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CMA Foundation · Fundamentals of Financial and Cost Accounting · Four Frameworks of Accounting and Forms of Organization

Kapoor Textiles sold goods worth ₹80,000 in March 2025 on credit, and the customer paid in May 2025. The firm's accounting year ends on 31 March. Which treatment follows the accrual basis, and what is the effect on profit for the year ended 31 March 2025?

The sale of ₹80,000 should be recorded as revenue in March 2025 because accrual accounting recognises income when earned, not when cash arrives. The debtor is shown at year end and profit for the year includes the sale. Waiting for cash in May would follow the cash basis.

  1. ARecord the sale in May 2025 when cash is received; March profit is unaffected
  2. BRecord ₹80,000 as sales in March 2025; profit for the year includes the saleCorrect
  3. CRecord ₹80,000 as an advance received in March 2025; no profit effect
  4. DRecord the sale in both March and May to be safe; profit rises by ₹1,60,000

Explanation

Accrual accounting recognises revenue when it is earned, not when cash is received. The sale was completed in March, so ₹80,000 is revenue of FY 2024-25 and a debtor is created. Recording it on receipt of cash is the cash basis, which is the main wrong alternative here.

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