set 1 mb0025 financial and management accounting

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FINANCIAL AND MANAGEMENT ACCOUNTING

1. Explain any two accounting concepts with example?

Ans. Concepts are the basic assumptions or conditions up on which

the science of accounting is based. There are five basic concepts ofaccounting namely

Business entity concept,

Going concern concept,

Money measurement concept,

Periodicity concept and

Accrual concept.

Business separate entity concept:

The essence of this concept is that business is a separate entity and

different from the owner or the proprietor. This is true in the case allforms of organization. If X starts business, he should not mix up his

personnel properties with that of the business. When he invests his

funds into the business, it is regarded as capital to the business andcapital is a liability from the business point of view. If X withdraws any

money fro the business, it is detectable form the capital and to thatextent the liability of the business towards the owner is reduced. On

the other hand, if the proprietor withdraws money form the business

for business purposes, then it is treated as expenditure to thebusiness. This legal separation between business and ownership is

kept in mind while recoding the transactions in the books of business.

Going concern concept

The fundamental assumption is that the business entity will continue

fairly for a long time to come. There is no reason why an enterpriseshould be promoted for a short period only to liquidate the business in

the foreseeable future. This assumption is called Going concernconcept. For this reason accountants value fixed assets on historical

cost method. Had the business been setup to last for short period,

fixed assets should have been valued at a market price. Besides, goingconcern concept provides for amortization of the cost of fixed assets

over the lifetime of the assets. For example, an entrepreneurpurchases a plant for Rs. one crore and it has a life of 10 years. During

this period, he sets aside every year certain funds from the income of

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the business so that it would help him for replacement of the asset atthe end of ten years. This process of amortization presupposes that

the enterprise will continue to do business fairly for long time.

2. Prove that accounting equation is satisfied in all the

following transactions of Mr. Xi. Commenced business with cash Rs 80,000ii. Purchased goods for cash Rs 40,000 and oncredit Rs. 30,000iii. Sold goods for cash Rs. 40,000 costing Rs.25,000iv. Paid salary Rs. 2,000 and salaryoutstanding Rs. 1,000v. Brought scooter for personal use for cash at Rs.

20,000

Ans. The accounting equation is,

Equity [Working Capital] + Liabilities + Assets

i. Commenced business with cash Rs 80,000

In the first transaction, the business receives a capital of Rs. 80,000

cash and so capital account and cash accounts are affected.

Capital is a liability and cash is an asset to the business.This is shown in the transaction number 1, in the table.

ii. Purchased goods for cash Rs 40,000 and on credit Rs.

30,000

In this transaction, cash account, goods account and liabilities account

gets affected.Cash account reduces by Rs. 40,000

Goods account increases by Rs. 40,000Liabilities account increases by Rs. 30,000

This is shown in the transaction number 2, in the table.

iii. Sold goods for cash Rs. 40,000 costing Rs. 25,000

In this transaction, goods account, cash account and profit account

gets affected.Cash account increases by Rs. 40,000

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Goods account reduces by Rs. 25,000Profit account being owners account, it gets credited with Rs 15,000


iv. Paid salary Rs. 2,000 and salary outstanding Rs. 1,000

In this transaction, cash and salary accounts are affected.Cash account reduces by Rs. 2,000 ans salary account gets credited by

Rs. 2,000Outstanding salary is Rs. 1,000 which is not paid yet, hence non of the

accounts gets affected.


v. Brought scooter for personal use for cash at Rs. 20,000The scooter is for personal use, the liability of the business on owners

capital decreases.

Cash account and capital account decreases by Rs. 20,000This is shown in the transaction number 5, in the table.

Transaction

Number

AssetsLiabilities and owner's

equity

Cash

a/c

Goods

a/c

Salary

a/c Liabilities

Mr.X's

Capital

1 80000 80000

2 -40000 70,000 30000

3 40000 -25000 15000

4 -2000 2000

5 -20000 -20000

58000 45000 2000 30000 75000

105000 105000

3. Show the rectification of entries for the following

a. the sales account is undercast by Rs.15,000b. Goods returned by customer Mr. X of Rs.5650 has

been posted in return inward account as Rs.5560 andin Mr. Xs account as Rs. 6550c. Salary paid Rs.6,000 has been posted to rentaccount.d. Cash received from Ram posted to Shyam accountRs. 7000

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e. Cash received from jadu Rs. 8640 has been postedto the debit of Madhus account.

Ans.The below table shows the rectification of entries

Particulars Debit [Rs.] Credit [Rs.]

Suspense account Dr

To Sales account

15,000

15,000

Suspense account Dr

To Return account

Mr. Xs account Dr

To Suspense account

90

900

90

900

Salary account Dr

To rent account

6000

6000

Shyam account Dr

To Ram account

7000

7000

Jadu account Dr

To Madhu account

8640

8640

4. The following balances are extracted from thebooks of Kiran Trading Co on 31st March 2000. Youare required to prepare trading and profit and lossaccount and a balance sheet as on that date:

Opening Stock 5,000 Commission

received

2,000

B/R 22,500 Return Outward 2,500

Purchases 1,95,000 Trade Expenses 1,000

Wages 14,000 Office furniture 5,000

Insurance 5,500 Cash in hand 2,500

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Sundry Debtors 1,50,000 Cash at bank 23,750

Carriage

Inwards

4,000 Rent and Taxes 5,500

Commission

Paid

4,000 Carriage

Outward

7,250

Interest on

Capital

3,500 Sales 2,50,000

Stationery 2,250 Bills Payable 15,000

Return Inwards 6,500 Creditors 98,250

Capital 89,500

The closing stock was valued at Rs.1,25,000

Ans.Trading account of M/s Kiran Trading Co

Trading Account

Dr Cr

Opening stock 5,000 Sales - Return Inward 243,500

Purchases - Return Outward 192,500 Closing Stock 125,000

Carriage Inwards 4,000

Wages 14,000

Gross Profit 153,000

368,500 368,500

Profit and Loss Account of M/s Kiran Trading Co

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Profit and Loss Account

Dr Cr

Rent and Taxes 5,500 by Trading a/c Gross Profit 153,000

Insurance 5,500 Comission Received 2,000

Trade Expenses 1,000

Commission Paid 4,000

Interest on Capital 3,500

Staionary 2,250

Carriage Outward 7,250

Net Profit 126,000 155,000 155,000

Balance Sheet Account of M/s Kiran Trading Co

Balance Sheet

Capital and Liabilities Assets

Bills Payable 15,000 Sundry Debtors 150,000

Capital 89,500 Office Furniture 5,000

Creditors 98,250 Cash in Hand 2,500

Net Profit from P & L Account 126,000 Cash in Bank 23,750

B/R 22,500 Closing Stock 125,000

328,750 328,750

5. Write a note on:a. outstanding expenses

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b. prepaid expenses

Ans.

a. Out standing expenses:

Expenses due but not paid are known a outstanding expenses.Wages, salaries, rent, commission etc payable in the current month

are paid in the following month. If the final accounts are prepared for

the year ending 31st December, then the expenses payable forDecember will be paid in January of next year. The extent to which the

amount belongs to the current year but payable in the next year iscalled outstanding expenses. To record that aspect, the journal entry

drawn in the journal proper is:

Concerned Expenses account Dr

To outstanding expenses account.

Outstanding expenses account indicates liability for the current yearand it will appear in the balance sheet.

b. Prepaid expenses:

Expenses paid in advance are regarded as prepaid expenses. Prepaidexpenses form an asset and therefore prepaid expenses account is

debited. For example, insurance premium is paid from April, 2004 toMarch, 2005; and the amount is Rs. 3600. The financial year ends by

31st December, 2004. Therefore the premium relating to Jan, Feb. andMarch of 2005 Rs. 900 is said to have been paid in advance. To record

this internal adjustment, the entry is:

Prepaid Expenses account Dr 900

To insurance account 900Note that outstanding or prepaid expenses accounts are regarded as

personal accounts.

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set 1 mb0025 financial and management accounting

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