Sem-1 Management Accounting 1

Question 1 Define Accounting & Explain it’s objective? Answer

Accounting has rightly been termed as a language of the business. The basic function of business is to serve as a mean of communication. Accounting communicates the result of the business operations to various interested parties such as owner, creditors, investors, government and others agencies. In business, the need for accounting is of great importance. Accounting records gives position as to:a) What the business owns (Assets & properties) b) What the business owns (Liabilities) c) What is the extent of profit earned or losses suffered in an accounting period(Profit & Loss) d) What is the capability of the business to honor the financial commitment and obligations, as and when they fall due (Liquidity) Accounting has been recognized as a tool for mastering various economic problems. It provides information which can be taken into the decisions to decide the future of the organization. Definition of Accounting Accounting can be defined as art of recording, classifying and summarizing in terms of money transaction and events of financial character and interpreting the results thereof. According to “American Accounting Association ”, accounting is the process of identifying, measuring and communicating information to permit judgment and decisions by the users of accounts. Objectives of Accounting 1. To keep systematic records :- Accounting is done to keep the systematic records of the financial transaction. In the absence of accounting it would become very difficult for a businessman to keep a proper record of transactions of the business. 2. To protect business properties ;- Accounting is done to protect the business properties from unjustified and unwanted use. This is done by providing the following information as under a) What the business owns? b) What the business owes? c) What amount of owner’s fund invested in business? d) What amount had a business has to recover from others?

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3. To ascertain the operational profit or loss: One of the main objectives of accounting is to ascertain the operational profit and loss in an accounting period. This is done by properly maintaining the of revenue & expenses for a particular period. 4. To ascertain the financial position of the business: Ascertaining the financial position of the business required the operation of balance sheet and Profit & Loss A/c shows the performance of business during a given period. Balance sheet shows the state of affairs of assets and liabilities on a given point of time. 5. To help rational decision marking :- Accounting has been recognized as a tool for mastering various economics problems. It’s objective is to provides information which can be used to taken decisions to decide the further of the organization. Thus to conclude we can say that “Accounting is the language of business through which the business house communicates”. _*_*_*_*_*_*_ Question 2. Explain the meaning & significance of the following :a) Dual Aspect b) Consistency c) Materiality d) Full Disclosure e) Cost Concept Answer…2 a) Dual Aspect:- Dual Aspect concept is the basis principal of accounting. According to this concept , every transaction has a dual aspect i.e. two fold effect. The principal is also called “Double-Entry System”. For example- If Mr. Divya purchase a furniture for Rs. 10000/- in cash, than the two fold effect in this transaction is increasing in asset i.e. cash. Thus the accounting equation which it gives is Assets = Liabilities + Capital b) Consistency:- Consistency is one of the accounting conventions. According to this convention accounting practices should remain the same from one year to another year. For example in case of charging depreciation either straight line method of written down method should be consistently followed. However, consistency does not mean inflexibility. If due to change in law or any other requirement a change is required in the current system then this convention can be broken and the effect of this change on profit or loss should be disclosed in the notes of accounts.

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c)

Materiality :- Materiality is one of the accounting convention. According to this convention an accountant should attach importance to material details and ignore insignificant details. Now what is material and what is immaterial is left to the discretion of accountant should treat an item, as material if the knowledge of it would influence the decision of investors. The importance of this convention is that it helps in avoiding unnecessary burden on accounting.

d) Full Disclosure :- According to this convention all significant information should be disclosed fully & fairly. Account should be honestly prepared and all the material information which is important to the creditors, investors, owners, government & other agencies which should be duly disclosed. e) Cost Concept :- Cost concept is one of the accounting concept. According to this concept asset is recorded at the price paid to acquire it. This cost is the basis for all subsequent accounting a for the asset. For example Mr Nigam plot of land purchased for Rs 500000/- will be recorded at this value, irrespective of market prices. One of the advantage of cost concept is that it brings objective in the presentation of financial statements. _*_*_*_*_*_*_ Question.3 “Trial Balance is a conclusive proof of Accounts”- Comment. Answer ..3 A statement is made after the prepration of ledger to shoe separately the debit & credit balances. This statement is known as Trial Balance. The arithmetical accuracy ensured by the agreement of trial balance is not a conclusive proof of accuracy. There exists a scope of following errors:i)

Omission of an entry in the original books:- If an entry is omitted from being recorded in the book of accounts it will not affect the trial balance. For example if goods are sold on cash and this fact is omitted from being recorded in the original books, than effect of it would neither come in Sales A/c nor in Cash A/c but the trial will agree.

ii)

Positing an item on correct side but to the wrong A/c :- If an item is posted on correct side but to a wrong A/c than also trial will agree. For example- if a good are purchased on credit from Ram, but by mistake we have credited in Rema A/c in place of Ram A/c, in this case trial will not be affected.

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iii)

A wrong amount is entered in the books:- If by mistake wrong amount is entered in the books in that case also trial will not be affected For example- Purchase of good worth Rs 6000/- is wrongly entered in purchase journal but still trial will agree.

iv)

Compensating Errors:- When two or more errors are committed in such a way that one error nullifies the effect of another error. For example- a bookkeeper by mistake forgets to post Rs 1000/- on debits side of a certain A/c and similarly forgets to post Rs 1000/- on credit side of another A/c. This will have no effect on trial .

v)

Error of Principle :- If fundamental principle of accounting are not followed while recording a transaction it is known as error of principal. Fore Example- wrong allocation of expenses between capital & revenue, treating direct expenses as indirect expenses. Such errors also not detected by trial balance.

vi)

Errors of duplication:- When a transaction is recorded twice in the book of account it is known as “Error of duplication”. Such error also have no effect on trial.

Thus in spite of all the limitations, preparation of the trial balance is important before preparation of final account. _*_*_*_*_*_*_ Question.4 You are required to pass the rectification entries & redraft the Trial Balance Answer..4 Trial Balance Particular i) Drawings A/c Dr To Purchase (Being the error rectified) ii) R’s A/c Dr To H’s A/c To Suspense (Being the error rectified) iii) Fittings A/c Dr To Salaries & Wages (Being the error rectified) iv) Suspense A/c Dr To Atul (Being the error rectified) v) Suspense A/c Dr

Dr. 1500

Cr. 1500

1250 250 1000 500 500 5000 5000 1000

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To Arun’s A/c To Ajay’s A/c (Being the error rectified) vi) Debtor’s A/c Dr. To Purchase A/c To Sales (Being the error rectified) vii) Purchase A/c Dr Sales A/c Dr To Creditors A/c (Being the error rectified)

500 500 3000 1500 1500 2000 2000 4000

Redrafted Trail Balance Particular Dr Capital Drawings( 6500+1500) Purchase (92750+2000-1500-1500) Sale (1,07,200+1500-2000) Salary & Wages (12250-500) Fur. & Fittings (17500+500) Debtors(30,250+3000) Creditors (21,250+4000) Stationery Cash at bank B/R B/P Rent & Rates K’s A/c Atul’s A/c H’s A/c Arun’s A/c Ajay’s A/c Cash in hand

Cr 4500

8000 91750 106700 11,750 18,000 33,250 25250 1,250 5,700 15,750 9000 3200 1250 5000 250 500 500 2300 1,92,200

1.92,200

_*_*_*_*_*_*_ Question.5 What are the causes of difference in the bank balance as shown by the cash book & the pass book. Answer..5

Assets are the causes of difference in the bank balance as shown by the cash book & pass book. It is not necessary that on a particular date balance shown by cashbook & pass book agree. The reasons for such difference in cash book & pass book are

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1) Cheques deposited into bank but not yet collected or credited by bank:- When Cheques are deposited into the bank, in the books of concern’s account bank A/c is debited but the bank will not credit the concern’s A/c until cheques are collected and credited by bank. 2) Cheques issued but not yet presented for payment:- When cheques are issued in the books of the concern’s account the bank A/c is credited but the bank will not debit the concern’s A/c until cheques are presented for payment in the bank. 3) Bank Charges: - Bank renders many services to it’s clients and charges for providing services. Entry for such charges are made by bank but the corresponding entry for it in the concern’s book is not made until the concern receives a statement from the bank showing such charges. 4) Amount collected or credited by bank on standing instructions:Often concern issues standing instructions to bank to collect on it’s behalf dividends, interest on investments etc. Banks after collecting such amount credit the concern’s A/c but the concern will not debit in bank A/c but it receives instruction from the bank showing such collection made by the bank. 5) Amount paid or debited by bank on standing instruction:- Often concern issues standing instructions to bank to pay on it’s behalf the insurance premium, rent, payment of installments etc. The bank often making such payments debit the concerns A/c but the concern will not credit the bank A/c until it receives a statement from the bank showing such payment made by the bank. 6) Interest credited by bank :- If banks provide some interest on Current A/c than it will credit the concern’s A/c with the amount of such interest but the corresponding entry for it will not appear in the concern’s book until it receives an statement from the bank. 7) Interest debited by bank on overdraft :- If bank has provided an overdraft to the concern than bank will debit the concerns A/c with amount of interest to be changed on such overdraft. But the corresponding entry for it will not appear in the concern’s books until it receives a statement from bank. 8) Direct payment by customer in the bank:- Sometimes customers directly deposit the money in the concern’s A/c in the bank. The

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bank after receiving such payments will credit the concern’s A/c to corresponding entry for it will not appear in concern’s books until a statement is received by it. 9) Dishonor of Cheque of Bill:- If any cheque of bill of a concern is dishonored than the bank will not credit the concerns A/c however the bank A/c has already been debited in the concern’s book when the cheque were deposited. 10) Errors :- Errors in recording of transaction may also result in difference in balance. Ex–cheque forgotten to send to bank but are already entered in cash book. _*_*_*_*_*_*_ Question.6 From the particulars prepare the bank reconciliation statement as on 31st December 2000 Answer...6 Bank Reconciliation Statement as on 31st , December 2000 Particular

Amount

Balance as per Cash Book Add Cheque Issued but not presented for payment (5000-4000) Direct deposit by customer

Amount 6000

1000 500

1500

. 7500 Less Cheque deposit but not yet credited Cheque deposit but dishonored Bank charges debited by bank Balance as per pass book

1400 400 20

1820 5680

_*_*_*_*_*_*_

Question.7

Prepare Machinery Account for the year 1999. Page 7 of 12

Answer...7

Machinery Account Date 1.1.99 1.7.99

Particular To balance b/d To bank (150000+8000)

Amount Date 9,72,000 1.7.99 1,58,000 1.7.99 31Dec 99 31Dec 99 31Dec

Particular Amount By bank 45,000 By P& L A/c 16,560 (Loss on sale) By P&L A/c 11,200 (Additional Dep) By depreciation 1,23,140 By balance c/d

9,34,100

99 11,30,000

11,30,000

Working Note : a. Calculation of the profit or loss on sales of machine : Cost of machinery on 1.1.97 = 80000 Less Deprecation for the year = 8000 st Closing Balance of machine on 31 Dec 97 72000 Less Deprecation for the year = 7200 Closing Balance of machine on 31st Dec 98 64800 Less Deprecation for the year = 3240 Closing Balance of machine on 31st Dec 99 61560 Therefore, loss on Sale = 61560-45000 =16560 b. Calculation of additional depreciation: Cost of machinery on 1st Jan 97 972000 x (100/90) x (100/90) = 12,00,000 Less cost of Machinery sold = 80,000 11,20,000 Depreciation as per WDL For the year 1997 = 1120000 x (10/100) = 112000 For the year 1998 = 1008000 x (10/100) = 100800 Total Depreciation as per WDV -> 212800 Depreciation as per SLM For the year 1997 = 1120000 x (10/100) = 112000 For the year 1998 = 1120000 x (10/100) = 112000 Total Depreciation as per SLM -> 224000 c. Calculation of depreciation for the current year : a) Dep on new machinery purchased= 158000 x (10/100) x (5/12) = 7900

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b) Dep on machinery sold = 3240 (Half year’s Dep) c) Dep as per sum on balance of machinery = 112000 x (10/100) = 112000 Total depreciation for current year = 7900+3240+112000 = 123140 _*_*_*_*_*_*_ Question.8 Distinguish between:Answer..8 CAPITAL EXPENDITURE REVENUE EXPENDITURE 1. Capital Expenditure is incurred 1. Revenue Expenditure is incurred either for acquiring a new asset for maintaining existing fixed or for improving the existing asset or for meeting the routine asset expenses of business. 2. Capital Expenditure increases earning capacity of business. 3. Benefits of capital expenditure are available over a period of time. 4. Capital expenditure is record-ed in balance sheet.

2. Revenue expenditure helps is maintaining the existing capacity of business. 3. Benefits of Revenue Expenditure restricted only to account period in question. 4. Revenue expenditure is transfer-red either to trading or profit & loss A/c

CAPITAL RECEIPT

REVENUE RECEIPTS

1. Capital Recipts are normally of non-recurring nature 2. Receipt which are not revenue are regarded as capital receipts

1. Revenue Receipts are normally of recurring nature. 2. Revenue receipts are obtained in in course of normal trading operations. 3. Capital receipts are not directly 3. Revenue receipts are directly credited to income statement. Credited to income statement. 4. Capital receipt are normally not 4. Revenue receipt are available for available for payment as profit distribution to the owner of the to the owner of business. Business. _*_*_*_*_*_*_

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Question.9 Prepare Manufacturing Trading Profit & Loss Account for the year ended 31st March 1998& balance sheet as at the end of the year. Answer..9

Manufacturing Account Particular To opening stock 12000

Amount 5000

Particular By closing stock

To Raw material consumed Add Op-Stock 30000 Add Purchase 250000 Less Cl-Stock 40000

240000

(work in progress) By bal t/f to Trading A/c

To Carriage inward To Wages To Salaries To rent rates & taxes To Traveling & Convy. To Dep. on furniture

4000 50000 19500 6000 875 200 3,25,575

Amount

313575

3,25,575

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Trading and Profit & Loss Account For the year ended 31st March 1998 Particular

Amount

Particular

To manufacturing A/c To Op-Stock (Finished good) To Purchase To Gross Profit

313575 16000

By closing stock (finished goods) By Sales

400000

By Gross profit b/d By prov. for doubtful debt

408000 70425 500

To Salaries 6500 Add O/s 2400 To commission To bad debts To insurance 4000 Less prepaid 600 To Rents &taxes To Communication To Tea & Tiffin To Trav. &Conv. To Carriage outward To dep on machinery To dep on furniture (10% of 3000) To Net profit t/f to capital A/c

8000 70425 408000 8900

Amount 8000

3000 2000 3400 6000 2800 1600 2625 4000 4000 300 33700 70925

70925

Balance Sheet as on 31st March 1998 Liabilities Capital 72000 Add Net Profit 33700 Outstanding Salary Creditors

Amount 105700

2400 50000

Assets

Amount

Closing Stock Work in Progress 12000 Raw Material 40000 Finished goods 8000 Insurance prepaid Debtors 60000 less Prov.for Debts 3000 Machinery 40000 less dep. 4000 Furniture 50000

60000

600 57000 36000

4500 less Dep.

500

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158100

158100

Question.10 Under what headings, the following items will be classified. a) Preliminary Expenses b) Unclaimed dividend c) Bills Receivable d) Loose tools e) Share Premium Account Answer..10 Balance Sheet as on…… Liabilities CURRENT LIABILITIES & PROVISIONS: Current Liabilities: Unclaimed dividend

Amount

Assets

Amount

RESERVES & SURPLUS Share Premium Account xxxx

CURRENT ASSETS, LOANS & ADVANCES: Current Assets: Loose Tools xxxx Loans & Advances Bill Receivable xxxx MISCELLANEOUS E XPENDITURE: Preliminary Expenses xxxx

xxxx

xxxx

xxxx

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