Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016

Q-1. What is Business?

Business is an economic activity undertaken with the motive of earning profits and to maximize the wealth for
the owners. Business cannot run in isolation. Largely, the business activity is carried out by people coming
together with a purpose to serve a common cause. This team is often referred to as an organization, which could
be in different forms such as sole proprietorship, partnership, body corporate etc. The rules of business are based
on general principles of trade, social values, and statutory framework encompassing national or international
boundaries. While these variables could be different for different businesses, different countries etc., the basic
purpose is to add value to a product or service to satisfy customer demand.

Q-2. Term accounting divided into three terms:

A. Book-keeping.
B. Financial Accounting.
C. Cost accounting and.
D. Management Accounting.

A. Book-keeping:-
The most common definition of book-keeping as given by J. R. Batliboi is “Book-keeping is an art of
recording business transactions in a set of books.”

Book-keeping is basically a record keeping function. It is also referred to as a set of primary records. It is an art
because, the record is to be kept in such a manner that it will facilitate further processing and reporting of financial
information which will be useful to all stakeholders of the business.

B. Financial accounting:-

According to the American Institute of Certified Public Accountants defines Accounting as “an art of
recoding, classifying and summarizing in a significant manner and in terms of money, transactions and events
which are in part at least of a financial character, and interpreting the results thereof.”

C. Cost accounting:-

According to the Chartered Institute of Management Accountants (CIMA), Cost Accountancy is defined as
“application of costing and cost accounting principles, methods and techniques to the science, art and practice of
cost control and the ascertainment of profitability as well as the presentation of information for the purpose of
managerial decision-making.”

D. Management accounting:-

According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is “the
process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of
information used by management to plan, evaluate and control within an entity and to assure appropriate use of and
accountability for its resources. Management Accounting also comprises the preparation of financial reports for non
management groups such as shareholders, creditors, regulatory authorities and tax authorities”. Basically,
Management Accounting aims to facilitate management in formulating strategies, planning and constructing
business activities, making decisions, optimal use of resources, and safeguarding assets of business.

Q-3. Objectives of accounting?

The main objective of Accounting is to provide financial information to stakeholders. This financial information is
normally given via financial statements, which are prepared on the basis of Generally Accepted Accounting
Principles (GAAP). There are various accounting standards developed by professional accounting bodies all over the
world. In India, these are governed by The Institute of Chartered Accountants of India, (ICAI). In the US, the
American Institute of Certified Public Accountants (AICPA) is responsible to lay down the standards. The Financial
Accounting Standards Board (FASB) is the body that sets up the International Accounting Standards.

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016
The following are objectives of accounting

A. To ascertain the amount of profit or loss made by the business i.e. to compare the income earned
versus the expenses incurred and the net result thereof.
B. To know the financial position of the business i.e. to assess what the business owns and what it owes.
C. To provide a record for compliance with statutes and laws applicable.
D. To enable the readers to assess progress made by the business over a period of time.
E. To disclose information needed by different stakeholders.
Q-4. Basic accounting term?
 Transaction:- It means an event or a business activity which involves exchange of money or money’s
worth between parties. The event can be measured in terms of money and changes the financial
position of a person.
 Goods/services:- These are tangible article or commodity in which a business deals. These articles or
commodities are either bought and sold or produced and sold. Services are intangible in natures which
are rendered with or without the object of earning profits.
 Profit:- The excess of Revenue Income over expense is called profit.
 Loss:-The excess of expense over income is called loss.
 Asset:- Asset is a resource owned by the business with the purpose of using it for generating future
profits.
 Tangible Asset:- Tangible assets are the capital assets which have some physical existence. They can
be seen, touched and felt.
 Intangible Asset:- The capital assets which have no physical existence and whose value is limited by
the rights and anticipated benefits that possession confers upon the owner are known as intangible
assets.
 Liability: - It is an obligation of financial nature to be settled at a future date. It represents amount of
money that the business owes to the other parties.
 Internal liability: - These represent proprietor’s equity, i.e. all those amount which are entitled to the
proprietor, e.g., Capital, Reserves, Undistributed Profits, etc.
 Working capital: - Working capital is the excess of current assets over current liabilities.
Working Capital (Net) = Current Assets – Currents Liabilities.
 Contingent liability: - It represents a potential obligation that could be created depending on the
outcome of an event.
(N:B:- contingent liability is not recorded in books of account, but disclosed by way of a note to the
financial statements.)
 Capital: - It is amount invested in the business by its owners.
 Drawings: - It represents an amount of cash, goods or any other assets which the owner withdraws
from business for his or her personal use.
 Net worth: - It represents excess of total assets over total liabilities of the business.
 Non-current investments : Non-current Investments are investments which are held beyond the
current period as to sale or disposal
 Current investments: - Current investments are investments that are by their nature readily realizable
and are intended to be held for not more than one year from the date on which such investment is
made.
 Debtor:- The sum total or aggregate of the amounts which the customer owe to the business for
purchasing goods on credit or services rendered or in respect of other contractual obligations, is
known as sundry debtors or trade debtors
 Creditor:- A creditor is a person to whom the business owes money or money’s worth. e.g. money
payable to supplier of goods or provider of service.
 Capital Expenditure:- The expenditure incurred for acquiring or improvement of a fixed asset.
Which result in increasing the earning capacity of the business is known as capital expenditure. the
benefits of capital expenditure are generally availed in several accounting year

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016

 Revenue Expenditure:- The expenditure incurred to meet the day today expenses or running
expenses of a business and it will be benefit for current period only. revenue expenditure incurred to
maintain the capital asset in good condition.
 Balance sheet:- It is the statement of financial position of the business entity on a particular date. It
describes what the business owns and what the business owes to outsiders.
 Profit and loss account or income statement:- This account shows the revenue earned by the
business and the expenses incurred by the business to earn that revenue.
 Trade Discount:- It is the discount usually allowed by the wholesaler to the retailer computed on the
list price or invoice price. Trade discount is not recorded in the books of accounts.
 Cash Discount:- This is allowed to encourage prompt payment by the debtor. This has to be recorded
in the books of accounts
 Account:- an account is a defined as a summarized record of transactions related to a person or a
thing.
 Accounting:- accounting is an art of recording, classifying and summarizing the financial
transaction.
 Double entry accounting:-
 Debit:- The left hand side of double-entry system is called as “Debit’ that represent the addition of an
asset or expenses or the reduction to liability or revenue.
 Credit:- The right hand side of double-entry system is called as “Credit’ that represent the reduction
of an asset or expenses or the addition to liability or revenue.
 Advance:- payment made on account of, but before completion of a contract, or before acquisition of
goods or receipt of service.
 Bad Debts:- The debt which is not recoverable or irrecoverable debt is known as bad debt.
 Bond/Debenture:- A formal document constituting acknowledgement of a debt by an enterprises
usually given under its common seal and normally containing provision regarding payment of interest
and repayment of principal.
 Charges:- An encumbrance on an asset to secure an indebtedness or other obligation.
 Cheque:- A bill of exchange drawn upon a specified banker and not expressed to be payable
otherwise than on demand.
 Deficit:- The debit balance in the profit and loss statement.
 Prepaid Expenses:- Prepaid expenses represent payments made against which services are expected
to be received in a very short period.
 Cash in Hand: -This represents cash actually held by the business on the balance sheet date.
 Bank overdrafts:- Banks may give fund facilities like overdraft whereby, business is permitted to
issue cheques up to a certain limit. The bank will honour these cheques and will recover this money
from business.
 Investments:- These are funds invested outside the business on a temporary basis.
 Deprecation:- Depreciation means gradual decrease in the value of an asset due to normal wear and
tear, obsolescence etc.
 Expenses:- A cost relating to the operation of an accounting period or to the revenue earned during
the period or the benefits of which do not extend beyond that period.
 Goodwill:- An intangible asset arising from business connections or trade name or reputation of an
enterprises.
 Obsolescence:- Diminution in the value of an asset by reason of its becoming out-of date or less
useful due to technological changes, improvement in production in production methods, change in
market demand for the product or service.
 Prepaid Expenses:- payment for expenses in an accounting period, the benefit for which will accrue
in subsequent accounting periods.

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016

 Promissory note:- An instrument in writing containing unconditional undertaking, signed by the

maker, to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of
the instrument.
 Generally Accepted Accounting Principle (GAAP):- A widely accepted set of rules, conventions,
standards, and procedures for reporting financial information, as established by the Financial
Accounting Standards Board are called Generally Accepted Accounting Principles (GAAP).
 Capital Expenditure:- The expenditure incurred for acquiring or improvement of a fixed asset which
results increasing the earning capacity of the business is known as capital expenditure. The benefits of
capital expenditure are generally availed in several accounting years.
 Revenue Expenditure:-The Expenditure incurred to meet the running expenses of a business and it
will be benefit for current period only. Revenue expenditure incurred to maintain the capital asset in a
good condition.
 Deferred revenue Expenditure:- Deferred revenue expenditure represent certain types of asset
whose usefulness does not expire in the year of their occurrence but generally expires in the near
feature. These types of expenditure are carried forward and are written off in feature accounting
periods.
 Capital Receipt:-When a contribution is made by the proprietor towards the capital of the business is
known as capital receipts.
 Revenue Receipts:- when a receipt of money received from customers for goods or service rendered
is known as revenue receipt
 Capital Profit:- when a profit arises out of a casual and non-recurring transaction, it is termed as
Capital Profit. Capital profits arise out of the sale of assets other than inventory at a price more than
its book value.
 Revenue Profit:- If profit arises out of an ordinary nature, being the outcome of the ordinary function
and object of the business, it is termed as ‘Revenue Profit. Revenue profit arises out of the sale of the
merchandise that the business deals in.

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016
Q-5. Accounting Concept & Convention?

Theory base of accounting

Basic assumptions Basic Principle Modifying Principles

(a) Business Entity Concept
(b) Going Concern Concept
(c) Money Measurement Concept
(d) Accounting Period Concept
(e) Accrual Concept
A. Basic Assumption:-
(a) Revenue Realization Concept (a) Materiality Concept
(b) Matching Concept (b) Consistency Concept
(c) Full Disclosure Concept (c) Conservatism Concept
(d) Dual Aspect Concept (d) Timeliness Concept
(e) Verifiable Objective Evidence Concept (e) Industry Practice Concept
(f) Historical Cost Concept
(g) Balance Sheet Equation Concept

Q-1. Business Entity Concept:- This concept state that business has separate existence. It is
different from its owner. It has a special status. The transactions are recorded on business point
of view but not owner’s point of view
view.
Q-2. Going Concern Concept:
Concept:- The basic
asic principles of this concept is that business is assumed to
exist for an indefinite period and is not established with the objective of closing it down.
Q-3. Money Measurement Concept Concept:- The advantage of this concept is that different types of
transactions could be recorded as homogenous entries with money as common denominator. A
business transaction will always be recoded if it can be expressed in terms of money
money.
Q-4. Accounting Period Concept:
Concept:- This concept state that accounting must be maintained yearly,
whichh could be a calendar year i.e. 1st January to 31st December or its could be fiscal year 1st
April to 31st March. The business organizations have the freedom to change their own
accounting year.
Q-5. Accrual Concept:
Concept:- The essence of accrual concept is that revenue is recognized when the
sale is completed or service are given and it is immaterial whether cash is received or not.

B. Basic Principle:-
Q-1. Revenue Realization Concept:
Concept:-This Concept emphasis that profit should be considered only
when it is realized.. This concept ensure that income unearned or unrealized will not be
considered as revenue and the firm will not inflate profit.
Q-2. Matching Concept:
Concept:- It is the principle of accounting that expenses will
wi be matched against
income to know the profit & loss of the business. Similarly asset will be matched against liability
to know the financial position of the business.
Q-3. Fully Disclosure Concept:
Concept:- As per this concept accounting
ccounting data should properly be clarified,
clar
summarized, aggregated and explained for the purpose of presenting the financial statement
statement.
Q-4. Dual Aspect Concept:
Concept:- This concept state that each & every transaction has two aspect one
is treated as debit & another is treated as credit
credit.
(Asset = Liability
ity + Capital
Capital)
Q-5. Verifiable objective Evidence concept:- Under this principle, accounting data must be
verified. In other words, documentary evidence of transactions must be made which are capable
of verification by an independent respect.
Q-6. Historical cost co concept:- Business transactions are always recorded at the actual cost at
which they are actually undertaken. The basic advantage is that it avoids an arbitrary value being
attached to the transactions
Q-7. Balance sheet Equation concept concept:- Under this principle, all which has been received by us
must be equal to that has been given by us.

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016
C. Modifying Principles:-
Q-1. The Concept of Materiality:- according to materiality principle, all items having significant
economic effect on the business of the enterprises should be disclosed in the financial statement
and insignificant items should be ignored.
Q-2. The Concept of Consistency:- in order to enable the management to do the comparison of
the result of the several year of the business the adopted accounting method should be
consistently applied year after year. Unless there is a valid reason for changes in the method.
Q-3. The Prudence concept:- As per the law of conservatism (Prudence), at the time of preparing
financial statements, all the possible losses must be kept in mind and all anticipated profit
should be left out.
Q-4. Timeliness concept:- Under this principle every transaction must be recorded in proper
time, when the transaction is made.
Q-6. Define voucher? Describe types of voucher?
It is a written instrument that serves to confirm for some fact such as a transaction. Commonly, a voucher is
a document that shows goods have bought or services have been rendered, authorizes payment, and indicates
the ledger account(s) in which these transactions have to be recorded.

Types of Voucher
A. Receipt Voucher.
B. Payment Voucher.
C. Non-Cash or Transfer Voucher.
D. Supporting Voucher

A. Receipt Voucher:- Receipt voucher is used to record cash or bank receipt. Receipt vouchers are of two
types. i.e.
i. Cash Receipt:- It denotes receipt of cash.
ii. Bank Receipt:- It indicate receipt of cheque or DD.

B. Payment Voucher:- Payment voucher is used to record a payment of cash or cheque. Payment vouchers
are of two types. i.e.
i. Cash Payment:- It denotes payment of cash.
ii. Bank Payment:- It indicate payment of cheque or DD.

C. Non-Cash or Transfer Voucher:-These vouchers are used for non-cash transactions as documentary
evidence.
D. Supporting Voucher:- These vouchers are the documentary evidence of transactions that have happened.

Q-7. Define Accounts? Describe types of accounts?

According to the American Institute of Certified Public Accountants defines Accounting as “an art of
recoding, classifying and summarizing in a significant manner and in terms of money, transactions and events
which are in part at least of a financial character, and interpreting the results thereof. An account is divided in
two parts. (A). Personal Account (B) Impersonal Account.
Natural Persons
Types of Accounts:-

Artificial Persons
Personal Accounts

Representative
Accounts Persons

Real Accounts
(tangible and intangible)
Impersonal
Accounts
Nominal Accounts
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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016
A. Personal Accounts:- The Accounts which is related to person, firm and companies is called personal
account. Personal account is of three types.
I. Natural Personal Account:- These persons could be natural persons like Suresh’s A/c, Anil’s
A/c, Rani’s A/c etc.
II. Artificial Personal Accounts:- The persons could also be artificial persons like companies,
bodies corporate or association of persons or partnerships etc. i.e. Bharat Store, Bank, Ray
Traders.
III. Representative Personal Account:- Accounts which represent a certain person or group of
person is called representatives personal account. i.e. Salary payable, Outstanding rent,
prepaid insurance.
B. Impersonal Accounts:- The account which is not related to person, firm and companies is called
representative personal account. Representative personal account is of two types.
I. Real Account:- The account which is related to assets or properties or possessions of the
business. Depending on their physical existence is called real account. Real account is of two
types.
 Tangible Real Account:- Assets that have physical existence and can be seen, and
touched. i.e. Machinery A/c, Stock A/c, Cash A/c.
 Intangible Real Account:- These represent possession of properties that have no
physical existence but can be measured in terms of money and have value attached
to them. i.e. Goodwill A/c, Trademark A/c, Patents & Copy Rights A/c.
II. Nominal Account;- The account which is related to losses, expenses, income or gains is
called nominal account. i.e. Wages A/c, Rent A/c, Salaries A/c, Commission A/c etc.

Q-7. Accounting Process?

There are two approaches for deciding when to write on the debit side of an account and when to
write on the credit side of an account
A. American Approach/ Modern Approach.
B. British Approach/ Traditional Approach/Double Entry System.

A. American Approach/ Modern Approach:-

For Asset Increase in Assets Dr.

Decrease in Assets Cr.
For Liabilities Decrease in Liabilities Dr.
Increase in Liabilities Cr.
For Capital Decrease in Capital Dr.
Increase in Capital Cr.
For Incomes Decrease in Incomes Dr.
Increase in Incomes Cr.
For Expenses Increase in Expenses Dr.
Decrease in Expenses Cr.

B. British Approach/ Traditional Approach/Double Entry System/ (Golden Principle)?

Personal Account Real Account Nominal Account

Debit the receiver Debit what comes in Debit all expenses or losses
Credit the giver Credit what goes out Credit all income or gains

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016

Q-9. Accounting Equations?

The whole Financial Accounting depends on Accounting Equation which is also known as Balance
Sheet Equation. The basic Accounting Equation is:

Assets = Liabilities + Owner’s equity

Or A = L + P
Or P = A - L Where A = Assets, L = Liabilities, P = Capital
Or L = A – P

Q-10. Basic of Accounting?

A. Accrual Basis of Accounting.
B. Cash Basis of Accounting.
C. Hybrid or Mixed Basis Accounting.
A. Accrual Basis of Accounting:- Accrual basis of accounting is a method of recording transaction
by which revenue, cost, assets & liability are reflected in the accounts for the period in which they
accrue.
B. Cash Basic Accounting:- Cash basic accounting is a method of recording transaction by which
revenue, cost, assets & liability are reflected in the accounts for the period in which actual
receipt/actual payment are made.
C. Hybrid or Mixed Basis Accounting:- Mixed basis accounting is the combination of both cash &
accrual basic. Incomes are recorded on cash basic & expenses are recorded on accrual basic.

Q-11. Books of Primary entry?

A journal entry is often referred as books of primary entry/ original entry. The process of recording
transaction in a journal is called as ‘journalisation’. The entry made in books is called a ‘journal
entry’.

Q-12. Subsidiary Books?

Cash Books

Purchase Day Book

Sales Day Book

Return Outward Books

Subsidiary
Return Inward Books

Bills Receivable Book

Bills Payable Book

Journal Proper

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016
A. Cash Books:- A Cash Book is a special journal which is used for recording all cash/bank receipts
and all cash payments.
 Cash & Bank receipt are recorded on the left hand side (Debit Side).
 Cash & Bank payment are recorded on the right hand side (Credit Side).
Types of cash Book
 Single Column Cash Book:- Single column cash book has one amount column on each
side
 Double Column Cash Book:- Double column cash book has two amount column on
each side one for cash and another for discount on each side.
 Triple Column Cash books: - Triple column cash book has two amount columns on
each side one for cash, one for bank and one for discount on each side.
B. Purchase Day Book:- The transaction related to credit purchase of goods are recorded on
purchase day book. If goods are purchase on cash it will enter in cash book.
C. Sales Day Book:- The transaction related to credit sale of goods are recorded on sales day book.
If goods are sold on cash it will enter in cash book.
D. Return Inward Books/ Sales Return:- The transactions relating to goods which are returned by
the customer is known as return inward.
 The customer returns the goods issue a debit note.
 The supplier who received the goods issues a credit note.
E. Return Outward Books/ Purchase Return:- The transactions relating to goods which are
returned by us is known as return outward.
F. Bills Receivable Books:- All received of bill are entered in a book is called bill receivable books.
In this book the data of bill drawn, acceptance, maturity amounts of bill, name of the drawer and
name of the drawee are maintained.
G. Bills Receivable Books:- All payment of bill entered in a book is called bills payable book.
Whenever a bill of exchange is paid.
H. Journal Proper Book:- it is the book where several journal entries are recorded which are not
seen in any other book of subsidiary book. The entries are:-
 Opening Entry.
 Closing Entry.
 Adjustment Entry.
 Rectification Entry.
 Miscellaneous Entry.
Q-13. Subdivisions of Ledger?
Ledger

Personal Ledger Impersonal

Debtor Ledger Creditor’s Ledger Cash Ledger General Ledger

Private Ledger Nominal Ledger

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016
A. Ledger:- Ledger is a principal book of account where similar transaction relating to a particular
person/property or revenue/expenses are recorded.
B. Personal Ledger:- The ledger where the details of all transactions about the person are recorded is called
personal ledger.
C. Impersonal ledger: - The ledger where the details of all transaction about assets, income & expenses etc.
are recoded is called impersonal ledger.
D. Creditor Ledger:- The ledger where the details of transactions about the persons from whom goods are
purchased on credit are recorded is called creditor ledger.
E. Debtor Ledger:- The ledger where the details of transactions about the persons to whom goods are sold,
cash is received, etc. are recorded, is called debtors’ ledger.
F. Cash ledger:- The ledger where all cash & bank transactions are recorded, is called Cash ledger.
G. General Ledger:- The ledger where all transactions relating to real accounts, nominal accounts, details of
Debtors’ Ledger and Creditors’ Ledger are recorded, is called General Ledger.
H. Nominal Ledger:- The ledger where all transactions relating to incomes and expenses are recorded, is
called Nominal Ledger.
I. Private Ledger:- The Ledger where all transactions relating to assets and liabilities are recorded, is called
Private Ledger.
Q-14. Trial Balance?
After posting the accounts in the ledger, a statement is prepared to show separately the debit and
credit balance. Such a statement is known as the trial balance. It may also be prepared by listing each and
account entering in separate columns the totals of debit and credit sides. Whichever is prepared, the totals
of debit column and credit column should be agreed.
A. Purpose/Objectives of Trial balance:-
(I) To check the arithmetical accuracy of the recorded transactions.

(II) To ascertain the balance of any Ledger Account.

(III) To serve as an evidence of fact that the double entry has been completed in respect of every
transaction.
(IV) To facilitate the preparation of final accounts promptly.

B. Feature’s of a Trial Balance

(I) It is a list of debit and credit balances which are extracted from various ledger accounts.
(II) It is a statement of debit and credit balances.
(III) The purpose is to establish arithmetical accuracy of the transactions recorded in the Books of
Accounts.
(IV) It does not prove arithmetical accuracy which can be determined by audit.
(V) It is not an account. It is only a statement of account.
(VI) It is not a part of the final statements.
(VII) It is usually prepared at the end of the accounting year but it can also be prepared anytime as
and when required like weekly, monthly, quarterly or half-yearly.
(VIII) It is a link between books of accounts and the Profit and Loss Account and Balance Sheet.

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016
C. Method of Preparation of Trial Balance
(I) Total Method:- Under this method, every ledger account is totaled and the total amount is transfer to
trial balance, in this method, trial balance can be prepared as soon as ledger account is totaled.
(II) Balance Method:- under this method every ledger account is balanced and those balances only are
carried forward to the trial balance. This is the common method for preparation of trial balance.
(III) Total and Balance Method: - Under this method two method are combined.

D. Rules of Preparing of trial balance

(I) The balance of all assets A/c, Expenses A/c, Losses A/c, Drawing A/c, Cash & Bank A/c balances are
placed in the debit column of the trial balance.
(II) The balances of all liabilities A/c, Income A/c, Profits A/c, Capital A/c balances are placed in the
credit column of the trial balance.
E. Errors which are not disclosed by a trial Balance
(I) Errors of Omission: When the transaction is not at all recorded in the books of accounts, i.e. neither
in the debit side nor in the credit side of the account – trial balance will agree.
(II) Errors of Commission: Where there is any variation in figure/amount, e.g. instead of ` 800 either ` 80
or ` 8,000 is recorded, in both sides of ledger accounts – trial balance will agree.
(III) Errors of Principal: When accounts are prepared not according to double entry principle e.g.
Purchase of a Plant wrongly debited to Purchase Account – Trial balance will agree
(IV) Errors of Misposting: When wrong posting is made to a wrong account instead of a correct one
although amount is correctly recorded, e.g., sold goods to B but wrongly debited to D’s Account –
trial balance will agree
(V) Compensating Errors: When one error is compensated by another error e.g. Discount Allowed `100
not debited to Discount Allowed Account, whereas interest received `100, but not credit to Interest
Account – trial balance will agree
Q-15. Important Adjustments?
A. Closing Stock:- The closing stock figure does not appear in the trial balance, but is valued and
directly taken to the P & L A/c. The entry passed for this is:
Closing Stock A/c Dr.
To Trading and P & L A/c

In solving the examination problem, this entry is not actually passed, but the effect of its outcome is
given. Here, one effect is “show closing stock as asset in Balance Sheet” and second effect is “show it
on the credit side of Trading A/c”.

Note : But, if the closing stock appears in the debit side of Trial Balance, it means it has already been
adjusted against purchases. In that case, the closing stock will appear only in the asset side of the
Balance Sheet.

A. Depreciation:- A reduction in the value of an asset over time, due to wear and tear.
Depreciation A/c Dr.
To Fixed Asset A/c
The effect given is one – include in the P & L A/c as expense for the period and two – reduce from
asset value in the Balance Sheet.
B. Accrued Income:- The income which is earned but not yet received is known as Accrued income.
(I) When income accrued: - Accrued income A/c debited to income A/c.
(II) When income received:- Bank A/c debited to accrued income A/c .

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016
C. Outstanding Expenses/Accrued Expenses:- Certain expenses relating to a particular period may not
have been paid in that accounting period such expenses is treated as outstanding expenses.
(I) When Expenses is Outstanding:- Expenses A/c Debited to Outstanding Expenses A/c.
(II) When Outstanding Expenses Paid:- Outstanding Expenses A/c to Cash/ Bank A/c.
D. Prepaid Expenses:- Cost that have been paid but are not yet used up or have not yet expired and the
benefits of expenses will be avail in the next accounting year such portion of expenses is called pre
paid expenses.
(I) When paid:- Expenses A/c Debited, Prepaid Expenses A/c Debited to Cash/Bank A/c
(II) When Adjusted: - Prepaid Expenses A/c Debited to Expenses A/c.

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016

Q-16. Accounting for Deprecation?

A. Depreciation:- Depreciation means gradual decrease in the value of an asset due to normal wear and
tear, obsolescence etc. is known as deprecation.
B. Depretium:- it is a latin word where ‘De’ denotes declining and ‘Pretium’ means price. It is word
from which deprecation has been derived.
C. Amortization:- the process of writing of intangible asset like goodwill, patents & trade mark is
known as amortization.
D. Depletion:- Removable of an available and irreplaceable resource is known as depletion.
E. Obsolescence:- The process of discarding the asset before it is worn out is called obsolescence.
F. Salvage/Scrap Value:-The estimate value realized at the time of selling, discarding & exchanging of
asset is called salvage or scrap value.
G. Dilapidation:- Any damage to building or other property during tenancy is termed as dilapidation.
H. Written Down Value/(WDV):- The value of asset remains after providing of deprecation is called
written down value.
I. Inadequacy:- Changes in the scale of production or volume of activities may lead to discarding an
asset.

International Accounting Standard (IAS)-4 provides that “Depreciation is the allocation of the depreciable
amount of an asset over its estimated useful life.

 Calculate annual deprecation = Or D =

D= Depreciation, C= Cost of Fixed Asset, S= Expected Scrap Value & N= Estimate useful life

 Rate of deprecation is calculated by= x 100 Or R= x 100

R= Rate of depreciation, D= Annual depreciable amount, C= Cost of asset
 Deprecation at the end of 1st year=rc & W.D.V at the end of 1st Year =c-rc= C (1 - r)
W.D.V at the end of 2nd Year =𝐶(1 − 𝑟)
W.D.V at the end of 𝑛 Year =𝐶(1 − 𝑟)
Therefore, 𝐶(1 − 𝑟) = S or r = 1- 𝑆/𝐶
N= Estimate useful life, S= Scrap value, C= Cost of fixed asset & r= Annual rate of depreciation

Methods of charging Depreciation:-

A. Fixed/Equal Installment Or Straight Line Method:- A fixed portion of the cost of a fixed asset is
allocated and charged as periodic depreciation. Such depreciation becomes an equal amount in each
period. The formula for calculation of depreciation is : Depreciation = (V-S)/n. or V x R x
V = Cost of the asset, S = Residual value or the expected scrap value of the asset, N = Useful life
B. Diminishing Balance method: - fixed percentage depreciation is charges each year on the
diminishing value of the asset till the amount is reduced to scrap value.

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016

Q-17. Treading Accounts?

It is an account which is prepared at the end of financial year after preparation of trial balance to know
gross profit or gross loss of the concern. Generally cost of goods purchased and direct expenses are post in the
debit side of and closing stock and net sale are posted n the credit side of trading accounts. The excess of
credit balance over debit balance show gross profit of the concern which is transferred to profit and loss
accounts (gross profit b/d) & excess of debit balance over credit balance show the gross loss of the concern
which is transferred to debit side of profit and loss accounts (gross loss b/d)

FORMAT OF TRADING ACCOUNT

Trading Account of ___ for the period ending____________

Dr. Cr.
Particulars ₹ Particulars ₹
To Opening Stock ……. By Sales ………
To Purchase ….... Less: Return inward ……..
Less: Return outward …. ……. By closing stock
To Cartage/Carriage Inward By gross loss c/d
Carriage/ Carriage on Purchase ……
To Wages/ Productive Wages
Wages & Salaries/ Manufacturing
Wages/ Direct wages/factory wages ……
To Coal, gas and water …..
To Factory Insurance …..
To Motive Power …..
To Octroi …..
To Import duty & clearing charges ......
To Store Consumed/Consumable Store .….
To Duck charges …..
To Packing charges (Direct) …..
To Transit insurance on purchase …...
To Commission on purchase …..
To Royalty on purchase …...
To Excise duty …..
To Factory lighting …..
To Foreman’s salary …..
To Works manager’s salary …..
To Gross profit c/d ….

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016
Q-18. Profit & Loss Account?

This account is prepared at the end of the financial year after preparation of trading accounts to know the net
profit or net loss of the concern. The important of such account is to compare current profit with past profit. Generally
indirect expenses and losses such as selling and distribution expenses, managerial expenses, depreciation, factory
expenses are treated on debit side of profit and loss account & the indirect incomes & gains such as commission,
discount, interest received are treated on credit side of profit & loss account. The excess of credit balance over debit
balance shows the net profit which is added with capital in the asset side of balance sheet & the excess of debit balance
over credit balance shows net loss which is less from capital in the liability side of balance sheet.

Specimen of Profit and Loss Account

Dr. Profit and Loss Account for the year ended ____________ Cr.
Particulars Amounts Particulars Amount
To Gross loss b/d …… by Gross profit b/d …..
Office & management Expenses By Interest received ….
To Salaries/bonus & wages ……. By Commission received …..
To Rent, rates & taxes & audit fees .….. By Discount received ..…
To Printing & Stationery/ Legal charges ……. By Dividend received ..….
To Entertainment expenses ……. By Apprenticeship premium ..….
To Postage, Fax, Paper & Mobile phone …… By Bad debts recovered .......
To Sundry general expenses …… By Sale of old news papers ……
To Trade expenses …… By Profit on sale of fixed assets .…..
To Office heating/cooling, lighting expenses …… By Interest on drawings .…..
Selling and Distribution Expenses By interest on drawings ..…
To advertisement .…… By sundry receipts .….
To Salaries and commission of sales dept. ……. By net loss .…..
To Showroom rent/lighting …….
To travelling expenses …….
To Free sample …….
To commission on sales …….
To Delivery van expenses …….
To cost of printing catalogue …….
To bad debts …….
To Provision for doubtful debts ……
To export duty …….
To transit insurance on goods sold …….
To carriage outward …….
To packing charges (indirect) ….....
To Brokerage …….
To Godown rent/Warehouse rent …….
To depreciation on showroom building …….
To Forwarding charges (indirect) ……..
To sales & promotion expenses …….

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016

Repairs & Deprecation …….

To Repairs to furniture …….
To Repairs to machinery ……
To Repairs to building …….
To Deprecation on furniture …….
To Deprecation on machinery …….
To Deprecation on building ….....
Losses And Miscellaneous Expenses …….
To Charity …….
To Donations …….
To Gifts & presents ……
To Diwali poojan expenses …….
To Loss of sales of fixed assets …….
To Loss of stock by fire/theft …….
To Fines and penalty ….....
To Employees welfare expenses …….
To Employees state insurance …….
To Loss by embezzlement ….....
To Net profit
(Transfer to capital account) …….

Q-19. Balance Sheet?

A balances sheet is a statement which is prepared at the end of the financial year to view to measure the financial
position of the business on a certain date. The financial position of the concern is indicated by its assets & liabilities on a
given date. Excess of asset over liabilities represent the capital and is indicated the financial soundless. A balance sheet is
also described as a statement showing the source & application of the capital. The left hand side of the balance sheet
shows liability side and right hand side shows assets side. The assets and liabilities are arranged in a systematic manner
which is called marshalling of asset & liability. The importance of preparation of balance sheet is that it provides
information about the credit worthiness & solvency of the firm
Specimen of Balance Sheet
Balance Sheet as on ___________________
Liabilities Amount Assets Amount
Capital …... Fixed Assets …...
Fixed liabilities Goodwill, patents & copy right …...
Long term loan …... Land, Building, Plant & Machinery …...
Reserve Furniture, fixture & fittings …...
General, reserve etc. ….. Vehicles, live stock & investment …...
Current Liabilities Current Assets
Bills payable …... Closing stock, Raw materials & finished goods …...
Sundry creditor …... Sundry Debtor …...
Bank overdraft …... Bills receivable …...
Outstanding expenses …... Cash in hand & Cash at Bank …...
Income received in advance …... Prepaid expenses …...
….. …..

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 Fundamentals of Accounting FAC/ Inter Group –I Syllabus 2016

Q-1. Negotiable instruments?

Deferred payments are done through instruments like cheques, pay order, letter of credit, promissory
note, bills of exchange, hundies etc. these instruments facilitate credit transactions and hence sometimes they are
referred to as credit instruments or negotiable instruments.

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