CA Foundation PAPER 1: ACCOUNTING Syllabus

Define an accounting estimate and give an example.

An approximation of an amount in the absence of a precise means of measurement, requiring judgement based on the latest available information. Examples: estimated useful life of an asset, provision for doubtful debts, provision for warranty.

Name the four common measurement (valuation) bases used in accounting.

(1) Historical Cost, (2) Current Cost, (3) Realisable (Settlement) Value, and (4) Present Value.

What is an Accounting Standard and who issues them in India?

Accounting Standards are written policy documents (codified guidelines) covering recognition, measurement, presentation and disclosure of accounting transactions. In India they are issued by the Institute of Chartered Accountants of India (ICAI).

State the main objectives of Accounting Standards.

To harmonise diverse accounting policies, reduce variations and improve comparability, enhance reliability and transparency of financial statements, and standardise recognition, measurement, presentation and disclosure.

State the modern (accounting equation based) rules of debit and credit.

Increase in Assets/Expenses = Debit; Increase in Liabilities/Capital/Income = Credit. Conversely, decrease in Assets/Expenses = Credit; decrease in Liabilities/Capital/Income = Debit.

State the traditional (golden) rules of debit and credit for the three account types.

Personal account: Debit the receiver, Credit the giver. Real account: Debit what comes in, Credit what goes out. Nominal account: Debit all expenses and losses, Credit all incomes and gains.

What is a trial balance and what is its primary purpose?

A statement (not an account) listing the debit and credit balances of all ledger accounts on a particular date. Its primary purpose is to check the arithmetical accuracy of the ledger postings (total debits must equal total credits).

Name three types of errors that are NOT disclosed by a trial balance.

Errors of omission (complete), errors of principle, errors of commission of compensating nature (compensating errors), and errors of recording the wrong amount in both accounts. (Any three.)

What is an error of principle? Will the trial balance still agree?

An error where a transaction is recorded against accounting principles, e.g., treating capital expenditure as revenue (purchase of machinery debited to repairs). The trial balance still agrees because debit and credit amounts are equal.

What is a Suspense Account in the context of rectification of errors?

A temporary account opened to make the trial balance agree when the difference cannot immediately be located. One-sided errors found after preparing the trial balance are rectified through it; it is closed when all errors are corrected.

Define a Bank Reconciliation Statement (BRS).

A statement prepared to reconcile and explain the differences between the bank balance as per the Cash Book and the balance as per the Pass Book (bank statement) on a particular date.

List four common reasons for differences between Cash Book and Pass Book balances.

(1) Cheques issued but not yet presented for payment; (2) cheques deposited but not yet cleared/collected; (3) bank charges/interest debited by bank not in cash book; (4) direct deposits/collections by bank, or dishonoured cheques, not yet recorded in cash book.

When preparing a BRS starting from a favourable (Dr) Cash Book balance, how is a cheque issued but not yet presented treated?

It is ADDED to the Cash Book balance to arrive at the Pass Book balance, because the bank has not yet reduced the balance for that cheque.

Define inventory and name its three categories for a manufacturer.

Inventory comprises assets held for sale in the ordinary course of business, in the process of production, or in the form of materials/supplies to be consumed. The three categories: Raw Materials, Work-in-Progress, and Finished Goods.

State the basic principle of inventory valuation under AS 2.

Inventories should be valued at the LOWER of Cost and Net Realisable Value (NRV).

What is included in the "Cost of Inventory" under AS 2?

Cost of purchase (purchase price + duties/taxes not recoverable + freight inwards, less trade discounts/rebates) + Cost of conversion (direct labour + systematic allocation of fixed and variable production overheads) + other costs incurred to bring inventory to its present location and condition.

Define Net Realisable Value (NRV).

The estimated selling price in the ordinary course of business LESS the estimated costs of completion and the estimated costs necessary to make the sale.

Differentiate the Periodic and Perpetual inventory record systems.

Periodic system: stock is determined by physical count at period-end and cost of goods sold is a balancing figure (no continuous record). Perpetual system: stock records are updated continuously after each receipt and issue, giving the inventory balance at any time.

Compare FIFO and Weighted Average methods of inventory valuation.

FIFO: assumes goods received first are issued first, so closing stock is valued at the latest (most recent) prices. Weighted Average: issues and closing stock are valued at the average cost per unit (total cost of goods available ÷ total units available).

Distinguish tangible assets from intangible assets with examples.

Tangible assets have physical existence and can be seen/touched (e.g., land, building, machinery). Intangible assets lack physical substance but have value (e.g., goodwill, patents, trademarks, copyrights).

Define depreciation.

Depreciation is the systematic allocation of the depreciable amount (cost less residual value) of a tangible fixed asset over its useful life, arising from use, effluxion of time, or obsolescence.

Give the formula for depreciation under the Straight Line Method (SLM).

Depreciation per year = (Cost of asset − Estimated Scrap/Residual Value) ÷ Estimated Useful Life (in years). The annual amount remains constant.

How is depreciation computed under the Written Down Value (Diminishing Balance) Method?

Depreciation = Rate of depreciation × Opening book (written down) value of the asset each year. The amount decreases every year as it is charged on the reducing balance.

Compare amortisation with depreciation.

Both spread an asset's cost over its useful life. Depreciation applies to tangible fixed assets; amortisation applies to intangible assets (e.g., patents, goodwill, copyrights).

How is a change in the method of depreciation treated?

A change in depreciation method is treated as a change in accounting estimate, applied prospectively (going forward); the unamortised depreciable amount is charged over the remaining useful life under the new method, with appropriate disclosure.

Define a bill of exchange.

A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker (drawer), directing a certain person (drawee) to pay a certain sum of money only to, or to the order of, a certain person (payee) or to the bearer, on a fixed or determinable future date.

Distinguish a bill of exchange from a promissory note (parties involved).

A bill of exchange contains an unconditional ORDER to pay and has three parties (drawer, drawee, payee). A promissory note contains an unconditional PROMISE to pay and has two parties (maker and payee).

What are accommodation bills?

Bills of exchange drawn and accepted without any consideration (no sale/purchase of goods), purely to provide temporary financial accommodation to one or both parties by getting the bill discounted. The proceeds are shared/repaid as agreed.

What is the formula to calculate the due date of a bill (with days of grace)?

Due date = Date of bill (or acceptance) + Term of the bill + 3 days of grace. If the due date is a public holiday, it falls due on the preceding business day; if an emergency/sudden holiday, the next business day.

Name the elements of financial statements.

Assets, Liabilities, Capital (Equity), Income/Revenue, and Expenses. Assets, liabilities and capital relate to financial position; income and expenses relate to performance.

What are closing adjustment entries and name two examples.

Adjustment entries passed at the end of the accounting period to account for items not yet recorded, so that final accounts reflect the correct position. Examples: outstanding expenses, prepaid expenses, accrued income, income received in advance, closing stock, depreciation, provision for doubtful debts.

State the purpose of a Trading Account and the formula for Gross Profit.

The Trading Account is prepared to ascertain Gross Profit/Loss from buying and selling. Gross Profit = Net Sales − Cost of Goods Sold, where COGS = Opening Stock + Net Purchases + Direct Expenses − Closing Stock.

What is the function of the Profit and Loss Account and how is Net Profit derived?

It ascertains the net result of operations after considering indirect (operating, administrative, selling, financial) expenses and incomes. Net Profit = Gross Profit + Other Incomes − Indirect/Operating Expenses.

What is a Balance Sheet?

A statement (not an account) prepared at the end of the accounting period showing the financial position of an entity — its assets, liabilities and capital — as on a particular date. It is based on the accounting equation.

For a manufacturing entity, what additional account is prepared and what does it show?

A Manufacturing Account is prepared to ascertain the Cost of Goods Manufactured (cost of production), including raw material consumed, direct wages, direct/factory expenses and factory overheads; this cost is then transferred to the Trading Account.

Define a Receipt and Payment Account.

A summarised cash book of a not-for-profit organisation showing all cash and bank receipts (debit side) and payments (credit side) during a period, irrespective of whether they are capital/revenue or relate to past/current/future periods. It begins with the opening cash/bank balance and ends with the closing balance.

Define an Income and Expenditure Account.

A nominal account (akin to a P&L account) of a not-for-profit organisation, prepared on accrual basis, recording only revenue items relating to the current period to ascertain the Surplus (excess of income over expenditure) or Deficit.

State two key differences between a Receipt & Payment Account and an Income & Expenditure Account.

(1) R&P records all cash transactions (capital and revenue, all periods) on cash basis; I&E records only revenue items of the current period on accrual basis. (2) R&P shows opening and closing cash/bank balances; I&E shows surplus or deficit. (R&P is a real account; I&E is a nominal account.)

Distinguish a Profit and Loss Account from an Income and Expenditure Account.

A P&L Account is prepared by trading/profit-seeking entities to find net profit or loss; an Income and Expenditure Account is prepared by not-for-profit organisations to find surplus or deficit. The format and accrual basis are similar but the objective and entity type differ.

In the absence of a partnership deed, what are the default provisions of the Indian Partnership Act regarding profit sharing, interest on capital, interest on loan and salary?

Profits/losses shared EQUALLY; NO interest on capital; NO partner's salary/remuneration; interest on a partner's LOAN to the firm allowed at 6% per annum; no interest charged on drawings.

What is the formula for the interest on a partner's loan and the treatment of partner's salary?

Interest on partner's loan (in absence of agreement) = Loan amount × 6% p.a., charged to the P&L Account (an expense before profit distribution). Partner's salary, if allowed by the deed, is an appropriation of profit, debited to the Profit & Loss Appropriation Account.

What is goodwill and name two methods of valuing it.

Goodwill is the value of a firm's reputation/earning capacity in excess of normal return on capital employed — an intangible asset. Methods: Average Profit Method, Super Profit Method, Capitalisation Method (and Annuity Method).

Give the formula for Super Profit and goodwill under the Super Profit Method.

Super Profit = Average (actual) Profit − Normal Profit, where Normal Profit = Capital Employed × Normal Rate of Return. Goodwill = Super Profit × Number of years' purchase.

On admission of a partner, how is goodwill brought in by the new partner (premium method) treated?

The premium (goodwill) brought in by the new partner is credited to the OLD partners in their SACRIFICING RATIO. Sacrificing ratio = Old ratio − New ratio.

How is the gaining ratio used on the retirement or death of a partner?

On retirement/death, the retiring/deceased partner's share of goodwill is debited to the continuing partners in their GAINING RATIO (Gaining ratio = New ratio − Old ratio) and credited to the outgoing partner.

What is the treatment of the deceased partner's share of profit up to the date of death?

It is calculated on a time basis or sales/turnover basis (as agreed) from the last balance sheet date to the date of death, credited to the deceased partner's capital account and debited to P&L Suspense Account (or continuing partners).

What is dissolution of a partnership firm, and which account is prepared to close the books?

Dissolution means the complete closure/winding up of the firm where all assets are realised, all liabilities paid off, and the firm ceases to exist. A REALISATION ACCOUNT is prepared to record the sale of assets, payment of liabilities, and the resulting profit or loss on realisation.

State the order of distribution of cash on dissolution of a firm (Section 48).

(1) Pay outside (third-party) creditors; (2) repay partners' loans/advances to the firm; (3) repay partners' capital; (4) distribute any surplus among partners in their profit-sharing ratio.

What is piecemeal distribution of assets and name its two methods.

Distributing cash to partners in instalments as and when assets are realised gradually (rather than all at once) on dissolution. Methods: (1) Maximum Loss Method and (2) Surplus Capital (Highest Relative Capital) Method.

Define a share and distinguish equity shares from preference shares.

A share is a unit of the share capital of a company representing ownership. Equity (ordinary) shares carry no fixed dividend, get residual profits and voting rights. Preference shares carry a fixed rate of dividend, have preferential right to dividend and to repayment of capital on winding up, but usually no voting rights.

Define a debenture and how it differs from a share.

A debenture is an instrument acknowledging a debt of the company, usually carrying a fixed rate of interest. A shareholder is an OWNER (gets dividend out of profits); a debenture holder is a CREDITOR (gets interest as a charge against profit whether or not there are profits).

What is calls-in-arrears and calls-in-advance?

Calls-in-arrears: the amount called up by the company but not yet paid by shareholders (shown by deduction from called-up capital). Calls-in-advance: amount paid by a shareholder in excess of what has been called up (a liability; interest may be paid on it).

What is forfeiture of shares and what happens to the amount already received?

Forfeiture is the cancellation of shares due to non-payment of allotment/calls money. On forfeiture, the share capital account is debited with the called-up value, the unpaid calls are removed, and the amount already received is transferred to the Forfeited Shares (Share Forfeiture) Account.

How is profit on re-issue of forfeited shares treated?

When forfeited shares are re-issued, the balance left in the Forfeited Shares Account (after meeting any discount allowed on re-issue) is a CAPITAL PROFIT and is transferred to the Capital Reserve Account.

What are the legal conditions for redemption of preference shares (Companies Act)?

Only fully paid-up preference shares can be redeemed; they are redeemed either out of profits available for dividend or out of a fresh issue of shares; and where redeemed out of profits, an amount equal to the nominal value of shares redeemed must be transferred to the Capital Redemption Reserve (CRR) Account.

What is the purpose and permitted use of the Capital Redemption Reserve (CRR)?

CRR is created to maintain the company's capital base when preference shares are redeemed out of profits (so that capital is not reduced). It can be used only for issuing fully paid-up bonus shares to members.

What is a bonus issue and from which sources can it be made?

A bonus issue is the issue of fully paid-up shares to existing shareholders free of cost, in proportion to their holdings, by capitalising reserves. Sources: free reserves, securities premium, and capital redemption reserve.

What is a rights issue?

A rights issue is the offer of new/additional shares to EXISTING shareholders in proportion to their current holdings (pre-emptive right), usually at a price lower than the market price; shareholders may accept, reject, or renounce the rights.