1). Explain the meaning and scope of financial accounting.

ANS. Meaning: Accounting is the process of recording, classifying, summarizing,

analyzing, and interpreting the financial transactions of the business for the benefit of
management and those parties who are interested in business such as shareholders, creditors,
bankers, customers, employees, and government. Thus, it concerns with financial reporting
and decision-making aspects of the business.

These financial statements are prepared on a routine basis by companies and presented to all
its stakeholders. Financial accounting aims at delivering the fair and accurate image of
financial affairs of business to all its stakeholders. It is done in accordance with rules
provided by GAAP or IFRS. It is an important tool for management in their decision making
as they depend on financial reports for decision making and forecasting purposes. 

Financial statements prepared by financial accounting takes into account the following
aspects of business viz. Expenses, Revenue, Asset, Equity and Liability. Financial accounting
has an important role in increasing profitability and efficiency as it helps in managing all
financial resources of the business. It is statutory required to practice financial accounting in
their operations by every business organisation.

Scope:

1. Records Financial Transactions

Financial accounting record each and every financial transaction taking place in the
business organisation. It maintains a clear and systematic record of all information in the
form of journals and various subsidiary books. It avoids any confusion or loss because if
any problem arises these records can be easily checked. All transaction cannot be just
memorized by humans without recording them and that makes the financial accounting
important part of every business.
2. Classify And Summarize Information
Information collected and recorded by financial accounting is properly categorized
according to their nature. Financial accounting involves classifying and summarizing all
financial information recorded at the initial step. All transactions of similar nature are
grouped together under one head by making accounts like Sales, Purchase, Rent, Salaries,
 Interest etc. Grouping of same nature transactions together adds convenience in
understanding of information collected. 
3. Prepares Financial Statements
Financial accounting prepares financial statements like cash flow statement, income
statement, balance sheet etc. These financial statements depict the true financial position
of business. Financial statements are the result of various information collected and
analysed in overall process of financial accounting. All financial strength and weakness
of business are determined by preparation of financial statements. 
4. Interprets Financial Information
Financial accounting interprets information from several analysis conducted and financial
statements prepared. It understands and explains the results of several relationships
establishes by analysis to different users for easy understanding and decision making. It
simplifies the accounting information so that it is well understood by persons having
limited or no knowledge of accounting subject.
5. Communicates All Outcomes
Financial accounting serves the needs of all external stakeholders by delivering them true
and accurate picture of the company’s financial affairs. It communicates them all
financial information by providing them with financial reports routinely. All interested
parties to business are fully aware of all business financial matters and this helps them in
making conclusions. It helps them in knowing profitability and future growth aspects
through these reports.
6. Determines and Maintains Financial Position
Financial accounting determines fair and actual image of financial position of business.
Finance is termed as lifeline of business activities and its management is quite important
for every organisation. Mismanagement of financial resources may have adverse effects
on the company’s performance. Financial accounting records and analyse each financial
aspect of business.
It delivers all information to internal management team from time to time for their
decision making. Management are able to take all necessary steps whenever required
related to financial resources which will improve the overall productivity. This all helps
in maintaining a proper financial position for every business.
2). Explain the advantages and utility of financial accounting.

ANS. Advantages:

1. Maintain Business Record

Financial accounting records each and every transaction of business organization. It
systematically maintains a proper book of accounts of all monetary transactions. Unlike
human memory which has a limited capacity to remember things, financial accounting
can record large amounts of transactions.
2. Prevention And Detection Of Fraud
Avoidance and detection of frauds or errors is important role played by financial
accounting. It records all financial data fairly which is used by management for analysis
purposes. This data acts as proof and reduces the chances of any frauds or errors.
3. Present True Financial Position
Financial accounting reveals and interprets the true financial position of organizations. It
records each financial aspect and supplies it from time to time to the internal management
team. Managers get the real ideas of all financial resources of the organization regularly
through data supplied by financial accounting. It helps them in making proper decisions
for managing the overall financial position.
4. Helps In Preparing Financial Statements
Preparation of financial statements is a must for knowing the true profit or loss and real
worth of the organization. Financial accounting supplies all relevant accounting data for
the preparation of financial statements like profit and loss account and balance sheet.
5. Comparison Of Result
Financial accounting helps in comparing the performance of business organizations. It
systematically records and stores financial data for many accounting years. This way
comparison of present data with previous year’s data can be easily done.
6. Acts As Legal Evidence
Financial accounting serves as legal evidence of all data and helps in settling of all
business disputes. It prepares and maintains systematic books of accounts of all financial
transactions which can be used for avoiding any confusion or misunderstanding. 
7. Assists The Management
 Managers depends on financial accounting for various data for taking managerial
decisions. It provides the full information’s regarding all cash flows in an organization.
They can easily anticipate any surplus or deficit of funds in an organization and take
decisions accordingly.

Utility:

Individuals can use accounting information to manage and manage their bank accounts, to
evaluate job eligibility in the organization, to invest money, rent a house, and manage their
routine matters. Business managers have to set goals, evaluate progress, and start corrective
action in case of adverse deviations from planned courses of action.

Many such decisions require accounting information – purchasing equipment, maintenance

of inventory, borrowing, and lending, etc. Investors and creditors are willing to evaluate the
profitability and solvency of a company before giving benefits to the company. Therefore,
they are interested in obtaining financial information about the company in which they are
considering an investment.

3). Write short note on accounting principles and explain any two-accounting
principle in detail.

ANS. 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). These are the common set of accounting
principles, standards and procedures that companies use to compile their financial statements.
GAAP are a combination of standards (set by policy boards) and simply the commonly accepted
ways of recording and reporting accounting information. GAAP is to be followed by companies
so that investors have a optimum level of consistency in the financial statements they use when
analyzing companies for investment purposes. GAAP cover such aspects like revenue
recognition, balance sheet item classification and outstanding share measurements.

Accounting Principles:

1. Accrual Principle:
 Accrual accounting concept has required the revenues and expenses to be recorded
and recognized in the entity’s financial statements when they are incurred rather than
when cash is paid or received.
This principle helps the users of financial statements to get the financial information
that really reflected in the current financial status or the economic situation of the
entity.
The recognition is not only related to the cash flow like a cash basis where the
revenues are recorded and recognized in the financial statements only when the cash
is collected from the customers for the services or products that entity sells to them.
And the expenses are recordings and recognized in the financial statements when the
cash is an outflow from the entity.
For example, based on accrual accounting principle, sales revenues from selling of
cloths are recognized where the right and obligation are transferred from seller to
buyer even the seller does not receive the payments from buyer.
Records and recognize the sales based on the accrual basis, the users could see all of
the sales that entity make during the period for both credit sales and cash sales. It
provides a complete picture of sales during the period.
Another example related to accrued expenses is that the maintenance expenses are
recognizing at the time that services consume by entity rather than at the time that the
entity paid to suppliers.
This recognition will bring the complete picture to the users of financial statements
about how much the maintenance expenses incurred during the period rather than just
showing how much the payments are made for maintenance expenses during the
period as per cash basis.
2. Going Concern Principle:
Going concern is the concept that assumes entity will remain the business in the
foreseeable period which is normally twelve months from the operating date. If the
financial statements are prepared based on the going concern basis.
In others words, the entity does not face going concern problem, then the users of
financial statements could their reliance on entity’s financial information that they are
valued by considering the entity could survive in the period of twelve months.
 There are many factors that indicate entity might face going concern problem. Or
entity might stop it business in the period of twelve months from the reporting date of
financial statements.
For examples, the entity’s main services or products are no longer need in the markets
and sales dramatically drop also most to zero. This situation indicates that an entity
probably liquidates its assets to support its operation in the period of less than twelve
months.
And, we could say that it will go into solvency in a period of fewer than twelve
months. In this case, the financial statements should not prepare by using the going
concern problem. For example, there is no accrual of expenses recognize in both
balance sheet and income statement. Prepayments should not also recognize.
The entity should conduct going concern assessment annually to see if it is in the
going concern problems. The assessment should not only focus on financial factors
but also non-financial factors that might affect the entity to shut down its business

4). Differentiate book keeping and accounting.

ANS. Accounting is the process by where a company’s financials are recorded,

summarized, analyzed, consulted and reported on. Bookkeeping is the recording part of this
process, in which all of the financial transactions of the business (consisting of income and
expenses) are entered into a database.

Bookkeeping Accounting

Definition

Bookkeeping deals with identifying Accounting refers to the process of summarising,

and recording financial transactions interpreting and communicating the financial data of an
only organisation.

Decision making

Data provided by bookkeeping is not Management can take important decisions based on the
 sufficient for decision making data obtained from accounting

Preparation of Financial Statement

Not done in the case of bookkeeping Financial statements are a part of the accounting process

Analysis

No analysis is required in the Accounting analyses the data and creates insights for the
bookkeeping business

Persons Involved

The person concerned with The person concerned with accounting is known as an
bookkeeping is known as a bookkeeper accountant

Determining Financial Position

Bookkeeping does not show the Accounting helps in showing a clear picture of the
financial position of a business financial position of a business

Level of Learning

No high-level learning required High-level learning required for understanding and

analysing accounting concepts

https://byjus.com/commerce/difference-between-bookkeeping-and-accounting (Refer for more

data)

5). Write short note on users of accounting

ANS. The accounting process provides financial data for a broad range of individuals whose
objectives in studying the data vary widely.   Three primary users of accounting information
were previously identified, Internal users, External users, and Government/ IRS.  Each group
uses accounting information differently, and requires the information to be presented differently.
Users of accounting information are internal and external.

External users are creditors, investors, government, trading partners, regulatory agencies,
international standardization agencies, journalists and internal users are owners, directors,
managers, employees of the company.

Internal users of Accounting information

Internal users are that individual who runs, manages and operates the daily activities of the inside
area of an organization.

So, who are the internal users of account information;

1. Owners and Stockholders.

2. Directors,
3. Managers,
4. Officers.
5. Internal Departments.
6. Employees
7. Internal Auditor.

Managerial accounting identifies, measures, analyzes and communicates the financial

information needed by management to plan, control, and evaluates a company’s operations for
the internal users.

Accounting’s goal is to provide necessary information for the management or also can be
defined as Internal users.

External users of Accounting information

External users are those individuals who take interest in the account information of an
organization but they are not part of the organization’s administrative process.

External users have a direct or indirect interest in accounting information.

Financial accounting is the process for the preparation of financial reports of the enterprise
for use by both internal and external parties.

These reports are important to the external users of accounting information.

Examples of external users of accounting information are;

 Creditors.
 Investors.
 Government.
 Trading partners.
 Regulatory agencies.
 International standardization agencies.
 Journalists.

Creditors and Investors are the most regular example of external users among many other
external users.

The external users of accounting are;

Creditors

Creditors or lenders use the accounting information to find out the ability of the borrower to
repay the loan, the number of assets and liabilities of the borrower, evidence of income,
economic position, etc. before he or she lend the money to the economic entity.

Investors

Investors are the capital providers of a business.

Before investing, an investor sees the financial report for figuring out the possibilities of the
business in the future. Financial information is important for an investor for making sure that the
investment is secure.

Trading partners

Business needs business to do business, it is the truth.

Associate trading companies look at the financial information and decide to trade with the
particular economic entity.

Government Regulatory Agencies

The financial information is vital for government regulatory agencies as it allows them to
monitor the economy and market.

Lawmakers and economic planners

It is important to keep a nation’s economic structure up-to-date with global changes. It is a job
for lawmakers and economic planners.

The accounting information provides information that is necessary for making changes to the
existing laws at the right moment for the economy and society betterment.

Other examples

There are other external users for example; labor unions, customers and consumers, suppliers,
SEC, tax authority, chamber of commerce, press, competitors, auditors, etc.

Anybody outside of the managing radius of an economic entity is interested in the financial
information of it, is defined as an external user.

For example, to that statement; an MBA student looking for financial information on Google,
he/she is the external user of the accounting information of Google.

The financial reports or information are the result of the accounting process that transferred
to the users in two forms-internal and external.

These reports used for effective for operating the business by the internal users, on the other
hand, the external users use the information to get a real picture of the financial state of the
organization.

(READ ONCE BEFORE WRITING)

6). Explain the difference between management accounting and financial

accounting.

ANS. Financial Accounting: Determining the financial results for the period and the state of
affairs on the last day the accounting period.

- Stewardship Accounting
Management Accounting: Accounting to assist management in planning and decision making.

- Decision Accounting

Difference between Management Accounting and Financial Accounting:

The significant difference between Management Accounting and Financial Accounting are:

NO. Management Accounting Financial Accounting

1. Management Accounting is primarily Financial Accounting is based on the

based on the data available from Financial monetary transactions of the enterprise.
Accounting.
2. It provides necessary information to the Its main focus is on recording and
management to assist them in the process classifying
of planning, controlling, performance monetary transactions in the books of
evaluation and decision making. accounts and preparation of financial
statements at the end of every accounting
period.
3. Reports prepared in Management Reports as per Financial Accounting are
Accounting are meant for management meant for the management as well as for
and as per management requirement. shareholders and creditors of the
concern.
4. Reports may contain both subjective and Reports should always be supported by
objective figures. relevant figures and it emphasizes on the
objectivity of data.
5. Reports are not subject to statutory audit. Reports are always subject to statutory
audit.
6. It evaluates the sectional as well as the It ascertains, evaluates and exhibits the
entire performance of the business. financial strength of the whole business.

7). Explain difference between accrual system of accounting and cash system of
accounting with example.

ANS. Definition of Accrual Accounting: Accrual Accounting is the base of present accounting.
It is also known as the mercantile system of accounting wherein the transactions are recognized
as and when they take place. Under this method, the revenue is recorded when it is earned, and
the expenses are reported when they are incurred.

Definition of Cash Accounting: The basis of accounting in which the recognition of revenues and
expenses are done only when there is actual receipt or disbursement of cash takes place. In this
method, in which the income or expense is recognized when the inflow or outflow of cash exists
in reality.

Difference:

The following are the major differences between cash accounting and accrual accounting:

1. The accounting system in which the income or expense is recognised when an exchange
of consideration is actually done is known as Cash Accounting. Accrual Accounting, in
which the income or expense is recognised when it arises.
2. Cash Accounting is simple as compared to Accrual Accounting.
3. Cash basis of accounting is not a recognised method as per companies act, whereas
accrual basis of accounting is a recognised method.
4. In Cash accounting, the income statement, shows lower income, while in accrual basis of
accounting the income statement shows relatively higher income.
5. Cash Accounting is not in alignment with the matching concept, whereas the concept
completely applies in Accrual Accounting.
6. The basis of cash accounting is actual receipt and payment of cash. On the other hand, in
accrual accounting, the recognition is done when the revenue or expense occurs.
7. The degree of accuracy is more in accrual accounting, which is very less in cash
accounting.
8. Cash Accounting is suitable for sole proprietors or contractors. Conversely, big
enterprises should prefer Accrual Accounting.

Example:

1. Sent out an invoice for $5,000 for a web design project completed this month
2. Received a bill for $1,000 in developer fees for work done this month
3. Paid $75 in fees for a bill you received last month
4. Received $1,000 from a client for a project that was invoiced last month
  Using the cash basis method, the profit for this month would be RS. 925 (RS.
1,000 in income minus RS. 75 in fees).
 Using the accrual method, the profit for this month would be RS.4,000 (RS.
5,000 in income minus RS. 1,000 in developer fees).

8). Explain the concept of

a. Capital income and expenditure

b. Revenue income and expenditure

ANS. Capital Income: A capital income is an increase in the value of an asset or investment
resulting from the price appreciation of the asset or investment. In other words, the gain occurs
when the current or sale price of an asset or investment exceeds its purchase price. Capital gains
are attributable to all types of capital assets, including, but not limited to, stocks,
bonds, goodwill, and real estate.

Classifications of Capital Gain

Capital gain can be realized or unrealized. The realized gain is the gain from the final sale of an
asset or investment. Conversely, an unrealized gain arises when the current price of an asset or
investment exceeds its purchase price, but the asset or investment is still unsold. Note that only
realized capital gains are taxed, while unrealized (capital) gains are merely paper gains that are
usually subject to accounting reporting but do not trigger a taxable event.

Additionally, realized capital gains are usually classified as short-term gains or long-term

gains. Short-term (capital) gains occur if an asset or investment was held for less than a year.
Long-term (capital) gains are gains from an asset or investment that was held for more than one
year.

Capital Expenditure: Capital expenditures refer to funds that are used by a company for the
purchase, improvement, or maintenance of long-term assets to improve the efficiency or capacity
of the company. Long-term assets are usually physical, fixed and non-consumable assets such as
property, equipment, or infrastructure, and that have a useful life of more than one accounting
period.

Also known as Cap Ex or capital expenses, capital expenditures include the purchase of items
such as new equipment, machinery, land, plant, buildings or warehouses, furniture and fixtures,
business vehicles, software, or intangible assets such as a patent or license.

The expenditure amounts for an accounting period are disclosed in the cash flow statement.
Capital expenditures normally have a substantial effect on the short-term and long-term financial
standing of an organization.

Revenue Income:

Income arose from Recurring transactions in the ordinary course of business is called revenue
income. 

Revenue income includes:

1. Commission received.
2. discount received.
3. interest from debtors.
4. fees and room rent from patients.
5. donations and charities received by the charitable institution.
6. Fright received by transport companies.
7. interest dividend and bonus shares received by the investment company.

Revenue Expenditure: Revenue expenditure meaning can be defined as the summation of all

expenses incurred by a business through the course of production of its goods and services. They
are considered significant for generating revenue in a given accounting period.

It must be noted here that revenue expenditure does not boost the profit-generating capacity of a business.
However, it comes in handy in maintaining the operational activities and helps to manage assets better.

Typically, the benefits resulting from revenue expenditure do not extend beyond an accounting
year. Further, there are certain factors that help business entities and financial analysts to
categorise business operations as revenue expenditure.
9). Explain the following accounting principles with example:

a) Business Entity Concept

b) Matching Concept
c) Consistency Principle
d) Conservatism Principle

ANS.

a) Business Entity Concept

The business entity concept (also known as separate entity and economic entity concept)
states that the transactions related to a business must be recorded separately from those of
its owners and any other business. In other words, while recording transactions in a
business, we take into account only those events that affect that particular business; the
events that affect anyone else other than the business entity are not relevant and are
therefore not included in the accounting records of the business.

This concept is very important because if transactions of a business are mixed up with
that of its owners or other businesses, the accounting information would lose its usability.

Example:

 Mr. John has acquired a floor of a building having 3 halls for $1,500 per month. He uses
two halls for his business and one for personal purpose. According to business entity
concept, only $1,000 (the rent of two halls) is a valid expense of the business.
 Mr. Sam owns a company. He uses two different credit cards – one for the payment of
business expenses and one for the payment of personal expenses. He pays $200 as the
electricity bill of his company using his personal credit card. According to business entity
concept of accounting, the electricity bill of the business should have been paid using
company’s credit card. The payment of $200 using personal credit card would therefore
be considered as the contribution of additional capital by Sam.
 b) Matching Concept

Matching principle is the accounting principle that requires that the expenses incurred
during a period be recorded in the same period in which the related revenues are earned.
This principle recognizes that businesses must incur expenses to earn revenues.

The principle is at the core of the accrual basis of accounting and adjusting entries. It is a
part of Generally Accepted Accounting Principles (GAAP). The matching principle is
based on the cause-and-effect relationship. If there’s no cause-and-effect relationship,
then the accountant will charge the cost to the expense immediately.

Example:

The expense must relate to the period in which they were incurred rather than on the period in
which they were paid. For example, if a business pays a 10% commission to sales representatives
at the end of each month. If the company has $50,000 in sales in the month of December, the
company will pay the commission of $5,000 next January.

The matching statement requires that the commission expense is reported in the December
income statement. If the company uses the cash basis of accounting, the commission would be
reported in January (in the month they were paid) rather than December (the month they were
incurred).

c) Consistency Principle
The consistency principle states that once you decide on an accounting method or
principle to use in your business, you need to stick with and follow this method or
principle consistently throughout your accounting periods.
The sole purpose of the consistency principle, or consistency concept, is to ensure
that transactions or events are recorded in the same way, from one accounting year to
the next.
When talking about different accounting methods, this can include anything from
cash vs accrual accounting, and using LIFO vs FIFO methods.
In other words, businesses should not use a certain accounting method one year, and a
different accounting method the next year. 
Example:

Company A’s Financial Statements report base on IFRS. Its accounting policies for depreciation
is using a straight-line basis. In 2014 and 2015, it uses a straight line.

But the company subsequently wants to change its accounting policies from a straight line to a
declining balance.

In this case, the entity should apply with IAS 8 whether it is the retrospective or prospective
change. All of the change requires full disclosure in the financial statements and how the change
affected. This is how we apply the Consistency Principle.

d) Conservatism Principle
The conservatism principle is the general concept of recognizing expenses and
liabilities as soon as possible when there is uncertainty about the outcome, but to only
recognize revenues and assets when they are assured of being received. Thus, when
given a choice between several outcomes where the probabilities of occurrence are
equally likely, you should recognize that transaction resulting in the lower amount of
profit, or at least the deferral of a profit. Similarly, if a choice of outcomes with
similar probabilities of occurrence will impact the value of an asset, recognize the
transaction resulting in a lower recorded asset valuation.

Under the conservatism principle, if there is uncertainty about incurring a loss, you
should tend toward recording the loss. Conversely, if there is uncertainty about
recording a gain, you should not record the gain.

Example:

The entity should recognize the liabilities that claim to the employee for the legal case even the
entity not sure if they are failing. And the recognition should be at the highest value.

But the entity should recognize assets for legal claims from an employee unless there is a clear
statement from the court.
And if assets are recognized, it should be at the lowest value. In this case, it is helping users of
FS to understand all types of liabilities and expenses that probably happen to the entity. And, it
assures that the revenues recorded are realistic.

Conservatism principle assumes the entity could possibly try to overstate assets and revenues,
and understate expenses and liabilities.

For recognition revenue, conservatism principle, the entity could recognize the revenue if the
revenue transaction could not measure reliably and the outcome of those transactions are
unpredictable.

10). Explain types of account and its corresponding rule of debit and credit with
example.

ANS. Financial Accounting is based on ‘Principle of Duality’ which states that each business
transaction recorded in books of accounts has a twofold effect. In other words, each transaction
involves at least two accounts when recorded in the books of accounts.

Accounts are classified into following categories:

a) Personal Account
b) Real Account
o Tangible Real Account
o Intangible Real Account
c) Nominal Account
a) Personal Account
As the name suggests, Personal Accounts are the ones that are related with individuals,
companies, firms, group of associations etc. These persons could include natural persons,
artificial persons or representative persons.

Rule Related To The Personal Account:

Debit the Receiver, Credit the Giver

Example: Payment of salary to employees

In this example, the receiver is an employee and the giver will be the business. Hence, in
the journal entry, the Employee’s Salary account will be debited and the Cash / Bank
account will be credited.

b) Real Accounts
The ledger accounts which contain transactions related to the assets or liabilities of the
business are called Real accounts. Accounts of both tangible and intangible nature fall
under this category of accounts, i.e. Machinery, Buildings, Goodwill, Patent rights, etc.
These account balances do not come to zero at the end of the financial year unless there is
a sale of the asset or payment made towards a liability or closure or acquisition of the
business. These accounts appear in the Balance Sheet and the balances get carried
forward to the next financial year.
o Tangible Real Accounts
Tangible Real Accounts are accounts which have physical existence. In other
words, such assets can be seen, felt or touched.
For example Machinery A/c, Vehicle A/c, Building A/c etc.
o Intangible Real Accounts
These are the assets or possessions that do not have physical existence but can be
measured in terms of money. This means that such assets have some value
attached to them.
For example, trademarks, patents, goodwill, copyrights etc.

The golden rule for real accounts is: debit what comes in and credit what goes out.

Example: Payment made for a loan

In this transaction, cash goes out and the loan is settled. Hence, in the journal entry, the Loan
account will be debited and the Bank account will be credited.

c) Nominal Accounts
Transactions related to income, expense, profit and loss are recorded under this category.
These components actually do not exist in any physical form but they actually exist. For
example, during the purchase and sale of goods, only two components directly get
 affected i.e money and stock. But, apart from this we may incur profit or loss out of such
transactions and we might incur some expenses for these transactions to happen. These
secondary components fall under the Nominal Category and the accounts that are in
Profit and Loss statement are shown under this category.

The golden rule for nominal accounts is: debit all expenses and losses and credit all income and

gains.

Example of Nominal Account: Karan paid wages worth Rs 1,00,000 in cash. So, this transaction
involves two accounts: Nominal Account of Wages and Real Account of Cash.

Thus, paying wages worth Rs 1,00,000 in cash means wages are an expense to the business. And
Cash is paid towards such an expense. Now Golden Rules pertaining to two accounts would
apply in such a case. The Golden Rule of Nominal Account says, “Debit All Expenses and
Losses, Credit All Incomes and Gains”. Whereas, Golden Rule of Real Account says, “Debit
What Comes In, Credit What Goes Out”.

Thus, Wages A/c will be debited with Rs 1,00,000. Whereas, Cash A/c will be credited with the
same amount.

11). COVID Limited provides you the following information for the accounting
year 2019-20.

a) Total Sales Revenue Rs. 40,00,000.

b) Sales revenue received Rs.35,50,300, of which goods of Rs. 50,300 was sold
in January 2019.
c) Salary of staff Rs. 10, 00,000 of which 9,00,000 was paid and remaining is
yet to pay.
d) Rent of the factory premises Rs. 400000 is not paid till date.

Compute the net income of the COVID Limited as per cash accounting system.

ANS.

12). &13). & 17). Explain the concept of forensic accounting in detail.
 &
Write short note on need and importance of forensic accounting.
&
Write short note on importance of forensic accounting.

ANS. Forensic Accounting: Forensic accounting is the investigation of fraud or financial

manipulation by performing extremely detailed research and analysis of financial information.
Forensic accountants are often hired to prepare for litigation related to insurance claims,
insolvency, divorces, embezzlement, fraud, skimming, and any type of financial theft.
Bologna and Lindquist had defined forensic accounting as;
“The application of financial skills, and an investigative mentality to unresolved issues, conducted
within the context of rules of evidence. As an emerging discipline, it encompasses financial
expertise, fraud knowledge, and a sound knowledge and understanding of business reality and the
working of the legal system.”

Concept:

Forensic accounting can characterize as help with a question in regards to assertions or suspicion
of extortion; which are liable to include case, master assurance, and inquiry by a fitting power,
and examinations of suspected misrepresentation, abnormality or indecency which could prompt
common, criminal or disciplinary procedures.

The emphasis is basically on accounting issues; however, the part of the forensic bookkeeper
may stretch out to more broad examination which incorporates proof social affairs. It is a result
of the way that by definition, forensic assignments are identified with a legal or semi-legal
debate determination; that the Forensic specialist requires a fundamental comprehension of the
material statutory and customary law, the law of confirmation and the law of methodology

The most skillfully led examination will be of no quality to the customer ought to the
confirmation accumulated rule to forbid or the master accounting witness find to miss the mark
in appreciation of the necessities of ability, believability, or autonomy.

Need:
Forensic accounting identifies with the use of accounting ideas and systems to lawful issues.
Measurable accountants for the most part research and archive money related extortion and
cushy wrongdoings. The result of the measurable examination, including appraisals of
misfortunes, harms, and resources would utilize as prosecution backing to lawyers and law
requirement staff.

They offer imperative help for legitimate cases in numerous regions of the law; for example,
securities exchange controls, value altering plans, item risk, shareholder debate, and breaks of
agreement. Forensic accounting, forensic auditing or financial forensics is the forte practice
range of accounting that depicts engagements; that outcome from genuine or expected debate or
suit.

Importance:

1. Complex Litigation
Many of today’s financial disputes require specialized attention that even knowledgeable
attorneys are unable to provide. Forensic accountants can lend a hand by deciphering
complicated financial issues and relaying them in a way that both attorneys and their
clients can understand. Forensic accountants may also play an investigative role in civil
cases, working with attorneys to find unreported income or assets.
2. Government Investigations
Forensic accountants’ investigative abilities can be put to good use, not only in standard
civil disputes, but also in larger government investigations. For example, in major
criminal investigations, forensic accountants can play a chief role in tracing complex
money trails. Although non-agent consultants may be relied on at the regional and state
level, the hundreds of forensic accountants employed by the FBI typically handle
sensitive matters. Accounting currently qualifies as one of five main FBI Special Agent
Entry Programs. Other major government employers include the IRS and the SEC’s
Division of Enforcement.
3. Prevention and Risk Management
Corporate entities and government agencies are increasingly turning to forensic
accounting experts for assistance with preventive measures, designed to keep fraud and
the associated expense of the investigation (and litigation) process to a minimum.
 Forensic accountants may be asked to conduct thorough internal audits, through which
potential pitfalls are uncovered. After identifying problem areas, forensic accountants can
help corporate and nonprofit clients take the necessary next steps to minimize the
potential for fraud. In the corporate environment, forensic accountants can also monitor
for compliance with emerging regulations.
Forensic accounting is an exciting and rewarding field that allows professionals to use
their accounting knowledge and investigative skills to catch criminals, settle lawsuits, and
reduce the risk of large-scale fraud. Success in forensic accounting often requires a
wealth of knowledge beyond that deemed necessary for traditional, entry-level
accounting roles.

14). Explain in detail the area where the one can use the knowledge of forensic
accounting.

ANS. https://blog.ipleaders.in/forensic-accounting/

15). Explain the legal framework of forensic accounting.

ANS.

1. Assessment of litigation risks

Litigation risks refer to the possibility of adverse consequences arising from litigation.
They include criminal lawsuit risks, civil lawsuit risks, and administrative lawsuit risks.
Criminal lawsuit risks include the following: the defendant and his defender or the victim
and his agent participate in the first instance, appeal, complaint, and protest of a criminal
lawsuit. The following consequences may occur, such as criminal judgments adverse to
the defendant or victim, incidental civil judgments adverse to the defendant or victim,
weak or no enforcement of judgments. The guiltless defendant is convicted; the
defendant who commits a minor offense is given a heavy sentence; the accusation of the
defendant is wrong; the penalty is too heavy; the victim requests for a heavy sentence, but
the defendant is given a light sentence; the victim requests for the conviction of the
defendant, but the defendant is judged as guiltless; the victim requests for a severe
punishment, but the defendant is given a light penalty; civil compensation is too small.
 Civil litigation risks include the following: the litigant and his law agent participate in the
first instance, appeal, complaint, and protest of a lawsuit. They may encounter some risk
factors irrelevant to disputed facts which may influence the trial and enforcement of cases
and make legal rights and interests unable to be safeguarded. They include the risk of
improper claims, that of being unable to provide sufficient evidence, that of being unable
to provide original evidence, that of not appearing in a court on time or withdrawing from
the court, that of one party having no property, and that of litigation interests less than
litigation costs. Administrative litigation risks include the following: the litigant and his
law agent participate in the first instance, appeal, complaint, and protest of a lawsuit.
They may encounter some risk factors irrelevant to disputed facts which may influence
the trial and enforcement of cases and make legal rights and interests unable to be
safeguarded. Specifically speaking, they include the risk of improper claims, that of
unworthy litigation, and that of litigation being impossible.
2. Measurement of litigation values
Forensic accounting professionals can employ a mathematic model, measurement
technology and assessment method to quantify possible time costs, capital costs, in -kind
costs, energy costs, and opportunity costs in the prosecution, appeal, complaint, and
protest. They predict possible litigation interests, judge whether a lawsuit is worthy,
assess various risks in the prosecution, appeal, complaint, and protest, help the litigant
make decisions and control blind litigation.
3. Risk prevention
Upon starting a prosecution, appeal, complaint or protest, the litigant and his agent and
defender will necessary encounter various risks. Forensic accounting professionals may
help the litigant and his agent and defender provide litigation risk prevention plans and
avoidance strategies to increase lawsuit winning chances and lawsuit interests and
guarantee that a lawsuit is highly worthy.

16). Write short note on techniques of forensic accounting.

ANS.
1. Reviewing Public Documents and Doing Background Checks
 The documents made available to the public are scrutinised as they are the easiest to
obtain. Also, thorough background checks of a particular company are done to see the
past dealings of the business. Public Documents would include any information in the
public database, the corporate records and any information which is legally available on
the internet.
2. Conducting Interviews
Conducting an interview is an essential technique which can transform an unwilling
person into a source of valuable information. It helps in fully understanding all the facts.
An interview should be conducted by accurately assessing the gravity of the situation and
preparing the questions according to it. Discussions should take every little detail into
account and look at the greater picture to figure out the magnitude of the illegal activity
and the culprit responsible.
3. Gathering Information from Trustworthy Sources
Information provided by a confidential and trustworthy source can be precious to any
case. When a piece of information is gained from a confidential source or a confidential
informant, all the necessary precautions should be taken to hide the identity of the so-
called cause. A forensic accountant should try to have as many confidential sources
possible because such sources can virtually guarantee a correct result.
4. Analysing Evidence
Proper analysis of the obtained evidence can point to the guilty party and can also assist
to understand the extent of the fraud committed in the business. This analysis would also
help in understanding how secure the company is against financial scams and installing
various austerity measures to prevent any such future situation.
5. Surveillance
This can be done physically or electronically and is one of the conventional measures
conducted to uncover any fraud. It can be done by monitoring and tracking all the official
emails and messages.               
6. Going Undercover
This is an extreme measure and should be used only as a last resort. It is best left to the
professionals as they have the proper knowledge of how and where to conduct the
 investigations. Even a small mistake while being undercover can signal the offender that
something is wrong and the person might vanish.
7. Analysing the Financial Statements
This is a precious tool for finding out the fraud committed. All the necessary details are
summarized in the financial statement, and the analysis of these statements can help a
forensic accountant to figure out the scam.
Nowadays the economic conditions are getting stricter, and each country’s government is
now implementing tighter laws in terms of the governance of the businesses. As the
companies are increasing the level of sophistication, so is fraud. This has led to a higher
sensitivity to fraud which can be interpreted as a massive demand for the services of
forensic accountants by all the businesses.
Thus, it can be clearly understood that if forensic accounting is best left to the
professionals, they can provide you with solutions to the business problems which would
be tailored to your needs. If you are in search of the services of forensic accountants in
the UAE, then look no further. JAXA will take care of all your financial and business-
related problems. We not only provide forensic accounting services but also offer a range
of various other facilities such as Audit and Assurance services, Tax services, etc.
18). Differentiate normal auditing and forensic auditing.
ANS. (draw table From Pdf)
19). Write short note on forensic accounting and forensic auditing.
ANS. https://cleartax.in/g/terms/forensic-audit (Forensic Auditing)
For Forensic accounting refer the above notes.
20). Explain provision relating to managerial remuneration under Companies Act,
2013.
ANS. https://taxguru.in/company-law/provision-related-to-managerial-
remuneration-under-companies-act-2013.html
https://cleartax.in/s/managerial-remuneration
21). Write short note on requirement to maintain books of account under different
laws in India.
ANS. https://cleartax.in/s/maintenance-books-accounts
https://taxguru.in/company-law/provisions-books-accounts-companies-act.html
22). Explain the provision relating to evidentiary value of accounting entries in
books of account as per Indian Evidence Act.
ANS. https://www.mondaq.com/india/financial-services/823596/evidentiary-value-
of-bank-records
23). Define books of account and relevance of entries in books of account under
section 34 of Indian Evidence Act.
https://www.shareyouressays.com/knowledge/section-34-of-the-indian-evidence-
act-1872/120421
24). Ascertain types of account and the debit and credit from the following
particulars:
a. Mr. A started business with capital of Rs. 1,00,000.
b. Paid salary to staff Rs. 5000.
c. Receive interest income of Rs. 9800
d. Salary of Rs. 500 to Mr. X for the month of March 2020 is not paid yet.
e. Paid rent in cash Rs. 9300
f. Sold good for cash Rs. 321000
g. Bought goods for cash Rs. 121000.
Bought goods worth Rs. 20,000 on credit from Mr. Y/
ANS.
25). Mr. Manoj Singh, a junior lawyer, provides the following particulars for the
year ended 31st December, 2019:

a. Fees received in cash in 2019 Rs. 35,000

b. Salary paid to staff Rs. 3000
c. Office expenses paid in 2019 Rs. 10000
d. Rent of office in 2019 Rs. 15000
e. Bar Association fees paid for 2019 Rs.1000
f. AIR Subscription paid Rs.5000

Additional Information:
1. Fees include Rs 4,000 in respect of 2018 and fees not yet received is Rs.
6,000
2. Office rent includes Rs. 3,000 for previous year and rent of Rs. 1,000 not yet
paid
3. Bar Association fees is for 2 years

Compute his net income for the year 2013, under – (a) Cash Basis, (b) Accrual
Basis
ANS.
26). State whether the following are capital, revenue or deferred revenue
expenditure.
a. Fright and Carriage of Rs. 7,500 spent on machinery purchased and installed
b. Advertisement cost Rs. 10,000. The contract is advertisement is for 5 years.
c. Purchase of goods to be sold Rs. 75,300
d. Sales of goods Rs. 1,03,000
e. Purchase of fixed asset Rs. 65000
ANS.

27). Explain how forensic accounting can be used as a tool to prevent corporate
fraud?
ANS. http://www.scielo.br/scielo.php?script=sci_arttext&pid=S1807-
17752013000100008
28). Explain how your accounting knowledge is useful in field of law in your
language.
ANS. There are laws prevailing to land control, trade and commerce mostly. Hence, Accounting
and Law are closely related. The accountant and accounts officer must have a clear knowledge of
partnership law, company law, tax law, industrial law, cooperative law, and other relevant laws.
Accounts of an organization are kept on following accepted principles and by relevant laws.

For example, accounts of every company are kept accurately and precisely in light of company
law. In partnership business accounts are maintained in the light of the partnership act or
agreement. Keeping accounts, auditing of accounts of a company are compulsory as per the
specific provision of the companies act. Similarly, accounts of other organizations are to be kept
by the provisions of the relevant law.
If the court requires accounting in a lawsuit, the defendant must account for his or her
administration of the affairs in question. This may include:

 The management of an estate by an executor.

 The disclosure of the business actions of a partner.

This legal remedy dates back to ancient courts of equity, in which the officers of the chancery
served as auditors on behalf of the king.

Today, plaintiffs may request accounting when a jury has difficulty resolving the complication of
the accounts referenced in a case or when a position of trust has been violated. U.S. courts have
both law and equity jurisdiction. Moreover, they can order an accounting when needed.

In addition to the examples mentioned above, this could occur if the court desires to prevent a
party from profiting a wrong it has committed. For example, a bank teller who has invested
embezzled funds in the stock market may be stripped of all the associated earnings, not just the
original amount stolen. All financial transactions must be traced that have resulted from the
injury.

Importance of Accounting for Lawyers:

Lawyers need to maintain accounts and for this they ought to have the knowledge of accounting
due to the following reasons:
 1) As a member of the Bar Council, he should know its accounting.
2) He should know Legal services Authorities and Supreme Court Legal Services
Committee.
3) He should know the accounting of Advocates as per Supreme Court rules.
4) He should know the welfare fund accounting.
5) He should know how to prepare his own accounts.

29). Explain the effect of classification and presentation of liability in books of

account.

ANS.

30). Explain the following concepts:

a. Fundamental accounting equation

b. Double entry accounting system

ANS.

a. Fundamental accounting equation

https://efinancemanagement.com/financial-accounting/fundamental-accounting-
equation

b. Double entry accounting system

https://www.toppr.com/guides/principles-and-practice-of-accounting/basic-
accounting-procedures/double-entry-system/
https://tallysolutions.com/accounting/double-entry-system-of-accounting/