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CMA Intermediate · Financial Accounting · Disclosure of Accounting Policies (AS 1)

Kaveri Ltd has a year ended 31 March. On 20 March it supplied goods worth ₹4,00,000 on credit and received payment on 10 April. It also paid ₹60,000 on 25 March as insurance premium for the following year. Under the accrual assumption, what are the amounts to be recognised as sales and as insurance expense for the year?

Sales of ₹4,00,000 and insurance expense of nil. Under the accrual assumption, revenue is recognised when earned even though cash comes in April, and the premium paid relates to next year's period, so it is not an expense of the current year.

  1. ASales ₹4,00,000; insurance expense ₹60,000
  2. BSales ₹4,00,000; insurance expense ₹0Correct
  3. CSales ₹0; insurance expense ₹60,000
  4. DSales ₹0; insurance expense ₹0

Explanation

Revenue is recognised when earned, not when cash is received, so sales of ₹4,00,000 belong to this year. The premium relates to the following year and is recorded in the period to which it relates, so ₹0 is expensed now. Option A wrongly follows cash payment, and option C is wrong on both items.

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