FINANCIAL ACCOUNTS

Name RATI BHAN

Roll No. 511022630
Program MBA
Subject FINANCIAL ACCOUNTS
[Set 1]
Code MB0041
Learning IICM KINGSWAY CAMP
Centre

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Q1.What is accounting cycle? List the sequential steps involved in

Accounting cycle?
Ans.
The Accounting Cycle: The accounting cycle refers to a series of
sequential steps or procedures performed to accomplish the accounting
process. The steps in the cycle are as follows:
Step 1 Transactions
are recorded in the journal
Step 2 Journal Entries are posted in the Ledger
Step 3 Preparation of a Trial Balance
Step 4 Adjusting journal entries are journalized and posted
Step5 Preparation of the worksheet
Step 6 Preparation of the financial statements
Step 7 Closing journal entries are journalized and posted
Step 8 Preparation of the post-closing trial balance
Step 9 Reversing journal entries are journalized and posted

The Journal
The journal is a chronological record of the entity's transactions. A journal
entry shows all the effects of a business transaction in terms of debits and
credits. Each transaction is initially recorded in a journal rather than directly
in the ledger. A journal is called the book of original entry. Of only two
accounts are affected- one account is debited and the oilier account is
credited- it is called a Simple Journal entry. When three or more accounts
are required in a journal entry, the entry is referred to as a Compound
entry.

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The Ledger
A grouping of the entity's accounts is referred to as the ledger. Although
some firms may use various ledgers to accumulate certain detailed
information, all firms have a general ledger. A general ledger is the
reference book of the accounting system and is used to classify and
summarize transactions, and to prepare data for the basic financial
statements.

The Trial Balance

The Trial Balance is a list of all accounts with their respective debit or credit
balances. It is prepared to verily the equality of debits and credits in the
ledger at the end of each accounting period or at any time the postings are
updated.

Q2.A. Bring out the difference between Indian GAAP and US GAAP
norms?

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There are significant differences between Indian GAAP and US GAAP. US GAAP
stipulate stringent accounting treatment as well as disclosure norms,
FINANCIAL ACCOUNTS
whereas their Indian GAAP in many cases has relaxed requirements (AS 18,
17, AS 3). Similarly, there are several areas where no Accounting Standard
has been issued by ICAI. These differences lead to wide variations when
Financial Results of Indian Companies are computed under US GAAP and it
is found that Profits computed under US GAAP are generally lower

Some of these major differences between US GAAP and

Indian GAAP which give rise to differences in profit are
highlighted hereunder:

1. Underlying assumptions: Under Indian GAAP, Financial

statements are prepared in accordance with the principle of
conservatism which basically means “Anticipate no profits
and provide for all possible losses”. Under US GAAP
conservatism is not considered, if it leads to deliberate and
consistent understatements.

2. Prudence vs. rules: The Institute of Chartered

Accountants of India (ICAI) has been structuring Accounting
Standards based on the International Accounting Standards
(IAS), which employ concepts and `prudence' as the principle
in contrast to the US GAAP, which are “rule oriented",
detailed and complex. It is quite easy for the US accountants
to handle issues that fall within the rules, while the
International Accounting Standards provide a general
framework of accounting standards, which emphasise
"substance over form" for accounting. These rules are less
descriptive and their application is based on prudence. US
GAAP has thus issued several Industry specific GAAP, like
SFAS 51 (Cable TV), SFAS 50 (Record and Music Industry) ,
SFAS 53 ( Motion Picture Industry) etc.
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3. Format/ Presentation of financial statements: Under

Indian GAAP, financial statements are prepared in accordance
with the presentation requirements of Schedule VI to the
 FINANCIAL ACCOUNTS

If no cause-and-effect relationship exists (e.g., a sale is impossible), costs

are recognized as expenses in the accounting period they expired: i.e.,
when have been used up or consumed (e.g., of spoiled, dated, or
substandard goods, or not demanded services). Prepaid expenses are not
recognized as expenses, but as assets until one of the qualifying conditions
is met resulting in a recognition as expenses. Lastly, if no connection with
revenues can be established, costs are recognized immediately as expenses
(e.g., general administrative and research and development costs).

Prepaid expenses, such as employee wages or subcontractor fees paid out

or promised, are not recognized as expenses (cost of goods sold), but as
assets (deferred expenses), until the actual products are sold.

The matching principle allows better evaluation of actual profitability and

performance (shows how much was spent to earn revenue), and reduces
noise from timing mismatch between when costs are incurred and when
revenue is realized.

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Q3. Prove that the accounting equation is satisfied in all the

following transactions of Mr. X
(1) Commence business with cash Rs.50000
(2) Paid rent in advance Rs.1000
(3) Purchased goods for cash Rs.18000 and Credit Rs.20000
(4) Sold goods for cash Rs.25000 costing Rs.22000
(5) Paid salary Rs.5000 and salary outstanding is Rs.3000
(6) Bought moped for personal use Rs.20000

Liabilities +
Sr. No. Assets =
Capital
1 50000 = 0 + 50000
2 -1000
+1000
50000 = 0 + 50000
3.1 -18000
+18000
50000 = 0 + 50000
3.2 + 20000 =
70000 = 20000 + 50000
4 - 22000
+ 25000 = 0 + 3000
73000 = 20000 + 53000
5 - 5000 = + 3000 + (-) 8000
68000 = 23000 + 45000
6 - 20000 = 0 + (-) 20000
48000 = 23000 + 25000
End
Equati 48000 = 48000
on

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Liabilities +
Asset =
Capital
Sr.No.
Debto Good Salar Person Credit Capita
Cash Rent
rs s y al or l
1 50000 50000
2 -1000 +1000
- +180
3.1
18000 00
3.2 20000 20000
+250 - +3000
4
00 22000
5 -5000 3000 -8000
6 - 20000 -20000
End 5600 1600 - 25000
1000 -5000 23000
Equati 0 0 20000
on = 48000 = 48000

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Q4. Following are the extracts from the Trial Balance of a firm as
on 31st March 20X7
Dr Cr
Sundry Debtors 2,05,00
0
Provision for Doubtful Debts 10,000
Provision for Discount on 1,800
Debtors
Bad Debts 3,000
Discount 1,000
Additional Information:
1) Additional Bad Debts required Rs.4,000
2) Additional Discount allowed to Debtors Rs.1,000
3) Maintain a provision for bad debts @ 10% on debtors
4) Maintain a provision for discount @ 2% on debtors
Required: Pass the necessary journal entries and show the relevant
accounts including final accounts.

Journal entries as on 31st March 20X7

Particulars LF Debit Credit

(Rs.) (Rs.)
Bad Debt account DR 4000

To Sundry Debtor account 4000

Provision for Doubtful Debts account DR 7000

To Bad Debts account 7000

P&L account DR 17100

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To Provision for Doubtful Debt 17100

Provision for Discount account DR 1000

To Discount on Debtors account 1000

P&L account DR 2818

To Provision for Doubtful Debts account 2818

Provision for Doubtful Debts account

Particulars Amoun Particulars Amoun
t (Rs.) t (Rs.)
To Bad Debts account 7000 By Balance b/d 10000
To Balance c/d 20100 By P&L account 17100

27100 27100

Provision for Discount on Debtors account

Particulars Amoun Particulars Amoun
t (Rs.) t (Rs.)
To Discount on Debtors 1000 By Balance b/d 1800
account
To Balance c/d 3618 By P&L account 2818

4618 4618

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Bad Debts account

Particulars Amou Particulars Amoun
nt t (Rs.)
(Rs.)
To Balance b/d 3000 By Provision for Doubtful Debts 7000
account
To Sundry debtors 4000

7000 7000

Calculation of Provision required

Debtors as per Trial Balance 205000
Less additional Bad Debt - 4000
201000

10% on 201000 20100

Opening balance in Provision account 10000

Less Bad Debts w/o - 7000
3000
Provision needed 20100
Therefore Provision required to be made 20100 – 3000 = 17100
Calculation of Provision for Discount
Debtors as per Trial Balance 205000
Less additional Bad Debts - 4000
201000
Less additional Provision - 20100
180900
2% of 180900 3618

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Profit & Loss account

Particulars Amou Amou Particula Amou Amou
nt nt rs nt nt
(Rs.) (Rs.) (Rs.) (Rs.)
To Bad Debts 3000
+ New Bad Debts 4000
+ New R.D.D 20100
27100
- Old R.D.D -10000
17100

Discount as per Trial 1000

Balance
+ New Provision 3618
4618
- Old Provision -1800
2818

Balance Sheet
Particula Amou Amou Particulars Amou Amoun
rs nt nt nt t
(Rs.) (Rs.) (Rs.) (Rs.)
C.A
Sundry Debtors 20500
0
- Bad Debts -
4000
- R.D.D -
20100
18090
0
- Reserve for Discount - 3618
on Debtors
17728
2

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Q.5. A. Bring out the difference between trade discount and cash
discount.

Cash
Trade Discount
Discount

Is a reduction granted by Is a reduction granted by supplier from

supplier from the invoice the list price of goods or services on
price in consideration of business consideration re: buying in
immediate or prompt bulk for goods and longer period when
payment in terms of services

As an incentive in credit
management
Allowed to promote the sales
to encourage prompt
payment

Not shown in the supplier Shown by way of deduction in the

bill or invoice invoice itself

Cash discount account is Trade discount account is not opened in

opened in the ledger the ledger

Allowed on payment of
Allowed on purchase of goods
money

It may vary with the time It may vary with the quantity of goods
period within which purchased or amount of purchases
payment is received made

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Q5.B. Explain the term (1) asset (2) liability with the help of
examples.
Ans. In financial accounting, assets are economic resources. Anything
tangible or intangible that is capable of being owned or controlled to
produce value and that is held to have positive economic value is
considered an asset. Simplistically stated, assets represent ownership of
value that can be converted into cash (although cash itself is also
considered an asset).[1] The balance sheet of a firm records the monetary
value of the assets owned by the firm. It is money and other valuables
belonging to an individual or business. Two major asset classes are tangible
assets and intangible assets. Tangible assets contain various subclasses,
including current assets and fixed assets.[4] Current assets include
inventory, while fixed assets include such items as buildings and
equipment.[5] Intangible assets are nonphysical resources and rights that
have a value to the firm because they give the firm some kind of advantage
in the market place. Examples of intangible assets are goodwill, copyrights,
trademarks, patents and computer programs,[5] and financial assets,
including such items as accounts receivable, bonds and stocks.

In financial accounting, a liability is defined as an obligation of an entity

arising from past transactions or events, the settlement of which may result
in the transfer or use of assets, provision of services or other yielding of
economic benefits in the future.

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• All type of borrowing from persons or banks for improving a business

or person income which is payable during short or long time.
• They embody a duty or responsibility to others that entails settlement
by future transfer or use of assets, provision of services or other
yielding of economic benefits, at a specified or determinable date, on
occurrence of a specified event, or on demand;
• The duty or responsibility obligates the entity leaving it little or no
discretion to avoid it; and,
• The transaction or event obligating the entity has already occurred.

Liabilities in financial accounting need not be legally enforceable; but can

be based on equitable obligations or constructive obligations. An equitable
obligation is a duty based on ethical or moral considerations. A constructive
obligation is an obligation that can be inferred from a set of facts in a
particular situation as opposed to a contractually based obligation.

The accounting equation relates assets, liabilities, and owner's equity:

Assets = Liabilities + Owner's Equity

Probably the most accepted accounting definition of liability is the one used
by the International Accounting Standards Board (IASB). The following is a
quotation from IFRS Framework:

A liability is a present obligation of the enterprise arising from past events,

the settlement of which is expected to result in an outflow from the
enterprise of resources embodying economic benefits

Regulations as to the recognition of liabilities are different all over the

world, but are roughly similar to those of the IASB.

Examples of types of liabilities include: money owing on a loan, money

owing on a mortgage, or an IOU.

Liabilities are debts and obligations of the business they represent

creditors claim on business assets. Example of Liabilities All kinds of

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payable 1) Notes payable - an written promise. 2) Accounts Payable - an

oral promise. 3) Interests Payable. 4) Sales Payable

Classification of accounting liabilities

Liabilities are reported on a balance sheet and are usually divided into two
categories:

• Current liabilities — these liabilities are reasonably expected to be

liquidated within a year. They usually include payables such as wages,
accounts, taxes, and accounts payables, unearned revenue when
adjusting entries, portions of long-term bonds to be paid this year,
short-term obligations (e.g. from purchase of equipment), and others.
• Long-term liabilities — these liabilities are reasonably expected not to
be liquidated within a year. They usually include issued long-term
bonds, notes payables, long-term leases, pension obligations, and
long-term product warranties.

Bank account example

Money deposited with a bank becomes a liability of the bank, because the
bank has an obligation to pay the depositor the money deposited; usually
on demand. The money deposited is an asset for the depositor; but this
asset will not be recorded by the bank because it is not the bank's asset.

A debit increases an asset; and a credit decreases an asset. A debit

decreases a liability; and credit increases a liability.

When a bank receives a deposit it credits a liability account called

"deposits" and credits the depositor's bank account for the same amount
(the bank's "deposits" account is the sum of all of the amounts credited to
all of its customer's individual bank accounts). A deposit received by a bank
is credited because the bank's liability to its customer, the depositor,
increases. When a bank informs its depositor that it has debited the
depositor's bank account, it means that the depositor's bank account has
been decreased by the amount debited.

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6. A fresh MBA student joined as trainee was asked to prepare

Trial balance. He was unable to submit a correct trial balance. You,
as a senior accountant find out the errors and rectify them. After
redrafting the trial balance prepare trading and Profit and loss
account.

Particulars Debit Credit

Capital 7,670
Cash in Hand 30
Purchases 8,990
Sales 11,060
Cash at bank 885
Fixtures and Fittings 225
Freehold premises 1,500
Lighting and Heating 65
Bills Receivable 825
Return Inwards 30
Salaries 1,075
Creditors 1890
Debtors 5,700
Stock at 1st April 2007 3,000
Printing 225
Bills Payable 1,875
Rates, taxes and insurance 190
Discount received 445
Discount allowed 200
21,175 21,705
Adjustments:
1) Stock on hand on 31st March 2008 was valued at Rs.1800
2) Depreciate fixtures and fittings by Rs.25
3) Rs.35 was due and unpaid in respect of salaries
4) Rates and insurance had been paid in advance to the extent of Rs.40

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Trading Account for the year ended 31-03-2008

Amou Amou Amou Amou
Particulars nt nt Particulars nt nt
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening stock 3000 By Sales 11060
To Purchase 8990 Less Sales Returns 30 11030
To G/P closed 840 By closing stock 1800
1283
0 12830

P&L Account for the year ended 31-03-2008

Amou Amou Amou Amou
Particulars nt nt Particulars nt nt
(Rs.) (Rs.) (Rs.) (Rs.)
To Lighting and
heating 65 By G/P balanced 840
To Salaries 1075 By Discount received 445
Add outstanding 35 By N/L closed 490
To Printing 225
To Rates taxes &
insurance 190 1775
- Less prepaid - 40
To Discount Allowed 200
To depreciation
fixture & fittings 25
1775

Balance Sheet as on 31-03-2008

Amou Amou Amou Amou
Particulars nt nt Particulars nt nt
(Rs.) (Rs.) (Rs.) (Rs.)
Capital 7670 Freehold premises 1500

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- Less Net Loss - 490 7180 Fixtures & Fittings 225

- Less Depreciation -25 200
Creditor 1890 1700
Bills Payable 1875
Outstanding salaries 35 Stock 1800
Debtors 5700
Bills Receivable 825
Cash at Bank 885
Cash in hand 30
Prepaid Rates 40

10980 10980

Redrafted Trial Balance

Particulars Deb Credit

it
Capital 7,670
Cash in Hand 30
Purchases 8,990
Sales 11,060

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Cash at bank 885

Fixtures and Fittings 225
Freehold premises 1.500
Lighting and Heating 65
Bills Receivable 825
Return Inwards 30
Salaries 1.075
Creditors 1890
Debtors 5,700
Stock at 1st April 2007 3,000
Printing 225
Bills Payable 1875
Rates, taxes and insurance 190
Discount received 445
Discount allowed 200
22940 22940

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