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MB0041-Financial and Management Accounting

MB0041-Financial and Management Accounting

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Published by Pankaj Sharma

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Published by: Pankaj Sharma on Nov 17, 2011
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Master of Business Administration-MB0041 – Financial and Management Accounting
Q.1 Explain the Various accounting Concepts and Principles?Concepts:
Concepts take the form of assumptions or conditions, which guide theaccountants while preparing accounting statements.
Types of Accounting Concepts
As said earlier, concepts are the basic assumptions or conditions upon which the scienceof accounting is based. There are five basic concepts of accounting, namely – businessentity concept, which is also termed as separate entity concept, going concern concept,money measurement concept, periodicity concept and accrual concept. Each concept isdiscussed below.
Business Separate Entity Concept:
The essence of this concept is that business is aseparate entity and it is different from the owner or the proprietor. It is an economic unitwhich owns its assets and has its own obligations. This enables the business to segregatethe transactions of the company from the private transactions of the proprietor(s).
Going concern concept:
The fundamental assumption is that the business entity willcontinue fairly for a long time to come. There is no reason why an enterprise should be promoted for a short period only to liquidate the business in the foreseeable future. Thisassumption is called “going concern concept”.This concept forms the basis for the distinction between expenditure that will yield benefit over a long period of time (Fixed Assets) and expenditure whose benefit will beexhausted in the short term (Current Asset). Similarly liabilities are classified as shortterm liabilities and long term liabilities.
 
Money Measurement Concept:
All transactions of a business are recorded in terms of money. An event or a transaction that cannot be expressed in money terms, cannot beaccounted in the books of accounts.
Periodicity Concept:
The time interval for which accounts are prepared is an importantfactor even though we assume long life for a business. The accounting period could behalf year or even a quarter. The financial statements should be prepared at the end of eachaccounting period so that income statement shows profit or loss for that accounting period. So also a balance sheet is prepared to depict the financial position of the business.
Accrual Concept:
Profit earned or loss suffered for an accounting period is the result of  both cash and credit transactions. It is possible that certain incomes are earned but notreceived and similarly certain expenses incurred but not yet paid during an accounting period. But it is relevant to consider them while computing the financial results just because they are related to the specific accounting period.
Accounting Principles:
Accounting Principles are the rules basing on which accountingtakes place and these rules are universally accepted.
Principle of Income Recognition:
According to this concept, revenue is considered as being earned on the date on which it is realized, i.e., the date on which goods and servicesare transferred to customers for cash or for promise. It should further be noted that it isthe amount which the customers are expected to pay which shall be recorded. In effect,only revenue which is actually realized should be taken to profit and loss account.Unrealized revenue should not be taken into consideration for determining the profit.
Principle of Expense:
Expenses are different from payments. A payment becomesexpenditure or an expense only when such payment is revenue in nature and made for consideration.
Principle of Matching Cost and Revenue:
Revenue earned during a period is comparedwith the expenditure incurred to earn that income, whether the expenditure is paid duringthat period or not. This is matching cost and revenue principle, which is important to findout the profit earned for that period. Here costs are reported as expenses in the accounting period in which the revenue associated with those costs is reported.
Principle of Historical Costs:
This is called ‘cost’ principle. All assets are recorded atthe cost of acquisition and this cost is the basis for all subsequent accounting for theassets. The expenses and the goods purchased are shown at the value at which they areincurred. The value of the assets is constantly reduced by charging depreciation againsttheir cost to present their book value in the balance sheet.
 
Principle of Full Disclosure:
The business enterprise should disclose relevantinformation to all the parties concerned with the organization. It means that anyinformation of substance or of interest to the average investors will have to be disclosedin the financial statements.
Double Aspect Principle:
This concept is the most fundamental one for accounting. A business entity is an independent unit and it receives benefits from some and gives benefits to some other. Benefit received and benefit given should always match and balance.
Modifying Principle:
The modifying principle states that the cost of applying a principle should not be more than the benefit derived from. If the cost is more than the benefit, then that principle should be modified. This is called cost-benefit principle. Thereshould be flexibility in adopting a principle and the advantage out of the principle shouldover weigh the cost of implementing the principle.
Principle of Materiality:
While important details of financial status must be informed toall relevant parties, insignificant facts which do not influence any decisions of theinvestors or any interested group, need not be communicated. Such less significant factsare not regarded as material facts. What is material and what is not material depends uponthe nature of information and the party to whom the information is provided. Whileincome has to be shown for income tax purposes, the amount can be rounded off to thenearest ten and fraction does not matter. The statement of account sent to a debtor contains all the details regarding invoices raised, amount outstanding during a particular  period. The information on debtors furnished to Registrar of Companies need not be indetail.
Principle of Consistency:
Consistency is required to help comparison of financial datafrom one period to another. Once a method of accounting is adopted, it should not bechanged. For instance if stock is valued under FIFO method in first year it should bevalued under the same method in the subsequent years also. Likewise if the firm choosesto depreciate assets under diminishing balance method, it should continue to do so year after year, unless the management takes a policy decision to change the depreciationmethod. Any change in the accounting methods should be informed to the concernedauthorities with justification.
Principle of Conservatism or Prudence:
Accountants follow the rule “anticipate no profits but provide for all anticipated losses “. Whenever risk is anticipated sufficient provision should be made. The value of investments is normally taken at cost, even if themarket value is higher than the cost. If the market value expected is lower than the cost,then provision should be made by charging profit and creating investment fluctuationfund. This is the principle of conservatism and it does not mean that the income or thevalue of assets should be intentionally under stated.
Q.2 Pass journal entries for the following transactions

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