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B.Com - Financial Accounting 10. What is book-keeping? Book-keeping is a

Semester 1 systematic way of recording business transactions in
the books of accounts.
Important Theory Questions & Answers
11. What are drawings? The cash or goods taken away
1. What do you mean by contingent liabilities? A by the owner of the business for his personal use are
Contingent liability is one which is not an actual liability called drawings.
but which will become an actual one on the happening of
some event which is uncertain. 12. What is a separate entity concept? It is an
accounting assumption that the business is separate
2. What do you mean by Generally Accepted Accounting from its owner.
Principles (GAAP)? The rules and guidelines used
in preparing accounting reports are termed as Generally 13. What is a cash transaction? If the cash is paid
Accepted Accounting Principles. immediately at the time of occurrence of transaction,
it is called a cash transaction.
3. What do you mean by Accounting Assumption or
Concepts? Accounting Assumption or concept 14. What is double entry book-keeping? A system of
refers to certain necessary assumptions or condition on book-keeping in which both debit and credit aspects
which the accounting system is based. of a transaction are recorded.

4. Explain Capital expenditure. Any amount spent 15. What are liabilities? The debts due by a business
on acquisition of an asset or for increasing the value of an to outsiders are called liabilities of the business.
asset or for increasing the earning capacity of a business
16. What is capital? The cash or goods
is called capital expenditure. Eg: Cost of land, Building,
provided/invested by the owner of the business to
Furniture.
start a business is called capital.
5. Explain Revenue expenditure. It is the expenditure
17. What is a business transaction? A business
incurred during one accounting period, the full benefit of
transaction is an event or occurrence that impacts the
which is obtained in the same period. Example: Rent paid,
financial position of a business entity and that must
Salaries, Advertisement.
be recorded in the books of accounts
6. What do you mean by Matching Principles? As
18. What are assets? The things of value which are
per the matching concept only those expenses pertaining
possessed by the business and which can be used to
to the current accounting period must match against the
generate revenue are called assets. For example, cash,
revenue relating to the same period.
building, and furniture.
7. What do you mean by deferred revenue expenditure?
19. What are fixed assets? The assets which are
It is an expenditure of a revenue nature, the benefit of
of permanent nature and which are permanently used
which lasts for more than one accounting year.
in business are called fixed assets, such as furniture,
8. Define Accounting Standards. An accounting land, building, and machinery etc.
standards are the policy documents issued by the
20. What are current assets? Cash and other
recognised expert accounting body relating to various
assets which can be converted into cash within a
aspects of measurement, treatment and disclosure of
short period of time (usually one year) are called
accounting transactions and events.
current assets. For example, cash, debtors, inventories
9. Define accounting. Accounting is an art of etc.
recording, classifying, summarizing, and interpreting the
21. What is meant by tangible assets? The assets
information of an economic entity.
which have physical existence and which can be seen

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and touched, such as cash, machinery, furniture and
land etc.
22. What is meant by intangible assets? The assets
which can only be felt but cannot be seen or touched. For
example, goodwill, copyright, patent, and trademark etc.
23. What is an adjustment? An adjustment means to make
a correct record of a transaction which has not been
entered or which has been entered in an incomplete or
wrong way.
24. What is the purpose of adjustments?
Adjustments are made to obtain accurate results from
financial statements. It includes profit and loss for a
particular accounting period and financial position of the
business at the end of the period etc.
25. What are outstanding expenses? The expenses whose
benefit has been utilized during expenses, unexpired
expenses or expenses paid in advance. the current year but
have not been paid till the end of the current year are
called outstanding expenses
26. What do you mean by prepaid expenses? The
expenses which have been paid in advance but benefit for
which is still to receive are called prepaid
27. What is accrued income/revenue? It is the
income/revenue which has been earned during the year
but has not been actually received till the end of the
accounting period.
28. What is unearned income/revenue? The
income/revenue which has been received in advance but
the services has not yet been provided.
29. What is an accounting equation? An equation which
expresses the assets and claims against those assets is
called the accounting equation. In the form of a formula it
is written as: Assets = Liabilities + Owner's equity.
30. If total assets are RS. 20,000 and owner's equity is RS.
15,000, what is the amount of total liabilities?
The total liabilities of the business are RS. 5,000 (RS.
20,000 – RS. 15,000).
31. If total liabilities are RS. 40,000 and owner's equity is
RS. 60,000, what is the amount of total assets?
The amount of total assets is RS. 100,000 (RS. 40,000 +
RS. 60,000)
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32. What is the difference between liabilities and
owner's equity? Both liabilities and owner's
equity are obligations of the business. The
difference between two is that the liabilities are the
obligations of the business to parties other than the
owner or owners (i.e., creditors) whereas owner's
equity is the obligation of the business to its owner
or owners.
33. Define depreciation? When the value of assets
gradually reduces due to use and wear and tears, it is
called depreciation.
34. What do you mean by depletion? The process
of measuring and recording the exhaustion of
natural resources due to their use is called depletion.
35. Define the term "Amortization"? The term
amortization is used in respect of intangible assets
like goodwill copyright, patents etc. The process of
writing off their value is called Amortization
36. What is a journal? Journal is a book in which
business transactions are recorded in chronological
order (in order in which they occur).
37. What is meant by a journal entry? Journal
entry means recording business transactions in
general journal strictly in accordance with the rules
of the double entry system of book-keeping.
38. What is meant by the term journalizing?
The term journalizing refers to the process of
recording journal entries in the journal. The person
who is responsible for this process, needs to know the
certain principles of the double entry system of
book-keeping.
39. Why is the journal called the book of original
entry? Journal is a book in which business
transactions are recorded at first instance as they
occur, so journal is called the book of original entry.
40. What is a ledger? Ledger is a book in which all
the accounts of the business enterprise are
maintained. These accounts are called ledger
accounts to which entries from general journal are
periodically
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41. What is meant by posting? Posting is the
process of transferring entries from journal to ledger
accounts
42. A ledger account has two sides - left side and right
side. What are book-keeping/accounting names of
these two sides? The left side of the account is
termed as debit (Dr.) side and the right side of the
account is termed as credit (Cr.) side.
43. What are Financial Statements? Name The Major
Financial Statements? The Financial
statements are the reports that result from the process
of accounting which allow the interested parties to
evaluate the profitability and the solvency of the
business. The major financial statements are:
o Profit and Loss Account
o Balance sheet
o Cash Flow statement.
44. What Are The Principal Qualitative
Characteristics Of Financial Statements?
The principle characteristics of financial statements
are the attributes that make the information provided
in the financial statements useful to the users. The
principal qualitative characteristics are
o Understandability: They should be
readily understandable to the users. For this
purpose users are deemed to have reasonable
knowledge of business and economic activities.
o Relevance: To be useful information
must be relevant to the decision-making needs
of the users.
o Reliability: Information is said to be
reliable when it is free from errors, bias and can
be depended upon by the users to represent
faithfully, which it purports to represent.
o Comparability: Users must be able to
compare the financial statements of an
enterprise through time in order to identify
trends in its financial position and performance.
45. Mention what are the rules for debit and credit for
different accounts to increase the amount in your
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business accounts? The rules for debit and credit
for different accounts,
• for a capital account, you credit to
increase it and debit to decrease it
• for an asset account, you debit to
increase it and credit to decrease it
• for a liability account, you credit to
increase it and debit to decrease it
• for an expense account, you debit to
increase it, and credit to decrease it
• for an income account, you credit to
increase it and debit to decrease it.
46. Explain Financial Accounting. What are its
characteristic features? Financial
Accounting is the process in which business
transactions are recorded systematically in the
various books of accounts maintained by the
organization in order to prepare financial statements.
These financial statements are basically of two types:
First is Profitability Statement or Profit and Loss
Account and second is Balance Sheet.
Following are the characteristics features of
Financial Accounting:
1) Monetary Transactions: In financial
accounting only transactions in monetary terms
are considered. Transactions not expressed in
monetary terms do not find any place in
financial accounting, however important they
may be from a business point of view.
2) Historical Nature: Financial accounting
considers only those transactions which are of
historical nature i.e the transaction which have
already taken place. No futuristic transactions
find any place in financial accounting, however
important they may be from a business point of
view.
3) Legal Requirement: Financial accounting is a
legal requirement. It is necessary to maintain
the financial accounting and prepare financial
statements there from. It is also obligatory to
get these financial statements audited.
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4) External Use: Financial accounting is for receipts from the owner of the business or lender of
those people who are not part of the decision the money creating a liability to either of them.
making process regarding the organization like
investors, customers, suppliers, financial 52. What do you mean by Revenue receipts?
institutions etc. Thus, it is for external use. Revenue receipts may be defined as “A recurring
receipts against sale of goods in the normal course of
5) Disclosure of Financial Status: It discloses business and which generally the result of the trading
the financial status and financial performance of activities”.
the business as a whole.
53. What do you mean by Materiality concepts? It
6) Interim Reports: Financial statements which is a one of the accounting principles, as per only
are based on financial accounting are interim important information will be taken, and un important
reports and cannot be the final ones. information will be ignored in the preparation of the
financial statement.
7) Financial Accounting Process: The process
of financial accounting gets affected due to the 54. What do you mean by Matching concepts?
different accounting policies followed by the The cost or expenses of a business of a particular
accountants. These accounting policies differ period are compared with the revenue of the period in
mainly in two areas: Valuation of inventory and order to ascertain the net profit and loss.
Calculation of depreciation.
55. Define Accounting standard. A code of conduct
47. Briefly explain Conventions of accounting. imposed on an accountants by custom, law or
professional body
1. Conservatism
2. Full disclosure 56. Briefly explain following Accounting standards
3. Consistency
4. Materiality 1. AS-1 : Disclosure of accounting
48. Briefly explain Concepts of accounting. policies
2. AS-2 : Valuation of inventories
1. Separate entity concept 3. AS-4 : Contingencies and events
2. Going concern concept occurring after the balance sheet date
3. Money measurement concept 4. AS-5 : Prior period and extraordinary
4. Cost concept item and changes in accounting policies
5. Dual aspect concept 5. AS-6 : Depreciation Accounting
6. Accounting period concept 6. AS-10 : Accounting for fixed assets
7. Periodic matching of costs and revenue 57. What do you mean by branch? Branch is
concept nothing but a department conducted at a distant place.
8. Realization concept.
49. What do you mean by Credit note? The 58. Mention four features of the branch.
customer when returning the goods gets credit for the
1. Brach are units physically segregated
value of the goods returned. A credit note is sent to
from the HO
him intimating that his a/c has been credited with the
2. Head office makes capital investments
value of the goods returned.
for branches.
50. What do you mean by debit note? When the 3. Branches are sub division and work
goods are returned to the supplier, a debit note is sent like an extension of the HO
to him indicating that his a/c has been debited with 4. The entire profit of the branches go to
the amount mentioned in the debit note. the head office.
5. Usually there will be only one branch
51. What do you mean by Capital receipts? at one place.
Capital receipts may be defined as “non-recurring

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59. Explain the objective of branch accounts. 8. Branch assets account.

64. What are the features of independent branches?
1. To find out the profit of each branch Branch that maintains a complete set of
separately. accounting books. Subject to the broad policies
2. To assess the financial position of each framed by the Head Office, Independent branches
branch separately. operate like autonomous business units and execute
3. To evaluate the progress and all accounting functions.
performance
4. To know the stock and cash 1. Keep full system of accounting
requirement of branches. 2. Operate like autonomous business
5. To ascertain the commission payable 3. Independent branches work like
to the manager autonomous business units and have a complete
6. Suggestion for the improvement. set of books.
7. Comparability 4. They do not remit all cash to the head
8. To meet the statutory requirement office
60. What do you mean by dependent branches? 65. What do you mean by transit item? Transit
Explain features of dependent branches. items refers to goods or cash sent by Head Office or
Branches that do not maintain a full system of Branch but not received by branch or Head office
accounting. before closing of the book of accounts.

Features- 66. What do you mean by Goods in transit?

1. Debtors ledger and stock ledger Goods sent by Head Office or Branch but not
2. Petty cash book received by branch or Head office before closing of
3. Procurement of goods the book of accounts.
4. Mode of sale
5. Branch expense 67. What do you mean by cash in transit? Cash sent
6. Remittance to head office. by Head Office or Branch but not received by branch
7. Cost price or invoice price. or Head office before closing of the book of accounts.
61. Explain different methods of accounting of
68. What do you mean by inter branch transactions?
dependent branches.
Transactions occur between branches as per the
1. Debtors system instructions of the head office are called inter branch
2. Stock and debtors system transactions.
3. Final account system
69. What do you mean by Branch Debtors Account?
4. Wholesale branch system
The account is prepared in the similar manner
62. What do you mean by Memorandum Debtors
that of the debtors system but bad debts, allowances
Account? Help to ascertain the amount due from
and discount allowed are debited to the branch
debtors on account of credit sales (Closing debtors),
expense account and the same is credited to branch
opening debtors and cash received from debtors.
debtors account. .
63. What do you mean by the stock and debtors
70. What is a single entry system of accounting?
system?
Single entry system is an unscientific, incomplete and
1. Branch stock account unsystematic method of keeping the books of
2. Goods sent to branch account accounts of a trader.
3. Branch stock reserve account
71. List out the features of a single entry system.
4. Branch adjustment account
5. Branch debtors account 1. Followed by sole proprietorship or
6. Branch expense account partnership firms
7. Branch profit and loss account

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2. Limited number of accounts is Other Name: Final Accounts method.

required to be maintained
3. Lack of uniformity Under this method profit is ascertained by
4. Cannot determine profitability converting the system of accounting from
5. Cannot determine the financial single entry to double entry by the
position following steps:
6. Cannot prepare trial balance
7. Mixture of single entry, double entry 1. Prepare an opening statement of
or no entry affairs to find the opening capital.
8. No acceptable to tax authorities 2. Prepare a Cash book
72. List out the disadvantages of a single entry system.
3. Prepare Debtors, Creditors, Bills
1. Not a scientific method of accounting Receivable and Bills payable accounts.
2. Trial balance cannot be prepared 4. Prepare any asset account if
3. Trading and profit or loss account required.
cannot be prepared 5. Prepare stock account, expense or
4. Financial position cannot be income account.
determined 6. Prepare a trial balance
5. Internal check is not possible Prepare the final accounts.
6. Difficult to ascertain the value of the
75. What is the Net Worth method under a single
business
entry system? Other names: Capital
7. Do not inspire confidence in outsiders.
8. May lead to tax evasion. Comparison method, Statement of Affairs
method.
73. Distinguish between single entry system and
Under this method profit is ascertained by
double entry system.
comparing capitals – opening and closing
74. Which are the different methods for profit capital.
determination under a single entry system?
The capital balances are found by preparing
a statement of affairs.
A. Net Worth method
Closing capital
Other names: Capital Comparison method, Add: Drawings
Statement of Affairs method. Less: Additions to capital
Opening capital.
Under this method profit is ascertained by 76. What is Conversion method under single
comparing capitals – opening and closing entry system? Other Name: Final
capital. Accounts method.

The capital balances are found by preparing Under this method profit is ascertained by
a statement of affairs. converting the system of accounting from
single entry to double entry by the
Closing capital
following steps:
Add: Drawings
Less: Additions to capital 1. Prepare an opening statement of
Opening capital. affairs to find the opening capital.
B. Conversion Method 2. Prepare a Cash book

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3. Prepare Debtors, Creditors, Bills 1. Mining royalty

Receivable and Bills payable accounts. 2. Patent royalty
4. Prepare any asset account if 3. Copyright royalty
required. 82. Differentiate royalty and rent.
5. Prepare stock account, expense or Royalty:
income account. • Payable for use of tangible and
6. Prepare a trial balance intangible assets
7. Prepare the final accounts. • Paid on the basis of production or
77. List out the steps for the conversion of single sale.
entry to double entry under conversion • Contains a clause to pay minimum
method. rent.
• Parties are known as lessor and
Other Name: Final Accounts method. lessee.
Under this method profit is ascertained by • It is transferred to trading A/c or
converting the system of accounting from Profit and Loss A/c
single entry to double entry by the Rent:
following steps: • Payable for use of tangible assets.
• Paid on the basis of time.
1. Prepare an opening statement of • No clause for minimum rent.
affairs to find the opening capital. • Parties are known as tenant and
2. Prepare a Cash book landlord.
3. Prepare Debtors, Creditors, Bills • Always transferred to profit & loss
Receivable and Bills payable accounts. A/c.
4. Prepare any asset account if 83. What is Minimum rent? Otherwise known
required. dead rent or fixed rent. The minimum amount
5. Prepare stock account, expense or that should be paid by the lessee to the lessor in a
income account. particular period of lease even if there is no
6. Prepare a trial balance output or the amount of output does not reach the
7. Prepare the final accounts. level so fixed.
78. Differentiate Statement of affairs and Balance
sheet. 84. Explain shortworking. It is the excess of
minimum rent over actual royalty calculated on
79. Define Royalty. Sum payable based on the basis of output or sales.
output or sale, to the owner of a mine, a patentee
or an author or any other such person for use of 85. What is surface rent? It refers to a fixed
right vested in him. yearly or half yearly rent payable by the lessee to
the lessor in addition to the minimum rent.
80. Who is a lessor and a lessee?
86. What is excess working? It is the excess of
The person who lends the ownership right and royalty over minimum rent.
receives royalty as consideration – lessor
87. What is recoupment of shortworking? Explain
The person who takes the property on lease – the different types of recoupment. The
lessee process of deducting shortworkings from actual

81. List out different types of royalty.

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royalty out of excess working is known as
recoupment/ recovery of shortworking.
1. Fixed recoupment
2. Fluctuating recoupment
88. What is a royalty A/c?
● It is a nominal account.
● It is a revenue expenditure to the lessee.
● It is debited in the books of the party
paying it and credited in the books of the
party receiving it.
● If royalty is based on sales, it is transferred
to P/L A/c; and if it is based on output, it is
transferred to production A/c.
89. What do you mean by consignment? A
shipment or transfer of goods by a manufacturer or
wholesale dealer to an agent to be sold by him on
behalf of the sender for commission.
90. Who are a consignor and consignee? The person
who appoints and sends goods to the agent to sell
on commission basis is called the ‘consignor’.
The person to whom the goods are sent for sale on
commission basis is called the ‘consignee’.
91. What is an ‘outward consignment’ and
‘inward consignment’? To the consignor,
the consignment of goods is known as ‘outward
consignment’ and to the consignee it is ‘inward
consignment’.
92. Explain the features of consignment business.
• Ownership - Ownership rests with
the consignor
• Risk – Consignor has to bear all the
risk.
• Possession – Possession with the
consignee till sold.
• Relationship – Principal and agent
relationship.
• Bearing of expenses – consignment
expenses borne by the consignor.
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• Repossession of goods – goods can
be repossessed by the consignor at any time
from the consignee.
• Stock of goods – the unsold goods
with the consignee is treated as stock of the
consignor.
• Sharing of profit – Entire amount
of profit or loss goes to the consignor.
• Commission – A fixed percentage
of sales is given to consignee as
remuneration.
93. Differentiate consignment and sale.
94. What do you mean by Pro-forma invoice?
Statement prepared and sent by the consignor to
the consignee along with the goods dispatched
and contains information regarding the quantity,
quality, price, packing etc. It can be prepared at
cost price or invoice price. It does not make the
consignee responsible to pay the amount.
95. What do you mean by del credere commission?
The extra commission offered by the
consignor to the consignee for guaranteeing the
entire amount of sales effected on consignment is
called del credere commission.
96. What do you mean by overriding commission?
Extra commission paid to the consignee as
an incentive to sell the goods at the highest
possible price. Usually allowed when a new
product is introduced in the market.
97. Differentiate Non- recurring and recurring
expenses in consignment with examples.
Non-recurring expenses:
Expenses incurred by the consignor and
consignee till the goods are brought to the
godown of the consignee. These expenses
do not arise repeatedly for a particular
consignment.
Ex: Packing and forwarding charges,
freight, import and customs duty etc.
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Recurring expenses: 6. For commission payable to

consignee:
Expenses met by the consignee after the Consignment A/c Dr.
goods reach his godown. These expenses To Consignee
incur repeatedly on the same consignment. 7. For the consignment stock with
Ex: Godown rent and insurance, consignee:
Salesman’s salary and commission, Stock on consignment A/c Dr.
advertising etc. To Consignment A/c
8. For closing the goods sent on
98. What is an account sale? Periodical consignment A/c:
statement sent by the consignee showing the Goods sent on Consignment Dr.
amount of gross sales, the amount of To Trading or purchases A/c
commission, advance remitted, balance amount 9. For profit on consignment:
due, stock position etc. Consignment A/c Dr.
To profit or loss A/c
99. What is a consignment A/c? It is a nominal 10. For loss on consignment :
account prepared by the consignor. It is debited Profit or loss A/c Dr.
with the cost of goods sent, expenses incurred To Consignment A/c
by the consignor and consignee and the 11. For the remittance from consignee
commission due to the consignee. It is credited on settlement of accounts:
with the amount of sales and also with the Bank/ Bills Receivable Dr.
closing stock if any. The difference between the To Consignee
two sides shows the profit or loss. 101. List out the entries in the books of consignee.
100. Point out the entries passed in the books of a
consignor. 1. For expenses met by consignee
Consignor’s A/c Dr.
1. For goods sent on consignment:
To Cash A/c
Consignment A/c Dr.
2. For advance remitted to consignor:
To goods sent on consignment
Consignor’s A/c Dr.
2. For expenses of the consignor:
To Bills payable or bank A/c
Consignment A/c Dr.
3. For sales effected by consignee:
To Bank
Bank A/c Dr.
3. For advance received from the
Debtors A/c Dr.
consignee:
To Consignor’s A/c
Bills Receivable/ Bank A/c Dr.
4. For commission on sales:
To bank
Consignor’s A/c Dr.
4. For sales effected by consignee:
To Commission A/c
Consignee A/c Dr.
5. For remittance to consignor on
To Consignment A/c
final settlement of accounts:
5. For expenses incurred by
Consignor’s A/c Dr.
consignee:
To Bills payable/ Bank
Consignment A/c Dr.
To Consignee

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