Course: Principles of Accounting

Code:- 8401

Spring, 2023

Level: BBA (4 Years)

ASSIGNMENT No. 1

Q. 1 (a) What is the importance of study of accounting? (20)

(b) Discuss the main features of any two of the financial statements?

Importance of studying accounting:

The study of accounting is crucial for various reasons. It serves as the

language of business, enabling companies to communicate their

financial information to stakeholders effectively. Accounting provides

valuable insights into a company's financial health, performance, and

sustainability. It plays a significant role in decision-making, both within

organizations and by external parties. Additionally, accounting principles

and practices ensure transparency, accuracy, and consistency in

financial reporting, which are essential for building trust and credibility

with investors, creditors, and regulatory bodies.

Next, let's move on to discussing the main features of two financial

statements: the Income Statement and the Balance Sheet. I'll cover the

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Income Statement first:

The Income Statement:

1. **Revenue and Sales:** This section displays the total revenue

generated by the company through its core operations, usually over a

specific period (e.g., a fiscal quarter or year).

2. **Cost of Goods Sold (COGS):** This includes the direct costs

associated with producing the goods or services sold during the

reporting period.

3. **Gross Profit:** Calculated by subtracting COGS from the total

revenue, gross profit indicates the initial profitability before considering

operating expenses.

4. **Operating Expenses:** These are the costs incurred in the day-to-

day operations of the business, such as salaries, rent, utilities, and

marketing expenses.

5. **Operating Income:** Also known as operating profit, this is derived

by subtracting total operating expenses from the gross profit. It reflects

the profitability of core business operations.

6. **Non-Operating Items:** This section accounts for any income or

expenses not directly related to the core business operations, such as

interest income, interest expenses, and gains or losses from

investments.

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7. **Net Income:** Often referred to as the bottom line, net income is the

final profit figure after accounting for all expenses, taxes, and other

financial activities.

Moving on to the Balance Sheet:

The Balance Sheet:

1. **Assets:** This section lists the company's resources, both tangible

(like cash, inventory, and property) and intangible (such as patents or

trademarks), at a specific point in time.

2. **Liabilities:** Liabilities represent the company's financial obligations,

including debts, loans, and accounts payable, as of a specific date.

3. **Equity:** Also known as shareholder's equity or net assets, equity

represents the residual interest in the company's assets after deducting

liabilities.

4. **Current Assets and Liabilities:** These are assets and liabilities that

are expected to be converted to cash or settled within a year. They

provide insight into the company's short-term financial health.

5. **Long-Term Assets and Liabilities:** These items have a longer life

span and provide information about the company's long-term investment

and financing strategies.

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These financial statements offer valuable insights into a company's

financial performance, position, and cash flow. They are essential tools

for evaluating a company's financial health, making informed investment

decisions, and assessing its ability to meet its obligations.

Q. 2 Write short notes on the following: (20)

Accounting Equation Realization Concept

Cost Concept Petty Cash

1. **Accounting Equation:**

The accounting equation, also known as the fundamental accounting

equation, is the cornerstone of double-entry bookkeeping. It states that

the total assets of a business are equal to the total liabilities plus the

owner's equity. In equation form: Assets = Liabilities + Owner's Equity.

This equation ensures that every financial transaction has a dual effect

on the balance sheet, maintaining a balance between the sources of

funds (liabilities and equity) and the uses of funds (assets).

2. **Realization Concept:**

The realization concept, also referred to as the revenue recognition

principle, is a fundamental accounting principle. It states that revenue

should be recognized and recorded in the books of accounts when it is

earned and becomes realizable, regardless of when the payment is

received. In simpler terms, revenue is recognized when the company has

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fulfilled its obligations to provide goods or services to customers, and

the revenue is expected to be collected. This principle ensures that

financial statements accurately reflect the company's performance

during a specific period.

3. **Cost Concept:**

The cost concept, also known as the historical cost concept, is a

principle that suggests assets should be recorded in the books of

accounts at their original acquisition cost. This means that assets are

initially recorded at the amount paid to acquire them, and subsequent

changes in their market value are generally not reflected in the

accounting records. This concept ensures that financial statements are

reliable and can be objectively verified, as historical cost is a verifiable

and objective value.

4. **Petty Cash:**

Petty cash is a small amount of cash that a business keeps on hand to

cover minor and day-to-day expenses that are not suitable for payment

through checks or electronic means. This fund is usually managed by a

designated person and is used for expenses like office supplies,

refreshments, and small incidental costs. To ensure accountability,

businesses establish procedures for requesting and reconciling petty

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cash expenses. Regular replenishments and documentation help

maintain control and transparency over these small cash transactions.

Q. 3 From the following trial balance, prepare income statement and

Balance Sheet for the year ended on 31st Dec 1989 and balance sheet

as on that date. (20)

Debit Rs. Credit Rs.

Wages 2,000

Cash 6,650

Bank 1,500

Inventory 850

Sundry Debtors 2,700

Insurance 1,800

Patent rights (4 years unexpired) 2,000

Advertisement 1,200

Machinery 7,500

Sundry Creditors 2,500

Commission 2,200

Bad Debts 1,500

Loan 6,500

Common stock 10,000

Sales 15,000

Discount 1,200

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 Purchases 8,000

Salaries 1,000

Electric charges 500

Telephone charges 700

Rent 1,000

Return outward 1,500

38,900 38,900

Adjustments:

i. Prepaid insurance amounts to Rs.200

ii. Unpaid advertisement expenses Rs.400

iii. Machinery is to be depreciated @ 10%

iv. Unearned commission Rs.200

v. Accrued salaries Rs.200

vi. Closing inventory is Rs.7,500

Here is Income Statement and Balance Sheet based on the provided trial

balance and adjustments:

*Income Statement for the Year Ended on 31st Dec 1989:**

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*

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Please note that the "Patent Rights (Net)" and "Machinery (Net)"

accounts reflect the adjustments made for depreciation.

Q. 4 Concord Products uses a perpetual inventory system. On January

1 the Inventory account had a balance of Rs.84,500. During the first few

days of January the following transactions occurred: (20)

Jan. 2Purchased merchandise on credit from Smith Company for

Rs.9,200.

Jan. 3Sold merchandise for cash, Rs.22,000 The cost of this

merchandise was Rs.14,300.

(a) Prepare entries in general journal form to record the above

transactions.

(b) What was the balance of the inventory account at the close

of business January 3?

**(a) Journal Entries:**

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**(b) Balance of the Inventory Account on January 3:**

Beginning Balance on January 1: Rs.84,500

Inventory Increase (Purchase on January 2): Rs.9,200

Inventory Decrease (Cost of Goods Sold on January 3): Rs.14,300

Calculating the balance:

Beginning Balance + Purchases - Cost of Goods Sold

= Rs.84,500 + Rs.9,200 - Rs.14,300

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= Rs.79,400

So, the balance of the Inventory account at the close of business on

January 3 is Rs.79,400.

Q. 5 Far Corners Imports sells a variety of merchandise to retail stores

on open account, but it insists that any customer who fails to pay an

invoice when due must replace it with an interest-bearing note. The

company adjusts and closes its accounts at December 31. Among the

transactions relating to notes receivable were the following:(20)

Sept. 1 Received from a customer (Party Plus) a nine-month, 9% note

for Rs.42,000 in settlement of an account receivable due today.

June 1 Collected in full the nine-month, 9% note receivable from

party Plus, including interest.

Pass journal entries

Here are the entries for the transactions involving the notes receivable:

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Explanation:

- On September 1, the company received a note from Party Plus, which is

recorded as an increase in Notes Receivable and a decrease in Accounts

Receivable.

- On June 1, the company collected the note from Party Plus, along with

interest income. The interest income of Rs.1,890 (9% of Rs.42,000 for 9

months) is recognized as revenue, and the Notes Receivable account is

decreased.

These journal entries ensure proper recording of the note-related

transactions in Far Corners Imports' accounts.

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