Intermediate Course

Study Material
(Modules 1 to 3)

Paper 1

Accounting
Module – 1

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

© The Institute of Chartered Accountants of India

 ii

This study material has been prepared by the faculty of the Board of Studies. The
objective of the study material is to provide teaching material to the students to
enable them to obtain knowledge in the subject. In case students need any
clarifications or have any suggestions to make for further improvement of the
material contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner
useful for the students. However, the study material has not been specifically
discussed by the Council of the Institute or any of its Committees and the views
expressed herein may not be taken to necessarily represent the views of the
Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this
material.

© The Institute of Chartered Accountants of India

All rights reserved. No part of this book may be reproduced, stored in a retrieval
system, or transmitted, in any form, or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without prior permission, in writing, from
the publisher.

Edition : September, 2021

Website : www.icai.org

E-mail : bosnoida@icai.org

Committee/ : Board of Studies

Department

ISBN No. :

Price (All Modules) : `

Published by : The Publication Department on behalf of The

Institute of Chartered Accountants of India, ICAI
Bhawan, Post Box No. 7100, Indraprastha Marg, New
Delhi 110 002, India.

Printed by :

© The Institute of Chartered Accountants of India

 iii

BEFORE WE BEGIN …

Evolving role of a CA - Shift towards strategic decision making

The traditional role of a chartered accountant restricted to accounting and

auditing, has now changed substantially and there has been a marked shift
towards strategic decision making and entrepreneurial roles that add value
beyond traditional financial reporting. The primary factors responsible for the
change are the increasing business complexities on account of plethora of laws,
borderless economies consequent to giant leap in e-commerce, emergence of
new financial instruments, emphasis on corporate social responsibility, significant
developments in information technology, to name a few. These factors
necessitate an increase in the competence level of chartered accountants to take
up the role of not merely an accountant or auditor, but a global solution provider.
Towards this end, the scheme of education and training is being continuously
reviewed so that it is in sync with the requisites of the dynamic global business
environment; the competence requirements are being continuously reviewed to
enable aspiring chartered accountants to acquire the requisite professional
competence to take on new roles.

Skill requirements at Intermediate Level

Under the Revised Scheme of Education and Training, at the Intermediate Level,
you are expected to not only acquire professional knowledge but also the ability
to apply such knowledge in problem solving. The process of learning should also
help you inculcate the requisite professional skills, i.e., the intellectual skills and
communication skills, necessary for achieving the desired level of professional
competence.
Accounting is one of the core competence areas of chartered accountants. The
paper of 'Accounting' at Intermediate level concentrates on conceptual
understanding of the crucial aspects of accounting. The objective of the paper at
this level is to acquire the ability to apply specific accounting standards and
legislations to different transactions and events for preparation and presentation
of financial statements of various business entities. The students are required to
develop understanding of the Accounting Standards and gain ability to apply the
provisions contained therein to practical situations.

© The Institute of Chartered Accountants of India

 iv

Know your syllabus and Study Material

The syllabus of Accounting has an appropriate mix of various topics of sole

proprietorship, partnership and companies as the objective of the paper is to gain
ability to solve simple problems related to different businesses entities. The
Study Material of Accounting has been designed having regard to the needs of
home study and distance learning students. The Study Material has been divided
into fourteen chapters in line with the syllabus. It is important to read the Study
Material thoroughly for understanding the coverage of syllabus in the paper of
Accounting.
The study material has been bifurcated into three modules for the easy handling
and convenience of students. For bare text of Framework for Preparation and
Presentation of Financial Statements and Accounting Standards, the students are
advised to refer the “Accounting Pronouncements” which has been separately
published by the Board of Studies.

Framework of Chapters – Uniform Structure comprising of specific

components
Efforts have been made to present each topic of the syllabus in a lucid manner.
Care has been taken to present the chapters in a logical sequence to facilitate
easy understanding by the students. Sincere efforts have been taken to
incorporate the relevant amendments in the Accounting Standards, Companies
Act, 2013 and SEBI regulations in this study material.
The content for each chapter/unit of the study Material has been structured in the
following manner –

Components of About the component

each Chapter
1. Learning Learning outcomes which you need to demonstrate
Outcomes after learning each topic have been detailed in the first
page of each chapter/unit. Demonstration of these
learning outcomes would help you to achieve the
desired level of technical competence
2. Chapter/Unit As the name suggests, the flow chart/table/diagram
Overview given at the beginning of each chapter would give a
broad outline of the contents covered in the chapter
3. Content of each The concepts and provisions of each accounting

© The Institute of Chartered Accountants of India

 v

unit/ chapter standards/topics are explained in student-friendly

manner with the aid of
Examples/illustrations/diagrams/flow charts. These
value additions would help you develop conceptual
clarity and get a good grasp of the topic. Diagrams and
Flow charts would help you understand the
concept/application of accounting standard/topic in a
better manner.
4. Illustrations Illustrations would help the students to understand the
involving application of concepts/provisions of accounting
conceptual standards. In effect, it would test understanding of
understanding concepts/ provisions as well as ability to apply the
concepts/provisions learnt in solving problems and
addressing issues.
5. Summary A summary of the chapter is given at the end to help
you revise what you have learnt. It would especially
facilitate quick revision of the chapter the day before
the examination.
6. Test Your This section comprises of number of multiple choice
Knowledge questions, theoretical questions and practical questions
which would help students to evaluate what they have
understood after studying the chapter. The questions
given in this section have also been supplemented with
the answers to help the students in evaluating their
solutions so that they can know about their grey areas.

We hope that these student-friendly features in the Study Material makes your
learning process more enjoyable, enriches your knowledge and sharpens your
application skills.

Happy Reading and Best Wishes!

© The Institute of Chartered Accountants of India

 vi

SYLLABUS

PAPER 1: ACCOUNTING
(One paper – Three hours – 100 Marks)

Objective:
To acquire the ability to apply specific accounting standards and legislations to
different transactions and events and in preparation and presentation of financial
statements of various business entities.
Contents:
1. Process of formulation of Accounting Standards including Ind AS (IFRS
converged standards) and IFRSs; convergence vs adoption; objective and
concepts of carve outs.
2. Framework for Preparation and Presentation of Financial Statements (as
per Accounting Standards).
3. Applications of Accounting Standards:
AS 1 : Disclosure of Accounting Policies
AS 2 : Valuation of Inventories
AS 3 : Cash Flow Statements
AS 10 : Property, Plant and Equipment
AS 11 : The Effects of Changes in Foreign Exchange Rates
AS 12 : Accounting for Government Grants
AS 13 : Accounting for Investments
AS 16 : Borrowing Costs
4. Company Accounts
(i) Preparation of financial statements – Statement of Profit and Loss,
Balance Sheet and Cash Flow Statement;
(ii) Managerial Remuneration;
(iii) Profit (Loss) prior to incorporation;
(iv) Accounting for bonus issue and right issue;

© The Institute of Chartered Accountants of India

 vii

(v) Redemption of preference shares;

(vi) Redemption of debentures.
5. Accounting for Special Transactions:
(i) Investment;
(ii) Insurance claims for loss of stock and loss of profit;
(iii) Hire- purchase and Instalment sale transactions.
6. Special Type of Accounting
(i) Departmental Accounting;
(ii) Accounting for Branches including foreign branches;
(iii) Accounts from Incomplete Records.
Note : If either new Accounting Standards (AS), Announcements and Limited
Revisions to AS are issued or the earlier ones are withdrawn or new AS,
Announcements and Limited Revisions to AS are issued in place of existing AS,
Announcements and Limited Revisions to AS, the syllabus will accordingly
include/exclude such new developments in the place of the existing ones with
effect from the date to be notified by the Institute.

© The Institute of Chartered Accountants of India

 viii

SIGNIFICANT CHANGES IN 2021 EDITION

OVER 2020 EDITION

Chapter Sections/Sub Sections wherein major

updations have been done

Chapter 3 - Unit 1 Unit updated in line with the scheme for

applicability of Accounting Standards to Non-
Applicability of Accounting company entities revised by the ICAI in March
Standards 2021.

Chapter 4 The chapter has been updated in line with the

provisions of the Companies Act. It also
Preparation of Financial incorporates the amendments in Schedule III
Statements of Companies to the Companies Act, 2013 Vide MCA
notification dated 24th March, 2021.
Schedule III (given as Annexure
at the end of chapter 4)

The chapters have been updated in line with

Chapters 5, 6, 7 and 8
the provisions of the Companies Act.

© The Institute of Chartered Accountants of India

 ix

CONTENTS

MODULE I

CHAPTER 1: Introduction to Accounting Standards

CHAPTER 2: Framework for Preparation and Presentation of Financial
Statements

CHAPTER 3: Overview of Accounting Standards

MODULE II

CHAPTER 4: Financial Statements of Companies

CHAPTER 5: Profit or Loss Pre and Post Incorporation

CHAPTER 6: Accounting for Bonus Issue and Right Issue

CHAPTER 7: Redemption of Preference Shares

CHAPTER 8: Redemption of Debentures

MODULE III

CHAPTER 9: Investment Accounts

CHAPTER 10: Insurance Claims for Loss of Stock and Loss of Profit

CHAPTER 11: Hire Purchase and Instalment Sale Transactions

CHAPTER 12: Departmental Accounts

CHAPTER 13: Accounting for Branches Including Foreign Branches

CHAPTER 14: Accounts from Incomplete Records

© The Institute of Chartered Accountants of India

 x

DETAILED CONTENTS: MODULE – 1

CHAPTER 1: INTRODUCTION TO ACCOUNTING STANDARDS .......... 1.1 – 1.29

Learning Outcomes ................................................................................................................. 1.1
Chapter overview ..................................................................................................................... 1.2
1. Introduction ................................................................................................................. 1.2
2. Standards Setting Process ....................................................................................... 1.6
3. How Many Accounting Standards? ....................................................................... 1.8
4. Status of Accounting Standards........................................................................... 1.10
5. Need for Convergence towards Global Standards ......................................... 1.10
6. International Accounting Standard Board......................................................... 1.12
7. International Financial Reporting Standards as Global Standards ............. 1.13
8. Becoming IFRS Compliant .................................................................................... 1.14
9. What are Carve Outs/Ins in Ind AS? .................................................................... 1.15
10. Convergence to IFRS in India ................................................................................ 1.16
11. What are Indian Accounting Standards (Ind AS)? ........................................... 1.17
12. History of IFRS Converged Indian Accounting Standards (Ind AS) ............ 1.18
13. List of Ind AS ............................................................................................................. 1.19
14. Roadmap for Implementation of Indian Accounting Standards (Ind AS): A
Snapshot ...................................................................................................................... 1.22
Summary .................................................................................................................................. 1.25
Test Your Knowledge ............................................................................................................ 1.26

CHAPTER 2: FRAMEWORK FOR PREPARATION AND PRESENTATION OF

FINANCIAL STATEMENTS .............................................. 2.1 – 2.34
Learning Outcomes ................................................................................................................. 2.1
Chapter overview ..................................................................................................................... 2.2
1. Introduction ................................................................................................................. 2.2
2. Purpose of the Framework ...................................................................................... 2.3
3. Status and Scope of the Framework ..................................................................... 2.3

© The Institute of Chartered Accountants of India

 xi

4. Components of Financial Statements ................................................................... 2.3

5. Objectives and Users of Financial Statements ................................................... 2.4
6. Fundamental Accounting Assumptions ............................................................... 2.6
7. Qualitative Characteristics ..................................................................................... 2.10
8. True and Fair View ................................................................................................... 2.12
9. Elements of Financial Statements ........................................................................ 2.12
10. Measurement of Elements of Financial Statements ....................................... 2.19
11. Capital Maintenance................................................................................................ 2.23
Summary .................................................................................................................................. 2.27
Test Your Knowledge ............................................................................................................ 2.30

CHAPTER 3: OVERVIEW OF ACCOUNTING STANDARDS .................. 3.1 – 3.162

UNIT-1: APPLICABILITY OF ACCOUNTING STANDARDS ................... 3.1 – 3.26
Learning Outcomes ................................................................................................................. 3.1
Unit overview ............................................................................................................................ 3.2
1.1 Status of Accounting Standards............................................................................. 3.2
1.2 Applicability of Accounting Standards ................................................................. 3.6
Summary .................................................................................................................................. 3.23
Test Your Knowledge ......................................................................................................... 3.23
UNIT-2: OVERVIEW OF ACCOUNTING STANDARDS ...................... 3.27– 3.62
Learning Outcomes ............................................................................................................... 3.28
Unit Overview.......................................................................................................................... 3.28
2.1 AS1: Disclosure of Accounting Policies .............................................................. 3.28
2.2 AS 2: Valuation of Inventory ................................................................................. 3.38
2.3 AS 3: Cash Flow Statement .................................................................................... 3.49
2.4 AS 10: Property, Plant and Equipment ............................................................... 3.65
2.5 AS 11: The Effects of Changes in Foreign Exchange Rates ........................... 3.97
2.6 AS 12: Accounting for Government Grants .................................................... 3.113
2.7 AS 13: Accounting for Investments .................................................................. 3.126
2.8 AS 16: Borrowing Costs ...................................................................................... 3.134
Test Your Knowledge ......................................................................................................... 3.143

© The Institute of Chartered Accountants of India