SEBI GRADE

COMMERCE
&
ACCOUNTANCY

SAMPLE NOTES
 Table of Content

Title Page No

Accounting as a Financial Information System 1

Accounting for Depreciation 6

Accounting for Inventories 12

Revenue Recognition 20

Accounting Standards for Fixed Assesses 29

Accounting Standards for Investments 38

Cash Flow Statement 45

Fund Flow Statement 51

Financial Statement Analysis 53

Ratio Analysis 57

Accounting for Share Capital Transactions Including Bonus Shares,

Right Shapes 61

Employees Stock Option 68

Buy Back of Securities 85

Preparation and Presentation of Company Final Accounts 88

 COMMERCE & ACCOUNTANCY 2020
ACCOUNTING AS A FINANCIAL INFORMATION SYSTEM
An accounting information system (AIS) is a structure that a business uses to
collect, store, manage, process, retrieve and report its financial data so it can be
used by accountants, consultants, business analysts, managers, chief financial
officers (CFOs), auditors, regulators, and tax agencies.

Specially trained accountants work in-depth with AIS to ensure the highest level of
accuracy in a company's financial transactions and record-keeping, as well as make
financial data easily available to those who legitimately need access to it—all
while keeping data intact andsecure.

Accounting information systems generally consist of six primary components:

people, procedures and instructions, data, software, information technology
infrastructure, and internal controls. Let's look at each component in detail.

Introduction to Accounting Information Systems

1. AISPeople
The people in AIS are simply the system users. Professionals who may need
to use an organization's AIS include accountants, consultants, business analysts,
managers, chief financial officers, and auditors. AIS helps the different
departments within a company worktogether.

For example, management can establish sales goals for which staff can then order
the appropriate amount of inventory. The inventory order notifies the accounting
department of a new payable. When sales are made, salespeople can enter
customer orders, accounting can invoice customers, the warehouse can assemble
the order, the shipping department can send it off, and the accounting department
gets notified of a new receivable. The customer service department can then track
customer shipments and the system can create sales reports for management.
Managers can also see inventory costs, shipping costs, manufacturing costs and so
on.

With well-designed AIS, everyone within an organization who is authorized to do

so can access the same system and get the same information. An AIS also
simplifies getting information to people outside of the organization, when
necessary.

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For example, consultants might use the information in an AIS to analyze the
effectiveness of the company's pricing structure by looking at cost data, sales data,
and revenue. Also, auditors can use the data to assess a company's internal
controls, financial condition and compliance with the Sarbanes-Oxley Act(SOX).

The AIS should be designed to meet the needs of the people who will be using it.
The system should also be easy to use and should improve, not hinder efficiency.

2. Procedures andInstructions
The procedure and instructions of an AIS are the methods it uses for
collecting, storing, retrieving and processing data. These methods are both manual
and automated. The data can come from both internal sources (e.g., employees)
and external sources (e.g., customers' online orders). Procedures and instructions
will be coded into AIS software—they should also be "coded" into employees
through documentation and training. To be effective, procedures and instructions
must be followedconsistently.

3. AISData
To store information, AIS must have a database structure such as structured
query language (SQL), a computer language commonly used for databases. The
AIS will also need various input screens for the different types of system users
and data entry, as well as different output formats to meet the needs of different
users and various types ofinformation.

The data contained in an AIS is all the financial information pertinent to the
organization's business practices. Any business data that impact the company's
finances should go into anAIS.

The type of data included in an AIS will depend on the nature of the business, but
it may consist of thefollowing:

 Salesorders
 Customer billingstatements
 Sales analysisreports
 Purchaserequisitions
 Vendorinvoices
 Checkregisters
 Generalledger
 Inventorydata
 Payrollinformation

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 Timekeeping
 Taxinformation

This data can then be used to prepare accounting statements and reports, such as
accounts receivable aging, depreciation/amortization schedules, trial balance, profit
and loss, and so on. Having all this data in one place—in the AIS—facilitates a
business's record-keeping, reporting, analysis, auditing, and decision-making
activities. For the data to be useful, it must be complete, correct and relevant.

On the other hand, examples of data that would not go into an AIS include memos,
correspondence, presentations, and manuals. These documents might have a
tangential relationship to the company's finances, but, excluding the standard
footnotes, they are not really part of the company's financial record-keeping.

4. AISSoftware
The software component of an AIS is the computer programs used to store,
retrieve, process, and analyze the company's financial data. Before there were
computers, an AIS was a manual, paper-based system, but today, most companies
are using computer software as the basis of the AIS. Small businesses might use
Intuit's Quick books or Sage's Sage 50 Accounting, but there are others. 2 Small to
mid-sized businesses might use SAP's Business One. Mid-sized and large
businesses might use Microsoft's Dynamics GP, Sage Group's MAS 90 or MAS
200, Oracle's PeopleSoft or Epic or Financial Management.

Quality, reliability, and security are key components of effective AIS software.
Managers rely on the information it outputs to make decisions for the company,
and they need high-quality information to make sounddecisions.

AIS software programs can be customized to meet the unique needs of different
types of businesses. If an existing program does not meet a company's needs, the
software can also be developed in-house with substantial input from end-users or
can be developed by a third-party company specifically for the organization. The
system could even be outsourced to a specialized company.

For publicly-traded companies, no matter what software program and

customization options the business chooses, Sarbanes-Oxley regulations will
dictate the structure of the AIS to some extent. This is because SOX regulations
establish internal controls and auditing procedures with which public companies
mustcomply.

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5. ITInfrastructure
Information technology infrastructure is just a fancy name for the hardware
used to operate the accounting information system. Most of these hardware items a
business would need to have anyway, including computers, mobile
devices, servers, printers, surge protectors, routers, storage media, and possibly
back-up power supply. In addition to cost, factors to consider in selecting hardware
include speed, storage capability and whether it can be expanded andupgraded.

Perhaps most importantly, the hardware selected for an AIS must be compatible
with the intended software. Ideally, it would be not just compatible, but optimal—a
clunky system will be much less helpful than a speedy one. One way businesses
can easily meet hardware and software compatibility requirements is by purchasing
a turnkey system that includes both the hardware and the software that the business
needs. Purchasing a turnkey system means, theoretically, that the business will get
an optimal combination of hardware and software for itsAIS.

A good AIS should also include a plan for maintaining, servicing, replacing and
upgrading components of the hardware system, as well as a plan for the disposal of
broken and outdated hardware so that sensitive data is completely destroyed.

6. InternalControls
The internal controls of an AIS are the security measures it contains to
protect sensitive data. These can be as simple as passwords or as complex as
biometric identification. An AIS must have internal controls to protect against
unauthorized computer access and to limit access to authorized users, which
includes some users inside the company. It must also prevent unauthorized file
access by individuals who are allowed to access only select parts of the system.

An AIS contains confidential information belonging not just to the company

but also to its employees and customers. This data may include Social Security
numbers, salary information, credit card numbers, and so on. All of the data in an
AIS should be encrypted, and access to the system should be logged and surveilled.
System activity should be traceable as well.

An AIS also needs internal controls that protect it from computer viruses,
hackers and other internal and external threats to network security. It must also be
protected from natural disasters and power surges that can cause data loss.

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How an AIS Works In Real Life
We've seen how well-designed AIS allows a business to run smoothly on a
day-to-day basis or hinders its operation if the system is poorly designed. The third
use for an AIS is that, when a business is in trouble, the data in its AIS can be used
to uncover the story of what went wrong.

The cases of WorldCom and Lehman Brothers provide two examples.

In 2002, WorldCom's internal auditors Eugene Morse and Cynthia Cooper

used the company's AIS to uncover nearly $4 billion in fraudulent expense
allocations and other accounting entries. Their investigation led to the termination
of CFO Scott Sullivan, as well as new legislation — section 404 of the Sarbanes-
Oxley Act, which regulates companies' internal financial controls and procedures.

When investigating the causes of Lehman's collapse, a review of its AIS and other
data systems was a key component, along with document collection and review,
plus witness interviews. The search for the causes of the company's failure
"required an extensive investigation and review of Lehman's operating,
trading, valuation, financial, accounting and other data systems," according to the
2,200-page, nine-volume examiner'sreport.

Lehman's systems provide an example of how an AIS should not be structured.

Examiner Anton R. Valukas' report states, "At the time of its bankruptcy filing,
Lehman maintained a patchwork of over 2,600 software systems and applications...
Many of Lehman's systems were arcane, outdated or non-standard."

The examiner decided to focus his efforts on the 96 systems that appeared most
relevant. This examination required training, study, and trial and error just to learn
how to use the systems.

Valukas' report also noted, "Lehman's systems were highly interdependent, but
their relationships were difficult to decipher and not well-documented. It took
extraordinary effort to untangle these systems to obtain the necessaryinformation."

Conclusion
The six components of an AIS all work together to help key
employees collect, store, manage, process, retrieve, and report their financial data.
Having a well-developed and maintained accounting information system that is
efficient and accurate is an indispensable component of a successfulbusiness

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ACCOUNTING FOR DEPRECIATION
Definition
Depreciation is a measure of the wearing out, consumption or other loss of
value of a depreciable asset arising from use, effluxion of time or obsolescence
through technology and market changes. Depreciation is allocated so as to charge a
fair proportion of the depreciable amount in each accounting period during the
expected useful life of the asset. Depreciation includes amortisation of assets
whose useful life ispredetermined.
Depreciable assets are assets which
(i) are expected to be used during more than one accounting period;and
(ii) have a limited useful life;and
(iii) are held by an enterprise for use in the production or supply of goods
and services, for rental to others, or for administrative purposes and not for
the purpose of sale in the ordinary course ofbusiness.
Useful life is either
(i) the period over which a depreciable asset is expected to be used by the
enterprise;or
(ii) the number of production or similar units expected to be obtained from
the use of the asset by theenterprise.
Depreciable amount of a depreciable asset is its historical cost, or other amount
substituted for historical cost1 in the financial statements, less the estimated
residual value.
Explanation
Depreciation has a significant effect in determining and presenting the
financial position and results of operations of an enterprise. Depreciation is
charged in each accounting period by reference to the extent of the depreciable
amount, irrespective of an increase in the market value of theassets.
Assessment of depreciation and the amount to be charged in respect Thereof
in an accounting period are usually based on the following three factors:

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(i) historical cost or other amount substituted for the historical cost of the
depreciable asset when the asset has beenrevalued;
(ii) expected useful life of the depreciable asset;and
(iii) estimated residual value of the depreciableasset.
Historical cost of a depreciable asset represents its money outlay or its
equivalent in connection with its acquisition, installation and commissioning as
well as for additions to or improvement thereof. The historical cost of a
depreciable asset may undergo subsequent changes arising as a result of increase or
decrease in long term liability on account of exchange fluctuations, price
adjustments, changes in duties or similarfactors.
The useful life of a depreciable asset is shorter than its physical life and is:
(i) pre-determined by legal or contractual limits, such as the expiry dates of
relatedleases;
(ii) directly governed by extraction orconsumption;
(iii) dependent on the extent of use and physical deterioration on account of
wear and tear which again depends on operational factors, such as, the
number of shifts for which the asset is to be used, repair and maintenance
policy of the enterprise etc.;and
(iv) reduced by obsolescence arising from such factorsas:
(a) technologicalchanges;
(b) improvement in productionmethods;
(c) change in market demand for the product or serviceoutput
of the asset;or
(d) legal or otherrestrictions.
Determination of the useful life of a depreciable asset is a matter of
estimation and is normally based on various factors including experience with
similar types of assets. Such estimation is more difficult for an asset using new
technology or used in the production of a new product or in the provision of a new
service but is nevertheless required on some reasonable basis.

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Any addition or extension to an existing asset which is of a capital nature 60
AS 6 and which becomes an integral part of the existing asset is depreciated over
the remaining useful life of that asset. As a practical measure, however,
depreciation is sometimes provided on such addition or extension at the rate which
is applied to an existing asset. Any addition or extension which retains a separate
identity and is capable of being used after the existing asset is disposed of, is
depreciated independently on the basis of an estimate of its own useful life.
Determination of residual value of an asset is normally a difficult matter. If
such value is considered as insignificant, it is normally regarded as nil. On the
contrary, if the residual value is likely to be significant, it is estimated at the time
of acquisition/installation, or at the time of subsequent revaluation of the asset.
One of the bases for determining the residual value would be the realisable value
of similar assets which have reached the end of their useful lives and have operated
under conditions similar to those in which the asset will beused.
The quantum of depreciation to be provided in an accounting period
involves the exercise of judgement by management in the light of technical,
commercial, accounting and legal requirements and accordingly may need
periodical review. If it is considered that the original estimate of useful life of an
asset requires any revision, the unamortised depreciable amount of the asset is
charged to revenue over the revised remaining usefullife.
There are several methods of allocating depreciation over the useful life of
the assets. Those most commonly employed in industrial and commercial
enterprises are the straightline method and the reducing balance method. The
management of a business selects the most appropriate method(s) based on various
important factors e.g., (i) type of asset, (ii) the nature of the use of such asset and
(iii) circumstances prevailing in the business. A combination of more than one
method is sometimes used. In respect of depreciable assets which do not have
material value, depreciation is often allocated fully in the accounting period in
which they are acquired.
The statute governing an enterprise may provide the basis for computation of
the depreciation. For example, the Companies Act, 1956 lays down the rates of
depreciation in respect of various assets. Where the management’s estimate of the
useful life of an asset of the enterprise is shorter than that envisaged under the
provisions of the relevant statute, the depreciation provision is appropriately

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computed by applying a higher rate. If the management’s estimate of the useful life
of the asset is longer than that envisaged under the Depreciation Accounting 61
statute, depreciation rate lower than that envisaged by the statute can be applied
only in accordance with requirements of the statute.
Where depreciable assets are disposed of, discarded, demolished or
destroyed, the net surplus or deficiency, if material, is disclosed separately.
The method of depreciation is applied consistently to provide comparability
of the results of the operations of the enterprise from period to period. A change
from one method of providing depreciation to another is made only if the adoption
of the new method is required by statute or for compliance with an accounting
standard or if it is considered that the change would result in a more appropriate
preparation or presentation of the financial statements of the enterprise. When such
a change in the method of depreciation is made, depreciation is recalculated in
accordance with the new method from the date of the asset coming into use. The
deficiency or surplus arising from retrospective recomputation of depreciation in
accordance with the new method is adjusted in the accounts in the year in which
the method of depreciation is changed. In case the change in the method results in
deficiency in depreciation in respect of past years, the deficiency is charged in the
statement of profit and loss. In case the change in the method results in surplus, the
surplus is credited to the statement of profit and loss. Such a change is treated as a
change in accounting policy and its effect is quantified anddisclosed.
Where the historical cost of an asset has undergone a change due to
circumstances specified in para 6 above, the depreciation on the revised
unamortised depreciable amount is provided prospectively over the residual useful
life of the asset.
The depreciation methods used, the total depreciation for the period for each
class of assets, the gross amount of each class of depreciable assets and the related
accumulated depreciation are disclosed in the financial statements along with the
disclosure of other accounting policies. The depreciation rates or the useful lives of
the assets are disclosed only if they are different from the principal rates specified
in the statute governing the enterprise.
In case the depreciable assets are revalued, the provision for depreciation is
based on the revalued amount on the estimate of the remaining useful life of such
assets. In case the revaluation has a material effect on the62 AS 6 amount of

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depreciation, the same is disclosed separately in the year in which revaluation is
carried out.
A change in the method of depreciation is treated as a change in an
accounting policy and is disclosed accordingly.
Main Principles
The depreciable amount of a depreciable asset should be allocated on a
systematic basis to each accounting period during the useful life of the asset.
The depreciation method selected should be applied consistently from period
to period. A change from one method of providing depreciation to another should
be made only if the adoption of the new method is required by statute or for
compliance with an accounting standard or if it is considered that the change would
result in a more appropriate preparation or presentation of the financial statements
of the enterprise. When such a change in the method of depreciation is made,
depreciation should be recalculated in accordance with the new method from the
date of the asset coming into use. The deficiency or surplus arising from
retrospective recomputation of depreciation in accordance with the new method
should be adjusted in the accounts in the year in which the method of depreciation
is changed. In case the change in the method results in deficiency in depreciation in
respect of past years, the deficiency should be charged in the statement of profit
and loss. In case the change in the method results in surplus, the surplus should be
credited to the statement of profit and loss. Such a change should be treated as a
change in accounting policy and its effect should be quantified anddisclosed.
The useful life of a depreciable asset should be estimated after considering the
following factors:
(i) expected physical wear andtear;
(ii) obsolescence;
(iii) legal or other limits on the use of theasset.
Any addition or extension which becomes an integral part of the existing
asset should be depreciated over the remaining useful life of that asset. The
depreciation on such addition or extension may also be provided at the rate applied
to the existing asset. Where an addition or extension retains a separate identityand

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is capable of being used after the existing asset is disposed of, depreciation should
be provided independently on the basis of an estimate of its own useful life.
Where the historical cost of a depreciable asset has undergone a change due
to increase or decrease in long term liability on account of exchange fluctuations,
price adjustments, changes in duties or similar factors, the depreciation on the
revised unamortised depreciable amount should be provided prospectively over the
residual useful life of the asset.
Where the depreciable assets are revalued, the provision for depreciation
should be based on the revalued amount and on the estimate of the remaining
useful lives of such assets. In case the revaluation has a material effect on the
amount of depreciation, the same should be disclosed separately in the year in
which revaluation is carriedout.
If any depreciable asset is disposed of, discarded, demolished or destroyed,
the net surplus or deficiency, if material, should be disclosed separately.
The following information should be disclosed in the financial statements:
(i) the historical cost or other amount substituted for historical cost of each
class of depreciableassets;
(ii) total depreciation for the period for each class of assets;and
(iii) the related accumulateddepreciation.
The following information should also be disclosed in the financial statements
along with the disclosure of other accountingpolicies:
(i) depreciation methods used;and
(ii) depreciation rates or the useful lives of the assets, if they are different from the
principal rates specified in the statute governing theenterprise.

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