Mb0025 Financial And Management Accounting

1. Explain any two accounting concepts with example? Concepts are the basic assumptions or conditions up on which the science of accounting is based. There are five basic concepts of accounting namely – • • • • •

Business entity concept, Going concern concept, Money measurement concept, Periodicity concept and Accrual concept.

Business separate entity concept: The essence of this concept is that business is a separate entity and different from the owner or the proprietor. This is true in the case all forms of organization. If X starts business, he should not mix up his personnel properties with that of the business. When he invests his funds into the business, it is regarded as capital to the business and capital is a liability from the business point of view. If X withdraws any money fro the business, it is detectable form the capital and to that extent the liability of the business towards the owner is reduced. On the other hand, if the proprietor withdraws money form the business for business purposes, then it is treated as expenditure to the business. This legal separation between business and ownership is kept in mind while recoding the transactions in the books of business. Going concern concept The fundamental assumption is that the business entity will continue fairly for a long time to come. There is no reason why an enterprise should be promoted for a short period only to liquidate the business in the foreseeable future. This assumption is called “Going concern concept”. For this reason accountants value fixed assets on historical cost method. Had the business been setup to last for short period, fixed assets should have been valued at a market price. Besides, going concern concept provides for amortization of the cost of fixed assets over the lifetime of the assets. For example, an entrepreneur purchases a plant for Rs. one crore and it has a life of 10 years. During this period, he sets aside every year certain funds from the income of the business so that it would help him for replacement of the asset at the end of ten years. This process of amortization presupposes that the enterprise will continue to do business fairly for long time. Set 1

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2. Prove that accounting equation is satisfied in all the

following transactions of Mr. X i. Commenced business with cash – Rs 80,000 ii. Purchased goods for cash –Rs 40,000 and on credit Rs. 30,000 iii. Sold goods for cash –Rs. 40,000 costing Rs. 25,000 iv. Paid salary – Rs. 2,000 and salary outstanding Rs. 1,000 v. Brought scooter for personal use for cash at Rs. 20,000 The accounting equation is, Equity [Working Capital] + Liabilities + Assets i.

Commenced business with cash – Rs 80,000

In the first transaction, the business receives a capital of Rs. 80,000 cash and so capital account and cash accounts are affected. Capital is a liability and cash is an asset to the business. This is shown in the transaction number 1, in the table. ii.

Purchased goods for cash –Rs 40,000 and on credit Rs. 30,000

In this transaction, cash account, goods account and liabilities account gets affected. Cash account reduces by Rs. 40,000 Goods account increases by Rs. 40,000 Liabilities account increases by Rs. 30,000 This is shown in the transaction number 2, in the table. iii.

Sold goods for cash –Rs. 40,000 costing Rs. 25,000

In this transaction, goods account, cash account and profit account gets affected. Cash account increases by Rs. 40,000 Goods account reduces by Rs. 25,000 Profit account being owner’s account, it gets credited with Rs 15,000 This is shown in the transaction number 3, in the table.

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iv. Paid salary – Rs. 2,000 and salary outstanding Rs. 1,000 In this transaction, cash and salary accounts are affected. Cash account reduces by Rs. 2,000 ans salary account gets credited by Rs. 2,000 Outstanding salary is Rs. 1,000 which is not paid yet, hence non of the accounts gets affected. This is shown in the transaction number 4, in the table. v. Brought scooter for personal use for cash at Rs. 20,000 The scooter is for personal use, the liability of the business on owner’s capital decreases. Cash account and capital account decreases by Rs. 20,000 This is shown in the transaction number 5, in the table. Assets Goods a/c

Transaction Number

Cash a/c

1

80000

2

-40000

70,000

3

40000

-25000

4

-2000

5

-20000 58000

Salary a/c

Liabilities and owner's equity Mr.X's Liabilities Capital 80000 30000 15000

2000 -20000 45000 105000

2000

30000

75000 105000

3. Show the rectification of entries for the following a. the sales account is undercast by Rs.15,000 b. Goods returned by customer Mr. X of Rs.5650 has been posted in return inward account as Rs.5560 and in Mr. X’s account as Rs. 6550 c. Salary paid Rs.6,000 has been posted to rent account. d. Cash received from Ram posted to Shyam account Rs. 7000 e. Cash received from jadu Rs. 8640 has been posted to the debit of Madhu’s account.

Set 1

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The below table shows the rectification of entries Particulars

Debit [Rs.]

Suspense account

Dr

15,000

To Sales account Suspense account

15,000 Dr

90

To Return account Mr. X’s account

90 Dr

900

To Suspense account Salary account

Dr

900 6000

To rent account Shyam account

6000 Dr

7000

To Ram account Jadu account

Credit [Rs.]

7000 Dr

To Madhu account

8640 8640

4. The

following balances are extracted from the books of Kiran Trading Co on 31st March 2000. You are required to prepare trading and profit and loss account and a balance sheet as on that date:

Opening Stock B/R Purchases Wages Insurance Sundry Debtors Carriage

Set 1

5,000 Commission 22,500 1,95,000 14,000 5,500 1,50,000 4,000

received Return Outward Trade Expenses Office furniture Cash in hand Cash at bank Rent and Taxes

2,000 2,500 1,000 5,000 2,500 23,750 5,500

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Inwards Commission

4,000 Carriage

7,250

Paid Interest

Outward 3,500 Sales

2,50,000

on

Capital Stationery Return Inwards

2,250 6,500

Bills Payable Creditors Capital The closing stock was valued at Rs.1,25,000

15,000 98,250 89,500

Trading account of M/s Kiran Trading Co Trading Account Dr

Cr

Opening stock

5,000 Sales - Return Inward

Purchases - Return Outward Carriage Inwards Wages Gross Profit

192,500 Closing Stock

243,500 125,000

4,000 14,000 153,000 368,500

368,500

Profit and Loss Account of M/s Kiran Trading Co

Profit and Loss Account

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Dr

Cr

Rent and Taxes

5,500 by Trading a/c Gross Profit

Insurance

5,500 Comission Received

Trade Expenses

1,000

Commission Paid

4,000

Interest on Capital

3,500

Staionary

2,250

Carriage Outward

7,250

Net Profit

153,000 2,000

126,000 155,000

155,000

Balance Sheet Account of M/s Kiran Trading Co

Balance Sheet Capital and Liabilities

Assets

Bills Payable

15,000 Sundry Debtors

150,000

Capital

89,500 Office Furniture

5,000

Creditors

98,250 Cash in Hand

2,500

126,000 Cash in Bank

23,750

B/R

22,500

Net Profit from P & L Account

Closing Stock 328,750

125,000 328,750

5. Write a note on: a. outstanding expenses b. prepaid expenses

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a. Out standing expenses: Expenses due but not paid are known a outstanding expenses. Wages, salaries, rent, commission etc payable in the current month are paid in the following month. If the final accounts are prepared for the year ending 31st December, then the expenses payable for December will be paid in January of next year. The extent to which the amount belongs to the current year but payable in the next year is called outstanding expenses. To record that aspect, the journal entry drawn in the journal proper is: Concerned Expenses account

Dr

To outstanding expenses account. Outstanding expenses account indicates liability for the current year and it will appear in the balance sheet. b. Prepaid expenses: Expenses paid in advance are regarded as prepaid expenses. Prepaid expenses form an asset and therefore prepaid expenses account is debited. For example, insurance premium is paid from April, 2004 to March, 2005; and the amount is Rs. 3600. The financial year ends by 31st December, 2004. Therefore the premium relating to Jan, Feb. and March of 2005 Rs. 900 is said to have been paid in advance. To record this internal adjustment, the entry is: Prepaid Expenses account

Dr 900

To insurance account 900 Note that outstanding or prepaid expenses accounts are regarded as personal accounts.

Set 1

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