Gaurav Kumar (EPGDM Term1) 33rd Batch

Question1: State the accounting assumption or principle that describes each of

the given situations.

Situation 1 – Person and business transactions are separately maintained

Solution: Accounting Entity Concept (Assumption)

A company is considered a separate “living” enterprise, apart from its owners. In

other words, a corporation is a “fictional” being:
 It has a name.
 It has a birth date and birthplace (referred to as incorporation date and place,
respectively).
 It is engaged in clearly defined activities.
 It regularly reports its financial health (through financial reports) to the general
public.
 It pays taxes.
 It can file lawsuits.

Situation 2 - Inventory is recorded at its purchase price

Solution: Consistency Concept (Assumption)

Companies can choose among several different accounting methods to measure the
monetary value of their inventories. What matters is that a company consistently applies the same
inventory method across different fiscal years.

Situation 3 - The death of the chief executive officer of the company is not recorded in
accounts.

Solution: Money Measurement Concept (Assumption)

Financial statements have limitations; they show only measurable activities of a

corporation such as its quantifiable resources, its liabilities (money owed by it), amount of
taxes facing it, and so forth. For example, financial statements exclude:
 Internally developed trademarks and patents (think of Coke, Microsoft, General
Electric)—the value of these brands cannot be quantified or recorded.
 Employee and customer loyalty—their value is undeterminable. Since financial
statements show only measurable activities of a company, they must be reported
in the national monetary unit: U.S. financial statements are reported in U.S.
dollars (Exhibit 2.2); European financial statements now use the euro as a
standard monetary unit.

Situation 4 - In case of doubt, it is considered better to understate rather than overstate

income.

Solution: Conservatism (Principles)

Financial statements should be prepared with a downward measurement bias. Assets

and revenues should not be overstated, while liabilities and expenses should not be understated.
Situation 5 - Assets are not stated at their liquidation value

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Gaurav Kumar (EPGDM Term1) 33rd Batch

Solution: Cost Concept (Assumption)

The fundamental concept of accounting closely related to the going concern concept
is that an asset is recorded in the books at the price paid to acquire it and that this concept is
the basis for all subsequent accounting for the assets.

Situation 6 - Financial Statements are prepared on an annual basis

Solution: Accounting Period Concept (Assumption)

Normally accounting period adopted is one year as it helps to take any corrective
action, to pay income tax, to absorb the seasonal fluctuations and for reporting to the
outsiders. A period of more than one year reduces the utility of accounting data.

Situation 7 - Expenses are recognized in the same period as the related revenues

Solution: Matching Concept of accrual Accounting (Principle)

Under the accrual basis of accounting, expenses are matched with the related
revenues and/or are reported when the expense occurs, not when the cash is paid.

Situation 8 - Revenue is recognized when it is earned and expense is recognized when it

is incurred

Solution: Revenue Recognition of accrual Accounting (Principle)

Accrual basis of accounting dictates that revenues must be recorded when earned and
measurable.

Situation 9 - The accounting records only events that affect the financial position of the
entity and at the same time can be reasonably determined in monetary terms.

Solution: Money Measurement Concept

Financial statements should be prepared with a downward measurement bias. Assets

and revenues should not be overstated, while liabilities and expenses should not be
understated.

Situation 10 - Same treatment is given to comparable transactions from period to period

Solution: Consistency

For each company, the preparation of financial statements must utilize measurement
techniques and assumptions that are consistent from one period to another.

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Gaurav Kumar (EPGDM Term1) 33rd Batch

Question 2: The manager of a company who did not have proper accounting
knowledge prepared the following balance sheet. He has wrongly classified the
items under assets, liabilities and owners’ equity.

Balance Sheet
Owner’s Equity and Rs Assets Rs
Liabilities
Share Capital 10,00,000 Retained Earnings 5,00,000
Equipment 9,00,000 Land and Buildings 7,00,000
Cash 2,00,000 Long – term loan 4,00,000
Accounts Payable 2,00,000
Accounts Receivables 3,00,000
21,00,000 21,00,000

Required: Prepare the correct Balance sheet

Solution:
Balance Sheet
Owner’s Equity and Rs Assets Rs
Liabilities
Share Capital 1000000 Equipment 900000
Retained Earnings 500000 Cash 200000
Accounts Payable 200000 Land and Buildings 700000
Long – term loan 400000 Accounts Receivables 300000

2100000 2100000

Question 3: Using Accounting Equation, Answer the following independent

Questions

A) New Company’s assets are Rs 250 Lakh and its external liabilities are of Rs 100
Lakh, determine the amount of owner’s Equity.

Solution:
Owner’s Equity = Company’s Assets – External Liabilities
= 250 Lakh – 100 Lakh
= 150 Lakh

Owner’s Equity = 150 Lakh

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 Gaurav Kumar (EPGDM Term1) 33rd Batch

B) Royal Industries has total assets of Rs 100 Lakh and owners’ Equity of Rs 70 Lakh,
Compute the amount of external liabilities.

Solution:
Owner’s Equity = Company’s Assets – External Liabilities
External Liability = Company’s Assets – Owner’s Equity
= 100 Lakh – 70 Lakh
= 30 Lakh

External Liability = 30 Lakh

C) Small Enterprise has following amounts appearing in Balance Sheet as at

31st December, 2015:

Capital Rs 50 Lakh, Reserves and undistributed profits Rs 15Lakh, and total

external liabilities Rs 35 Lakh, Determine the amount of total assets.

Solution:
Total Assets = Capital + Reserves and undistributed + External Liabilities
= 50 Lakh + 15 Lakh + 35 Lakh
= 100 Lakh

Total Assets = 100 Lakh

Question 4: Journalize the following transactions, Post them into ledger account
and prepare a Trial Balance.
2017
March – 1 Commenced business with cash Rs.1,00,000
March – 2 Purchased goods for cash Rs. 25,000
March – 3 Purchased furniture for cash Rs. 6,000
March – 5 Purchased goods from Suresh on credit Rs. 5,000
March – 7 Sold goods for cash Rs. 30,000
March – 10 Sold goods to Mahesh on credit Rs. 25,000
March – 12 Returned goods to Suresh Rs. 500
March – 13 Mahesh returned us goods worth Rs. 500
March -15 Paid Rs. 4,450 to Suresh by cheque in full settlement of his account
March – 20 Received a cheque of Rs. 24,450 from Mahesh and gave a discount of Rs. 50
March – 25 Withdrew cash for personal use Rs. 2,500
March – 28 Paid rent of Rs. 5,000 and Salary Rs. 6,000 by cheque

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Gaurav Kumar (EPGDM Term1) 33rd Batch

Solution:

Journal Entry
For the Month of March 2017
Date Particular LF Dr. (Amt Rs.) Cr. (Amt Rs.)
Mar-01 Cash A/C ...Dr 1,00,000
To Capital A/C 1,00,000
(Being Capital brought in)
Mar-02 Purchase A/C ...Dr 25,000
To Cash A/C 25,000
(Being Goods purchased by cash)
Mar-03 Furniture A/C ...Dr. 6,000
To Cash A/C 6,000
(Being Furniture purchased by cash)
Mar-05 Purchase A/C ...Dr. 5,000
To Suresh A/C 5,000
(Being Goods purchased by credit)
Mar-07 Cash A/C ...Dr. 30,000
To Sales A/C 30.000
(Being Goods sold by cash)
Mar-10 Mahesh A/C ...Dr. 25,000
To Sales A/C 25,000
(Being Goods sond by credit)
Mar-12 Suresh A/C ...Dr. 500
To Purchase Return A/C 500
(Being Goods returned to Suresh)
Mar-13 Sales Return A/C ...Dr. 500
To Mahesh A/C 500
(Being goods returned by Mahesh)
Mar-15 Suresh A/C ...Dr. 4,500
To Bank A/C 4,450
To Discount A/C 50
(Being Payment made and discount received from Suresh
Mar-20 Bank A/C ...Dr. 24,450
Discount A/C ...Dr. 50
To Mahesh A/C 24,500
(Being Payment received and discount allowed to Mahesh)
Mar-25 Drawings A/C ...Dr. 2,500
To Cash A/C 2,500
(Being amount withdrawn by proprietor)
Mar-28 Rent A/C ...Dr. 5,000
To Bank A/C 5,000

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Gaurav Kumar (EPGDM Term1) 33rd Batch

(Being Rent paid for the Month of March 2017)

Mar-28 Salary A/C ...Dr. 6,000
To Bank A/C 6,000
(Being Salery paid for the month of March 2017)
Total 2,34,500 2,34,500

Ledgers:

Dr. Capital A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-31 To Balance b/d 100000 Mar-01 By Cash 100000

Total 100000 Total 100000

Dr. Cash A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-01 To Capital 100000 Mar-02 By Purchase 25000
Mar-07 To Sales 30000 Mar-03 By Furniture 6000
Mar-25 By Drawings 2500
Mar-30 By Balance b/d 96500

Total 130000 Total 130000

Dr. Bank A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-20 To Mahesh 24450 Mar-15 By Suresh 4450
Mar-28 By Rent 5000
Mar-28 By Salary 6000
Mar-31 By Balance b/d 9000
Total 24450 Total 24450

Dr. Purchase A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-02 To Cash 25000 Mar-31 By Balance b/d 30000
Mar-05 To Suresh 5000
Total 30000 Total 30000

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Gaurav Kumar (EPGDM Term1) 33rd Batch

Dr. Sales A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-31 To Balance b/d 55000 Mar-07 By Cash 30000
Mar-10 By Mahesh 25000

Total 55000 Total 55000

Dr. Furniture A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-03 To Cash 6000 Mar-31 By Balance b/d 6000

Total 6000 Total 6000

Dr. Purchase Return A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-31 To Balance b/d 500 Mar-12 By Suresh 500

Total 500 Total 500

Dr. Sales Return A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-13 To Mahesh 500 Mar-31 By Balance b/d 500

Total 500 Total 500

Dr. Suresh A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-12 To Purchase Return 500 Mar-05 By Purchase 5000
Mar-15 To Bank 4450
Mar-15 To Discount 50

Total 5000 Total 5000

Dr. Mahesh A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-10 To Sales 25000 Mar-13 By Sales Return 500
Mar-20 By Bank 24450
Mar-20 By Discount 50
Total 25000 Total 25000

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Gaurav Kumar (EPGDM Term1) 33rd Batch

Dr. Discount A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-20 To Mahesh 50 Mar-15 By Suresh 50

Total 50 Total 50

Dr. Drawings A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-25 To Cash 2500 Mar-31 By Balance b/d 2500

Total 2500 Total 2500

Dr. Rent A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-28 To Cash 5000 Mar-31 By Balance b/d 5000

Total 5000 Total 5000

Dr. Salary A/C Cr.

Date Particular JF Amt Date Particular JF Amount
Mar-28 By Cash 6000 Mar-31 To Balance b/d 6000

Total 6000 Total 6000

Trial Balance:

Trial Balance
Account Title Dr Cr
Capital A/C 100000
Purchase 30000
Cash 96500
Furniture 6000
Sales 55000
Purchase return 500
Sales Return 500
Drawings 2500
Rent 5000
Salary 6000
Bank 9000
Total 155500 155500

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