ASSIGNMENT II. Topic: MEANING AND OBJECTIVES OF ACCOUNTING

Transcription

1 ASSIGNMENT I Topic: MEANING AND OBJECTIVES OF ACCOUNTING Q1. What is bookkeeping? Q2. Write the activities covered under accounting. Q3. List any two characteristics of accounting. Q4. What is accounting? Q5. Enlist the steps of Accounting Cycle. Q6. Distinguish between book keeping and accounting. Q7. Discuss any five limitations of accounting. Q8. Accounting records financial transactions in terms of money. Explain. Q9. Discuss any five advantages of accounting. Q1. Explain reliability and understandability as a characteristic of accounting information. ASSIGNMENT II TOPIC BASIC ACCOUNTING TERMS Q.1 Fill in the blanks: a) A person who owes money to a firm is called b) Debtors are c) Sales less will give gross profit d) and are examples of indirect expenses. e) Income statement means f) Position statement means g) Capital is a to the business. h) Income = i) Assets = k) If I am a dealer in cycles, buying cycles is. l) If I buy a car for the company it is an m) If debtors are not able to pay back they are to the company Q2. Explain any three of the following terms with example: i. Current Assets ii. Fixed Liabilities iii. Creditors iv. Capital Q.3 Differentiate between Cash and Trade Discount.

2 Q4 Define the following terms: i) Drawings ii) Sales iii) Expenses iv) Asset v) Drawings Q.5 Explain any two of the following with an example: Liabilities, stock, gain. Q.6 What is a business transaction? Explain with the help of an example.

3 CHAPTER 1 NOTES BASIC ACCOUNTING TERMS : Transaction : An economic activity that affects financial position of the business and can be measured in terms of money e.g. sale of goods, paying for expenses etc. Voucher : The documentary evidence in support of a transaction is known as voucher. For example, if we buy goods for cash we get cash memo, if we buy on credit we get an invoice, when we make a payment we get a receipt and so on. Capital : Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner. Assets : Assets are economic resources of an enterprise useful in its operations. Assets can be broadly classified into two types : 1. Fixed Assets are assets used for normal operations and held on a long-term basis, such as land, buildings, machinery, plant, furniture and fixtures etc. 2. Current Assets are assets held for a short-term and converted into cash within one year such as debtors, stock etc. Liabilities : Liabilities are obligations or debts that an enterprise has to pay at some time in the future. Liabilities can be classified as : 1. Long-term liabilities are those that are usually payable after a period of one Year e.g. a long term loan from a financial institution. 2. Short-term liabilities are obligations that are payable within a period of one year, for example, creditors, bills payable, bank overdraft etc. Sales : Sales are total revenues from goods sold or services provided to customers. Sales may be cash sales or credit sales. Revenues : Revenue means the income from any source. It should be of regular nature. For example sales of goods/providing services to customer, commission, interest, dividends etc. Expenses : Costs incurred by a business for earning revenue are known as expenses. For example rent, wages, salaries, interest etc. Expenditure : Spending money or incurring a liability for acquiring assets, goods or services is called expenditure. The expenditure is classified as

4 1. Revenue expenditure : If the benefit of expenditure is received within a year it is called revenue expenditure e.g. rent, interest etc. 2. Capital expenditure : If any expenditure lasts for more than a year, it is treated capital expenditure such as purchase of machinery, furniture etc. Profit : The excess of revenues over its related expenses during an accounting year is profit. Profit = Revenue Expenses. Gain : A non-recurring profit from events or transactions incidental to business such as sale of fixed assets, appreciation in the value of an asset etc. Loss : The excess of expenses of a period over its related revenues its termed as loss. e.g., cash or goods lost by theft of fire etc. Loss = Expenses - Revenue Discount : Discount is the rebate given by the seller to the buyer. It can be classified as : 1. Trade discount : The purpose of this discount is to persuade the buyer to buy more goods. It is Offered at an agreed percentage of list price at the time of selling goods. This discount is not recorded in the account books as it is deducted in the invoice/cash memo. 2. Cash discount : The objective of providing cash discount is to encourage the debtors to pay the dues promptly. This discount is recorded in the account books. Goods : The products in which the business deal in. The items that are purchased for the purpose of resale not for use in the business are called goods. Drawings: It the owner withdraw money and/ or goods from the business for personal use it is known as drawings. Purchases: The term Purchases is used only for the goods procured by a business for resale. In case of trading concerns it is purchase of final goods and in manufacturing concern this is purchase of raw materials. Purchases may be cash purchases or credit purchases. Closing Stock: It is the value of the goods lying unsold at the end of accounting year. Closing stock of one year becomes the opening stock of next year. Debtors; Debtors are persons and/ or other entities to whom business has sold goods and services on credit and amount has not received yet. These are assets of the business.

5 Creditors: If the business buys goods/ services on credit and amount is still to be paid to the persons and/ or other entities, these are called creditors. These are liabilities for the business.

6 THEORY BASE OF ACCOUNTING Generally Accepted Accounting Principles (GAAP) ; It refers to the rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity and consistency in the preparation and the presentation of financial statements. FUNDAMENTAL ACCOUNTING ASSUMPTIONS : 1. Going Concern Assumption : This concept assumes that an enterprise has an indefinite life or existence. It means that the intentions of the business are to continue for sufficiently longer period of time. It will not be dissolved or liquidated in the immediate future. If a machinery purchased is expected to last (to be used for) next 1 year, then the cost of machinery will be spread over the next 1 year for calculating net profit or loss of each year (Dep. Charged.) The full cost of the machine would not be treated as expense in the year of purchase itself. Market value of the asset is irrelevant and is not recorded in the balance sheet, as these assets are not going to be sold in the near future. Relevance : (a) Distinction is made between a capital expenditure and revenue expenditure. (b) Classification of assets and liabilities into short term and long term respectively. (c) Depreciation charged on fixed assets or fixed assets appears in the balance Sheet at book value, without having reference to their market value. 2. Consistency Assumption : a. It implies that accounting practices once selected and adopted, should be applied consistently year after year. b. Same Accounting practices will be followed for similar items year after year. This will ensure a meaningful study of the performance of the business for a number of years. c. When the accounting principles and practices are uniformly/consistently followed from year to year that the result obtained will be comparable. Consistency assumption does not mean that particular practices once adopted cannot be changed. The only requirement is that when a change is desirable, it should be fully disclosed in the financial statements along with its effect on income statement and financial position (Balance Sheet) of the year in which that change is made.

7 This assumption is important when alternative accounting practices are equally acceptable. E.g. two methods of charging depreciation, written down value method and Straight line method are equally acceptable. If a firm adopts one method in the previous year and the other method in next year, the result will not be comparable. 3. Accrual Assumption : Accrual concept applies equally to revenue and expenses. As per this assumption, revenue is recognized when it is accrued/ earned, that is, when sale is complete or services are rendered. It is immaterial, whether the cash is received or not. E.g. if a credit sale for Rs. 15, of two month is made on 15th Feb. 211, then the revenue earned is to be recorded on 15th Feb. 211 not on the date of cash realized, i.e, after two months. Similarly, expenses are recognized in the accounting period in which they facilitate in earning the revenues, whether the cash is paid for them or not. E.g. if at the end of year the two month salary is due but not paid. Then the expenses of salary will be recorded in the current year in which salary is due, not in the next year in which it will be paid. Relevance : Earning of a revenue and consumption of a resource (expenses) can be accurately matched to a particular accounting period Accounting Principles Accounting principles 1. Accounting Entity. / Business Entity : An entity has a separate existence from its owner. According to this principle, business is treated as an entity, which is separate and distinct from its owner. Therefore business transactions are recorded; analyzed and financial statements are prepared from the business point of view and not of the owner. i. The owner is treated as a creditor (liability) for his investment in the business, as if the firm has borrowed from its owner instead of the outside parties. ii. Interest on capital is treated as expense like any other business iii. expense. His private expenses are treated as drawings leadings to reduction in capital. iv. This concept is applicable to all forms of business organizations sole proprietorship, partnership or a company. 2. Money Measurement Principle:

8 According to this principle, only those transactions that are measured in money or can be translated in term of money are recorded in the books of accounts of the enterprises. i. Money means the currency of a country. ii. Money is a common measuring unit for recording and reporting business transactions. Example : purchases cost Rs. 15, will be recorded in the books of accounts but the good human relationship within organization will not be recorded. Limitations : 1. it ignores qualitative aspects e.g. efficient human resources (Assets), satisfied customers (Assets) and dishonest employee (liabilities) 2. Self-generated goodwill not recorded. 3. Value of money (currency) is not stable. 4. The facts which cannot be expressed in money cannot be recorded. 5. To make accounting records simple, relevant, understandable and homogeneous, facts are expressed in a common unit of measurement - money. 3. Accounting Period Principle : According to this principle, the whole indefinite life of an enterprise is divided into part, known as accounting period. Accounting period is defined as interval of time, at the end of which the profit and loss account and balance sheet are prepared. So the performance is measured at regular intervals and decision can be taken at the appropriate time. This interval may be quarterly, half-yearly and one year. Accounting period is usually a period of one year and that year may be financial year or calendar year. Relevance : 1. As per income tax law, tax on income is calculated on annual basis from 1st April to 31st March (Financial Year) 2. Accounting period concept is responsible for the preparation of income statement on accrual basis as distinguished from cash basis of accounting. 4. Full Disclosure Principle: According to this principle, apart from legal requirements all significant and material information related to the economic affairs of the entity should be completely disclosed in its financial statement and accompanying footnotes.

9 Disclosure of material information will result in better understanding of users, so, they take good and sound decision from the information. E.g. footnotes such as : 1. Contingent liabilities in respect to a claim of a very big amount against the business are pending in a court of law. 2. Change in the method of providing depreciation. 3. Market value of investment. Disclosure of all material facts is compulsory but is does not imply that even those figures which are irrelevant are to be included in financial statements 5. Materiality Principle : According to this principle, only those items or information should be disclosed that have material effect and relevant to the users. So, item having an insignificant effect or being irrelevant to user need not be disclosed separately, these may be merged with other item. If the knowledge of any information may effectthe decision of a user of account, is termedas material information. It should be noted that an item material for one enterprise may not be material for another enterprise. E.g. an item of expenses Rs.6, is material for an enterprise having turnover of Rs. 1,5, but it is not material for an enterprise having turnoverof Rs.1 crore. The nature of transaction should be taken into consideration for materiality of information. E.g. a difference of Rs.2 in the valuation of stock may be immaterial but the difference of Rs.5 in cash could be termed as material. 6. Prudence/ conservatism Principle : According to this principle, profit in anticipation should not be recorded but loss in anticipation should immediately be recorded. The objective of this principle is profit of the enterprise in no case overstated. When there are different equally acceptable alternative methods are available, the method which having least favourable immediate effect on profit should be adopted. e.g. 1. Valuation of stock at cost or realizable values whichever is lower. 2. Provision for doubtful debts and Provision for discount on debtor is made. 3. Ignore provision for discount on creditors. 7- Cost concept: The cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use. To illustrate, on June 25, an old plant was purchased for Rs. 5 lakh by Shiva Enterprise, which is into the business of

10 manufacturing detergent powder. An amount of Rs. 1, was spent on transporting the plant to the factory site. In addition, Rs. 15, was spent on repairs for bringing the plant into running position and Rs. 25, on its installation. The total amount at which the plant will be recorded in the books of account would be the sum of all these, i.e. Rs. 5,5,. The concept of cost is historical in nature as it is something, which has been paid on the date of acquisition and does not change year after year. For example, if a building has been purchased by a firm for Rs. 2.5 crore, the purchase price will remain the same for all years to come, though its market value may change. 8.Matching concept: The process of ascertaining the amount of profit earned or the loss incurred during a particular period involves deduction of related expenses from the revenue earned during that period. The matching concept emphasises exactly on this aspect. It states that expenses incurred in an accounting period should be matched with revenues during that period. It follows from this that the revenue and expenses incurred to earn these revenues must belong to the same accounting period. As already stated, revenue is recognised when a sale is complete or service is rendered rather when cash is received. Similarly, an expense is recognized not when cash is paid but when an asset or service has been used to generate revenue. For example, expenses such as salaries, rent, insurance are recognized on the basis of period to which they relate and not when these are paid. Similarly, costs like depreciation of fixed asset is divided over the periods during which the asset is used. 9. Dual aspect: Dual aspect is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the book of accounts. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places. In other words, at least two accounts will be involved in recording a transaction. This can be explained with the help of an example. Ram started business by investing in a sum of Rs. 5,, The amount of money brought in by Ram will result in an increase in the assets (cash) of business by Rs. 5,,. At the same time, the owner s equity or capital will also increase by an equal amount. It may be seen that the two items that got affected by this transaction are cash and capital account. 1. Revenue Recognition (Realisation) Concept The concept of revenue recognition requires that the revenue for a business transaction should be included in the accounting records only when it is realised. Here arises two questions in mind. First, is termed as revenue and the other, when the revenue is realised. Let us take the first one first. Revenue is the gross inflow of cash arising from (i) the sale of goods and services by an enterprise; and (ii) use by others of the enterprise s resources yielding interest, royalties and dividends. Secondly, revenue is assumed to be realised when a legal right to receive it arises, i.e. the point of time when goods have been sold or service has been rendered. Thus, credit sales are treated as revenue on the day sales are made and not when money is received from the buyer. As for the income such as rent, commission, interest, etc. these are recognized on a time basis.

11 Accounting Standards: Accounting standards are written statements of uniform accounting rules and guidelines or practices for preparing the uniform and consistent financial statements and for other disclosures affecting the user of accounting information. However, the accounting standards cannot override the provision of applicable laws, customs, usages and business environment in the country. The Institute tries to persuade the accounting profession for adopting the accounting standards, so that uniformity can be achieved in the presentation of financial statements. the Institute of Charted Accountants of India (ICAI) constituted an Accounting Standards Board (ASB) in April, 1977 for developing Accounting Standards. The main function of ASB is to identify areas in which uniformity in standards is required and develop draft standards after wide discussion with representative of the Government, public sector undertakings, industry and other organisations. ASB gives due consideration to the International Accounting Standards as India is a member of International Account Setting Body. ASB submits the draft of the standards to the Council of the ICAI, which finalises them and notifies them for use in the presentation of the financial statements. ASB also makes a periodic review of the accounting standards. International Financial Reporting Standards (IFRSs); International Financial reporting Standards (IFRSs) are globally accepted accounting standards developed by International Accounting Standard Board (IASB). IFRS is a set of accounting standards for reporting different types of business transactions and events in the financial statements. The objective is to facilitate international comparisons for true and fair valuation of a business enterprise. The qualitative characteristics associated with the preparation of financial statements are useful to the users of accounting information in making financial decisions. In an effort to narrow down the gap in the presentation of corporate financial statements, the Ministry of Corporate Affairs, Government of India has opted for the convergence of Indian Accounting Standards with IFRSs for bringing uniformity, comparability, transparency, rationalization and adaptability in the field of accounting.

12 ASSIGNMENT 3 Question bank: Q.1 What is meant by Accounting? Ans: Accounting is the art of recording, classifying, summarizing and communicating financial information to users for correct decision making. Q.2 Give any two objectives of accounting? Ans: a) To keep the records of the business systematically. b) To ascertain profit earned or loss suffered by the business during a specified period. Q.3 Give one point of distinction between Book-Keeping and Accounting. Ans: The main purpose of Book-Keeping is to maintain the systematic records of business transaction. And the main objective of Accounting is ascertain the profit or loss and the financial position of the business. Q.4 What is the end product of financial accounting? Ans: Financial Statements (i.e. Profit & Loss Account and Balance Sheet) and report which provide information to different users of it for making decisions. Q.5 Who are the internal users of accounting? Ans: Persons, directly involved in managing and operating the business activities, are the internal users of accounting. Example: partners, managers, officers. Q.6 Who are the external users of accounting? Ans: Persons, who are not involved directly in managing and operating the business activities, are the internal users of accounting. Example: potential investors, creditors, lenders, employees unions, customers, government etc. Q7 Write one limitation of accounting. Ans: Window dressing, i.e. accounts are manipulated by the accountant or management in favour of business in such a way that they do not present correct financial position of the business. Q.8 State the qualitative characteristics of accounting. Ans: Reliability, relevancy, understandability, comparability. Q.9 Accounting information should be verifiable and free from personal bias. Identify the qualitative characteristic of accounting information denoted by this statement. Ans: Reliability. Q.1 What is meant by window dressing? Ans: It refers to the practice of manipulating accounts, so that financial statement may disclose a more favourable position than the actual position. For example: purchase made in the year may not be recorded or closing stock may be over valued. Q.11 Which value is involved in adopting the same method of depreciation year after year? Ans: Comparability. Q.12 What is voucher? Ans: A voucher is a document on the basis of which transactions are first recorded in the books. Q.13 Define merchandise. Ans: Merchandise goods purchased for resale. Q.14 Distinguish between gain and profit. Ans: Profit is the excess of revenues over expenses during an accounting period. It is the result of business transactions which are of regular nature. Gain arises from events or transactions which are incidental to business such as sale of a fixed assets or winning a lottery prize.

13 Q.15 Distinguish between revenue expenditure and capital expenditure. Ans: If the benefit of expenditure is exhausted within a year, it is treated as revenue expenditure (also called expense). If the benefit of expenditure lasts for more than a year it is treated as capital expenditure. Q.16 Distinguish between debtor and creditor. Ans: Debtors are the persons to whom the enterprise sales the goods or services on credit. Creditors are the persons from whom the enterprise purchases the goods or services on credit. Q.17 Mr. Ajay, who owed us Rs. 1,, became insolvent and paid only 4% of this amount. What is the term used for the amount not received? Ans: Bad Debts. Q.18 Give the two characteristics of accounting principles. Ans: a) Accounting principles are man made b) Accounting principles are flexible Q.19 What is money measurement principle? Ans: Only those transactions and events are recorded in accounting which can be expressed in terms of money. Q.2 What is going concern principle? Ans: Business will continue for a long time and there is no intention to close down it in near future. Q.21 Closing stock is valued at lower of cost or realizable value. Which principle of accounting is applied here? Ans: Principle of prudence or conservatism. Q.22 What is meant by GAAP? Ans: Generally Accepted Accounting Principles. Q.23 Mohan, the owner of a business receives an order for supply of goods worth Rs. 2,,. He has also received Rs. 25, against this order. Mohan wants to record it as sale. Is Mohan correct in doing so? Ans: No. Under matching concept, revenue is recognized as earned only when cost incurred to earn that revenue is also recognized as expense in that period. Q.24 Which of the following transactions will be recorded in the books of accounts? a) Credit purchase b) Strike by employees. c) Goods worth Rs. 5, taken from the business and given by the proprietor to his friend as gift. d) Withdrawing of money by proprietor for his personal use. e) Interviewing the candidates for employment. f) Sale of household furniture for Rs. 2, g) Payment of school fees of proprietor children from his personal account. h) Make promise to send the goods. i) Receiving an order to send the goods. j) Loss of goods by fire. Ans: a, c, d and j. Q.25 State whether the following statements are true or false: a) Accounting is the language of business. True b) Accounting is helpful in raising loans. True c) Accounting is not accepted as evidence in legal matters. False d) Management of an enterprise is internal user of its accounting information. True

14 e) Accounting makes a record of qualitative aspects of business. False f) Accounting is a service function. True g) Accounting involves only the recording of business transactions. True h) Accounts are prepared on the basis of historical costs. True i) Only those transactions are recorded in accounting which can be expressed in terms of money True j) Book-keeping starts where accounting ends. False k) Creditors are external users of accounting information. True l) A creditor would use an entity s financial report to determine where or not credit may be granted to the firm. True m) Accounting may be affected by window dressing. True Q.26 Choose the best alternate: A: In accounts recording is made of: a) Only financial transactions * b) Only non-financial transactions c) Financial as well as non-financial transactions d) personal transactions of the proprietor B: Ghanshyam is a furniture dealer. Which one of the following will not be recorded in his books? a) purchase of Timber for Rs. 1, b) Sofa set worth Rs, 2, taken to his home c) Sale of house hold furniture for Rs. 2, * d) Dining table of Rs. 15, given as gift C: Which of the following transactions is not of financial character? a) Purchase of asset on credit b) Purchase of assets for cash c) withdrawing of money by proprietor for personal use d) strike by employees * D: Last step of accounting process is: a) Provide information to various parties who are interested in business enterprise * b) Record transactions in the books. c) To make summary in the form of financial statements. d) To classify the transactions under separate heads in the ledger. E: Internal users of accounting information are: a) Potential investors b) Creditors c) Management * d) Employees F: External users of accounting information are: a) Researchers b) Government c) Potential Investors d) All of the above * G: External users of accounting information are not: a) Lenders b) Officers * c) Employees d) Public H: Which of the following is not a limitation of accounting? a) Based on accounting conventions b) Evidence in Legal matter * c) Incomplete information d) Omission of qualitative information. I: Which of the following is not an objective of accounting? a) To provide information about the assets, liabilities and capital of the enterprise.

15 b) To provide information about the private assets and liabilities of the proprietor. * c) To maintain records of the business. d) To provide the information regarding the profit and loss of the enterprise. J: If accounting information is based on facts and it is verifiable by documents it has the quality of a) relevance b) reliability * c) understandability d) comparability K: Which of the following transaction is of a financial character and will be recorded in the business? a) Goods taken from the business by the proprietor for her personal use * b) Interviewing the candidates for employment c) Sale of household furniture d) Received an order for sale of goods L: Current Liability includes a) Bills payable b) Creditors c) Outstanding expenses d) all the above * M: Trade discount is: a) Which is allowed at the time of receiving the payment b) Which is allowed at the time of the sale of goods. * c) Which is allowed both at the time of receiving the payment and sale of goods. d) Allowed in all the above N: Consider the following items: 1. Prepaid Salary 2. Accrued Interest 3. Loan (short term) 4. Bank overdraft Current liability includes: a) 1,2,3,4, b) 2,3,4 c) 4,3,1 d) 3,4 * O: As per Income Tax, Accounting period is: a) from 1 st January to 31 st December b) from 1 st April to 31 st March* c) From 1 st July to 3 th June d) From Diwali to Diwali P: Principle of conservatism takes into accounts: a) All future profits and losses b) All future profits not losses c) All future losses not profits * d) Neither profits nor losses of future. Q: The owner of the firm records his medical expenses in the firm s income statement. Indicate the principle that is violated. a) cost principle b) prudence c) full disclosure d) entity concept * R: Omission of paise and showing the round figures in financial statement is based on a) conservatism concept b) money measurement concept c) materiality concept * d) consistency concept S: Income is measured on the basis of: a) Matching concept * b) consistency concept c) cost concept d) None of the above T: Due to which of the following, Contingent Liabilities are shown in the Balance Sheet: a) Dual Aspect Principle b) Principle of full disclosure *

16 c) Principle of materiality d) Going concern concept U: During the life-time of an entity accounting produce financial statements in accordance with which basic accounting concept: (a) Conservation (b) Matching (c) Accounting period * (d) None of the above V: When information about two different enterprises have been prepared presented in a similar manner the information exhibits the characteristic of: (a) Verifiability (b) Relevance (c) Reliability (d) None of the above * W: A concept that a business enterprise will not be sold or liquidated in the near future is known as: (a) Going concern * (b) Economic entity (c) Monetary unit (d) None of the above X : The primary qualities that make accounting information useful for decision-making are : (a) Relevance and freedom from bias (b) Reliability and comparability * (c) Comparability and consistency (d) None of the above Q.27 Higher Order Thinking Skills (HOTS) Questions: a) What is the traditional function of Accounting? b) Is the basic objective of book-keeping to maintain systematic records or to ascertain net results of operations of financial transactions? c) Recording of financial transactions and preparing the financial statements are the only objectives of accounting. Do you agree? d) What is the first step of Accounting Process? e) Which is the last step of Accounting Process? f) On 1 st Jan, 214, Mr. Robert was appointed as Marketing Manager of the firm with a salary of Rs. 5, per month. State whether this event will be recorded in the books of accounts. g) The firm follows a practice of giving the figures of previous year along with the figure of current year. Now the Accountant of the firm wants to discontinue this practice. Do you justify this decision? h) Give two examples of transactions which are not recorded in accounting. i) A firm has received a large order to supply the goods. Will it be recorded in the books? Ans: a) Recording of financial transactions. b) The basic objective of book-keeping is to maintain systematic records of financial transactions. c) No. Besides these two accounting has other objectives also such as providing useful information to various users. d) Recording of transactions in the books. e) Communicating the final results to the users who analyze them as per the individual requirement. f) No. The appointment will not be recorded. g) No. Comparability of current year figures with that of previous year is a qualitative characteristic of financial information. Firm should not discontinue this practice. h) i. Resignation by the employee.

17 ii. Value of human resources i) No. Only the receipt of order has not resulted in any change in the financial position of the firm.

18 Accounting Process Accounting Equation: Total Assets = Capital + Liabilities 1. Mohit has the following transactions, prepare accounting equation: Soln:- (i) Business started with cash 1,75, (ii) Purchased goods from Rohit 5, (iii) Sold goods on credit on Manish (costing Rs.17,5) 2, (iv) Purchased furniture for office use 1, (v) Cash paid to Rohit in full settlement 48,5 (vi) Cash received from Manish 2, (vii) Rent paid 1, (viii) Cash withdrew for personal use 3, Transaction No. Assets = Liabilities + Capital Cash + Stock + Debtors + Furniture = Creditors + Capital (i) Business started with cash 1,75, 1,75, New Equation (ii) Purchased goods from Rohit New Equation (iii) Sold goods on credit to Manish(costing Rs.17,5) New Equation (iv) Purchased furniture for office use New Equation (v) Cash paid to Rohit in full settlement New Equation (vi) Cash received from Manish New Equation (vii) Rent paid New Equation (viii) Cash withdrew for personal use 1,75, 1,75, 1,75, (1,) 1,65, (48,5) 1,16,5 2, 1,36,5 (1,) 1,35,5 (3,) 5, 5, (17,5) 32,5 32,5 32,5 32,5 32,5 2 2, 2, 2, (2,) Nil 1, 1, 1, 1, 1, 5, 5, 5, 5, (5,) 1,75, 1,75, 2,5 1,77,5 1,77,5 1,5 1,79, 1,79, (1,) 1,78, (3,)

19 Final Equation 1,32,5 32,5 nil 1, 1,75, Closing Capital = Closing Assets Closing Liabilities Profit = Closing Capital + Drawings Additional Capital Opening Capital 2. On 31 st March 215, the total assets and external liabilities were Rs.6,, and Rs.18, respectively. During the year, the proprietor had introduced capital of Rs.6, and withdrawn Rs.36, for personal use. He made a profit of Rs.6, during the year. Calculate the capital as on 1 st April 214 (Opening Capital) Soln: Closing Capital = Closing Assets Closing Liabilities Closing Capital = 6,, 18, = 5,82, Capital Profit = Closing Capital + Drawings Additional Capital Opening 6, = 5,82, + 36, 6, Opening Capital Opening Capital = 5,82, + 36, 6, 6, = Rs. 4,98, Capital as on 1 st April 214 (Opening Capital) = Rs. 4,98, Rules of Debit and Credit Under Double Entry System of Book keeping each transaction has two aspects. One is receiving or incoming aspect- Debit aspect; another giving or outgoing aspect- Credit aspect. OR i ii iii iv v Increase in assets are debits; decreases are credits. Increase in liabilities are credits; decreases are debits. Increase in owner s capital are credits; decreases are debits. Increase in expenses are debits; decreases are credits. Increase in revenues or incomes are credits; decreases are debits. Personal Accounts Real Account Nominal Account - Debit the Receiver; Credit the Giver - Debit what comes in; Credit what goes out - Debit all expenses and losses; credit all incomes and gains. Personal Account- related to persons- Ram s Account, Annu s account etc.; account of limited company, Outstanding Rent account etc.

20 Real Account- related to tangible or intangible assets.- Land, building, stock, cash etc. Nominal Account- related to expenses- losses, gains, revenue,income- interest account

21 ASSIGNMENT NO 4 Chapter: Introduction to Accounting Q1. Giving examples, explain each of the following accounting terms : Fixed assets Gain Profit Revenue Expenses Short-term liability Capital Q2. Medico Plus plans to install a new equipment..which of the following is the relevant data for this decision? a. Similar business acquired the new equipment in the previous year for Rs. 1,, b. Equipment cost details of last two years c. Equipment cost details of last ten years Q3. Many People in today s society think of an accountant as simply a glorified bookkeeper. But the role of an accountant is continually changing. Discuss. Q4. As a senior accountant of Taxman Limited, what three steps would you take to make your company s financial statements understandable and decision useful? Q5. Which stakeholder group Would be most interested in (a) the VAT and other tax liabilities of the firm (b) the potential for pay awards and bouns deals (c) the ethical or environmental activities of the firm (d) whether the firm has a long-term future (e) profitability and share performance. (f) the ability of the firm to carry on providing a service or producing a product. Q6. Aditya started a business for buying and selling of stationery with Rs. 5,, as an initial investment. Of which he paid Rs.1,, for furniture, Rs. 2,, for buying stationery items. He employed a sales person and clerk. At the end of the month he paid Rs.5, as their salaries. Out of the stationery bought he sold some stationery for Rs.1,5, for cash and some other stationery for Rs.1,, on credit basis to Mr.Rahul. Subsequently, he bought stationery items of Rs.1,5, from Mr. Peace. In the first week of next month there was a fire accident and he lost Rs. 3, worth of stationery. A part of the machinery, which cost Rs. 4,, was sold for Rs. 45,. From the above, answer the following : 1. What is the amount of capital with which Mr. Sunrise started business. 2. What are the fixed assets he bought? 3. What is the value of the goods purchased?

22 4. Who is the creditor and state the amount payable to him? 5. What are the expenses? 6. What is the gain he earned? 7. What is the loss he incurred? 8. Who is the debtor? What is the amount receivable from him? 9. What is the total amount of expenses and losses incurred?

23 Chapter: Recording of Transaction I 1. State different kinds of transactions that increase and decrease capital. 2. Classify the following into assets, liabilities, revenue, expense, gain and losses: (1) Building (2) Wages (3) Credit sales (4) Credit purchases (5) Electricity charges due but not yet paid(outstanding electricity bills) (6) Godown rent paid in advance(prepaid godown rent) (7) Sales (8)Fresh capital introduced (9) Drawings (1) Discount paid 3. Analyse the effect of each transaction on assets and liabilities and show that the both sides of Accounting Equation (A = L + C) remains equal : (i) Introduced Rs. 8,, as cash and Rs. 5, by stock. (ii) Purchased plant for Rs. 3,, by paying Rs. 15, in cash and balance at a later date. (iii) Deposited Rs. 6,, into the bank. (iv) Purchased office furniture for Rs. 1,, and made payment by cheque. (v) Purchased goods worth Rs. 8, for cash and for Rs. 35, in credit. (vi) Goods amounting to Rs. 45, was sold for Rs. 6, on cash basis. (vii) Goods costing to Rs. 8, was sold for Rs. 1,25, on credit. (viii) Cheque issued to the supplier of goods worth Rs. 35,. (ix) Cheque received from customer amounting to Rs. 75,. (x) Withdrawn by owner for personal use Rs. 25,. 4. Prepare accounting equation for the following information: Date Details Business started with cash Rs. 1,5, Goods purchased form Manisha Rs. 36, Stationery purchased for cash Rs. 2, Open a bank account with SBI for Rs. 35, Goods sold to Priya for Rs. 16, Received a cheque of Rs. 16, from Priya Sold goods to Nidhi Rs. 14, Nidhi pays Rs. 14, cash Purchased goods for Rs. 2, on credit from Ritu Insurance paid by cheque Rs. 6,.

24 Paid rent Rs. 2, Goods costing Rs. 1,5 given as charity Purchased office furniture for Rs. 11, Cash withdrawn for household purposes Rs Interest received cash Rs.1,2. 5. Prove that the accounting equation is satisfied in all the following transactions of Sita Ram house by preparing the analysis table. Also record the transactions in Journal. (i) Business commenced with a capital of Rs. 6,,. (ii) Rs. 4,5, deposited in a bank account. (iii) Rs. 2,3, Plant and Machinery Purchased by paying Rs. 3, cash immediately. (iv) Purchased goods worth Rs. 4, for cash and Rs. 45, on account. (v) Paid a cheque of Rs. 2,, to the supplier for Plant and Machinery. (vi) Rs. 7, cash sales (of goods costing Rs. 5,). (vii) Withdrawn by the proprietor Rs. 35, cash for personal use. (viii) Insurance paid by cheque of Rs. 2,5. (ix) Salary of Rs. 5,5 outstanding. (x) Furniture of Rs. 3, purchased in cash. 6. Show the effect of the following transactions in accounting equation: (1) Goods worth Rs. 13 were used by proprietor for domestic use (2) Rs. 8 due from Zaid are bad debts. (3)Goods uninsured worth Rs. 28 were destroyed by fire Q7. Show the effect of the following transactions in accounting equation: 1) Sohan is declared insolvent. Received from his official Receiver a first and final dividend of 6op. In the rupee on a debt of Rs. 1 2) Mohan who owed me Rs. 2 has failed. He pays me a composition of 5 p. in the rupee. 3)Received cash for a bad debt written off last year Rs. 7 Q8. Show the effect of the following transactions in accounting equation:

25 1) Received Rs. 4, from Manish, which were written off as bad debts in the previous year. 2) Salaries due to clerk Rs. 7,5 3) Out of the rent paid this year, Rs. 2, is related to next year. 4) Provide 1% depreciation on furniture costing Rs. 5,. 5) Provide 1% interest on capital amounting to Rs. 1,, 6) Goods used in making of furniture(sales Price Rs 2,, cost Rs. 1,5) Q9. Record the following transactions in Journal 1. Paid rent in advance Rs 1,. 2. Received cash from Ram for a bad debt written off last you Rs Paid Rs. 145 to Anil on his account for Rs Bought goods of the list price of Rs. 25, from Rohit less 2% trade discount and 2% cash discount and paid 4% by cheque. 5. Sold goods to Rakesh of the list price of Rs. 5, less 2% trade discount and 2% trade discount and 2% cash discount and paid 5% by cheque. Q1. State the title of the accounts affected, type of account and the account to be debited and account to be credited : 1. Bhanu commenced business with cash 1,, 2. Purchased goods on credit from Ramesh 4, 3. Sold goods for cash 3, 4. Paid salaries 3, 5. Furniture purchased for cash 1, Q11. Prepare accounting equation:- June 5 Business started with cash 2,, June 8 Opened a bank account with Syndicate Bank 8, June 12 Goods purchased on credit from M/s Gulmohar Fashion House 3, June 12 Purchase office machines, paid by cheque 2, June 18 Rent paid by cheque 5, June 2 Sale of goods on credit to M/s Mohit Bros 1, June 22 Cash sales 15, June 25 Cash paid to M/s Gulmohar Fashion House 3, June 28 Received a cheque from M/s Mohit Bros 1,

26 June 3 Salary paid in cash 6, Q12. Show the effect of the following transactions in accounting equation: (a) Cash paid for installation of machine Rs. 5 (b) Goods given as charity Rs. 2, (c) Interest charge on p.a. when total capital was Rs. 7, (d) Received Rs.1,2 of a bad debts written-off last year. (e) Goods destroyed by fire Rs. 2, (f) Rent outstanding Rs. 1, (g) Interest on drawings Rs. 9 (h) Sudhir Kumar who owed me Rs. 3, has failed to pay the amount. He pays me a compensation of 45 paise in a rupee. (i) Commission received in advance Rs. 7,