QUESTION 1

Explain the Various accounting Concepts and Principles?

ANSWER

The following concepts and principles have been covered:

1) business entity,
2) going concern,
3) objective evidence,
4) unit of measurement,
5) accounting period,
6) matching revenues and expenses,
7) adequate disclosure,
8) materiality,
9) consistency, and
10) conservatism.

BUSINESS ENTITY CONCEPT

The business entity concept states that each business entity should conduct its own
separate accounting. Only assets, liabilities, and owner's equity specifically related to
a given business should be reported in the financial statements of that business. It
should be noted, however, that in some circumstances the investors or owners of a
business are legally liable for debts or damages. This liability depends upon the legal
form of the business. In the event an individual owns more than one unrelated
business, each business must also be treated as a separate entity.

GOING CONCERN CONCEPT

The going concern concept is based on the belief that a business will operate
indefinitely. Assets purchased for long-term use, should be recorded at historical cost
even if the market value is above or below the original cost. When expenses are
prepaid, they should be listed as assets. In the event a business is near the end of its
life, this information should be disclosed in the financial statements of a company.
Accounting procedures should change to reflect the special needs of a business in
liquidation.

OBJECTIVITY

All information must be maintained objectively, which means that it is free of bias
and subject to verification. Objectivity is closely tied to reliability. Objective evidence
consists of anything that can be physically verified such as a bill, check, invoice, or

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bank statement. In the event something cannot be supported objectively, a number of
subjective methods are used to develop an estimate. The determination of items such
as depreciation expense and allowance for doubtful accounts are based on subjective
factors. Still even subjective factors are influenced by objective evidence such as past
experience.

STABLE-DOLLAR UNIT OF MEASUREMENT

All accounting transactions are recorded in terms of monetary value. The use of a
monetary value makes it easy to compare financial data, and it is the common factor
of all business transactions. During changing price levels, monetary value does not
always properly reflect true economic conditions. The use of current cost data or
constant cost data can be used to adjust price levels to a current price range. This data
is reported as supplementary information and the financial statements are prepared
with the assumption of a stable dollar.

ACCOUNTING PERIOD

Financial reports should be issued by businesses at least yearly. Most corporations

issue reports quarterly, as well. Timely information provided by financial reports is
essential for investors, creditors, industry analysts, management and government
agencies. Periodic income is difficult to determine because of the many adjustments
that are necessary. The accuracy of financial reports depends on subjective factors
such as an estimation of depreciation and inventory costing.

MATCHING REVENUES AND EXPENSES

For most businesses, recognition of revenue is based on when the revenue has been
realized, that is, when a price has been agreed with the purchaser and the seller has
completed all obligations. Few businesses rely on collection or receipt of payment.
For some businesses, revenue recognition is spread over time as in the installment or
time-of-completion method. All costs directly associated with a given revenue must
be matched with that revenue. Some expenses are not associated with specific revenue
items but with a given time period. Expenditures, for instance for plant asset, must be
allocated over their useful life and remain as unexpired cost or assets.

ADEQUATE DISCLOSURE

All relevant and material facts which affect the reliability and comparability of
financial statements must be disclosed. This usually relates to

1) accounting methods used,

2) changes in accounting estimates,
3) contingent liabilities,
4) performance of business segments, and
5) any significant event subsequent to the end of the financial period.

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CONSISTENCY CONCEPT

The purpose of the consistency concept is to assure that financial statements can be
easily compared period to period, and therefore to encourage that the same accounting
principles be used from year to year. When changes in accounting methods are
necessary, such changes should be disclosed and the reasoning explained in notes to
financial statements. If businesses were allowed to change accounting principles
whenever they wished, the amount of net income reported could continuously be
manipulated. Different accounting methods may be used for different business
segments.

MATERIALITY CONCEPT

The materiality concept proposes paying attention to important events and ignoring
insignificant accounting items. The extra effort required to process insignificant items
is not cost effective. The concept of materiality also suggests that small asset
purchases or improvements should be initially written off as an expense. Definitive
rules exist on whether an accounting element is significant or insignificant. Therefore
decisions are based on both objective and subjective criteria.

CONSERVATISM

Conservatism proposes that the information in financial statements should not foster
undue optimistic expectations and bends toward being prepared for the worst
situation. When a policy of conservatism is followed, assets and income tend to be
understated. For instance, depreciation expenses are often accelerated causing lower
book values for plant assets.

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QUESTION 2

Pass journal entries for the following transactions

Rs.
1. Madan commenced business with cash 70000
2. Purchased goods on credit 14000
3. Withdrew for private use 3000
4. Goods purchased for cash 12000
5. Paid wages 5000

ANSWER

Journal entries in the books of Madan as on…….

No. Particulars L. Amount
1. Cash a/c F. 70000
Dr.
70000
To Capital a/c

(being commenced business with cash)

2. Purchases a/c 14000

Dr.
14000
To Creditors a/c

(being purchased goods on credit)

3. Drawing a/c 3000

Dr.
3000
To Cash a/c

(being cash withrew for personal use)

4. Purchases a/c 12000
Dr.
12000
To Cash a/c

(being purchased goods on cash)

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5. Wage a/c 5000
Dr.
5000
To Cash a/c

(being wages paid)

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QUESTION 3

Explain the various types of errors disclosed by Trial Balance?

ANSWER

Those errors that can be disclosed by trial balance can easily be located. As soon as the
trial balance does not tally, the accountant can proceed to find out the spots where the
errors might have been committed. The total amount of difference in the trial balance is
temporarily transferred to a ‘Suspense Account’ so that it can be mitigated as and when
the errors get rectified. Therefore the suspense account gets debited or credited as the
case may be on rectification of these types of errors

The following are the errors which are disclosed by trial balance:

1. Posting a wrong amount

2. Posting to the wrong side of an account
3. Wrong totaling
4. Omitting to post an entry from subsidiary book to ledger
5. Omission of an account
6. Posting an amount to a correct account more than once
7. Posting an item to the same side of two different ledger accounts

Posting a wrong amount:

This mistake may occur while posting an entry from subsidiary book to ledger.

Posting to the wrong side of an account:

This error is committed while posting entries from subsidiary books to ledger.

Wrong Totaling:

Both under casting and over casting are detected by trial balance. If any account is
wrongly totaled, it gets reflected in the trial balance.

Omitting to post an entry from subsidiary book to ledger:

If an entry made in the subsidiary book does not get posted to ledger, the trial balance
does not tally.

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Omission of an account altogether from being shown in trial balance:

For instance, advertisement account which shows a debit balance is completely

omitted from trial balance. This can be rectified by bringing it to trial balance and
suspense account can be credited and advertisement account is debited.

Posting an amount to a correct account more than once:

This result in imbalance in the trial balance. The concerned account which is posted
twice should be cancelled and suspense account to be suitably debited
or credited as the case may be.

Posting an item to the same side of two different ledger accounts:

If two accounts are debited /credited for the same transaction, this type of error occurs.

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QUESTION 4

From the following balances extracted from Trial balance, prepare

Trading Account.

The closing stock at the end of the period is Rs.

56000
Particulars Amount in Rs.
Stock on 1-1-2004 70700
Returns inwards 3000
Returns outwards 3000
Purchases 102000
Debtors 56000
Creditors 45000
Carriage inwards 5000
Carriage outwards 4000
Import duty on materials 6000
received from abroad
Clearing charges 7000
Rent of business shop 12000
Royalty paid to extract 10000
materials
Fire insurance on stock 2000
Wages paid to workers 8000
Office salaries 10000
Cash discount 1000
Gas, electricity and 4000
water
Sales 250000

ANSWER
Trading Account for the year ending….
Particulars Rs. Particulars Rs.
To Stock on 1-1-2004 70700
To Purchases By Sales
102000 250000
Less: 99000 Less: 247000
Returns outwards Returns inwards
(3000) (3000)
To Carriage inwards 5000 By Closing stock 56000
To Import duty 6000
To Clearing charges 7000
To Royalty 10000
To Fire insurance 2000
To Wages 8000
To Gas, electricity and 4000
water

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 To Gross Profit 91300
Total 30300 Total 303000
0

QUESTION 5

Differentiate Financial Accounting and Management accounting?

ANSWER
The various differences between financial accounting and management accounting are given as
follows:

Difference 1

A management accounting system produces information that is used within an organization, by managers and
employees
A financial accounting system produces information that is used by parties external to the organization, such
as shareholders, bank and creditors.

Difference 2

Management accounting helps management to record, plan and control activities and aids the decision making
process.
Financial accounting provides a record of the performance of an organization over a defined period and the
state of affairs at the end of that period.

Difference 3

Management accounting can focus on specific areas of an organisation’s activities. Information may aid a
decision making rather than be an end product of a decision.

Financial accounting concentrates on the organization as a whole, aggregating revenues and costs from
different operation. Financial accounts are an end themselves.

Difference 4

Management accounting information may be monetary or alternatively non monetary.

Most financial accounting information is of a monetary nature.

Difference5
Management accounting has no specified format. There are no specific statements which should be produced.
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Financial accounts are supposed to be produced in accordance with a specified format by IAS or law.

Difference 6

Management accounting provides both an historical record of the immediate past and a future planning tool.

Financial accounting presents an essentially historical picture of past operation.

Difference 7

No strict rules govern the way in which management accounting operates. The management accounts and
information are prepared in a format that is of use to managers.

Financial accounting must operate within a framework determined by law and IASs so that the financial
accounts of different organizations can be easily compared.

Difference 8
In management accounting, reports are prepared on continuous basis, monthly or weekly or even daily.

In financial accounting, the financial data is presented for a definite period, say one year or a quarter year.

Difference 9
In management accounting, top, middle and lower level managers use the information for planning and
decision making.
The primary users of financial accounting information are shareholders, creditors, government authorities,
employees, etc.

Difference 10
In management accounting systems there is no requirement for an independent external review.
In financial accounting, annual statements must be audited by an independent CPA firm.

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QUESTION 6

Following is the Balance Sheet of M/s Srinivas Ltd. You are required
to prepare a Fund Flow Statement
Particulars 2006 2007 Particulars 2006 2007
Equity Share 50,000 65,000 Cash balances 10,000 13,000
capital
Profit & Loss 14,750 17,000 Debtors 25,000 27,000
Trade Creditors 29,000 31,000 Investment 5,000 nil
Mortgage 10,000 15,000 Fixed Assets 50,000 80,000
Short term loans 15,000 16,500 Less: Depreciation (5,250) (7000)
Accrued expenses 8,000 7,500 Goodwill 5,000 nil
Stock 37,000 39,000
Total 1, 26,750 1, 52,000 Total 1, 26,750 1, 52,000

Additional Information:
1. Depreciation provided is Rs.1750.
2. Write off goodwill.
3. Dividend paid Rs.3500.

ANSWER

Schedule of changes in Working Capital

Balance as on
2006 2007 Increase Decrease
Current Assets
Cash 10,000 13,000 3,000
Debtors 25,000 27,000 2,000
Stock 37,000 39,000 2,000
Total Current Assets 72,000 79,000

Current Liabilities
Trade Creditors 29,000 31,000 2,000
Short term loans 15,000 16,500 1,500
Accrued expenses 8,000 7,500 500
Total Current Liabilities 52,000 55,000
Working capital 20,000 24,000
Net Increase in Working Capital 4,000 - 4,000

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Total 24,000 24,000 7,500 7,500

Adjusted Profit and Loss Account

To By
Depreciation 1,750 Balance b/d 14,750
Goodwill 5,000 Funds generated 12,500
from operations
Dividend 3,500
Balance c/d 17,000
Total 27,250 Total 27,250

Funds Flow Statement

Issue of fresh equity 15,000 Purchase of fixed assets 30,000

Sale of investment 5,000 Payments of dividends 3,500
Loan on mortgage 5,000 Increase in working capital 4,000
Funds from operations 12,500
37,500 37,500

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