Assignment on Financial and Management Accounting

ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING

ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING BY RAHUL GUPTA Q. 1: Explain any two concepts of accounting with examples? Answer 

Introduction:

Acco Account untin ing g is the the lang langua uage ge of busi busine ness ss and and it is used used to comm commun unic icat atee finan financi cial al inform informati ation. on. In order for that that inform informati ation on to make sense, sense, accountin accounting g is based on 12 fundam fundament ental al concep concepts. ts. These These fundam fundament ental al concept conceptss then then form form the basis for all of the General Generally ly Accept Accepted ed Account Accounting ing Princi Principle pless (GAAP) (GAAP).. By using using these these concept conceptss as the foundation, readers of financial statements and other accounting information do not need to make assumptions about what the numbers mean. For instance, the difference between reading that a truck has a value of $9000 on the balance balance sheet and understanding understanding what that $9000 represents represents is huge. Can you turn around

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT SUBJECT CODE- MB0025 MB0025,, SET-1 Page 1

ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING and sell the truck for $9000? If you had to buy the truck today, today, would you pay $9000? Or, perhaps the the original original purchase price of the truck was was $9000. All of these assumptions assumptions lead to very different evaluations of the worth of that asset and how it contributes to the company’s company’s financial situation. situation. For this reason it is imperative imperative to know and understand the eleven key concepts.

 Eleven •

key Accounting concepts:

Entity:

Accounts are kept for entities entities and not the people who own or run the the company. Even in proprietor proprietorships ships and partnershi partnerships, ps, the accounts for the business must be kept separate from those of the owner(s). •

Money-Measurement:

For an accounting record to be made it must be able to to be expressed in monetary terms. For this reason, reason, financial statement statementss show only a limited limited picture picture of the business. business. Consider Consider a situation where there is a labor strike pending or the business owner’s health is failing; these situations have a huge impact on the operations and financial security of the company but this information is not reflected in the financial statements. •

Going Concern:

Accounting assumes that an entity entity will continue to operate indefinitely. indefinitely. This concept implies that financial statements do not represent a company’s worth if its assets were to be liquidated, but rather that the assets assets will be used in future operations. This concept also allows businesses to spread (amortize) the cost of an asset over its expected useful life. •

Cost:

An asset (something that is owned by the company) is entered into the accounting records at the price paid to acquire it. Because the “worth” of an asset changes over time it would be impossible to accurately record the the market value for the assets of a company. The cost concept does recognize that assets generally depreciate in value and so accounting practice removes the depreciation amount from the original cost, shows the value as a net amount, and records the difference difference as a cost of operations operations (depreciation expense.) Look at the following example:


ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING Truck $10,000 purchase price of the truck. truck. Less depreciation $ 1,000 amount deducted as a depreciation depreciation expense Net Truck: $ 9,000 net book-value of the truck. The $90 $9000 00 simply simply represen represents ts the book value value of the truck truck after after depreci depreciati ation on has been accounted for. This figure says says nothing about other aspects that affect the value of an item and is not considered a market price. •

Dual Aspect:

This concept is the basis of the fundamental accounting equation:

Assets = Liabilities + Equity 1. Assets Assets are what what the the comp company any owns. owns. 2. Liabilitie Liabilitiess are what the the company company owes to credito creditors rs against against those those assets assets 3. Equity Equity is the differ difference ence between between the two and and represents represents what what the company company owes owes to its investors/owners. All accounting transactions must keep this equation balanced so when there is an increase on one side there must be an equal increase on the other side or an equal decrease on the same side. •

Objectivity:

The objectivity concept states that accounting will be recorded on the basis of objective evidence (invoices, receipts, bank statement, etc…). This means that accounting records will initiate from a source document and that the information recorded is based on fact and not personal opinion. •

Time Period:

This This concept concept defines defines a specif specific ic interv interval al of time time for which an entity entity’s ’s report reportss are prepared. This can be a fiscal year (Mar 1 – Feb 28), natural year (Jan (Jan 1 – Dec 31), or any other meaningful period such as a quarter or a month.

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Conservatism:

This This requir requires es und unders erstat tating ing rather rather than than overst overstati ating ng revenu revenuee (incom (income) e) and expens expensee amounts amounts that have a degree of uncertainty uncertainty.. The rule is to recognize revenue revenue when it is


ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING reasonably reasonably certain certain and recognize recognize expenses as soon as they are reasonably reasonably possible. possible. The reasons for accounting in this manner are so that financial statements do not overstate the company’s financial position. position. Accounting chooses to err on the the side of caution and protect protect investors from inflated or overly positive results. •

Realization:

Revenues Revenues are recognized when they are earned or realized. realized. Realizatio Realization n is assumed assumed to occur when the seller receives cash or a claim to cash (receivable) in exchange for goods or services. This concept is related to conservatism in that revenue (income) is only recorded when it actually occurs and not at the point in time when a contract is awarded. •

Matching:

To avoid overstatement of income in any one period, the matching principle requires that revenues and related expenses be recorded in the same accounting period. If you bill $20,000 of services in a month, in order to accurately represent the income for the month you must report the expenses you incurred while generating that income in the same month. •

Consistency:

Once an entity decides on one method of reporting (i.e. method of accounting for invent inventory ory)) it must use that same method method for all subseque subsequent nt events events.. This This ensure ensuress that that differences in financial position between reporting periods are a result of changed in the operations and not to changes in the way items are accounted for. •

Materiality:

Account Accounting ing practi practice ce only only record recordss events events that that are signif significa icant nt enough enough to justif justify y the usefulness usefulness of the information. information. Technically Technically,, each time a sheet of paper is used, the asset “Office supplies” is decreased by an infinitesimal amount but that transaction is not worth accounting accounting for. By understanding understanding and applying applying these principles principles you will be able to read, prepare, prepare, and compare compare financial financial statements statements with clarity and accuracy. The bottom-line bottom-line is that the ethical practice of accounting mandates reporting income as accurately as possible and when there is uncertainty, choosing to err on the side of caution.



Basic Accounting Concepts: Balance Sheet Accounts: The three so-called so-called Balance Balance Sheet Accounts are Assets, Assets, Liabilitie Liabilities, s, and Equity. Equity. Balance Balance Sheet Accounts are used to track the changes in value of things you own or owe. Assets are the group of things that you own. Your assets could include a car, cash, a house, stocks, or anything else that has convertible value. Convertible value means that theoretically you could sell the item for cash. Liabilities are the group of things on which you owe money. Your liabilities could include a car loan, a student loan, a mortgage, your investment margin account, or anything else which you must pay back at some time. Equity is the same as "net worth." It represents what is left over after you subtract your liabilities from your assets. It can be thought of o f as the portion of your assets that you own outright, o utright, without any debt.

Income and Expense Accounts: The two Income and Expense Expense Accounts are used to increase or decrease the value of your accounts. Thus, while the balance sheet accounts simply track the value of the things you own or owe, income and expense accounts allow you to change the value of these accounts. Income is the payment you receive for your time, services you provide, or the use of your money. When you receive a paycheck, for example, that check is a payment for labor you provided to an employer. Other examples of income include commissions, tips, dividend income from stocks, and interest income from bank accounts. Income will always increase the value of your Assets Assets and thus you’re Equity. Equity. Expenses refer to money you spend to purchase goods or services provided by someone else. Examples of expenses are a meal at a restaurant, rent, groceries, gas for your car, or tickets to see a play. Expenses will always decrease your Equity. If you pay for the expense immediately, you will decrease your Assets, whereas if you pay for the expense on credit you increase your Liabilities.



Que 2: Prove that accounting equation is satisfied in all the following transactions of Mr.X? 1. Commenced Commenced business business with cash cash – Rs.80,000 Rs.80,000 2. Purcha Purchase sed d good goods s for cash cash – Rs.4 Rs.40, 0,00 000 0 and and on cred credit it Rs.30,000 3. Sold goods goods for cash – Rs.40,000 Rs.40,000 costing costing Rs.25,000 Rs.25,000 4. Paid salary salary – Rs.2,000 Rs.2,000 and salary outstandi outstanding ng Rs.1,000 Rs.1,000 5. Bought scooter scooter for personal personal use for cash cash at Rs.20,000 Rs.20,000 Answer Transac tion

Assets Cash

Commenced business with cash– Rs.80,000 Purchased goods for cash– Rs.40,000 and on credit Rs.30,000 Sold Sold good goodss for cash – Rs.40,000 costing Rs.25,000 Paid salary – Rs.2,000 and salary outstanding Rs.1,000

Good s

Liabilities Scoot er

Sala ry

Outstan ding Salary

Credi tors

+80,000

+80,000

-40,000

+40,000 +30,000

+40,000

-25,000

+1,000

Capital

+30,000

+15,000

+2,000

+1,000

-2,000


ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING Bought scoo scoote terr for for personal use for cash at Rs.20,000 Total

+20,000

81,00 0

45,000

20,00 0

+20,000

2,000

1,000

Grand Total

1,46,000 Hence Accounting Equation has been proved.

30,000

1,13,000

1,46,000

Que 3: Show the rectification entries for the following a. Sales account is under cast by Rs.15, 000. b. Goods Goods returned returned by the the customer customer Mr. of Rs.565 Rs.5650 0 has been posted posted in the the Return Inward Account as Rs.5560 and in Mr. A/c as Rs.6, 550. c. Salary paid Rs.6, 000 has been posted to rent account. d. Cash received from Ram posted to Shyam account Rs.7, 000.

e. Cash Cash rece receiv ived ed from from Jadu Jadu Rs.8 Rs.8,6 ,640 40 has has been been post posted ed to the the debi debitt of Madhu’s a/c Answer

a. The Sales Sales accoun accountt is under cast by by Rs.15,0 Rs.15,000 00

Suspense A/c To Sales A/c

Dr 15,000 15,000

Stat Statem emen entt- Bein Being g un unde derr cast castin ing g of Sale Saless A/c A/c by 15 15,0 ,000 00 no now w rectified . b. Goods Goods returne returned d by the custom customer er Mr. of Rs.565 Rs.5650 0 has been been posted posted in the Return Inward Account as Rs.5560 and in Mr. a/c as Rs.6,550

X A/c Dr

990


ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING To Suspense A/c

990

Statement- Being over casting of X A/c by 990 now rectified.

c. Salary Salary paid Rs.6, Rs.6,000 000 has has been poste posted d to Rent Rent account account

Original Entry

Wrong Entry

Rectified Entry

Salary A/c Dr

6,000

Salary A/c Dr 6,000

Rent A/c Dr

6,000

To Cash A/c

6,000

To Rent A/c

To Cash A/c

6,000

6,000

Statement- Being Salary A/c had been wrongly credited to Rent A/c now rectified .

d. Cash received from Ram posted posted to to Shyam Shyam account account Rs.7,000

Original Entry Cash A/c Dr To Ram A/c

7,000 7,000

Wrong Entry

Rectified Entry

Cash A/c Dr 7,000

Shyam A/c Dr

Shyam A/c

Ram A/c

7,000

6,000

6,000

Statement- Being cash wrongly credited to Shyam’s A/c now rectified. RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT SUBJECT CODE- MB0025 MB0025,, SET-1 Page 8


e. Cash Cash rece receiv ived ed from from Jadu Jadu Rs.8 Rs.8,6 ,640 40 has has been been post posted ed to the the debi debitt of Madhu’s a/c

Original Entry Cash A/c Dr To Jadu A/c

7,000 7,000

Wrong Entry

Rectified Entry

Cash A/c Dr 7,000

Madhu A/c Dr

Madhu A/c

Jadu A/c

7,000

6,000

6,000

Statement- Being cash wrongly credited to Madhu’s A/c now rectified.

Q.4: The following balances are extracted from the books of Kiran Trading Co on 31st March 2000. You are required to RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT SUBJECT CODE- MB0025 MB0025,, SET-1 Page 9

ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING prepare trading and profit and loss account and a balance sheet as on that date: (20 marks) Opening Stock B/R Purchases Wages Insurance Sundry Debtors Carriage Inwards Commission Paid Interest on Capital Stationery Return Inwards

5,000 22,500 1,95,000 14,000 5,500 1,50,000 4,000 4,000 3,500 2,250 6,500

Commission received Return Outward Trade Expenses Office furniture Cash in hand Cash at bank Rent and Taxes Carriage Outward Sales Bills Payable Creditors Capital The closing stock was valued at Rs.1, 25,000

2,000 2,500 1,000 5,000 2,500 23,750 5,500 7,250 2,50,000 15,000 98,250 89,500

Answer: The first step in preparing the trading account, profit and loss account and balance sheet is to prepare the trial balance. And for interest on capital it is assume that the interest had been already paid. So, it will give its effect on Profit and Loss Account at the debit site.

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TRIAL BALANCE OF KIRAN TRADING CO AS ON 31 ST MARCH 2000

PARTICULARS Opening Stock B/R Purchases

DEBIT

CREDIT

5 ,0 0 0 22 ,500 1,95,000

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE- MB0025, SET-1Page 10

ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING Wages Insurance Sundry Debtors Carriage Inwards Commission Paid Interest on Capital Stationery Return Inwards Commission received Return Outward Trade Expenses Office furniture Cash in hand Cash at bank Rent and Taxes Carriage Outward Sales Bills Payable Creditors Capital

1 4 ,000 5 ,5 0 0 1,50,000 4 ,000 4 ,000 3 ,5 0 0 2 ,2 5 0

Total

457, 250

•

6,500 2,000 2,500 1,000 5,000 2,500 23,750 5,500 7,250 2,50,000 15,000 98,250 89,500

457, 250

Trading account of Kiran Trading Co as on 31 st March 2000

Dr. Cr. PARTICULARS To Opening stock 1,95,000 To Purchases Less Return Outward

AMOUN PARTICULARS T 2,50,000 5,000 By Sales Less return Inwards 6,500 Less Carriage Outward

2,500

Add Carriage In 4000

7,250

1,92,50

Closing Stock

AMOUN T

2,36,25 0 1,25,00


ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING 0 14,000 Total 1,45,75 0

To Wages Gross Profit Total •

3,61,250

3,61,250

Profit and loss account of Kiran Trading Co as on 31st March 2000

PARTICULAR To Insurance

AMOUN PARTICULAR T 5,500 By Gross Profit

To Commission paid To Interest on Capital

4,000 3,500

To Stationery To Trade and Expenses To Rent and Taxes Net profit

2,250 1,000 5,500 1,26,00 0 147,75 0

Total

•

0

AMOUNT

1,45,75 0 By Commission Received 2,000 Total 1,47,75 0

Balance Sheet of Kiran Trading Co as at 31 st March 2000 LIABILITIES

Capital

AMOUNT

89,500

Add Net Profit 1,26,000

ASSETS Cash in Hand

2,15,50 0

Cash at Bank

AMOUNT

2,500 23,750


ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING Bills Payable Creditors

15,000 98,250

Bills Receivable Debtors Furniture Closing Stock

Total

3,28,75 Total 0

22,500 1,50,000 5,000 1,25,000 3,28,750

Q.5: Write short notes on: Answer 5 a)

 Accrued/

Outstanding Expenses:

Certain expenses may have been incurred during the financial year, but will only be paid in the next financial year. Examples of such expenses is where accounts or invoices have been received for accounting fees, advertising, rent, rates and taxes, water and electricity, etc., which is applicable to the financial year but which is not yet paid at the end of the financial year. The expense account must be adjusted so that the expense account represents the expense expensess for the full full financ financial ial year year or 12 consecut consecutive ive months months (accoun (accountin ting g period periodss or reporting reporting periods). The amount by which the expense account is outstanding outstanding will increase increase the amount of the expense at the end of the financial year. At the end of the financial year a liability is created - Accrued or outstanding expenses because the amount of the expense is consumed or used but not yet paid. It is owed to the party who has supplied the expense item, which is already used up in the financial year. 

To To Iden Identi tify fy,, Ent Enter the Trans ransac acti tion on and and to Post Post the the Transaction to the Ledger:

For exampl example, e, when when analyzi analyzing ng the figure figuress on the pre-ad pre-adjus justme tment nt trial trial balance balance,, it is discovered that the telephone expenses paid for the current financial year is R (£) 3 300. The telephone account for R (£) 300 of the last month of the financial year is received, but not yet paid. Enter the transaction in the General Journal. Enter the transaction in the batch. After After enteri entering ng the transa transacti ctions ons in the general general journa journal, l, the transa transacti ctions ons is as follow follows: s: The expense for the telephone is recognized and recorded in the expense accounts which will result that the net profit will be decreased by the expense of R(£) 300, which is not yet paid as at the end of the financial year (29 February). It has also increased the current


ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING liabilities, as it is an expense which is payable in the new financial year. An amount of R 3 600 will be recognized as an expense and not R (£) 3 300. The amount that should have been paid for the financial year is the amount on the preadjustment trail balance plus the amount of the outstanding expense not yet paid. The expenses are increased (debited) and current liabilities are increased (credited). Once these transactions have been processed and you have done the Year-end process in the Tools Global Processes - Do Year-end menu option, you need to reverse these adjustments in the new financial year. The reason for this is that these adjustments have served its purpose in the old financial year to assist you to generate the correct final financial statements.

5b)

 Prepaid

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expenses:

What Does Prepaid Expense Mean?

A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received in the near future. While prepaid expenses are initially recorded as assets, their value is expensed over time as the benefit is received onto the income income state statemen ment, t, because because unlike unlike convent convention ional al expense expenses, s, the busine business ss will will receiv receivee something of value in the near n ear future. •

Investopedia explains Prepaid Expense

Due to the nature of certain goods and services, they must be prepaid expenses. For example, insurance is a prepaid expense, because the purpose of purchasing insurance is to buy proactive proactive protection protection in case something something unfortunate unfortunate happens. happens. Clearly, Clearly, no insurance insurance company would sell insurance that covers the occurrence of an unfortunate event, after the fact, so insurance expenses must be pre-paid.

Prepaid expenses are those expenses which have been paid in advance. In other words, these are the expenses which have been paid during the accounting period for which the final accounts are being prepared but they relate to the next period. As the benefit of such


ASSIGNMENT ON FINANCIAL AND MANAGEMENT ACCOUNTING expenses is received in the subsequent years, it will be treated as expenses of the coming years and not the year in which it is paid. Examples: Insurance premium has been paid in advance. Rent has been paid for the next year. •

Treatment of prepaid expenses in final account:

If prepaid expenses are given in the trial balance they are recorded in the assets side of Balance sheet only. But if they are given in the adjustments they are subtracted from concerned expenses in the debit side of profit and loss account and again are shown in the assets side of Balance Sheet.


Assignment on Financial and Management Accounting

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