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CMA Intermediate · Corporate Accounting and Auditing · Conceptual Framework

Sahyadri Traders sells goods costing ₹60,000 for ₹90,000 in cash. According to the Conceptual Framework, how does the initial recognition of this transaction affect the elements of financial statements?

Income of ₹90,000 is recognised from receiving cash, and an expense of ₹60,000 is recognised from derecognising the goods sold. Both arise simultaneously from changes in assets, so the net effect is ₹30,000. No liability arises from this sale.

  1. AOnly an asset (cash) is recognised; the expense is recognised later at year end
  2. BIncome of ₹90,000 is recognised from the cash asset and an expense of ₹60,000 from derecognition of the goodsCorrect
  3. CIncome of ₹30,000 only is recognised, as expenses are never recognised separately
  4. DA liability of ₹60,000 is recognised for the goods given up

Explanation

A cash sale gives income from the recognition of one asset (cash) and an expense from the derecognition of another asset (the goods sold). So income of ₹90,000 and an expense of ₹60,000 arise together, leaving a net gain of ₹30,000. The option showing only ₹30,000 as income is wrong because the elements are recognised separately.

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