may
be asked to quantify the economic damages arising from a vehicle accident or a case of
medical malpractice or other claims. One of the concerns about taking a forensic accounting
approach to insurance claims as opposed to an adjuster approach is that forensic
accounting is mainly concerned with historical data and may miss relevant current
information that changes the assumptions around the claim.

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 Compiled by:
Vishal R.
Assistant Professor
Department of Professional Studies
Christ (Deemed to be University)

Email: [email protected]