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Note: Answer all the questions. 1. Explain any two concepts of accounting with examples. marks) (10
Accounting Concepts: Accounting is the language of business and it is concerned with measurement of financial performance of a business by recording, analyzing and reporting the business results for the sake of stakeholders. Since all stakeholders should understand the accounting language in the same sense, certain principles, concepts and policies of accounting have been laid down. Principles are basically the rules of action adopted by the accountants universally while recording accounting transactions. The principles are doctrines associated with theory and procedures and current practices of accounting. These principles may be classified as concepts and conventions. While concepts are in the form of assumptions or conditions, conventions are those customs and traditions which guide the accountants while preparing accounting statements. For instance business is started with an assumption that it shall be continued for a long period of time and no body promotes a business organization to close it down within a short period. Basing on this assumption, business man purchases fixed assets, uses them and values them from time to time. This is a strong assumption that any businessman approaches with. Such assumption is called a concept. To give an example for convention, inventory (stock) in a business is valued at the end of an accounting period, at cost or market price which ever is lower. This is an accepted convention or a practice or a principle in accounting. On the other hand, an accounting policy is one which is adopted by management, relevant to the situations. For example, every asset should be depreciated (this is a concept) at the end of an accounting period. The practice is to adopt fixed installment or diminishing balance method or any other method of depreciation.(this is a convention). The policy of the management may be to adhere to fixed installment method of depreciation and it is their choice. Therefore no management can exercise discretion regarding fundamental presumptions of accounting. But every management has a choice of making an accounting policy. It is not out of place to mention that in order to bring uniformity in terminology, accounting concepts, conventions, and assumptions, the Institute of Chartered Accountants of India (ICAI) established Accounting Standards Board (ASB) in 1977. The principal objective of ASB is to formulate accounting standards so that such standards will be established by the council of ICAI. While formulating the accounting standards, ASB will give due consideration to the International Accounting Standards and try to integrate them to the extent possible. It also considers the customs,
practices, laws and usages prevailing in Indian business. There are altogether 30 accounting standards issued by ASB which have to be adopted by management of different enterprises to improve the quality of presentation of financial statements in our country.
Concepts are the basic assumptions or conditions upon which the science of accounting is based. There are five basic concepts of accounting, namely –
• • • • •
Business entity concept, which is also termed as Separate entity concept, Going concern concept Money measurement concept Periodicity concept Accrual concept.
Going concern concept The fundamental assumption is that the business entity will continue 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. This assumption is called “going concern concept”. For this reason accountants value fixed assets on historical cost method. Had the business been set up to last for a short period, fixed assets should have been valued at a market price. Besides, going concern concept provides for amortization of the cost of fixed assets over the life time of the assets. For example, an entrepreneur purchases a plant for Rs. One crore and it has a life of 10 years. During this period, he sets aside every year certain funds from the income of the business so that it would help him for replacement of the asset at the end of ten years. This process of amortization presupposes that the enterprise will continue to do business fairly for long time. 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 not received and similarly 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. For example, interest receivable on Fixed deposit for the year ending 31-122006 is Rs. 12000 but it is actually credited to the bank account only in February 2007. For calculating the income from interest, the amount Rs.12000 is considered even though it is not received before 31-12-2006. This amount is called accrued interest. Similarly the expenses which are incurred for the accounting period, might be paid only after the accounting period. Such accrued expenses are deducted while calculating the profit for the accounting period. This is the accrual concept.
2. Prove that accounting equation is satisfied in all the following transactions of Mr.X 1. Commenced business with cash – Rs.80,000 marks) 2. Purchased goods for cash – Rs.40,000 and on credit Rs.30,000 3. Sold goods for cash – Rs.40,000 costing Rs.25,000 4. Paid salary – Rs.2,000 and salary outstanding Rs.1,000 5. Bought scooter for personal use for cash at Rs.20,000 (10
Mr. X Capit al +
Assets = Cas h a/c 800 00 (-) 400 00 Goo ds a/c Salar y a/c
1. Commenced business (+ with cash – Rs.80,000 )
2 a) Purchased goods for cash – Rs.40,000 ( + ) ( + ) ( + ) (+ ) 1500 0 (-)
2 b) Purchase on credit Rs.30,000
3 a) Sold goods for cash – Rs.40,000 3 b) Costing Rs.25,000
400 00 2500 0 200 0 2000
4 a) Paid salary – Rs.2,000
(-) ( + ) 1000 ( + ) 1000
4 b) Salary outstanding -Rs.1,000 (-) 5. Bought scooter for personal use for cash at Rs.20,000 (-)
7400 0 Total Amount
+ 31000 105000
450 00 2000 105000
Show the rectification entries for the following: marks) a. The Sales account is undercast by Rs.15,000
b. Goods returned by the customer Mr.X of Rs.5650 has been posted in the Return Inward Account as Rs.5560 and in Mr.X a/c as Rs.6,550. c. Salary paid Rs.6,000 has been posted to Rent account d. Cash received from Ram posted to Shyam account Rs.7,000 e. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhu’s a/c. Answer:
Journal Proper Particulars LF Debit Rs. Credit Rs.
Suspense account To Sales account
(Being under casting of sales book rectified) Mr. X account Dr Return Inward A/c To Suspense a/c (Being less debit given to returns inwards account to the extent of Rs90, and excess credit given to Mr. X, now rectified) Salary A/c Dr To Rent A.c (Being salary paid and account debited to rent a/c, now rectified) Shyam a/c Dr To Ram account (Being cash recd. From Ram but credited to Shyam now
900 90 990
rectified) Suspense a/c To Madhu a/c To Jadu
17280 8640 8640
1. The following balances are extracted from the books of Kiran Trading Co on 31st March 2000. You are required to prepare trading and profit and loss account (20 marks) Opening Stock B/R Purchases Wages Insurance Sundry Debtors Carriage Inwards Commission Paid Interest on Capital Stationery Return Inwards Commission received Return Outward Trade Expenses Office furniture Cash in hand Cash at bank Rent and Taxes Carriage Outward Sales Bills Payable Creditors Capital The closing stock was valued at Rs.1,25,000 5,000 22,500 1,95,000 14,000 5,500 1,50,000 4,000 4,000 3,500 2,250 6,500 2,000 2,500 1,000 5,000 2,500 23,750 5,500 7,250 2,50,000 15,000 98,250 89,500 and a balance sheet as on that date:
Answer: Trading Account Particulars Opening Stock Purchases 195000 Return Outward Wages Carriage Inwards Gross Profit TOTAL Amount 5000 192500 -2500 14000 4000 153000 368500 Particulars Closing Stock Sales 250000 Return -6500 Amount 125000 243500 Inward
Profit and Loss Account Particulars Amount Particulars Amount
Insurance Commission Paid Stationary Rent and Tax Carriage Outward Trade Exp Interest on Capital Net Profit TOTAL
5500 4000 2250 5500 7250 1000 3500 126000 155000
GP Commission Recd.
Balance Sheet Liabilities Capital Bills Payable Creditors Net Profit Amount 89500 15000 98250 126000 Assets Stock B/R S. Debtors Furniture Cash Bank TOTAL Amount 125000 22500 150000 5000 2500 23750 328750
2. Write short notes on : Marks) a. Outstanding Expenses b. Prepaid Expenses
Outstanding expenses Expenses due but not yet paid are known as outstanding expenses. Wages, salaries, rent, commission etc payable in the current month are paid in the following month. If final accounts are prepared for year ending 31 st December, then the expenses payable for December will be paid in January of next year. The extent to which the amount belongs to the current year but payable in the next year is called outstanding expenses. To record that aspect, the journal entry drawn in the Journal proper is: Concerned Expenses account Dr To outstanding Expenses account. Outstanding expenses account indicates liability for the current year and it will appear in the balance sheet. Example: Advertisement expenses for outstanding is Rs.5000. The journal entry is Advertisement expenses account Dr 5000 year 31-12-2003
To Outstanding expenses account 5000
Prepaid Expenses Expenses paid in advance are regarded as prepaid expenses. Prepaid expenses form an asset and therefore prepaid expenses account is debited. For example, insurance premium is paid from April, 2004 to March, 2005 and the amount is Rs.3600. The financial year ends by 31 st December, 2004. Therefore the premium relating to Jan, Feb and Mar of 2005 Rs.900 is said to have been paid in advance. To record this internal adjustment, the entry is Prepaid Expenses account Dr 900 To Insurance account 900
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