Assignment On Financial And Management Accounting
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ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING BY RAHUL GUPTA Q. 1: Explain any two concepts of accounting with examples? Answer
Introduction:
Accounting is the language of business and it is used to communicate financial information. In order for that information to make sense, accounting is based on 12 fundamental concepts. These fundamental concepts then form the basis for all of the Generally Accepted Accounting Principles (GAAP). By using these concepts as the foundation, readers of financial statements and other accounting information do not need to make assumptions about what the numbers mean. For instance, the difference between reading that a truck has a value of $9000 on the balance sheet and understanding what that $9000 represents is huge. Can you turn around RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 1
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING and sell the truck for $9000? If you had to buy the truck today, would you pay $9000? Or, perhaps the original purchase price of the truck was $9000. All of these assumptions lead to very different evaluations of the worth of that asset and how it contributes to the company’s financial situation. For this reason it is imperative to know and understand the eleven key concepts.
Eleven key Accounting concepts: • Entity: Accounts are kept for entities and not the people who own or run the company. Even in proprietorships and partnerships, the accounts for the business must be kept separate from those of the owner(s).
• Money-Measurement: For an accounting record to be made it must be able to be expressed in monetary terms. For this reason, financial statements show only a limited picture of the business. Consider a situation where there is a labor strike pending or the business owner’s health is failing; these situations have a huge impact on the operations and financial security of the company but this information is not reflected in the financial statements.
• Going Concern: Accounting assumes that an entity will continue to operate indefinitely. This concept implies that financial statements do not represent a company’s worth if its assets were to be liquidated, but rather that the assets will be used in future operations. This concept also allows businesses to spread (amortize) the cost of an asset over its expected useful life.
• Cost: An asset (something that is owned by the company) is entered into the accounting records at the price paid to acquire it. Because the “worth” of an asset changes over time it would be impossible to accurately record the market value for the assets of a company. The cost concept does recognize that assets generally depreciate in value and so accounting practice removes the depreciation amount from the original cost, shows the value as a net amount, and records the difference as a cost of operations (depreciation expense.) Look at the following example:
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 2
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING Truck $10,000 purchase price of the truck. Less depreciation $ 1,000 amount deducted as a depreciation expense Net Truck: $ 9,000 net book-value of the truck. The $9000 simply represents the book value of the truck after depreciation has been accounted for. This figure says nothing about other aspects that affect the value of an item and is not considered a market price. •
Dual Aspect:
This concept is the basis of the fundamental accounting equation:
Assets = Liabilities + Equity 1. Assets are what the company owns. 2. Liabilities are what the company owes to creditors against those assets 3. Equity is the difference between the two and represents what the company owes to its investors/owners. All accounting transactions must keep this equation balanced so when there is an increase on one side there must be an equal increase on the other side or an equal decrease on the same side.
• Objectivity: The objectivity concept states that accounting will be recorded on the basis of objective evidence (invoices, receipts, bank statement, etc…). This means that accounting records will initiate from a source document and that the information recorded is based on fact and not personal opinion.
• Time Period: This concept defines a specific interval of time for which an entity’s reports are prepared. This can be a fiscal year (Mar 1 – Feb 28), natural year (Jan 1 – Dec 31), or any other meaningful period such as a quarter or a month.
• Conservatism: This requires understating rather than overstating revenue (income) and expense amounts that have a degree of uncertainty. The rule is to recognize revenue when it is RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 3
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING reasonably certain and recognize expenses as soon as they are reasonably possible. The reasons for accounting in this manner are so that financial statements do not overstate the company’s financial position. Accounting chooses to err on the side of caution and protect investors from inflated or overly positive results.
• Realization: Revenues are recognized when they are earned or realized. Realization is assumed to occur when the seller receives cash or a claim to cash (receivable) in exchange for goods or services. This concept is related to conservatism in that revenue (income) is only recorded when it actually occurs and not at the point in time when a contract is awarded.
• Matching: To avoid overstatement of income in any one period, the matching principle requires that revenues and related expenses be recorded in the same accounting period. If you bill $20,000 of services in a month, in order to accurately represent the income for the month you must report the expenses you incurred while generating that income in the same month. •
Consistency:
Once an entity decides on one method of reporting (i.e. method of accounting for inventory) it must use that same method for all subsequent events. This ensures that differences in financial position between reporting periods are a result of changed in the operations and not to changes in the way items are accounted for.
• Materiality: Accounting practice only records events that are significant enough to justify the usefulness of the information. Technically, each time a sheet of paper is used, the asset “Office supplies” is decreased by an infinitesimal amount but that transaction is not worth accounting for. By understanding and applying these principles you will be able to read, prepare, and compare financial statements with clarity and accuracy. The bottom-line is that the ethical practice of accounting mandates reporting income as accurately as possible and when there is uncertainty, choosing to err on the side of caution.
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 4
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING
Basic Accounting Concepts: Balance Sheet Accounts: The three so-called Balance Sheet Accounts are Assets, Liabilities, and Equity. Balance Sheet Accounts are used to track the changes in value of things you own or owe. Assets are the group of things that you own. Your assets could include a car, cash, a house, stocks, or anything else that has convertible value. Convertible value means that theoretically you could sell the item for cash. Liabilities are the group of things on which you owe money. Your liabilities could include a car loan, a student loan, a mortgage, your investment margin account, or anything else which you must pay back at some time. Equity is the same as "net worth." It represents what is left over after you subtract your liabilities from your assets. It can be thought of as the portion of your assets that you own outright, without any debt.
Income and Expense Accounts: The two Income and Expense Accounts are used to increase or decrease the value of your accounts. Thus, while the balance sheet accounts simply track the value of the things you own or owe, income and expense accounts allow you to change the value of these accounts. Income is the payment you receive for your time, services you provide, or the use of your money. When you receive a paycheck, for example, that check is a payment for labor you provided to an employer. Other examples of income include commissions, tips, dividend income from stocks, and interest income from bank accounts. Income will always increase the value of your Assets and thus you’re Equity. Expenses refer to money you spend to purchase goods or services provided by someone else. Examples of expenses are a meal at a restaurant, rent, groceries, gas for your car, or tickets to see a play. Expenses will always decrease your Equity. If you pay for the expense immediately, you will decrease your Assets, whereas if you pay for the expense on credit you increase your Liabilities.
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 5
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING
Que 2: Prove that accounting equation is satisfied in all the following transactions of Mr.X? 1. Commenced business with cash – Rs.80,000 2. Purchased goods for cash – Rs.40,000 and on credit Rs.30,000 3. Sold goods for cash – Rs.40,000 costing Rs.25,000 4. Paid salary – Rs.2,000 and salary outstanding Rs.1,000 5. Bought scooter for personal use for cash at Rs.20,000 Answer Transac tion
Assets Cash
Commenced business with cash– Rs.80,000 Purchased goods for cash– Rs.40,000 and on credit Rs.30,000 Sold goods for cash – Rs.40,000 costing Rs.25,000 Paid salary – Rs.2,000 and salary outstanding Rs.1,000
Good s
Liabilities Scoot er
Sala ry
Outstan ding Salary
Credi tors
+80,000
+80,000
-40,000
+40,000 +30,000
+40,000
-25,000
+1,000
Capital
+30,000
+15,000
+2,000
+1,000
-2,000
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 6
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING Bought scooter for personal use for cash at Rs.20,000 Total
+20,000
81,00 0
45,000
20,00 0
+20,000
2,000
1,000
Grand Total
1,46,000 Hence Accounting Equation has been proved.
30,000
1,13,000
1,46,000
Que 3: Show the rectification entries for the following a. Sales account is under cast by Rs.15, 000. b. Goods returned by the customer Mr. of Rs.5650 has been posted in the Return Inward Account as Rs.5560 and in Mr. A/c as Rs.6, 550. c. Salary paid Rs.6, 000 has been posted to rent account. d. Cash received from Ram posted to Shyam account Rs.7, 000. e. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhu’s a/c Answer
a. The Sales account is under cast by Rs.15,000
Suspense A/c To Sales A/c
Dr 15,000 15,000
Statement- Being under casting of Sales A/c by 15,000 now rectified. b. Goods returned by the customer Mr. of Rs.5650 has been posted in the Return Inward Account as Rs.5560 and in Mr. a/c as Rs.6,550
X A/c Dr
990
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 7
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING To Suspense A/c
990
Statement- Being over casting of X A/c by 990 now rectified.
c. Salary paid Rs.6,000 has been posted to Rent account
Original Entry
Wrong Entry
Rectified Entry
Salary A/c Dr
6,000
Salary A/c Dr 6,000
Rent A/c Dr
6,000
To Cash A/c
6,000
To Rent A/c
To Cash A/c
6,000
6,000
Statement- Being Salary A/c had been wrongly credited to Rent A/c now rectified.
d. Cash received from Ram posted to Shyam account Rs.7,000
Original Entry Cash A/c Dr To Ram A/c
7,000 7,000
Wrong Entry
Rectified Entry
Cash A/c Dr 7,000
Shyam A/c Dr
Shyam A/c
Ram A/c
7,000
6,000
6,000
Statement- Being cash wrongly credited to Shyam’s A/c now rectified. RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 8
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING
e. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhu’s a/c
Original Entry Cash A/c Dr To Jadu A/c
7,000 7,000
Wrong Entry
Rectified Entry
Cash A/c Dr 7,000
Madhu A/c Dr
Madhu A/c
Jadu A/c
7,000
6,000
6,000
Statement- Being cash wrongly credited to Madhu’s A/c now rectified.
Q.4: The following balances are extracted from the books of Kiran Trading Co on 31st March 2000. You are required to RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 9
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING prepare trading and profit and loss account and a balance sheet as on that date: (20 marks) Opening Stock B/R Purchases Wages Insurance Sundry Debtors Carriage Inwards Commission Paid Interest on Capital Stationery Return Inwards
5,000 22,500 1,95,000 14,000 5,500 1,50,000 4,000 4,000 3,500 2,250 6,500
Commission received Return Outward Trade Expenses Office furniture Cash in hand Cash at bank Rent and Taxes Carriage Outward Sales Bills Payable Creditors Capital The closing stock was valued at Rs.1, 25,000
2,000 2,500 1,000 5,000 2,500 23,750 5,500 7,250 2,50,000 15,000 98,250 89,500
Answer: The first step in preparing the trading account, profit and loss account and balance sheet is to prepare the trial balance. And for interest on capital it is assume that the interest had been already paid. So, it will give its effect on Profit and Loss Account at the debit site.
•
TRIAL BALANCE OF KIRAN TRADING CO AS ON 31ST MARCH 2000
PARTICULARS Opening Stock B/R Purchases
DEBIT
CREDIT
5,000 22,500 1,95,000
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 10
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING Wages Insurance Sundry Debtors Carriage Inwards Commission Paid Interest on Capital Stationery Return Inwards Commission received Return Outward Trade Expenses Office furniture Cash in hand Cash at bank Rent and Taxes Carriage Outward Sales Bills Payable Creditors Capital
14,000 5,500 1,50,000 4,000 4,000 3,500 2,250
Total
457, 250
•
6,500 2,000 2,500 1,000 5,000 2,500 23,750 5,500 7,250 2,50,000 15,000 98,250 89,500
457, 250
Trading account of Kiran Trading Co as on 31st March 2000
Dr. Cr. PARTICULARS To Opening stock To Purchases 1,95,000 Less Return Outward 2,500
Add Carriage In 4000
AMOUN PARTICULARS T 2,50,000 5,000 By Sales Less return Inwards 6,500 Less Carriage Outward 7,250
1,92,50 Closing Stock
AMOUN T 2,36,25 0 1,25,00
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 11
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING 0 14,000 Total 1,45,75 0
To Wages Gross Profit Total •
3,61,250
3,61,250
Profit and loss account of Kiran Trading Co as on 31st March 2000 PARTICULAR
To Insurance To Commission paid To Interest on Capital To Stationery To Trade and Expenses To Rent and Taxes Net profit Total
•
0
AMOUN PARTICULAR T 5,500 By Gross Profit 4,000 3,500
AMOUNT
1,45,75 0 By Commission Received 2,000 Total 1,47,75 0
2,250 1,000 5,500 1,26,00 0 147,75 0
Balance Sheet of Kiran Trading Co as at 31st March 2000 LIABILITIES
Capital
AMOUNT
89,500
Add Net Profit 1,26,000
ASSETS Cash in Hand
2,15,50 0
Cash at Bank
AMOUNT
2,500 23,750
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 12
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING Bills Payable Creditors
15,000 98,250
Bills Receivable Debtors Furniture Closing Stock
Total
3,28,75 Total 0
22,500 1,50,000 5,000 1,25,000 3,28,750
Q.5: Write short notes on: Answer 5 a)
Accrued/ Outstanding Expenses: Certain expenses may have been incurred during the financial year, but will only be paid in the next financial year. Examples of such expenses is where accounts or invoices have been received for accounting fees, advertising, rent, rates and taxes, water and electricity, etc., which is applicable to the financial year but which is not yet paid at the end of the financial year. The expense account must be adjusted so that the expense account represents the expenses for the full financial year or 12 consecutive months (accounting periods or reporting periods). The amount by which the expense account is outstanding will increase the amount of the expense at the end of the financial year. At the end of the financial year a liability is created - Accrued or outstanding expenses because the amount of the expense is consumed or used but not yet paid. It is owed to the party who has supplied the expense item, which is already used up in the financial year.
To Identify, Enter the Transaction and to Post the Transaction to the Ledger: For example, when analyzing the figures on the pre-adjustment trial balance, it is discovered that the telephone expenses paid for the current financial year is R (£) 3 300. The telephone account for R (£) 300 of the last month of the financial year is received, but not yet paid. Enter the transaction in the General Journal. Enter the transaction in the batch. After entering the transactions in the general journal, the transactions is as follows: The expense for the telephone is recognized and recorded in the expense accounts which will result that the net profit will be decreased by the expense of R(£) 300, which is not yet paid as at the end of the financial year (29 February). It has also increased the current RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 13
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING liabilities, as it is an expense which is payable in the new financial year. An amount of R 3 600 will be recognized as an expense and not R (£) 3 300. The amount that should have been paid for the financial year is the amount on the preadjustment trail balance plus the amount of the outstanding expense not yet paid. The expenses are increased (debited) and current liabilities are increased (credited). Once these transactions have been processed and you have done the Year-end process in the Tools Global Processes - Do Year-end menu option, you need to reverse these adjustments in the new financial year. The reason for this is that these adjustments have served its purpose in the old financial year to assist you to generate the correct final financial statements.
5b)
Prepaid expenses: •
What Does Prepaid Expense Mean?
A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received in the near future. While prepaid expenses are initially recorded as assets, their value is expensed over time as the benefit is received onto the income statement, because unlike conventional expenses, the business will receive something of value in the near future. •
Investopedia explains Prepaid Expense
Due to the nature of certain goods and services, they must be prepaid expenses. For example, insurance is a prepaid expense, because the purpose of purchasing insurance is to buy proactive protection in case something unfortunate happens. Clearly, no insurance company would sell insurance that covers the occurrence of an unfortunate event, after the fact, so insurance expenses must be pre-paid. Prepaid expenses are those expenses which have been paid in advance. In other words, these are the expenses which have been paid during the accounting period for which the final accounts are being prepared but they relate to the next period. As the benefit of such RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 14
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING expenses is received in the subsequent years, it will be treated as expenses of the coming years and not the year in which it is paid. Examples: Insurance premium has been paid in advance. Rent has been paid for the next year. •
Treatment of prepaid expenses in final account:
If prepaid expenses are given in the trial balance they are recorded in the assets side of Balance sheet only. But if they are given in the adjustments they are subtracted from concerned expenses in the debit side of profit and loss account and again are shown in the assets side of Balance Sheet.
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 15
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING BY RAHUL GUPTA Q. 1: Explain any two concepts of accounting with examples? Answer
Introduction:
Accounting is the language of business and it is used to communicate financial information. In order for that information to make sense, accounting is based on 12 fundamental concepts. These fundamental concepts then form the basis for all of the Generally Accepted Accounting Principles (GAAP). By using these concepts as the foundation, readers of financial statements and other accounting information do not need to make assumptions about what the numbers mean. For instance, the difference between reading that a truck has a value of $9000 on the balance sheet and understanding what that $9000 represents is huge. Can you turn around RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 1
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING and sell the truck for $9000? If you had to buy the truck today, would you pay $9000? Or, perhaps the original purchase price of the truck was $9000. All of these assumptions lead to very different evaluations of the worth of that asset and how it contributes to the company’s financial situation. For this reason it is imperative to know and understand the eleven key concepts.
Eleven key Accounting concepts: • Entity: Accounts are kept for entities and not the people who own or run the company. Even in proprietorships and partnerships, the accounts for the business must be kept separate from those of the owner(s).
• Money-Measurement: For an accounting record to be made it must be able to be expressed in monetary terms. For this reason, financial statements show only a limited picture of the business. Consider a situation where there is a labor strike pending or the business owner’s health is failing; these situations have a huge impact on the operations and financial security of the company but this information is not reflected in the financial statements.
• Going Concern: Accounting assumes that an entity will continue to operate indefinitely. This concept implies that financial statements do not represent a company’s worth if its assets were to be liquidated, but rather that the assets will be used in future operations. This concept also allows businesses to spread (amortize) the cost of an asset over its expected useful life.
• Cost: An asset (something that is owned by the company) is entered into the accounting records at the price paid to acquire it. Because the “worth” of an asset changes over time it would be impossible to accurately record the market value for the assets of a company. The cost concept does recognize that assets generally depreciate in value and so accounting practice removes the depreciation amount from the original cost, shows the value as a net amount, and records the difference as a cost of operations (depreciation expense.) Look at the following example:
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 2
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING Truck $10,000 purchase price of the truck. Less depreciation $ 1,000 amount deducted as a depreciation expense Net Truck: $ 9,000 net book-value of the truck. The $9000 simply represents the book value of the truck after depreciation has been accounted for. This figure says nothing about other aspects that affect the value of an item and is not considered a market price. •
Dual Aspect:
This concept is the basis of the fundamental accounting equation:
Assets = Liabilities + Equity 1. Assets are what the company owns. 2. Liabilities are what the company owes to creditors against those assets 3. Equity is the difference between the two and represents what the company owes to its investors/owners. All accounting transactions must keep this equation balanced so when there is an increase on one side there must be an equal increase on the other side or an equal decrease on the same side.
• Objectivity: The objectivity concept states that accounting will be recorded on the basis of objective evidence (invoices, receipts, bank statement, etc…). This means that accounting records will initiate from a source document and that the information recorded is based on fact and not personal opinion.
• Time Period: This concept defines a specific interval of time for which an entity’s reports are prepared. This can be a fiscal year (Mar 1 – Feb 28), natural year (Jan 1 – Dec 31), or any other meaningful period such as a quarter or a month.
• Conservatism: This requires understating rather than overstating revenue (income) and expense amounts that have a degree of uncertainty. The rule is to recognize revenue when it is RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 3
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING reasonably certain and recognize expenses as soon as they are reasonably possible. The reasons for accounting in this manner are so that financial statements do not overstate the company’s financial position. Accounting chooses to err on the side of caution and protect investors from inflated or overly positive results.
• Realization: Revenues are recognized when they are earned or realized. Realization is assumed to occur when the seller receives cash or a claim to cash (receivable) in exchange for goods or services. This concept is related to conservatism in that revenue (income) is only recorded when it actually occurs and not at the point in time when a contract is awarded.
• Matching: To avoid overstatement of income in any one period, the matching principle requires that revenues and related expenses be recorded in the same accounting period. If you bill $20,000 of services in a month, in order to accurately represent the income for the month you must report the expenses you incurred while generating that income in the same month. •
Consistency:
Once an entity decides on one method of reporting (i.e. method of accounting for inventory) it must use that same method for all subsequent events. This ensures that differences in financial position between reporting periods are a result of changed in the operations and not to changes in the way items are accounted for.
• Materiality: Accounting practice only records events that are significant enough to justify the usefulness of the information. Technically, each time a sheet of paper is used, the asset “Office supplies” is decreased by an infinitesimal amount but that transaction is not worth accounting for. By understanding and applying these principles you will be able to read, prepare, and compare financial statements with clarity and accuracy. The bottom-line is that the ethical practice of accounting mandates reporting income as accurately as possible and when there is uncertainty, choosing to err on the side of caution.
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 4
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING
Basic Accounting Concepts: Balance Sheet Accounts: The three so-called Balance Sheet Accounts are Assets, Liabilities, and Equity. Balance Sheet Accounts are used to track the changes in value of things you own or owe. Assets are the group of things that you own. Your assets could include a car, cash, a house, stocks, or anything else that has convertible value. Convertible value means that theoretically you could sell the item for cash. Liabilities are the group of things on which you owe money. Your liabilities could include a car loan, a student loan, a mortgage, your investment margin account, or anything else which you must pay back at some time. Equity is the same as "net worth." It represents what is left over after you subtract your liabilities from your assets. It can be thought of as the portion of your assets that you own outright, without any debt.
Income and Expense Accounts: The two Income and Expense Accounts are used to increase or decrease the value of your accounts. Thus, while the balance sheet accounts simply track the value of the things you own or owe, income and expense accounts allow you to change the value of these accounts. Income is the payment you receive for your time, services you provide, or the use of your money. When you receive a paycheck, for example, that check is a payment for labor you provided to an employer. Other examples of income include commissions, tips, dividend income from stocks, and interest income from bank accounts. Income will always increase the value of your Assets and thus you’re Equity. Expenses refer to money you spend to purchase goods or services provided by someone else. Examples of expenses are a meal at a restaurant, rent, groceries, gas for your car, or tickets to see a play. Expenses will always decrease your Equity. If you pay for the expense immediately, you will decrease your Assets, whereas if you pay for the expense on credit you increase your Liabilities.
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 5
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING
Que 2: Prove that accounting equation is satisfied in all the following transactions of Mr.X? 1. Commenced business with cash – Rs.80,000 2. Purchased goods for cash – Rs.40,000 and on credit Rs.30,000 3. Sold goods for cash – Rs.40,000 costing Rs.25,000 4. Paid salary – Rs.2,000 and salary outstanding Rs.1,000 5. Bought scooter for personal use for cash at Rs.20,000 Answer Transac tion
Assets Cash
Commenced business with cash– Rs.80,000 Purchased goods for cash– Rs.40,000 and on credit Rs.30,000 Sold goods for cash – Rs.40,000 costing Rs.25,000 Paid salary – Rs.2,000 and salary outstanding Rs.1,000
Good s
Liabilities Scoot er
Sala ry
Outstan ding Salary
Credi tors
+80,000
+80,000
-40,000
+40,000 +30,000
+40,000
-25,000
+1,000
Capital
+30,000
+15,000
+2,000
+1,000
-2,000
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 6
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING Bought scooter for personal use for cash at Rs.20,000 Total
+20,000
81,00 0
45,000
20,00 0
+20,000
2,000
1,000
Grand Total
1,46,000 Hence Accounting Equation has been proved.
30,000
1,13,000
1,46,000
Que 3: Show the rectification entries for the following a. Sales account is under cast by Rs.15, 000. b. Goods returned by the customer Mr. of Rs.5650 has been posted in the Return Inward Account as Rs.5560 and in Mr. A/c as Rs.6, 550. c. Salary paid Rs.6, 000 has been posted to rent account. d. Cash received from Ram posted to Shyam account Rs.7, 000. e. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhu’s a/c Answer
a. The Sales account is under cast by Rs.15,000
Suspense A/c To Sales A/c
Dr 15,000 15,000
Statement- Being under casting of Sales A/c by 15,000 now rectified. b. Goods returned by the customer Mr. of Rs.5650 has been posted in the Return Inward Account as Rs.5560 and in Mr. a/c as Rs.6,550
X A/c Dr
990
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 7
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING To Suspense A/c
990
Statement- Being over casting of X A/c by 990 now rectified.
c. Salary paid Rs.6,000 has been posted to Rent account
Original Entry
Wrong Entry
Rectified Entry
Salary A/c Dr
6,000
Salary A/c Dr 6,000
Rent A/c Dr
6,000
To Cash A/c
6,000
To Rent A/c
To Cash A/c
6,000
6,000
Statement- Being Salary A/c had been wrongly credited to Rent A/c now rectified.
d. Cash received from Ram posted to Shyam account Rs.7,000
Original Entry Cash A/c Dr To Ram A/c
7,000 7,000
Wrong Entry
Rectified Entry
Cash A/c Dr 7,000
Shyam A/c Dr
Shyam A/c
Ram A/c
7,000
6,000
6,000
Statement- Being cash wrongly credited to Shyam’s A/c now rectified. RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 8
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING
e. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhu’s a/c
Original Entry Cash A/c Dr To Jadu A/c
7,000 7,000
Wrong Entry
Rectified Entry
Cash A/c Dr 7,000
Madhu A/c Dr
Madhu A/c
Jadu A/c
7,000
6,000
6,000
Statement- Being cash wrongly credited to Madhu’s A/c now rectified.
Q.4: The following balances are extracted from the books of Kiran Trading Co on 31st March 2000. You are required to RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1 Page 9
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING prepare trading and profit and loss account and a balance sheet as on that date: (20 marks) Opening Stock B/R Purchases Wages Insurance Sundry Debtors Carriage Inwards Commission Paid Interest on Capital Stationery Return Inwards
5,000 22,500 1,95,000 14,000 5,500 1,50,000 4,000 4,000 3,500 2,250 6,500
Commission received Return Outward Trade Expenses Office furniture Cash in hand Cash at bank Rent and Taxes Carriage Outward Sales Bills Payable Creditors Capital The closing stock was valued at Rs.1, 25,000
2,000 2,500 1,000 5,000 2,500 23,750 5,500 7,250 2,50,000 15,000 98,250 89,500
Answer: The first step in preparing the trading account, profit and loss account and balance sheet is to prepare the trial balance. And for interest on capital it is assume that the interest had been already paid. So, it will give its effect on Profit and Loss Account at the debit site.
•
TRIAL BALANCE OF KIRAN TRADING CO AS ON 31ST MARCH 2000
PARTICULARS Opening Stock B/R Purchases
DEBIT
CREDIT
5,000 22,500 1,95,000
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 10
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING Wages Insurance Sundry Debtors Carriage Inwards Commission Paid Interest on Capital Stationery Return Inwards Commission received Return Outward Trade Expenses Office furniture Cash in hand Cash at bank Rent and Taxes Carriage Outward Sales Bills Payable Creditors Capital
14,000 5,500 1,50,000 4,000 4,000 3,500 2,250
Total
457, 250
•
6,500 2,000 2,500 1,000 5,000 2,500 23,750 5,500 7,250 2,50,000 15,000 98,250 89,500
457, 250
Trading account of Kiran Trading Co as on 31st March 2000
Dr. Cr. PARTICULARS To Opening stock To Purchases 1,95,000 Less Return Outward 2,500
Add Carriage In 4000
AMOUN PARTICULARS T 2,50,000 5,000 By Sales Less return Inwards 6,500 Less Carriage Outward 7,250
1,92,50 Closing Stock
AMOUN T 2,36,25 0 1,25,00
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 11
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING 0 14,000 Total 1,45,75 0
To Wages Gross Profit Total •
3,61,250
3,61,250
Profit and loss account of Kiran Trading Co as on 31st March 2000 PARTICULAR
To Insurance To Commission paid To Interest on Capital To Stationery To Trade and Expenses To Rent and Taxes Net profit Total
•
0
AMOUN PARTICULAR T 5,500 By Gross Profit 4,000 3,500
AMOUNT
1,45,75 0 By Commission Received 2,000 Total 1,47,75 0
2,250 1,000 5,500 1,26,00 0 147,75 0
Balance Sheet of Kiran Trading Co as at 31st March 2000 LIABILITIES
Capital
AMOUNT
89,500
Add Net Profit 1,26,000
ASSETS Cash in Hand
2,15,50 0
Cash at Bank
AMOUNT
2,500 23,750
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 12
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING Bills Payable Creditors
15,000 98,250
Bills Receivable Debtors Furniture Closing Stock
Total
3,28,75 Total 0
22,500 1,50,000 5,000 1,25,000 3,28,750
Q.5: Write short notes on: Answer 5 a)
Accrued/ Outstanding Expenses: Certain expenses may have been incurred during the financial year, but will only be paid in the next financial year. Examples of such expenses is where accounts or invoices have been received for accounting fees, advertising, rent, rates and taxes, water and electricity, etc., which is applicable to the financial year but which is not yet paid at the end of the financial year. The expense account must be adjusted so that the expense account represents the expenses for the full financial year or 12 consecutive months (accounting periods or reporting periods). The amount by which the expense account is outstanding will increase the amount of the expense at the end of the financial year. At the end of the financial year a liability is created - Accrued or outstanding expenses because the amount of the expense is consumed or used but not yet paid. It is owed to the party who has supplied the expense item, which is already used up in the financial year.
To Identify, Enter the Transaction and to Post the Transaction to the Ledger: For example, when analyzing the figures on the pre-adjustment trial balance, it is discovered that the telephone expenses paid for the current financial year is R (£) 3 300. The telephone account for R (£) 300 of the last month of the financial year is received, but not yet paid. Enter the transaction in the General Journal. Enter the transaction in the batch. After entering the transactions in the general journal, the transactions is as follows: The expense for the telephone is recognized and recorded in the expense accounts which will result that the net profit will be decreased by the expense of R(£) 300, which is not yet paid as at the end of the financial year (29 February). It has also increased the current RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 13
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING liabilities, as it is an expense which is payable in the new financial year. An amount of R 3 600 will be recognized as an expense and not R (£) 3 300. The amount that should have been paid for the financial year is the amount on the preadjustment trail balance plus the amount of the outstanding expense not yet paid. The expenses are increased (debited) and current liabilities are increased (credited). Once these transactions have been processed and you have done the Year-end process in the Tools Global Processes - Do Year-end menu option, you need to reverse these adjustments in the new financial year. The reason for this is that these adjustments have served its purpose in the old financial year to assist you to generate the correct final financial statements.
5b)
Prepaid expenses: •
What Does Prepaid Expense Mean?
A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received in the near future. While prepaid expenses are initially recorded as assets, their value is expensed over time as the benefit is received onto the income statement, because unlike conventional expenses, the business will receive something of value in the near future. •
Investopedia explains Prepaid Expense
Due to the nature of certain goods and services, they must be prepaid expenses. For example, insurance is a prepaid expense, because the purpose of purchasing insurance is to buy proactive protection in case something unfortunate happens. Clearly, no insurance company would sell insurance that covers the occurrence of an unfortunate event, after the fact, so insurance expenses must be pre-paid. Prepaid expenses are those expenses which have been paid in advance. In other words, these are the expenses which have been paid during the accounting period for which the final accounts are being prepared but they relate to the next period. As the benefit of such RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 14
ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING expenses is received in the subsequent years, it will be treated as expenses of the coming years and not the year in which it is paid. Examples: Insurance premium has been paid in advance. Rent has been paid for the next year. •
Treatment of prepaid expenses in final account:
If prepaid expenses are given in the trial balance they are recorded in the assets side of Balance sheet only. But if they are given in the adjustments they are subtracted from concerned expenses in the debit side of profit and loss account and again are shown in the assets side of Balance Sheet.
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 15
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