1. Define Accounting. Explain the accounting concepts which guide the acco untant at the recording stage. The systematic and comprehensive recording of financial transactions pertaining to a business. Accounting also refers to the process of summarizing, analyzing and reporting these transactions. The financial statements that summarize a large company's operations, financial position and cash flows over a particular period are a concise summary of hundreds of thousands of financial transactions it may have entered into over this period. Accounting is one of the key functions for almost any business; it may be handled by a bookkeeper and accountant at small firms or by sizable finance departments with dozens of employees at larger companies. There are the necessary assumptions or conditions upon which accounting is bas ed. Accounting concepts are postulates, assumptions or conditions upon which accounting records and statement are based. The various accounting concepts are as follows: 1. Entity Concept: For accounting purpose the “business” is treated as a separate entity from the proprietor(s). On e can sell goods to himself,, but all the transactions are recorded in the book of the business. This concepts helps in keeping private affairs of the proprietor away from the business affairs. E.g. If a proprietor invests Rs. 1,00,000/- in the business, it is deemed that the proprietor has given Rs. 1,00,000/- to the “business” and it is shown as a “liability” in the boo ks of the business. Similarly, if the proprietor withdraws Rs. 10,000/- from the business, it is charged to them. 2. Dual Aspect Concept:
As per this concept, every business transaction has a dual affect. For example, if Ram starts business with cash Rs. 1,00,000/- there are two aspects of the transaction: “Asset Account” and “Capital Account”. The business gets asset (cash) of Rs. 1,00,000/- and on the other hand the business owes Rs. 1,00,000/- to Ram. 3. Going Business Concept (Continuity of Activity):
It is assumed that the business concern will continue for a fairly long time, unless and until has entered into a sta te of liquidation. It is as per this assumption, that the accountant does not take into account the forced sale values of assets while valuing them. 4. Money measurement concept:
As per this concept, in accounting everything is recorded in terms of money. Events or transact ions which cannot be expressed in terms of money are not recorded in the books of ac counts, even if they are very important or useful for the business. Purchase and sale of goods, payment of expenses and receipt of income are monetary transactions which ar e recorded in the accounting books however events like death of an executive, resignation of a manager a re such events which cannot be expressed in money. 5. Cost Concept (Objectivity Concept):
This concept does not recognize the realizable value, the replacement value or the real worth of an asset. Thus, as per the cost concept a) as asset is ordinarily recorded at the price paid to acquire it i.e. at its cos t, and b) this cost is the basis for all subsequent accounting for the asset.
For example, if a machine is purchased for Rs. 10,000/- it is recorded in the books at Rs. 10,000/- and even if its market value at the time of the preparation of the final account is Rs. 20,000/- or Rs. 60,000/- the same will not considered. 6. Cost-Attach Concept:
This concept is also known as “cost-merge” concept. When a finished good is produced from the raw material there are certain process and costs which are involved like labor c ost, power and other overhead expenses. These costs have a capacity to “merge” or “attach” when they are broughtr together. 7. Accounting Period Concept:
An accounting period is the interval of time at the end of which the income statement and financial position statement (balance sheet) are prepared to know the results and resources of the business. 8. Accrual Concept:
The accrual system is a method whereby revenue and expenses are identified with specific periods of time like a month, half year or a year. It implies recording of revenues and expenses of a particular accounting period, whether they are received/paid in cash or not. 9. Period Matching of Cost and Revenue Concept:
This concept is based on the period concept. Making profit is t he most important objective that keeps the proprietor engaged in business activities. That is why most of the accountant’s time is spent in evolving techniques for me asuring the profit/profitability of the concern. To ascertain the profit made during a period, it is necessary to match “revenues” of the period with the “expenses” of that period. Income (profit) earned by the business during a period is compared with the expenditure incurred to earn the revenue. 10. Realization Concept:
According to this concept profit, should be accounted fo r only when it is actually realized. Revenue is recognized only when sale is affected or the services are rendered. However, in order to recognize revenue, receipt of cash us not essential. Even credi t sale results in realization as it creates a definite asset called “Account Receivable”. However there are certain exception to the concept like in case of contract accounts, hire purchase etc. Similarly incomes like commission interest rent etc. are shown in Profit and Loss A/c on accrual basis though they may not be realized in cash on the date of preparing accounts. 11. Verifiable Objective Evidence Concept:
According to this concept all accounting transactions should be evidenced and supported by objective documents. These documents include invoices, contract, correspondence, vouchers, bills, passbooks, cheque etc.
2. (a) Name items which are recorded at the invoice price in the Consignment Account. Give reasons for consigning the goods at the invoice price. (b) Explain the separate set of books method for maintaining joint venture accounts Excess Price or Loading is to be calculated on the following items: 1. Consignment stock at the beginning
2. Goods sent on consignment 3. Goods returned by the consignee 4. Consignment stock at the end of the period Whenever a consignor sends goods to consignee at a p rice higher than the cost price, that is known as invoice price method. It is done if the consignor does not want to disclose the real profit to the consignee. The consignee will not be able to know the cost price if the goods are consigned at above price. Hence, he c annot find out profit or loss being made by the consignor on these goods. For the goods consigned at invoice price, the entries in the books of both consignor and consignee will be same. But the following changes and adjustment entries are required in the books of the consignor for eliminating loading charge in goods sent, goods returned, unsold goods and abnormal loss. 1. For goods sent on consignment Consignment to.................. A/C..........Dr.(invoice price) To goods sent on consignment A/C 2. For loading goods sent on consignment Goods sent on consignment A/C........Dr.(loading amount) To consignment to......A/C 3. For abnormal loss Abnormal loss A/C...............Dr.(invoice price) To consignment to........A/C 4. For loading on abnormal loss Consignment to......A/C.............Dr.(loading amount) To abnormal loss A/C 5. For unsold stock Consignment stock A/C.............Dr.(invoice price) To consignment to........A/C 6. For loading on unsold stock Consignment to..........A/C.......Dr. (loading amount) To consignment stock reserve A/C 7. For goods return by consignee Goods sent on consignment A/C.............Dr. (invoice price) To consignment to.....A/C 8. For loading on goods returned Consignment to.........A/C ........Dr.(loading amount) To goods sent on consignment A/C
(b) Mainly there are two ways of keeping joint venture account. Those are 1. Without keeping separate separate set of books, 2. With keeping separate set of books.
With Keeping Separate Set Of Books
When the size of the venture is considerably large, then a separate set of books of accounts may be maintained. Under this system, accounts are maintained just like in the case of partnership. While preparing the accounts, the principle of double entry must be followed. Under this method, the following ledgers are maintained. i. Joint Venture Account ii. Joint Bank Account iii. Co-venture's Account Joint Venture Account The joint venture account is very unique one where all the purchases, procurement related expenses, selling and distribution expenses as well as expenses related to the joint ventures are being debited like trading and profit and loss account. No any separate account of purchases, wages or any other expenses are opened. The goods supplied by c oventures etc. are also debited to it. Likewise, sale proceeds, closing stock, goods taken over by co -ventures are credited to joint venture account. If the joint venture account shows credit balance, it means profit and if it shows debit balance, it is loss and transferred to co-ventures personal account. Joint Bank Account It is just like a cash book. It records all the cash and bank transactions. It is opened with the contribution of cas h made by co-ventures. The investment made by then are deposited into a bank account and will operate this in their joint name. Any receipts of cash and any expenses related to venture are recorded in their account. The joint bank account is closed by transferring balance to the personal account of co -ventures. Co-ventures Account Like the capital accounts in partnership, co-venture account is opened in joint venture. it is credited with the investment of each co-venture and debited with the drawings made by them. The profits of the venture is credited and loss of venture is debited. This account comes to end by cash payment from joint bank account.
3. What is meant by single entry system? Distinguish it from Double Entry System. Explain the two methods of ascertaining profit when accounting records are incomplete. A single entry system records each accounting transaction with a single entry to the accounting records, rather than the vastly more widespread double entry system. The single entry system is centered on the results of a business that are reported in the income statement. The core information tracked in a single entry system is cash disbursements and cash receipts. Asset and liability records are usually not tracked in a single entry system; these items must be tracked separately. The primary form of record keeping in a single entry system is the cash book , which is essentially an expanded form of a check register, with columns in which to record the particular sources and uses of cash, and room at the top and bottom of each page in which to show beginning and ending balances. The most significant problems associated with a single entry system include:
Assets are not tracked, so it is easier for them to b e lost or stolen. Audited financial statements. It is impossible to obtain an audit opinion on the financial results of a business using a single entry system; the information must be converted to a double entry format for an audit to even be a possibility. Errors. It is much easier to make clerical errors in a single entry system, as opposed to the double entry system, where separate entries to different accounts must match.
Liabilities. Liabilities are not tracked, so you need a separate system for determining when they are due for payment, and in what amounts. Reporting . There is much less information available upon which to c onstruct the financial position of a business, so management may not be fully aware of the performance of the business.
Single entry systems are strictly use for manual accounting systems, since all computerized systems utilize the double entry system instead. Compare single and double entry system: 1. Meaning Single entry system is an incomplete system of recording financial transactions. Double entry system is a complete system of recording and reporting financial transactions. 2. Duality Single entry system is not based on the concept ofduality. Double entry system is b ased on theconcept of duality. 3. Accounts Single entry system maintains only personal accounts of debtors and c reditors and cash book. Double entry system all personal, real and nominal accounts. 4. Trial Balance Single entry system can not prepare a trial balance and hence, arithmetical accuracy of books of acco unts can not be checked. Double entry system prepares trial balance and hence, a rithmetical accuracy of the books of acc ounts can be checked. 5. Profit Or Loss Single entry system can not ascertain the true amount of profit o r loss of the business as it does not maintain nominal accounts. Double entry system ascertains true profit or loss of the business as it maintains all nominal accounts. 6. Financial Position Single entry system cannot ascertain the true financial position of the business b ecause it does not maintain real accounts except cash book. Double entry system ascertains financial position of the business as it maintains all personal and real accounts. 7. Suitability Single entry system is suitable to a small business where only limited number of transactions a re performed. Double entry system is suitable for a large business. 8. Tax Purpose Single entry system is not acceptable for the purpose of assessment of tax. Double entry system is acceptable for the purpose of assessment of tax.
The following method is used for the calculation of profit or loss under single entry system. Net Worth Method
Net worth method is also called statement of affairs method or capital comparison method. According to this method profit or loss of the business is determined by making comparison between the capital of two dates of a period. For example, Capital as on 1st January 2009 = $ 150000
Capital as on 31st December 2009 = $ 200000 Profit for the year 2009 = Closing capital -Opening capital = $200000-$150000 = $50000. If there are other capital related items such as drawing, additional capital, interest on capital etc. are to be ad justed to ascertain the amount of profit or loss. These items include: * Drawing: If the drawing is made during the year, it should be added to the amount of closing capital. * Additional capital: If additional c apital is introduced in the business during the year, it should be deducted from the amount of closing capital. * Interest on capital: If the interest is provided on capital, it should be deducted from the amount of closing capital .
4. Distinguish between the following: a) Income and Expenditure Account & Receipts and Payments Account. b) Straight line method and diminishing balance method of depreciation. (a) The following are the main differences between receipts and payments account and income and expenditure account: 1. Nature Receipts and payments account is a summary ofcash transactions for a period and it is a real account. Income and expenditure account is a summary of expenditure and income like trading and profit and loss account and it is a nominal account. 2. Objective Receipts and payments account is prepared to show cash and bank receipts and payments during the period to derive closing balance of cash and bank. Income and expenditure account is prepared to s how the net result of the operation during the period to derive surplus or deficit. 3. Recording All cash and cheque receipts are recorded on debit side of receipts and payments account where as all cash and bank payments are recorded on credit side. In income and expenditure account all expenditure of revenue nature are recorded on debit side and all incomes of revenue nature are recorded on credit side. 4. Capital And Revenue Items There is no distinction between capital and revenue receipts and payments in receipts and payments account. All expenses and incomes of revenue nature are recorded on accrual basis in income and expenditure account . 5. Contents Receipts and payments account contains only cash and bank transactions. Income and expenditure account c ontains both cash and non-cash expenses and incomes of revenue nature. 6. Balance Sheet Requirement Receipts and payments account is not required to prepare balance s heet. Income and expenditure account is required to prepare balance sheet. 7. Adjustments No adjustments are required in receipts and payments account. In income and expenditure account adjustments are made because it is prepared on accrual basis. (b) The following graph is taken from How to Site's Article Diminishing Balance Method . I have liked this graph to explain the difference between Straight line method an d Diminishing balance method . Both methods are of Calculation the amount of depreciation in financial accounting . In straight line depreciation method , depreciation is charged on fixed asset with f ixed rate . Suppose depreciation Rate is
10 % and Fixed Asset is 10 In the end of first year will be the depreciation = 1 and rest fixed asset will be 9 In the end of Second year will also depreciation = 1 and rest fixed asset will be 8 So , Graph will show the straight line . So , this method is famous with this name due to this reason. In other words we can say that the amount of depreciation will equal in f irst year or in end of asset. In diminishing balance method , depreciation is charged on the amount of fixed asset after deducting previous year depreciation Suppose fixed asset is 10 Then depreciation of first year at 10% = 1 balance of fixed asset at the beginning of second year =9 now depreciation will charge on 9 not on 10 So 9 X 10/100 = 0.9 now the balance fixed asset in the beginning of third year will be = 8.1 Now again depreciation will charge on the amount of 8.1 So , slop of curve under diminishing balance method will not straight line but more upward in left side .
5. From the following Trial Balance prepare Trading and Profit & Loss Account for the year ended 31st Dec., 2014 and Balance Sheet as on that date: Dr. (Rs.) Stock 1st Jan., 2014 Purchases and Purchases Return Freehold Premises Incidental Trade Exp. Insurance Audit Fees Commission Received
Cr. (Rs.) 22,300 2,30,000
1,00,000 11,200 1,850 800 2,700
5,200
Interest Dr. (Rs.) Stock 1st Jan., 2014 Purchases and Purchases Return Freehold Premises Incidental Trade Exp. Insurance Audit Fees Commission Received Interest
1,400 Cr. (Rs.) 22,300 2,30,000
5,200
1,00,000 11,200 1,850 800 2,700 1,400
Adjustments: a) Stock at 31st December, 2014 is Rs. 70,000. b) Write off 5% Depreciation on freehold premises and 20% on office furniture. c) Commission earned but not received Rs. 500. d) Interest earned Rs. 600. e) Rs. 200 for rent has been received in advance. f) Charge interest on Capital @ 6% and Rs. 500 on Drawings.
