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ASSIGNMENT ON FINANCIAL AND MANAGEMENT

ACCOUNTING

Q. 1: Explain any two concepts of accounting with examples?

Answer

 Introduction:
Accounting is the language of business and it is used to communicate financial
information. In order for that information to make sense, accounting is based on 12
fundamental concepts. These fundamental concepts then form the basis for all of the
Generally Accepted Accounting Principles (GAAP). By using these concepts as the
foundation, readers of financial statements and other accounting information do not need to
make assumptions about what the numbers mean.

For instance, the difference between reading that a truck has a value of $9000 on the
balance sheet and understanding what that $9000 represents is huge. Can you turn around
and sell the truck for $9000? If you had to buy the truck today, would you pay $9000? Or,
perhaps the original purchase price of the truck was $9000. All of these assumptions lead
to very different evaluations of the worth of that asset and how it contributes to the
company’s financial situation. For this reason it is imperative to know and understand the
eleven key concepts.

 Eleven key Accounting concepts:


• Entity:

Accounts are kept for entities and not the people who own or run the company. Even in
proprietorships and partnerships, the accounts for the business must be kept separate from
those of the owner(s).

• Money-Measurement:

For an accounting record to be made it must be able to be expressed in monetary terms. For
this reason, financial statements show only a limited picture of the business. Consider a
situation where there is a labor strike pending or the business owner’s health is failing;
these situations have a huge impact on the operations and financial security of the company
but this information is not reflected in the financial statements.

• Going Concern:

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ASSIGNMENT ON FINANCIAL AND MANAGEMENT
ACCOUNTING

Accounting assumes that an entity will continue to operate indefinitely. This concept
implies that financial statements do not represent a company’s worth if its assets were to be
liquidated, but rather that the assets will be used in future operations. This concept also
allows businesses to spread (amortize) the cost of an asset over its expected useful life.

• Cost:

An asset (something that is owned by the company) is entered into the accounting
records at the price paid to acquire it. Because the “worth” of an asset changes over time it
would be impossible to accurately record the market value for the assets of a company. The
cost concept does recognize that assets generally depreciate in value and so accounting
practice removes the depreciation amount from the original cost, shows the value as a net
amount, and records the difference as a cost of operations (depreciation expense.) Look at
the following example:

Truck $10,000 purchase price of the truck. Less depreciation $ 1,000 amount deducted as
a depreciation expense Net Truck: $ 9,000 net book-value of the truck.

The $9000 simply represents the book value of the truck after depreciation has been
accounted for. This figure says nothing about other aspects that affect the value of an item
and is not considered a market price.

• Dual Aspect:

This concept is the basis of the fundamental accounting equation:

Assets = Liabilities + Equity

1. Assets are what the company owns.


2. Liabilities are what the company owes to creditors against those assets
3. Equity is the difference between the two and represents what the company owes to
its investors/owners.

All accounting transactions must keep this equation balanced so when there is an increase
on one side there must be an equal increase on the other side or an equal decrease on the
same side.

• Objectivity:

The objectivity concept states that accounting will be recorded on the basis of objective
evidence (invoices, receipts, bank statement, etc…). This means that accounting records

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ASSIGNMENT ON FINANCIAL AND MANAGEMENT
ACCOUNTING

will initiate from a source document and that the information recorded is based on fact and
not personal opinion.

• Time Period:

This concept defines a specific interval of time for which an entity’s reports are
prepared. This can be a fiscal year (Mar 1 – Feb 28), natural year (Jan 1 – Dec 31), or any
other meaningful period such as a quarter or a month.

• Conservatism:

This requires understating rather than overstating revenue (income) and expense
amounts that have a degree of uncertainty. The rule is to recognize revenue when it is
reasonably certain and recognize expenses as soon as they are reasonably possible. The
reasons for accounting in this manner are so that financial statements do not overstate the
company’s financial position. Accounting chooses to err on the side of caution and protect
investors from inflated or overly positive results.

• Realization:

Revenues are recognized when they are earned or realized. Realization is assumed to
occur when the seller receives cash or a claim to cash (receivable) in exchange for goods or
services. This concept is related to conservatism in that revenue (income) is only recorded
when it actually occurs and not at the point in time when a contract is awarded.

• Matching:

To avoid overstatement of income in any one period, the matching principle requires
that revenues and related expenses be recorded in the same accounting period. If you bill
$20,000 of services in a month, in order to accurately represent the income for the month
you must report the expenses you incurred while generating that income in the same
month.

• Consistency:

Once an entity decides on one method of reporting (i.e. method of accounting for
inventory) it must use that same method for all subsequent events. This ensures that
differences in financial position between reporting periods are a result of changed in the
operations and not to changes in the way items are accounted for.

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ASSIGNMENT ON FINANCIAL AND MANAGEMENT
ACCOUNTING

• Materiality:

Accounting practice only records events that are significant enough to justify the
usefulness of the information. Technically, each time a sheet of paper is used, the asset
“Office supplies” is decreased by an infinitesimal amount but that transaction is not worth
accounting for. By understanding and applying these principles you will be able to read,
prepare, and compare financial statements with clarity and accuracy. The bottom-line is
that the ethical practice of accounting mandates reporting income as accurately as possible
and when there is uncertainty, choosing to err on the side of caution.

Basic Accounting Concepts:


Balance Sheet Accounts:

The three so-called Balance Sheet Accounts are Assets, Liabilities, and Equity. Balance
Sheet Accounts are used to track the changes in value of things you own or owe. Assets are
the group of things that you own. Your assets could include a car, cash, a house, stocks, or
anything else that has convertible value. Convertible value means that theoretically you
could sell the item for cash. Liabilities are the group of things on which you owe money.
Your liabilities could include a car loan, a student loan, a mortgage, your investment margin
account, or anything else which you must pay back at some time. Equity is the same as "net
worth." It represents what is left over after you subtract your liabilities from your assets. It
can be thought of as the portion of your assets that you own outright, without any debt.

Income and Expense Accounts:

The two Income and Expense Accounts are used to increase or decrease the value of your
accounts. Thus, while the balance sheet accounts simply track the value of the things you
own or owe, income and expense accounts allow you to change the value of these accounts.
Income is the payment you receive for your time, services you provide, or the use of your
money. When you receive a paycheck, for example, that check is a payment for labor you
provided to an employer. Other examples of income include commissions, tips, dividend
income from stocks, and interest income from bank accounts. Income will always increase
the value of your Assets and thus you’re Equity. Expenses refer to money you spend to
purchase goods or services provided by someone else. Examples of expenses are a meal at a
restaurant, rent, groceries, gas for your car, or tickets to see a play. Expenses will always
decrease your Equity. If you pay for the expense immediately, you will decrease your
Assets, whereas if you pay for the expense on credit you increase your Liabilities.

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ASSIGNMENT ON FINANCIAL AND MANAGEMENT
ACCOUNTING

Que 2: Prove that accounting equation is satisfied in all the


following transactions of Mr.X?
1. Commenced business with cash – Rs.80,000
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
Answer

Transac Assets Liabilities


tion
Cash Good Scoot Sala Outstan Credi Capital
s er ry ding tors
Salary
Commenced
business +80,000 +80,000
with cash–
Rs.80,000

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ASSIGNMENT ON FINANCIAL AND MANAGEMENT
ACCOUNTING

Purchased
goods for -40,000 +40,000 +30,000
cash– +30,000
Rs.40,000
and on
credit
Rs.30,000
Sold goods
for cash – +40,000 -25,000 +15,000
Rs.40,000
costing
Rs.25,000
Paid salary –
Rs.2,000 +1,000 +2,000 +1,000 -2,000
and salary
outstanding
Rs.1,000
Bought
scooter for +20,000 +20,000
personal use
for cash at
Rs.20,000
Total 81,00 45,000 20,00 2,000 1,000 30,000 1,13,000
0 0
Grand Total 1,46,000 1,46,000
Hence Accounting Equation has been proved.

Que 3: Show the rectification entries for the following


a. Sales account is under cast by Rs.15, 000.
b. Goods returned by the customer Mr. of Rs.5650 has been posted in the
Return Inward Account as Rs.5560 and in Mr. 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
a. The Sales account is under cast by Rs.15,000

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ASSIGNMENT ON FINANCIAL AND MANAGEMENT
ACCOUNTING

Suspense A/c Dr 15,000


To Sales A/c 15,000

Statement- Being under casting of Sales A/c by 15,000 now


rectified.

b. Goods returned by the customer Mr. of Rs.5650 has been posted in


the Return Inward Account as Rs.5560 and in Mr. a/c as Rs.6,550

X A/c Dr 990
To Suspense A/c 990

Statement- Being over casting of X A/c by 990 now rectified.

c. Salary paid Rs.6,000 has been posted to Rent account

Original Entry Wrong Entry Rectified Entry


Salary A/c Dr 6,000 Salary A/c Dr 6,000 Rent A/c Dr 6,000
To Cash A/c 6,000 To Rent A/c 6,000 To Cash A/c 6,000

Statement- Being Salary A/c had been wrongly credited to Rent A/c
now rectified.

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ASSIGNMENT ON FINANCIAL AND MANAGEMENT
ACCOUNTING

d. Cash received from Ram posted to Shyam account Rs.7,000

Original Entry Wrong Entry Rectified Entry


Cash A/c Dr 7,000 Cash A/c Dr 7,000 Shyam A/c Dr 6,000
To Ram A/c 7,000 Shyam A/c 7,000 Ram A/c 6,000

Statement- Being cash wrongly credited to Shyam’s A/c now


rectified.

e. Cash received from Jadu Rs.8,640 has been posted to the debit of
Madhu’s a/c

Original Entry Wrong Entry Rectified Entry


Cash A/c Dr 7,000 Cash A/c Dr 7,000 Madhu A/c Dr 6,000
To Jadu A/c 7,000 Madhu A/c 7,000 Jadu A/c 6,000

Statement- Being cash wrongly credited to Madhu’s A/c now


rectified.

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ASSIGNMENT ON FINANCIAL AND MANAGEMENT
ACCOUNTING

Q.4: 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 and a balance sheet
as on that date:
(20 marks)
Opening Stock 5,000 Commission received 2,000
B/R 22,500 Return Outward 2,500
Purchases 1,95,000 Trade Expenses 1,000
Wages 14,000 Office furniture 5,000
Insurance 5,500 Cash in hand 2,500
Sundry Debtors 1,50,000 Cash at bank 23,750
Carriage Inwards 4,000 Rent and Taxes 5,500
Commission Paid 4,000 Carriage Outward 7,250
Interest on Capital 3,500 Sales 2,50,000
Stationery 2,250 Bills Payable 15,000
Return Inwards 6,500 Creditors 98,250
Capital 89,500
The closing stock was valued at Rs.1, 25,000

Answer:
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ASSIGNMENT ON FINANCIAL AND MANAGEMENT
ACCOUNTING

The first step in preparing the trading account, profit and loss account and balance sheet is
to prepare the trial balance. And for interest on capital it is assume that the interest had been
already paid. So, it will give its effect on Profit and Loss Account at the debit site.

• TRIAL BALANCE OF KIRAN TRADING CO AS ON 31ST


MARCH 2000
PARTICULARS DEBIT CREDIT
Opening Stock 5,000
B/R 22,500
Purchases 1,95,000
Wages 14,000
Insurance 5,500
Sundry Debtors 1,50,000
Carriage Inwards 4,000
Commission Paid 4,000
Interest on Capital 3,500
Stationery 2,250
Return Inwards 6,500
Commission received 2,000
Return Outward 2,500
Trade Expenses 1,000
Office furniture 5,000
Cash in hand 2,500
Cash at bank 23,750
Rent and Taxes 5,500
Carriage Outward 7,250
Sales 2,50,000
Bills Payable 15,000
Creditors 98,250
Capital 89,500
Total 457, 250 457, 250

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• Trading account of Kiran Trading Co as on 31st


March 2000
Dr.
Cr.
PARTICULARS AMOUN PARTICULARS AMOUN
T T
To Opening stock 5,000 By Sales 2,50,000
To Purchases 1,95,000 Less return Inwards 6,500
Less Return Outward Less Carriage Outward 2,36,25
2,500 7,250
0
Add Carriage In 4000 1,92,50 Closing Stock 1,25,00
0 0
To Wages 14,000 Total 3,61,250
Gross Profit 1,45,75
0
Total 3,61,250

• Profit and loss account of Kiran Trading Co as on


31st March 2000
PARTICULAR AMOUN PARTICULAR AMOUNT
T
To Insurance 5,500 By Gross Profit 1,45,75
0
To Commission paid 4,000 By Commission Received 2,000
To Interest on Capital 3,500 Total 1,47,75
0
To Stationery 2,250
To Trade and Expenses 1,000
To Rent and Taxes 5,500

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Net profit 1,26,00


0
Total 147,75
0

• Balance Sheet of Kiran Trading Co as at 31st March


2000
LIABILITIES AMOUNT ASSETS AMOUNT
Capital 89,500 Cash in Hand 2,500
Add Net Profit 1,26,000 2,15,50 Cash at Bank 23,750
0
Bills Payable 15,000 Bills Receivable 22,500
Creditors 98,250 Debtors 1,50,000
Furniture 5,000
Closing Stock 1,25,000
Total 3,28,75 Total 3,28,750
0
Q.5: Write short notes on:
Answer

5 a)
 Accrued/ Outstanding Expenses:
Certain expenses may have been incurred during the financial year, but will only be paid in
the next financial year. Examples of such expenses is where accounts or invoices have been
received for accounting fees, advertising, rent, rates and taxes, water and electricity, etc.,
which is applicable to the financial year but which is not yet paid at the end of the financial
year. The expense account must be adjusted so that the expense account represents the
expenses for the full financial year or 12 consecutive months (accounting periods or
reporting periods). The amount by which the expense account is outstanding will increase

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the amount of the expense at the end of the financial year. At the end of the financial year a
liability is created - Accrued or outstanding expenses because the amount of the expense is
consumed or used but not yet paid. It is owed to the party who has supplied the expense
item, which is already used up in the financial year.

 To Identify, Enter the Transaction and to Post the


Transaction to the Ledger:

For example, when analyzing the figures on the pre-adjustment trial balance, it is
discovered that the telephone expenses paid for the current financial year is R (£) 3 300.
The telephone account for R (£) 300 of the last month of the financial year is received, but
not yet paid. Enter the transaction in the General Journal. Enter the transaction in the batch.
After entering the transactions in the general journal, the transactions is as follows:
The expense for the telephone is recognized and recorded in the expense accounts which
will result that the net profit will be decreased by the expense of R(£) 300, which is not yet
paid as at the end of the financial year (29 February). It has also increased the current
liabilities, as it is an expense which is payable in the new financial year. An amount of R 3
600 will be recognized as an expense and not R (£) 3 300.
The amount that should have been paid for the financial year is the amount on the pre-
adjustment trail balance plus the amount of the outstanding expense not yet paid. The
expenses are increased (debited) and current liabilities are increased (credited). Once these
transactions have been processed and you have done the Year-end process in the Tools -
Global Processes - Do Year-end menu option, you need to reverse these adjustments in the
new financial year. The reason for this is that these adjustments have served its purpose in
the old financial year to assist you to generate the correct final financial statements.

5b)
 Prepaid expenses:

• What Does Prepaid Expense Mean?

A type of asset that arises on a balance sheet as a result of business making payments for
goods and services to be received in the near future. While prepaid expenses are initially

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recorded as assets, their value is expensed over time as the benefit is received onto the
income statement, because unlike conventional expenses, the business will receive
something of value in the near future.

• Investopedia explains Prepaid Expense

Due to the nature of certain goods and services, they must be prepaid expenses. For
example, insurance is a prepaid expense, because the purpose of purchasing insurance is to
buy proactive protection in case something unfortunate happens. Clearly, no insurance
company would sell insurance that covers the occurrence of an unfortunate event, after the
fact, so insurance expenses must be pre-paid.

Prepaid expenses are those expenses which have been paid in advance. In other words,
these are the expenses which have been paid during the accounting period for which the
final accounts are being prepared but they relate to the next period. As the benefit of such
expenses is received in the subsequent years, it will be treated as expenses of the coming
years and not the year in which it is paid.

Examples: Insurance premium has been paid in advance. Rent has been paid for the next
year.

• Treatment of prepaid expenses in final account:

If prepaid expenses are given in the trial balance they are recorded in the assets side of
Balance sheet only. But if they are given in the adjustments they are subtracted from
concerned expenses in the debit side of profit and loss account and again are shown in the
assets side of Balance Sheet.

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