Professional Documents
Culture Documents
(10 Marks)
Answer:
In order to meet the ever increasing demands made on accounting by different interested
parties (such as owners, management, creditors, taxation authorities and other govt. agencies
etc.) the various branches of accounting have come into existence.
These branches are as follows:
1. Financial accounting
2. Cost accounting
3. Managerial accounting
The above three branches of accounting are briefly discussed below:
1. Financial Accounting:
The main purpose of financial accounting is to ascertain the true result (profit or loss) of
the business operations during a particular period of time and to state the financial position
of the business on a particular point of time.
Financial accounting produces general purpose reports for the use by the great variety of
people who are interested in the organization but who are not actively engaged in its day-today operation.
2. Cost Accounting:
The main object of cost accounting is to determine the cost of goods manufactured or
produced by the business. It also helps the management of the business in controlling the
costs by indicating avoidable losses and wastes.
In order to set prices of the products of the companies, correct calculation of all
manufacturing as well as non-manufacturing costs is necessary. Cost accounting is also
helpful to accomplish this task.
3. Managerial Accounting:
The object of managerial accounting is to communicate the relevant information
periodically to the management of the business to enable it to take suitable decisions.
Financial accounting is the oldest and the other branches have developed from it according
to the need of different parties. The objects of financial accounting can only be achieved by
recording business transactions in a systematic manner according to a set of principles.
2. Distinguish between the cash system and the accrual system of accounting. (10
Marks)
Answer:
There are two main methods of accounting used in the business: cash accounting and
accruals accounting. The basic difference is the timing of income and expense recording.
The choice of the method depends on the factors like the nature of the business, ease of use
or regulations by the related laws.
In cash accounting income is recognized when cash is received or deposited and expenses
are recorded when bills are paid. Therefore transactions are recorded only when cash is
handed over. Consequently non-cash transactions are excluded (such as provisions and
revaluations).
In accruals accounting, economic events are recognized by matching revenues to expenses
(the matching principle) at the time in which the transaction occurs rather than when
payment is made (or received). Therefore accruals accounting measures the performance and
position of a company by combining current cash flows with future expected cash flows,
giving a more accurate picture of current financial condition.
The accruals concept and matching principle can be illustrated simply with the following
example. Suppose a business had the following transaction at given times:
On the 15 April Company receives payment for the goods sold on 15 March.
Accruals accounting is perceived as the standard practice in the business. Only in the certain
cases, the small companies still may prefer cash accounting as they are less likely to operate
on credits. Accrual method provides more accurate picture of companys current financial
condition and their financial statements are relatively more detailed. Accrual basis balance
sheets have more items to be listed as they record non cash transactions.
Following is an illustration of differences between cash basis and accrual basis financial
statements. Take an example of a weekend school operating on donations. At the end of the
fiscal year, school has recorded its transactions based on its check book to produce cash
basis income statement and balance sheet:
Cash basis statements
Income statement as at 31 December XXXX
Income
Grants
3.000
Contributions
4.500
25.000
Total Income
32.500
Expenses
Salaries
20,000
6.000
Insurance
4.250
Utilities
2.000
Telephone
750
3.500
Total expenses
36.450
Fixed assets
Property and equipment
120,000
Accumulated depreciation
<100,000>
Current assets
Cash
2.500
10,000
12. 500
All these activities have been taken from the check book, so these statements were produced
on cash basis. This results in some of the pertinent information missing from the statements.
Such as:
Local government authorities had given a grant of 15.000 to provide scholarship for
low-income students.
There have been some students who attended school during last academic year and
paid their fees in check, which has not been yet cashed. And this amounts 3.000 in
total.
The school management did not pay the final installment for some of the goods that
they bought last year. They still owe 2.000 to the creditors.
Company has already paid its insurance for the next 3 months in advance to the date
of this statement is made. Therefore we can deduct (4250/12) x 3 = 1.062 from the
insurance item.
If we want to take these factors into account all transactions need to be recorded on accrual
basis. In order to do this well add new items to financial statements and reproduce it on
accrual basis. Followings are accrual basis statements of this weekend school for the same
fiscal year.
Income
Grants
18.000
Contributions
4.500
28.000
Total Income
50.500
Expenses
Salaries
20,000
6.000
Insurance
3.188
Utilities
2.000
Telephone
750
5.500
Total expenses
37.438
Fixed assets
120,000
Accumulated depreciation
<100,000>
Current assets
Cash
2.500
Accounts Receivable
18.000
Prepaid Expenses
1.062
10,000
Accounts Payable
2.000
29.562
We have added three more items to reflect accruals on the balance sheet. These are accounts
receivables for the transactions which have not yet received, prepaid expenses which
have already paid and accounts payable for the items which company is liable to pay.
It is obvious that, accruals accounting requires more work to collect data and more resources
are needed other than check book. We can say that cash accounting is much easier in terms
of populating data and to produce financial statements. This is why still some of the small
companies prefer to use cash accounting.
The very obvious reasons for choosing cash accounting can be summarized as follows:
1. Cash accounting principles are easier to understand than that of the accrual
accounting principles.
2. Considering the costs involved in hiring accountants for accrual accounting, cash
accounting seems to be cheaper.
3. In terms of tax planning, cash accounting is more attractive since the company is
taxed on its current cash flow, not from the accounts receivables.
Given these advantages there are still companies which might see cash accounting more
attractive for their business. However accrual accounting is now regarded as a industry
standards and also not all companies has the freedom of choosing any accounting method
since it is controlled by the governmental authorities.
Date
Particulars
Cash A/C
20000
20000
To Capital A/C
4th Jan 2004
Good/Stock A/C
4000
4000
3000
To Good/Stock A/C
3000
500
To Good/Stock A/C
14th June 2004
To Good/Stock A/C
Mr. Srikant A/C
500
200
200
6. On 30th June 2010, Sanjay extracted the following balances from his book. (10 marks)
Answer:
Trail Balance of Mr. Sanjay as on 30th June 2010.
Particulars
Capital A/C
Salaries A/C
4000
Sales A/C
50000
Machinery A/C
Purchases A/C
30000
2000
Insurance A/C
600
Rent A/C
3000
2000
Drawings A/C
10000
5000
Bank A/C
9000
Cash A/C
4000
Stock A/C
10400
Debtors A/C
5000
3000
Set 2
1. Write short notes on the following: (10 Marks)
a. Group depreciation method
Answer:
A method of calculating depreciation by amalgamating assets into a pool, or group, which is
used for depreciation cost base. The assets grouped together should be similar in the way
they function, or each asset should be small enough that it is not considered material on its
own, which will make group depreciation more relevant for financial accounting purposes.
When pooling assets that are similar in nature, such as all of a company's delivery trucks that
travel about the same distance every year, a company can simplify its depreciation
calculation. However, before deciding to pool assets into one group, it is important to
consider how each asset will be depreciated individually, and if it makes sense to group this
asset with any others.
b. Double declining balance method
The double declining balance depreciation method is like the straight-line method on
steroids. To use it, accountants first calculate depreciation as if they were using the straight
line method. They then figure out the total percentage of the asset that is depreciated the first
year and double it. Each subsequent year, that same percentage is multiplied by the
remaining balance to be depreciated. At some point, the value will be lower than the straightline charge, at which point, the double declining method will be scrapped and straight line
used for the remainder of the assets life (got all that?). An illustration may help.
In our straight-line example, we calculated that a $5,000 computer with a $200 salvage value
and an estimated useful life of three years would be depreciated by $1,600 annually. The first
year, we have to compare this to the total amount to be depreciated, in this case, $4,800
($5,000 base - $200 salvage value = $4,800). Dividing $1,600 by $4,800, we discover the
straight-line depreciation charge of $1,600 is 33.33% of the total depreciation amount of
$4,800. Using this information, we double the 33.33% figure to 66.67%.
In the first year, we would take $4,800 multiplied by .6667 to get a total depreciation charge
of approximately $3,200. In the second year, we would take the same percentage (66.67%)
and multiply it by the remaining amount to be depreciated. Continuing with the example, we
find that $1,600 is the remaining amount to be depreciated at the start of the second year
($4,800 - $3,200 = $1,600). Multiply 1,600 by .6667 to get $1,066. This is the depreciation
charge for the second year or not! Remember that once the depreciation charges dip below
the amount that would be charged using the straight-line method, the double declining
balance is scrapped and straight line immediately utilized. The straight line method called
for charges of $1,600 per year. Obviously, the $1,066 charge is smaller than the $1,600 that
would have occurred under straight line. Thus, the deprecation charge for the second year
would be $1,600.
For those of you who love algebra, you may find it easier to use this equation:
Balance Sheet
Expenses due but not paid and incomes Expenses due but not paid appear on the
due but not received do not appear in
liability side and income due but not
the trial balance
received appear on the asset side of the
balance sheet.
3. What are the key accounting norms concerning borrowing costs and segment reporting.
(10 Marks)
Answer:
4. List out the advantages and disadvantages of single entry system. (10 Marks)
Answer:
In every business, you need to have a day to day record for all the financial transactions.
Whether the business is small, medium or large, there must be records that include purchase,
sales, income, and payment by an individual or in a organization. A bookkeeping service
plays a big role in the business, it would help you records all the transaction that was done in
your business.
The one who does bookkeeping is what we called bookkeeper. These persons are the one
who records all day to day transactions on what are called "daybooks", it includes the
receipts, sales and payments or any record purposes. It is a systematic process that has two
methods that can be used to simplify the task. These methods are Single-Entry System and
Double-Entry System.
The Single-Entry System works like a normal check book in that it documents all the
expenses but this is only suitable for small companies with simple financial statement since
it does not rely in equal debits and credits. It may be easy compared to double-entry system
but it has lot of disadvantages.
Two Disadvantages of Single-Entry System
1. Two fold aspects of transactions are generally ignored because in this system,
only partial and incomplete record is maintained.
2. A trial balance cannot be drawn up to test the arithmetical accuracy of the
records. As the two fold aspects of transactions are not recorded.
The double-entry system is more sophisticated compared to single-entry
system. This method needs to be accurate because its entries must balance.
This system needs debits and credits and their amounts must be exactly the
same to be able to extract accurate financial statement. This system is very
reliable; the advantage here is that most of the double entry systems in the
market will not let the user proceed if the amounts do not match, thus forcing
balanced entries. For those who have small business, they prefer to use this
system because of its error prevention and at the same time it is easy to use
when producing statements directly from the account list.
5. The following errors were committed by the accountant of Geetha Dye Chemicals:
Solution:
Assuming that the errors were deducted after preparing Trail Balance but before
preparing final A/cs. (the difference being taken to Suspense A/c)
JOURNAL
a
Suspence A/C
Dr.
To Triman Chemicals
A/c
Stationery A/c
Dr.
To Suspence A/C
Office Furniture A/C
Dr.
To Office
Expenses A/C
Trivedi & Co. A/C
Dr.
To Suspence A/C
Sales A/C
Dr.
Purchase A/C
To Mantri & Co.
180
180
150
150
260
260
600
600
240
420
660
6. The following balances have been extracted from the books of accounts of M\s.
Jyothi Home Industries, Mysore. Prepare Trading and Profit and Loss Account for the
year ending 31st December, 2010. (10 Marks)
Solution
To Opening Stock
To Purchases
Less: return
outward
To Carriage
inwards
To Wages
To Gross Profit C/d
Salaries
Trade expenses
Sundry expenses
Postage and
Telegrams
Insurance
Printing and
stationery
Rent and Taxes
Carriage Outwards
Travelling
expenses
Bad debts
To Net profit
transferred to
capital a/c
1,65,0
00
5,000
50,000 By Sales
Less: sales
inward
1,60,0 By closing
00 stock
4,000
30,000
51,000
2,95,0
00
By Gross Profit
8,000 B/d
1,000 Interest earned
Commission
1,000 Earned
Bad debts
1,000 recovered
1,000
2,75,0
00
15,000
2,60,0
00
35,000
2,95,0
00
51,000
4,000
3,000
50
500
2,000
2,000
3,000
500
38,050
58,050
58,050