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The following questions contain multiple choices [ (a), (b), (c) and (d) ] in which
one is correct. Indicate the correct choice in your answer booklet.
I Set
2. Bill of exchange is drawn only when money is lent by a moneylender, banker or other financial
institution
a) TRUE b) FALSE
3. When the bill is dishonoured, the drawee will be debited in the books of the drawer whether the
bill is retained, endorsed or discounted.
a) TRUE b) FALSE
4. When the bill is endorsed or discounted, no entry is passed in the books of the drawer
a) TRUE b) FALSE
8. Interest on capital is
a) a personal expenditure of the owner; b) a non-business expenditure
c) a business expenditure and hence debited to P & L Account; d) none of the above
9. Insurance claim acknowledged by the insurance company but not yet paid on the closing day is
treated as
a) An Asset; b) A Liability; c) An Outstanding income; d) An Outstanding charge/expense.
10. The accounting principle that conforms to the tendency of accountants to resolve uncertainty
and doubt in favour of understating assets and revenues and overstating liabilities and expenses,
is known as:
a) conservatism b) materiality; c) industry practice;
d) consistency;
13. The liabilities of a firm are 350000 and the Capital is Rs150000. Of these Rs2 lakh is spent on
acquiring a building. What are the remaining assets?
a) Rs 500000 b) Rs150000 c) Rs700000 d) Rs300000
14. An amount of Rs 2800 was incurred on the installation of a machinery. The expenses are
treated as:
a) Dr to Wages Account; b) Dr to Machinery Account c) Dr to Repairs account
d) Dr Miscellaneous expenditure account
16. Discount column in the cash book should be balanced and the balance shall be carried over
to the next accounting period:
a) TRUE b) FALSE
19. When the balance as per Cash Book is the starting point, the direct deposits by the
customers in the bank are……. ……….while preparing the Bank Reconciliation Statement.
a) added b) subtracted; c) neither of the above
23. Depreciation is a
a) Cash expenditure; b) Non-Cash expenditure; c) Neither a nor b
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24. Fixed assets are stated at their market value in the balance sheet
a) TRUE b) FALSE
26. Withdrawal of cash from the bank for office purposes is entered in the Cash Book
a) only in the bank column; b) only in the cash column; c) as a contra entry
27. If the debit as well as credit aspects of a transaction are entered in the Cash book it is called:
a) Compound entry; b) An opening entry; c) Transfer Entry d) Contra Entry;
29. Fill in the blank by choosing the appropriate words given in the options a, b & c
Interest free loan given by the wife of the proprietor is…………… a) liability; b) asset; c) profit
30. Fill in the blank by choosing the appropriate words given in the options a, b & c
31. For a bill drawn on August 11 for two months falls due on 14th October
a) TRUE b) FALSE
33. In case the due date of a bill falls on 15th August of any year, the due correct due date falls on
the preceding working day a) TRUE b) FALSE
34. The due date of a bill drawn on 31-01-2004 for 1 month fell on
a) 1st March 2004; b) 3rd March 2004; c) 28-02-2004; d)29-02-2004
35. Wages and Salaries are debited to: a) Trading Account b) Profit and Loss Account;
c) Balance Sheet; d) The personal account of the wage and salary earner
36. Carriage OUtwards are debited to: a) Trading Account b) Profit and Loss Account;
c) Balance Sheet; d) The personal account of the cart owner
37. Ms Srilakshmi started business with cash Rs25,000 on 1st October 2002. She withdrew
Rs2500 on 1st November 2002. As on 31st December 2002 she suffered a net loss as per P & L
Account of Rs1800. Her closing capital is
a)Rs 23200; b) 21700; c) 20700
38. Expenses on foreign tour for purchasing a new machinery is a : a) Revenue expenditure;
b) Capital Expenditure; c) Travel and tourism expenditure; d) None of the above
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39. Interest paid on a term loan where the production has already started is a
a) Revenue Expenditure b) Capital Expenditure c) Both
40.The assumption that a business enterprise will not be sold or liquidated in the near future is
known as the:
a) economic entity; b) monetary unit; c) conservatism d) none of the above
41. The liabilities of a firm are 250000 and the Capital is Rs 125000. The total assets of the firm
are:
a) Rs125000 b) 250000 c) 375000 d) 125000
42. Journal is a book of; a) original entry b) Bank Reconciliation statement c) secondary
entry; d) all cash transactions;
48. The causes of differences in the Bank Reconciliation statements are rectified by passing
a) rectification entries on the date of the bank reconciliation statement; b) Journal entries are
passed only for some causes after the BRS is prepared; c) Journal entries are passed for all the
causes; d) Journal entries are passed only during the year end.
2. Providing depreciation in the accounts reduces the amount of profits available for dividend.
a) TRUE b) FALSE
3. Reserves and Surplus is: a) A Liability; b) An Asset; c) A Profit; d) Not an account at all
4. Reducing balance method of depreciation is followed to have a uniform charge for depreciation
and repairs and maintenance together: a) TRUE b) FALSE
5. Transactions entered on the debit side of the Cash book are to be posted to
a) the debit side of the concerned ledger accounts in the ledger
b) the credit side of the concerned ledger accounts in the ledger
c) None of the ledger accounts as the cash book serves as a permanent record.
8. Fill in the blank by choosing the appropriate words given in the options a, b & c
Income accrued due but not received is a…………………….. (a) asset, b) liability, c) profit)
10. Mr Rajesh starts with the business with Cash Rs45000/-, Furniture Rs20,000/- and Bank Loan
Rs2.5lakhs; Land and Buildings Rs4.5 lakhs. His capital is:
12 Assets are:
a) Sources of Funds b) application of funds;
14 Debit means
a) Increase in expenditure; b) Increase in income; c) an increase in liability; d) an increase in
owners’ capital
15 Ledger is a book of
a) original entry; b)secondary entry; c) all cash transactions; d) all non-cash transactions
16 Discount allowed is entered in the Cash Book with Bank Column on the
a) Debit side; b) Credit Side; c) not entered at all;
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17. If the debit and credit aspects of a transaction are recorded in the Cash Book itself it is called:
a) Compound entry;b) Double entry; c) Contra entry; d) Transfer entry
20) Credit balance in the bank column of the Cash Book means:
a) Bank Overdraft; b) Credit balance in the Bank pass book; c) funds available in the bank
account; d) none of these
21) When the balance as per Cash book is the starting point, direct deposits by customers are:
a) deducted; b) added; c) neither a nor b
23) When you start preparing Bank Reconciliation Statement we may observe
a) overdraft in both cash book and bank pass book;
b) overdraft in cash book and credit balance in the pass book;
c) overdraft in cash book and debit balance in the pass book;
d) all the above
33) Depreciation is
a) a non cash charge; b) an amortisation expenditure; c) both a and b
38. For a bill drawn on August 1 for two months falls due on 4th October
a) TRUE b) FALSE
39. In case of a public holiday the due date of the bill falls on the preceding working day
a) TRUE b) FALSE
40. The due date of a bill drawn on 31-01-2000 for 1 month fell on
a) 1st March 2000; b) 3rd March 2000; c) 28-02-2000; d)29-02-2000
45. Ram has total assets of Rs 580000. His outside liabilities are Rs80000 and the loan from his
family members is Rs 2 lakhs. What is his capital?
a) Rs280000 b) Rs660000 c) Rs3000000 d)Rs580000
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46. When a cheque received is endorsed it shall be entered on
a) Debit side of the Cash book;
b) Credit side of the Cash Book;
c) It is endorsed in the personal account of the endorsee and not in the cash book;
d) both sides of the Cash book
47. The causes of differences in the Bank Reconciliation statements are rectified by passing
a) rectification entries on the date of the bank reconciliation statement
b) Journal entries are passed only for some causes after the BRS is prepared
c) Journal entries are passed for all the causes.
d) Journal entries are passed only during the year end.
51. Bill of exchange is drawn only when money is lent by a moneylender, banker or other financial
institution
a) TRUE b) FALSE
52. When the bill is dishonoured, the drawee will be debited in the books of the drawer whether
the bill is retained, endorsed or discounted.
a) TRUE b) FALSE
53 When the bill is endorsed or discounted, no entry is passed in the books of the drawer
a) TRUE b) FALSE
57. Insurance claim acknowledged by the insurance company but not yet paid on the closing day
is treated as
a) An Asset; b) A Liability; c) An Outstanding income; d) An Outstanding charge/expense.
58. The accounting principle that conforms to the tendency of accountants to resolve uncertainty
and doubt in favour of understating assets and revenues and overstating liabilities and expenses,
is known as:
a) conservatism b) materiality; c) industry practice; d) consistency;
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GENERAL STRUCTURE OF THE BALANCE SHEET AND PROFIT AND LOSS ACCOUNTS:
Exercise No 1:
1. The things that a business enterprise owns are called -------- ( Assets)
3. Assets are usually listed in a Balance Sheet in 2 main groups…………….. (Fixed Assets and
Current Assets)
4. Assets which are generally intended for use in the business over a relatively long period are
called………………….assets. ( Fixed)
5. Assets which are not intended for long periods are called………………….
assets.( current)
6. Accounts ……………..(Receivables) are likely to be paid and therevore converted into cash.
They are classified as…………….assets (current)
7. Marketable securities are generally regarded as part of………….assets because they can
readily be converted into cash (current).
10. Accounts receivables and marketable securities can be converted into cash at short notice.
Hence they can e called …………. ……………(quick assets).
12. All receivables, employee accounts and other outstanding items are valued at…….. …………
less provision for…….. …………. (full value; doubtful items).
13. Stock in trade …………… are valued at cost or current market value whichever is the lower.
15.Building, Plant and Machinery, Furniture and fixtures are valued at……
Less………….. (cost, depreciation)
16.It is possible to tell how an enterprise has obtained its finance by looking at the …………..side
of the balance sheet (liability).
17.The moneys put by the shareholders into the company is the money the company owes to the
shareholders. Hence shareholders funds are part of the total……………..of the company.
(liabilities)
18.Excepting shareholders’ funds, other liabilities are described as …….. ……….These consists
of Current Liabilities (outside liabilities; fixed liabilities).
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19.Current liabilities are usually payable in…………. period say within a year. (short)
20. Bank Overdrafts and other current liabilities represent enterprises’ ……………finance (short
term)
21. Current Liabilities are usually met from …….. assets (short term or current)
23. The main items in the shareholders’ fund are likely to be ………………..
………………(capital issued and subscribed, capital reserve and revenue reserve)
24. Capital Reserve and Revenue Reserve figures in a Balance Sheet represent ………….that
have been ………….in the company. (profits; retained)
25.An enterprise is said to be solvent if its total assets are greater than its……… ……… So the
solvency of an enterprise is the ability to meet its…. ………(outside liabilities; outside liabilities)
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CHAPTER II: Manufacturing, Trading and Profit and Loss Account
2.1 INTRO:
Journal, ledger accounts and subsidiary books are written as and when transactions take place.
The owner of the business expects the results of his business once in a quarter / half year or
year. At the end of the financial period, a trail balance is prepared to find out the accuracy of the
accounts prepared and then the final accounts are prepared to ascertain the profit or loss and
also the financial status of the business. All the accounts are closed by passing closing entries by
giving a separate treatment in the final accounts.
The final accounts are generally a) Manufacturing account, b) Trading Account; c) Profit and Loss
Account and the final Statement is called BALANCE SHEET.
Opening stock of Work-in-progress + Raw Materials Consumed (Opening stock + Purchases+ All
direct expenses- Closing stock of Raw materials) MINUS (Sale of scrap and Closing stock of
work in progress). PLEASE note that opening stock and closing stock of finished goods do not
appear in the manufacturing account as they are taken to the Trading Account.
It may be observed that all the expenses directly connected with Factory land and building and
Plant and Machinery are debited to the Manufacturing Account.
A common guideline for preparation of manufacturing, trading and profit and loss account is that
all the ledger accounts are closed and the totals for the entire accounting period are taken into
account as the total expenses or total income under respective heads.
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A model Manufacturing Account is shown below:
2.1.2. Trading Account: is prepared to ascertain the gross profit or gross loss. In case of
manufacturing concerns the trading account is opened with the cost of goods manufactured
(brought down from manufacturing account). Then the direct expenses relating to finished goods
are debited. Then the sales of finished goods and closing stock are accounted. The result is the
gross profit or gross loss.
In case of trading concerns, it starts with the opening stock. Then the Net purchases and direct
expenses incurred for bringing the goods are debited. On the credit side, the value of sales and
the closing stock will appear. The result is the Gross profit, which is carried to Profit and Loss
Account.
Trading account is prepared for manufacturing concerns and also for traders. In case of
manufacturing concerns, the cost of manufacturing is taken to the trading account. In case of
trading concerns, the opening stock of goods added with the purchases (less returns) and direct
expenses on the goods are debited to the trading account and sales and closing stock are
credited.
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The objective of preparing Trading account is to know the gross profit or gross loss during the
accounting period. It helps matching the selling prices with the cost of goods and services
produced and delivered.
2.1.3. Profit and Loss Account: Manufacturing Account shows the cost of production.
The Trading account reflects gross profit—cost of goods purchased/manufactured and the cost of
goods sold. Other expenses of general nature are not accounted. A Profit and Loss account is a
comprehensive account showing all expenses of whatever nature incurred in running the
business and also provisions for losses, reserves, depreciation etc. It recognizes certain incomes,
which accrue in the normal course of business. The net result is the Net profit or Net Loss, which
is accounted to the Capital account of the proprietor/partner/s.
The basic objective of P & L Account is to find out the Net profit or Net loss
P & L Account takes into account all indirect revenue expenses and losses on the debit side and
all indirect revenue incomes
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A model of Profit and Loss Account is shown below
Dr Profit and Loss Account of….. for the period ending on……….. Cr
Particulars Amt Particulars Amt
To Gross Loss b/d (if any) NIL By Gross Profit b/d 119000
To Salaries and Wages 11000 By Interest earned 11000
To Rent, Rates and Taxes 1500 By Commission earned 12000
To Fire Insurance premium 600 By Rent Earned 33000
To Repairs and Maintenance 1200 By Profit on sale of fixed assets 2000
To Depreciation 9000 By Income from investments 7000
To Audit fees 600 By Sale of scrap 1000
To Bank Charges 250 By Miscellaneous Incomes 2000
To Legal Charges 550 By Net Loss transferred to
To Miscellaneous Expenses 350 Capital Account
To Discount allowed NIL
To Carriage Outward 1200
To Freight Outward NIL
To Commission to Salesmen NIL
To Travelling Expenses 1350
To Entertainment Expenses 550
To Business dev Expenses 12000
To Sales Promotion Expenses 14000
To Advertising and Publicity 22000
To Bad Debts 3000
To Packing Expenses 5500
To Interest on Loans 3500
To Loss by Theft 1250
To Loss by Fire NIL
To Loss by Embezzlement NIL
To Net Profit transferred to Capital
Account 98600
It is to be noted that the Manufacturing, Trading and Profit and Loss account comprises of only
revenue expenses and revenue incomes. That means income of a capital nature or expenditure
of a capital nature does not find a place here. For example, expenditure incurred in acquiring an
asset does not find a place in P & L Account. But the Profit on the proceeds on the sale of a Fixed
Asset is shown as revenue in the Profit and Loss Account. It must be noted that it is the profit or
loss on the sale of an asset and not the ENTIRE PROCEEDS that go the Profit and Loss
Account.
Again, the revenue items in the Profit and Loss Account are referred to as indirect expenses.
These indirect expenses may be classified into a) Selling and Distribution Expenses, b) Office
administration expenses; c) Interest on loans and Advances; d) Depreciation on Fixed Assets; e)
Reserves and Provisions.
ON the income side, the income by way of interest, commission, and rent earned by the concern
are recognized
Another way of putting up expenditure in the P & L Account is to be classify the heads of
expenditure –like Administrative Expenses, Legal Expenses, Selling and Distribution Expenses,
Promotion Expenses and Provisions.
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2.1. 5. Income and Expenditure Account of Non-Trading Organisations.
Social services; No profit motive; Majority are cash transactions; Generally a cash book and
journal are maintained; Members are not owners; Cash book contains individual receipts and
payments; Volume of ledger transactions is limited; Trial balance is prepared only exceptionally;
Receipts and payments account prepared at the end of year; Income and expenditure account
(also called revenue account) is prepared at the end of year; The surplus/deficit is transferred to
capital fund; The office bearers work out the methods of raising or utilizing the resources
depending on the amount of surplus or deficit.
The differences between Receipts and Payments account and Income and
Expenditure account is tabulated.
Receipts and payment account Income and expenditure account
1. Real account 1. Nominal account
2. Similar to cash book 2. Similar to profit and loss account
3. Summary of actual cash receipts and 3. Summary of income and expenses relating
payments to an accounting period
4. Cash system of accounting 4. Accrual system of accounting
5. Includes both capital and revenue items 5. It includes only revenue accounts
6. Entries may relate to items of previous year 6. Entries relates only to current year
or next year.
7. It does not include outstanding accounts 7. It includes outstanding items
8. Non cash items are not included 8. Non cash items like bad debts, depreciation
are included.
9. Receipts on the debit side and payments on 9. Income is shown on credit side and
the credit side are shown expenditure on the debit side.
10. Starts with an opening balance 10. It does not begin with the opening balance.
11. Closing balance represents cash in hand or 11. Closing balance represents surplus or
bank balances deficit
12. Closing balance is generally a debit 12. Closing balance may be a credit balance or
balance(exceptions being overdrafts) a debit balance.
13. Closing balance is brought down for the 13. A closing balance is not brought down but
next accounting period transferred to capital fund
14. Does not form a part of double entry 14. It forms a part of double entry
15. Does not accompany a balance sheet 15. Always accompanied by a balance sheet.
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2.1.6. Profit and Loss Account of PARTNERSHIP ACCOUNTS
The guidelines relating to Partnership accounts are governed by the Partnership Deed or in its
absence the Indian Partnership Act, 1932.
The name of the firm; Names and addresses of the partners; Nature of business; Date of
commencement; Duration/Period; The amount of capital to be brought in by each partner; The
amount of drawings that may be permitted in anticipation of profits and the manner of withdrawal;
Interest on partner’s capital and the Rate of interest; Interest on partner’s drawings and the rate of
interest; The amount of salary, commission or any other remuneration payable to any partner;
The ratio of sharing profits or losses; The treatment of losses arising on account of insolvency of
a partner; The manner of calculation of goodwill at the time of admission, retirement or death of a
partner; The method of settlement of account in case of retirement of a partner; Details re:
operation of the bank account; The manner of keeping books of account and audit; Sharing of
managerial work/responsibilities; Dissolution and settling of accounts thereupon; Disputes and
the manner of settlement.
Profits/losses are to be shared equally; Interest on partner’s capital is not allowed; Interest on
partner’s drawings is not to be charged; Partner is not eligible for salary, commission, or any
other remuneration for any extra work done; Where partners lend loans, they are entitled for
interest @ 6% p.a. only; A change in the constitution of the firm does not alter the rights and
duties of the partners; Every person has a right to participate in the management; Every partner
has a right to inspect the books of account; Every partner is to be indemnified in respect of all
acts done in the ordinary course of business; Majority of partners has to decide all matters
relating to day to day conduct of the business. Change in the nature of the business is to be
decided with the consent of all the partners; Every partner has a right to protect the firm in case of
an emergency; No person can be admitted as a partner without the consent of all the existing
partners; Every person must compensate the firm for any loss caused to it by fraud or wilful
negligence in the management of business; The benefits of the firm should not be diverted to the
personal purposes. If profits are derived by using the Pp property, the partner must hand over
such profits to the firm; A partner should not carry on other business which is competing with the
business of the firm.
The final accounts of Partnership accounts are similar to that of a sole proprietorship. However,
the treatment of certain items is subject to the Partnership Deed or in accordance with the Indian
Partnership Act, 1932.
The Profit and Loss account is influenced on the admission, retirement, death or dissolution of a
partnership. A REVALUATION ACCOUNT in case of admission, retirement or death is prepared
and the partners’ accounts are settled. In case of dissolution, a REALIZATION ACCOUNT is
prepared and the partners claims are settled.
In case of death of a partner, the balance due to the deceased partner may be paid immediately
to the executors or it may be paid by instalments if the legal heirs agree on the point. The balance
due to the deceased partner is ascertained so as to cover all the dues till the date of death. In
case of retirement or admission, the restructuring may take place as on a predetermined date
coinciding with the end of a month, quarter or half year. The partners/ firm would have also taken
a joint life insurance policy. The policy amount or the deceased partner’s share is also payable to
the executor.
On admission of a partner/s, the incoming partners bring capital and hence, profit sharing ratios
change. He also brings goodwill, which will be treated as per the agreement.
Goodwill is the value that is attached to the super-profit earning capacity of an existing firm. This
is in addition to the value represented by tangible or concrete assets. Goodwill arises on account
of name, fame, and reputation of an existing business. Goodwill is an intangible asset but not a
fictitious one. It is built or created by the efforts of the existing partnersand the new partner is
likely to get a share in the future profits which is the result of the super profit earning capacity of
the existing firm. Goodwill is an intangible asset but not a fictitious one.
The accumulated profits and General Reserves till the date of admission of a partner are
distributed to the old partners.
The Balance in the Profit and Loss Appropriation Account carried over from the last year plus the
current year’s Profit & Loss account balance is apportioned for:- a) Net losses transferred from
the P & L Account of the current year; b) Payment of dividends to shareholders; c) Transfer to
General Reserves; d) Transfer to Sinking Funds; e) Transfer to Dividend Equalisation Fund; f)
Transfer to Insurance funds; and g) the balance is transferred to Balance Sheet.
3.1. INTRO: Final accounts may be presented in two forms—a) Horizontal form and b) Vertical
form. Traditionally, the profit and loss account and the balance sheet are presented in horizontal
form. In the recent past, vertical form has been made mandatory in some types of organizations.
3.2. Horizontal Form: The forms of profit and loss account and balance sheet exhibited in the
previous chapters are all horizontal. In the horizontal form, the items are presented in “T” shape.
3.3. Vertical Form: Under the vertical form of presentation, the items are presented in a single
columnar form. The presentation has its own objectives, which are achieved when the items are
in a particular sequence. The formats are given below.
In vertical formats, separate schedules should always be maintained for each of the items in
detail, which will incorporate all the information. The schedules form an integral part of the
Balance Sheet. Contingent Liabilities, if any, should be shown separately in the foot-note of the
Balance sheet and not as contra entries.
3.3.1. In India, Vertical Form of presentation of Final Accounts has been made compulsory in
case of a) Banks (as per Banking Regulation Act, 1949 as amended from time to time);
The final Accounts of Joint Stock Companies the vertical form is being accepted for publication of
results in newspapers.
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3.3.2. Vertical Form of Profit and Loss Account:
Particulars Rs Rs Rs
A. Net Sales:
Sales (Gross)
Less Returns
C. Gross Profit (A – B)
D. Operating Expenses:
a) Selling Expenses:
Carriage Outward
Discount allowed
Commission allowed
Travelling Expenses
Entertainment Expenses
Sales Promotion Expenses
Bad Debts
b) Office and Administration Expenses
Salaries and Wages
Rent, Rates and Taxes
Repairs
Insurance
Printing and Stationery
Water and Electricity
Postage and Telegram
Staff Welfare Expenses
Conveyance Charges
Misc Expenses
Depreciation
B. Application of Funds
a) Net Working Capital:
i) Current Assets:
Cash in hand
Cash at Bank
Bills Receivable
Accrued Income
Debtors
Stock
Prepaid Expenses
LESS ii) Current Liabilities:
Bank Overdraft
Accrued expenses
Bills Payable
Trade creditors
Income received in Advance
b) Investments
c) Fixed Assets:
Furniture and Fixtures
Patents and Trade Marks
Plant and Machinery
Building
Land
Goodwill
C. LESS Drawings
Interest on Drawings
Loss for the current accounting period
D. Capital at the end of the year (A-B-C)
a) Identifying and measuring the transactions and economic activities; b) Recording, classifying,
summarizing, analyzing, interpreting and c) communicating with all the parties concerned.
4.1.2.Benefits of Accounting:
4.1.3.Limitations of Accounting:
4.1.4.Classification of Accounting:
a) Financial Accounting;
b) Cost and Management Accounting
c) Social Responsibility Accounting
d) Fund Based Accounting
4.1.5.GAAP: GAAP refers to Generally Accepted Accounting Principles are those rules of
action or conduct, which are derived from experience and practice. These when proved useful,
they become convention and accepted as principles of accounting. The criteria are a) Relevance,
b) Objectivity and c) Feasibility.
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a) Accounting Entity Assumption: This means that the business is different from the persons
owning it. Accounting is done for the business unit and not the person representing it. Personal
transactions of the owner with the business unit are also recorded in the business unit.
b) Money Measurement Concept: Accounting refers to recording only those transactions, which
are capable of expression in money terms. Hence, qualitative items like the morale of the
employee or the corporate image of the company cannot be recorded.
c) Accounting Period Concept: (Periodicity or Time Period): The income statement and all other
financial statements are prepared for determined accounting periods like a quarter, half year or a
year.
d) Going Concern Concept: Accounting is done for an enterprise as a going concern which
means that the business unit (enterprise) is continuing operations for a foreseeable future and
that it is neither the intention nor the necessity to liquidate the enterprise.
f) Accrual Concept: Revenues and Costs once accrued are recognized and recorded in the
financial statements. That means they are earned or incurred (and not money received or paid)
as and when the period is over.
g) Prudence Principle (Conservatism Concept): “Anticipate no profit but provide for all possible
losses” is the prudence expected of every accountant.
We have seen that an accounting cycle refers to Journalising, Posting, Balancing, Preparation of
Trial Balance and Final Accounts. We shall study them in detail.
4.2.1.JOURNALISING:
1. Every transaction is recorded in a journal as and when the transaction takes place. This
process of recording the transaction is called Journalising. Transaction refers to movement of
money or money’s worth. The basic principle of recording is that every debit has got a
corresponding credit and vice versa. The debit and credit has to be carried according to the
classification of accounts and the principle underlying therein.
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2. PERSONAL ACCOUNTS: Debit the receiver and credit the giver.
3. REAL ACCOUNTS: Debit what comes in and credit what goes out.
4. NOMINAL ACCOUNTS: Debit all expenses and losses and credit all gains and profits.
Once a particular debit or credit is identified the other is naturally the contra.
Every journal entry is entered in the respective head of account called the ledger account, which
is also called Account.
All the transactions in a particular head of account are available at a glance of the account
The ledger being the destination of all transactions it is called the Book of Final Entry.
The ledger may be in book form, loose sheet, punched card, electronic form or any other device.
Balancing of a ledger account reflects the debit or credit position of that head of account on a
given date.
Special journals are in the form of ledger accounts and hence separate journal and ledger are not
necessary--for example Cash book, Purchases and Sales register,
Purchases Returns Book, Sales Returns Book, Bills Receivable Book and Bills Payable Book and
Journal Proper. These serve the purposes of journal as well as ledger. Discounts, Rebates and
Concessions, are to be properly accounted. Cash Book may contain a) only cash column—single
columnar cash book; b) Cash book with cash and bank column—called two column cash book; or
c) Cash book with cash, bank and discount columns—called three column cash book each
serving specific purposes. Besides, there may be a separate cash book for petty cash
transactions.
Journal is book of the original entry. In the modern day business world, the number and volume of
transactions being high, it is not possible to pass every transaction through the journals. Hence, it
became necessary to evolve certain journals-cum-ledgers in which the voluminous transactions
of identical nature are passed. These are called special journals. They are also called subsidiary
books because they satisfy the requirements of Journal and Ledger. Those transactions, which
cannot be classified in any of these subsidiary books can be entered in Journal Proper.
Important Subsidiary Books are Cash Book, Purchases Book, Sales Book, Purchases Returns
Book, Sales Returns Book, Bills receivable Book and Bills Payable Book
Trial Balance is a statement as on a particular day reflecting either the balances of various ledger
accounts or the totals of such accounts. It shows debit and credit balances in a columnar form.
The total of debit and credit should tally. However, a trial balance is a trial as there is no
guarantee that once the trial balance tallies, the balances of all the accounts are correct.
The Trial balance is prepared a) to ascertain the arithmetical accuracy, b) to help in locating
errors and c) to facilitate in the preparation of the final accounts.
The Trial balance may not disclose the following errors: a) Error of Principle; b) Compensating
Errors; c) Error of Complete Omission; d) Error of recording in the books of original entry and e)
Posting a correct amount in the wrong account but on the correct side.
Sometimes, trial balance does not tally. Some errors affect the trial balance. A thorough scrutiny
becomes necessary. Though it may not be possible to check all the entries passed during the
accounting period, there are certain steps to locate the errors. When the errors are spotted check
the concerned entry/account thoroughly.
The trial balance can be prepared as on any date by arriving at the balance in various ledger
accounts. However, generally preparation of trial balance is a preparatory step to preparation of
final accounts. It is therefore necessary for us to find out the balance in the various accounts and
subsidiaries and how the entries are made.
Accounting or Book-keeping is both an art and a science. There are cardinal principles, which are
generally applied in all types of organizations right from a small concern right to the topmost
multinational companies. An accountant and his team will effectively complete an accounting
cycle and provide all the relevant information to all the users through proper accounting records.
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4.3. Rectification of Entries: There is bound to be errors in accounting entries as human
beings make them. Errors can be rectified as soon as they are located. Errors are located as and
when the accounting supervisors are checking the entries for the transactions or it may escape
their attention. Errors may be traced at the time of preparing the Trial Balance or after preparing
the Trial Balance. Sometimes errors are being traced after the final accounts are prepared.
The type of rectification entries depends on the time of location of errors and the type of errors
committed.
Suspense Account: A Suspense account is an account in which the amount of difference in the
trial balance is put till such time the errors are located and rectified.
11.1. Intro: Cost Accounting aims at ascertainment of costs and at analysis of savings. It is the
application of accounting, costing techniques, methods, and principles. It concerns with the
comparison of costs with previous figures or with standards. It helps in interpretation of
management problems.
Cost Accounting is concerned with a product, service or an operation. Actual cost incurred with
reference to future cost estimation is compared. Hence, Cost Accounting is applicable in Banks
and the service sector organizations as well. Cost Accounting can be for specific product,
identified departments etc. Cost Accounting by itself is a management information system
11.5.Classification of Costs:
Financial---Cash Cost Versus Non Cash Cost
Non-Financial Costs
Element-wise
Direct Costs and Indirect Costs
Functional Costs
Production Cost, Administration Costs, Selling & Distribution Cost and R & D Costs
The information provided by the management accountants shall facilitate the following purposes:
a) Policy formulation; b) Planning and Control functions of management; c) decision
making/taking –deciding on alternate courses of action; d) disclosure to internal and external
stake holders; e) safeguarding the assets; In short, the management accounting helps the
enterprise draw out long term plans and also short term plans and decide about the budget
allocation and operation plans
The management accountants shall involve themselves in the areas of decision making and
problem solving particularly in the following areas:
a) Strategic Management Accounting; b) Investment Appraisals; c) Financial Management; d)
Short-term and Ad-hoc decision and e) managing the management information systems
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11.9. Comparison between Management Accounting and Financial
Accounting
Personal Accounts: Accounts relating to natural persons, artificial persons and representative
persons
Accounting Cycle: Journalising, Posting the Ledgers, Balancing, Preparing Trial Balance, Income
Statement and Position Statement (Balance Sheet)
Advanced accounting functions are analysis, interpretation, communication and decision making.
Limitations of Accounting: Does not recognise qualitative elements; Not free from bias; Estimates
and not real positions; Ignores changes in the prices; Danger of manipulations and window
dressing
Assets: Assets refer to tangible or intangible assets, which are the uses of the funds in the
business. These assets are in the form of Fixed Assets (Permanent Assets), Current Assets,
Investments, Miscellaneous Assets and Intangible Assets
Liabilities: Liabilities means financial obligations of the business unit to others. Capital is a liability
to the owners because the business owes that amount to the owner. However owner takes the
risk of loss which he has to set off. Again, this depends on the constitution of the business.
Inventory: Stock of goods may be in the form of raw materials, semi-finished goods (work in
progress or work in process) and finished goods. The quantity and/or value is known as
inventory.
Debtors:The persons who owe amounts to a business unit. When the goods are sold on credit,
the purchaser owes the amount to the business, in which case he is called Trade Debtor. Trade
Debtors, Sundry Debtors, Book Debts are different names for this item.
Creditors: The persons to whom the business unit owe amounts. When the goods are purchased
on credit, the business owes the amount to the seller, in which case he is called Trade Creditor.
Trade Creditor, Sundry Creditors are the other names for this item.
Capital and Revenue Items: Permanent items are called Capital items and recurring items and
items where the period is generally an year are called Revenue items. There are both debits and
credits in both the items. Sometimes, large revenue items are deferred to be absorbed in future.
Net Profit: Net profit is the excess of revenue over expenses. If expenses exceed the revenue it is
Net loss.
Carriage Inwards & Carriage Outwards: The expenses on transportation for goods purchased
(raw-materials or finished goods) is called Carriage Inwards which adds to the cost of the goods
and is debited to Manufacturing/Trading Account. The transportation expenses incurred on
outgoing goods (sales) is called Carriage Outwards which find a place in P & L Account.
Cartage Inwards & Cartage Outwards: If the transportation is by way of a cart, it is called Cartage
charges. Same treatment in Mfg/Trading & P & L A/c
Freight: The charges for transportation of goods through transporters is called Freight. Freight
can be paid by the seller or by the buyer. Freight Inwards is debited to Mfg / Trading Account and
Freight Outwards is debited to P & L Account.
Apprentice Premium received. If the company / business receives the premium from the
apprentice pupils joining the company is a business income and credited to P & L Account.
Discounts allowed and received: Discount allowed is a expenditure and discount earned is an
income.
Depreciation: A non-cash provision for depreciation in the value of the various assets used in the
business. Whatever be the cause of depreciation, an amount is debited to P & L A/c as
depreciation as per the policy of the business and shown as a deduction from the value of the
asset concerned.
Trade Expenses: Just because the word Trade is there, it should not be debited to Trading
Account. Trade expenses are debited to P & L Account.
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Bad Debts, Doubtful Debts, Discount on Debtors and Creditors: Debtors means the amount due
from others. Generally this is on account of sales. There is a business risk. A part of the amount
which cannot be recovered is called BAD DEBTS. A part of the amount may be doubtful of
recovery but may come. They are called DOUBTFUL DEBTS. P & L Account shall provide for all
such possible losses. Besides, there are some debtors who pay the money in advance or before
the due dates agreed to. In such cases, a discount may be offered for prompt/advance payment.
It is called DISCOUNT ON DEBTORS. A provision for this is also made. All the above are debited
to the P & L Account and are deducted from the value of the Debtors in the Assets side of the
Balance sheet. Similarly a discount may also be received from our creditors,which is an income
for us.
Goodwill, Trade Marks, Copyrights, Patents, Intellectual Property Rights (IPRs) are all intangible
assets.
Outstanding Expenses/Charges. When we prepare the final accounts, we have to account for all
expenses till the last date of the accounting period whether paid or not. The outstanding
expenses are added to the concerned head of account in the P & L account and also shown as a
liability in the Balance Sheet.
Outstanding Income: This is added to the concerned head of account and shown as an asset in
the Balance Sheet.
Prepaid Expenses: Some expenses are paid in advance. These are deducted from the concerned
head of expenses in the P & L Account and shown as an Asset in the Balance Sheet.
Abnormal loss of stock: (flood, fire or any reason). It is shown as a credit in the
Manufacturing/Trading loss and the insurance claim is made. Insurance company will admit the
claim or reject the claim for a value. If the actual value of loss is more than the claim admitted the
difference is a loss, which has to be accounted in the P & L Account. If the full value is admitted
as a claim, then besides showing a credit in the Manufacturing/Trading account, it is shown on
the Assets side of the Balance Sheet.
The going concern assumption allows the accountant to classify the expenditure and receipts as
Capital Expenditure, Revenue Expenditure, Deferred Revenue Expenditure, Capital Receipts and
Revenue Receipts.
Capital expenditure is that expenditure which is incurred for permanent investment in the
business in the form of plant & machinery, land & building, Furniture & Fixtures or for expansion,
modernization or technology upgradation or replacement.
Revenue Expenditure is that expenditure which is incurred for maintaining productivity of the
business or for earning capacity of the business. This includes Office and Administration
expenses, Selling and distribution Expenses, and Non-operating Expenses and Losses.
Deferred Revenue Expenditure is that expenditure which yields benefits which extend beyond a
current accounting period but the amount of expenditure is fairly big to absorb in the current
accounting period. Expenses such as Advertising, Campaigning, Research and Development and
all other amortizations fall in this category.
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Capital Receipts and Revenue Receipts. Though no clear-cut formula for distinction could be
found, receipts in the form of sale of fixed asset, amount of loan received capital contributed by
the proprietor/partner/owner are all capital receipts. Revenue receipts are sales, revenue from
services rendered in the normal course of business, interests, rents, royalty etc. However, the
proceeds of sale of a car is a revenue receipt for one who is dealing in sale of cars as a
commodity whereas the same is treated as a capital receipt for other businesses.
All expenditure incurred till erection, installation and normal functioning of machinery etc is a
capital expenditure.
Interest on Capital: Sometimes interest is allowed on the capital contributed by the proprietor or
partner/s. This is an item of business expenditure and debited to P & L account.
ACCRUALS: Costs that were incurred although not paid during a particular period.
ACID TEST: A measure of a firm’s liquidity using the formula—Realisable Current Assets MINUS
Current Liabilities (also called Quick Ratio)
RATE OF RETURN: Percentage of gain from the annual Income in relation to total Capital
Investment.
CAPITAL BUDGETING: An exercise by which funds are allocated for particular projects/uses.
CASH FLOW: Inflow and outflow of Cash items in the operations of cash nature.
CAPITAL RESERVES: Reserves, which are not available for distribution as dividends as they
have not arisen out of trading operations. Eg. Surplus on account of revaluation of assets.
CURRENT ASSETS: Resources that are readily convertible to cash within a year.
GOODWILL: The premium recorded on the books of the company as an intangible asset
whenever payment for any assets exceeds its book value.
NET SALES: Sales less of rebate, discount, excise duty and cess.
TANGIBLE NETWORTH: Total share holder’s equity.(Total equity minus intangible assets).
RETAINED EARNINGS: That portion of annual income after tax less dividend that is held
cumulatively and is part of common stock holder’s equity.
SINKING FUND: Annual sum set apart from income after tax for the purpose of redeeming any
bonds or preferred stock.
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SOURCES OF FUNDS: Decrease in Assets, Increase in Liability and equity.
Accounting Concepts:
Accounting Policies:
Depreciation, Depletion and Amortisation; Treatment of preliminary expenditure
Conversions of foreign currency items; Valuation of Inventory
Treatment of goodwill; Valuation of Investment
Treatment of retirement benefits; Recognition of profits on ongoing projects
Valuation of fixed assets Treatment and provision for contingent liabilities
Capital Adequacy on an on going basis keeping in mind the business risks
ACCOUNTING EQUATIONS:
Resources = Sources of finance
Assets = Capital + Liabilities
Capital =Assets - External Liabilities
Sources of Funds: