MBA- I semester

MB0025- Financial & Management Accounting – 3 Credits

Book ID- ( B0907 )
Assignment Set 1- (60 Marks)
Note: Answer all the questions.

1. Explain any two concepts of accounting with examples. (10

marks)

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 31-12-
2006 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 (10

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

Mr. X
Capit Liabilit Assets
Particulars al + ies =
Cas Goo
h ds Salar
a/c a/c y a/c
1. Commenced business (+ 8000 800
with cash – Rs.80,000 ) 0 00

(-)
2 a) Purchased goods for 400 4000
cash – Rs.40,000 00 0

( (
2 b) Purchase on credit + + 3000
Rs.30,000 ) 30000 ) 0

(
3 a) Sold goods for cash – + 400
Rs.40,000 ) 00

(+ 1500 2500
3 b) Costing Rs.25,000 ) 0 (-) 0

200
4 a) Paid salary – Rs.2,000 (-) 0
(
+
) 2000
(
4 b) Salary outstanding +
-Rs.1,000 (-) 1000 ) 1000

5. Bought scooter for

personal use for cash at 2000 200
Rs.20,000 (-) 0 (-) 00
 7400 580 450
0 + 31000 = 00 00 2000
105000 105000
Total Amount
 3. Show the rectification entries for the following: (10
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

Date Particulars LF Debit Credit

Rs. Rs.
a Suspense account Dr 15,000

To Sales account 15,000

(Being under casting of sales

book rectified)
b Mr. X account Dr 900

Return Inward A/c 90

To Suspense a/c 990

(Being less debit given

to returns inwards account to
the extent of Rs90, and excess
credit given to Mr. X, now
rectified)
c Salary A/c Dr 6000

To Rent A.c 6000

(Being salary paid and

account debited to rent a/c,
now rectified)
d Shyam a/c Dr 7000

To Ram account 7000

(Being cash recd. From Ram

but credited to Shyam now
 rectified)
e Suspense a/c 17280

To Madhu a/c 8640

To Jadu 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 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:

Trading Account

Particulars Amount Particulars Amount

Opening Stock 5000 Closing Stock 125000
Purchases 192500 Sales 243500
195000 250000
Return Outward -2500 Return Inward
-6500
Wages 14000
Carriage Inwards 4000

Gross Profit 153000

TOTAL 368500 TOTAL 368500

Profit and Loss Account

Particulars Amount Particulars Amount

Insurance 5500 GP 153000
Commission Paid 4000 Commission Recd. 2000
Stationary 2250
Rent and Tax 5500
Carriage Outward 7250
Trade Exp 1000
Interest on Capital 3500
Net Profit 126000
TOTAL 155000 TOTAL 155000

Balance Sheet

Liabilities Amount Assets Amount

Capital 89500 Stock 125000
Bills Payable 15000 B/R 22500
Creditors 98250 S. Debtors 150000
Net Profit 126000 Furniture 5000
Cash 2500
Bank 23750

TOTAL 328750 TOTAL 328750

 2. Write short notes on : (10
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 year 31-12-2003

outstanding is Rs.5000. The journal entry is

Advertisement expenses account Dr 5000

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