ASSIGNMENT: SET-1

NAME: Chaitali A. Nayak

ROLL NO.: 520920472

SEMESTER: FIRST (I)

SUBJECT NAME: Financial and Management Accounting

SUBJECT CODE: MB0025

1. Explain any two accounting concepts with example?

Answers:

Concepts are the basic assumptions or conditions up on which the science of accounting is
based. There are five basic concepts of accounting namely:

• Business entity concept,

• Going concern concept,
• Money measurement concept,
• Periodicity concept and
• Accrual concept.

Business separate entity concept:

The essence of this concept is that business is a separate entity and different from the owner
or the proprietor. This is true in the case all forms of organization. If X starts business, he
should not mix up his personnel properties with that of the business. When he invests his funds
into the business, it is regarded as capital to the business and capital is a liability from the
business point of view. If X withdraws any money fro the business, it is detectable form the
capital and to that extent the liability of the business towards the owner is reduced. On the
other hand, if the proprietor withdraws money form the business for business purposes, then it
is treated as expenditure to the business. This legal separation between business and
ownership is kept in mind while recoding the transactions in the books of business.

Let us take an example. Suppose Mr. Sahoo started business investing Rs. 100000. He
purchased goods for Rs. 40000, Furniture for Rs. 20000 andplant and machinery of Rs. 30000.
Rs10000 remains in hand. These are the assets of the business and not of the owner.
According to the business entity concept Rs100000 will be treated by business as capital i.e. a
liability of business towards the owner of the business. Now suppose, he takes away Rs. 5000
cash or goods worth Rs. 5000 for his domestic purposes. This withdrawal of cash/goods by the
owner from the business is his private expense and not an expense of the business. It is
termed as Drawings. Thus, the business entity concept states that business and the owner are
two separate/distinct persons. Accordingly, any expenses incurred by owner for himself or his
family from business will be considered as expenses and it will be shown as drawings.

Significance
The following points highlight the significance of business entity concept:

• This concept helps in ascertaining the profit of the business as only the business
expenses and revenues are recorded and all the private and personal expenses are
ignored.
• This concept restraints accountant from recording of owner’s private/personal
transactions.
• It also facilitates the recording and reporting of business transactions from the business
point of view.
• It is the very basis of accounting concepts, conventions and principles.

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 setup to last for 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 lifetime 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.

For example, a company purchases a plant and machinery of Rs.100000 and its life span is 10
years. According to this concept every year some amount will be shown as expenses and the
balance amount as an asset. Thus, if an amount is spent on an item which will be used in
business for many years, it will not be proper to charge the amount from the revenues of the
year in which the item is acquired. Only a part of the value is shown as expense in the year of
purchase and the remaining balance is shown as an asset.

Significance
The following points highlight the significance of going concern concept;

• This concept facilitates preparation of financial statements.

• On the basis of this concept, depreciation is charged on the fixed asset.
• It is of great help to the investors, because, it assures them that they will continue to get
income on their investments.
• In the absence of this concept, the cost of a fixed asset will be treated as an expense in
the year of its purchase.
• A business is judged for its capacity to earn profits in future.

2. Prove that accounting equation is satisfied in all the following transactions of Mr. X
i. Commenced business with cash – Rs 80,000
ii. Purchased goods for cash –Rs 40,000 and on credit Rs. 30,000
iii. Sold goods for cash –Rs. 40,000 costing Rs. 25,000
iv. Paid salary – Rs. 2,000 and salary outstanding Rs. 1,000
v. Brought scooter for personal use for cash at Rs. 20,000

Answer:

The accounting equation is,

Equity [Working Capital] + Liabilities + Assets

i. Commenced business with cash – Rs. 80,000

In the first transaction, the business receives a capital of Rs. 80,000 cash and so capital
account and cash accounts are affected.
Capital is a liability and cash is an asset to the business.
This is shown in the transaction number 1, in the table.

ii. Purchased goods for cash –Rs 40,000 and on credit Rs. 30,000

In this transaction, cash account, goods account and liabilities account gets affected.
Cash account reduces by Rs. 40,000
Goods account increases by Rs. 40,000
Liabilities account increases by Rs. 30,000
This is shown in the transaction number 2, in the table.

iii. Sold goods for cash –Rs. 40,000 costing Rs. 25,000

In this transaction, goods account, cash account and profit account gets affected.
Cash account increases by Rs. 40,000
Goods account reduces by Rs. 25,000
Profit account being owner’s account, it gets credited with Rs 15,000
This is shown in the transaction number 3, in the table.

iv. Paid salary – Rs. 2,000 and salary outstanding Rs. 1,000

In this transaction, cash and salary accounts are affected.

Cash account reduces by Rs. 2,000 ans salary account gets credited by Rs. 2,000
Outstanding salary is Rs. 1,000 which is not paid yet, hence non of the accounts gets
affected. This is shown in the transaction number 4, in the table.

v. Brought scooter for personal use for cash at Rs. 20,000

The scooter is for personal use, the liability of the business on owner’s capital
decreases.
Cash account and capital account decreases by Rs. 20,000
This is shown in the transaction number 5, in the table.

Assets Liabilities and owner's equity

Transaction Goods Salary
Number Cash a/c a/c a/c Liabilities Mr.X's Capital
1 80000 80000
2 -40000 70,000 30000
3 40000 -25000 15000
4 -2000 2000
5 -20000 -20000
58000 45000 2000 30000 75000
105000 105000
3. Show the rectification of entries for the following

a. the sales account is undercast by Rs.15,000

b. Goods returned by customer Mr. X of Rs.5650 has been posted in return inward
account as Rs.5560 and in Mr. X’s account as Rs. 6550
c. Salary paid Rs.6,000 has been posted to rent account.
d. Cash received from Ram posted to Shyam account Rs. 7000
e. Cash received from jadu Rs. 8640 has been posted to the debit of Madhu’s account..

Answer:

The below table shows the rectification of entries

Particulars Debit [Rs.] Credit [Rs.]

Suspense account Dr 15,000

To Sales account 15,000

 Suspense account Dr 90

To Return account 90

Mr. X’s account Dr 900

To Suspense account 900

Salary account Dr 6000

To rent account 6000

Shyam account Dr 7000

To Ram account 7000

Jadu account Dr 8640

To Madhu account 8640

4. The following balances are extracted from the books of Kiran Trading Co on 31 st
March 2000. You are required to prepare trading and profit and loss account and a
balance sheet as on that date:

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

Trading account of M/s Kiran Trading Co

Trading Account
Dr Cr
Opening stock 5,000 Sales - Return Inward 243,500
Purchases - Return Outward 192,500 Closing Stock 125,000
Carriage Inwards 4,000
Wages 14,000
Gross Profit 153,000
368,500 368,500

Profit and Loss Account of M/s Kiran Trading Co

Profit and Loss Account

Dr Cr
Rent and Taxes 5,500 by Trading a/c Gross Profit 153,000
Insurance 5,500 Comission Received 2,000
Trade Expenses 1,000
Commission Paid 4,000
Interest on Capital 3,500
Staionary 2,250
Carriage Outward 7,250
Net Profit 126,000
155,000 155,000

Balance Sheet Account of M/s Kiran Trading Co

Balance Sheet
Capital and Liabilities Assets
Bills Payable 15,000 Sundry Debtors 150,000
Capital 89,500 Office Furniture 5,000
Creditors 98,250 Cash in Hand 2,500
Net Profit from P & L Account 126,000 Cash in Bank 23,750
 B/R 22,500
Closing Stock 125,000
328,750 328,750

5. Write a note on:

a. outstanding expenses
b. prepaid expenses

Answer:

a. Out standing expenses:

Expenses due but not paid are known a outstanding expenses. Wages, salaries, rent,
commission etc payable in the current month are paid in the following month. If the final
accounts are prepared for the year ending 31st 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.

b. 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 March 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

Note that outstanding or prepaid expenses accounts are regarded as personal accounts.