SBA 32 FINANCIAL ACCOUNTING Unit-1 ACCOUNTING CONCEPTS Type: 20% Theory 80% Problem Question & Answers

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1 ACADEMIC YEAR: REGULATION CBCS SBA 32 FINANCIAL ACCOUNTING Unit-1 ACCOUNTING CONCEPTS Type: 20% Theory 80% Problem Question & Answers PART A ANSWERS 1. Define Subsidiary Books.(2015) A subsidiary account is an account that is kept within a subsidiary ledger, which in turn summarizes into a control account in the general ledger. Subsidiary account is used to track information at a very detailed level for certain types of transactions, such as accounts receivable and accounts payable. 2. Define Accounting? (April 2012) According to the American Institute of Certified Public Accountants (AICPA) Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are of a financial character and interpreting the results thereof. 3. Write short note on Accounting concepts? (Nov/Dec. 2013) The generally accepted principles were evolved from common experience of accountants, historical precedents, regulations of government agencies and statements from professional bodies. 4. Write short note on ledger? (Nov/Dec. 2013) Ledger is the second important stage in the accounting cycle or process. In this stage of a accounting cycle, all recorded business transactions or entries are grouped on a predetermined basis. Ledger is the main book of accounts in a business. Ledger and the accounts contains are the core of accounting process. 5. What do you mean by subsidiary books? (Apr./May 2014) Maintaining a single Journal book in which journal entries are written for each transaction and posting them to ledger is practicable in small business where a single accountant can maintain accounts or the owner himself can do the accounts work. 6. State any two accounting rules? (Apr./May 2014) 1. To maintain accounting records 2. To ascertain the financial position. RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 1 of 13

2 ACADEMIC YEAR: REGULATION CBCS What is Double Entry System? (Apr./May 2013) The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to always be in balance. 8. What is meant by Dual Aspect Concept? (April 2012) This state that there are two aspects of accounting, one represented by the assets of the business and the other by the claims against them. The concept states that these two aspect are always equal to each other. In other words, this is the alternate form Assets=Liabilities+Capital Dual aspect concept is known as "Double Entry Book Keeping System". 9. Define Journal? Recording is the first step which usually accomplished through journal or subsidiary books. Classifying is achieved through ledger. Summarising is accomplished by preparation of trial balance. Finalising is through preparation of trading account, profit and loss account and balance sheet. It is essential to understand the objective of each stage and the books and records maintained to achieve the objective. 10. What are the objectives of accounting? 1. To maintain accounting records. 2. To calculate the result of operations. 3. To ascertain the financial position. 4. To communicate the information to users. 11. What is purchase book? Purchase book is also known as bought book, purchase day book, invoice book and purchase journal. All credit purchases of goods are recorded in this book. Periodical total of this book provides total credit purchase of goods made by the firm. Inward invoices received from suppliers, duly verified, form the basis for entries in purchase book. 12. What is Sales Book? Sales book is also known as day book, sales day book, sold book, sales journal etc. All credit sales of goods are recorded in this book. Periodical totals of this book provide the total credit sales of goods by the firm. Outward invoices form the basis for making entries in the sales book. RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 2 of 13

3 ACADEMIC YEAR: REGULATION CBCS What is Purchase Return Book? It is also called Return outward book and Purchase returns journal. Goods returned to suppliers which were originally purchased on credit are recorded in this book. Periodical totals of this book provide data on purchase returns by the firm. 14. What is Sales Return Book? This book is also called Return inward book and sales return journal. Goods returned by customers who were originally sold on credit are recorded in this book. Monthly total of this book provide data on sales returns. 15. What is cash book? Cash book plays a dual role by serving as a subsidiary book and also as a ledger account. It is the book of original entry because receipts and payments are recorded in the cash book and they are posted to the different accounts in the ledger. 16. Give Journal Entries for the following: a) Purchased goods from kumar for cash Rs b) Paid Interest Rs a) Purchase a/c 6000 To Cash a/c 6000 (Purchased goods for cash) b) Interest a/c 1500 To Cash a/c 1500 (Paid interest) 17. What is debit note? Debit note means sent by the firm to the suppliers when goods are returned form the basis for entries in this book. 18. What is credit note? Credit note sent to the customers after receiving the goods returned by them form the basis for entries in this book. RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 3 of 13

4 ACADEMIC YEAR: REGULATION CBCS Mention the different types of cash book? 1. Simple cash book or single column cash book 2. Two column cash book with cash and discount columns 3. Two column cash book with bank and discount columns and 4. Three column cash book with cash, bank and discount columns. 20. What is a Three columnar cash book? This cash book is of maximum utility because it minimizes work relating to accounts and presents a summarized picture of the liquidity position of a business. 21. What are the basic documents needed for subsidiary books? Inward invoice, Outward invoice, Debit note, Credit note, Cash receipts and vouchers. 22. What are the benefits of subsidiary books? 1. Reduction in work 2. Permits group work 3. Accuracy 4. Better information 5. Cash book 23. What is a contra entry? When cash is deposited into bank, it is debited in bank column on debit side and credited in cash column on the credit side. Similarly, when cash is withdrawn for business use, cash column is debited on the receipts side and bank column is credited on the payment side. Thus, both debit and credit aspects of contra entries are completed in cash book itself. 24. What is Inward invoice? It is received from suppliers, duly verified, form the basis for entries in purchase book. 25. What is Outward invoice? Outward invoice form the basis for making entries in the sales book. The invoices must be properly authenticated. RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 4 of 13

5 ACADEMIC YEAR: REGULATION CBCS What are the methods of recording the purchase return book? As per the dates of returns made, entries are recorded in purchase returns book. Name of supplier, with details of goods returned and the relevant debit note number are shown along with the net amount. PART B ANSWERS 1. Give journal entries to the following transactions.(apr/may 2015) Mar 1 sold goods to Ragavan for cash Rs. 9,500 2 Sold goods to Mugunthan Rs. 7,000 3 Cash sales Rs.12,000 4 Goods bought by Murthy Rs. 3,500 5 Sold old Machinery Rs. 14, Prepare Double Column cash book from the following information cash balance Rs.6900 (Apr/May 2015) Mar 1 6 Paid to sundar Rs. 1,428 and received discount Rs Paid salary Rs.5, cash sales Rs, 11, Cash withdraw for personal use Rs.1, Getting compensation from railway officer Rs. 4, Cash received from santhi Rs.3, 975 and allowed discount Rs Journalise the following(april 2012) (i) Sold goods to Mani for cash Rs 25,000 (ii) Paid wages by cheque Rs. 10,000 (iii) Old furniture sold to Ram for cash Rs 3, Journalise the following transactions in the books of Sri T.N of Coimbatore: (April/May 2013) Oct 1 commenced business with Rs 50,000 3 Purchased goods for cash Rs.10,000 at 5% trade discount. 4 Paid Carriage Rs 50 8 Purchased machinery for Rs. 20, Sold goods to Madan on account for Rs.15, Why we are preparing subsidiary books? What are subsidiary books? Subsidiary Book: Maintaining a single Journal book in which journal entries are written for each transaction and posting them to ledger is practicable in small business where a single accountant can maintain accounts or the owner himself can do the accounts RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 5 of 13

6 ACADEMIC YEAR: REGULATION CBCS work. In bigger transactions are so numerous and varied that a single journal book is absolutely inadequate and cumbersome. Need for preparing subsidiary books: (a) Reduction in work: Overall work reduces in this system compared to a single journal because one posting alone is made on the date of the transactions. Consolidated monthly posting is made for the second aspect. (b)permits group work: Single journal can be written by one personal alone. Work on subsidiary books can be carried on by many accountants. (c) Accuracy: Accounts will be more accurate because of specialized work and monthly summarized postings. (d) Better information: A lot of useful data like total credit sales, credit purchases, returns, etc., is made available which is not possible in journal system. (e) Cash book: Cash book itself takes the place of journal as well as ledger account. Thus, separate cash account in not needed. In case of three column cash book, even bank a/c is not needed in the ledger. 6. Enter the following transactions in the purchases book and sales Book of Mr.Pandian 2012 (April/May 2013) Jan 1 Purchased goods from Balu 30,000 2 Sold goods to swamy 15,000 4 Bought goods from gown 13, Sold goods to Thenali 10, Sold goods to jayaraman Bought goods from Rajesh 9, Sold goods to shanthi Explain types of accounts and state the rules for it? (Nov/Dec.2013) Types of Accounts: 1. Personal Accounts 2. Impersonal Accounts Impersonal accounts can be further divided into real and nominal accounts. Thus, there are Three kinds of accounts maintained by a business. a) Personal Accounts: Accounts of persons with whom the business has dealings are known as personal accounts. It takes the following forms: (i) Natural Accounts: The name of an individual customers or suppliers. RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 6 of 13

7 ACADEMIC YEAR: REGULATION CBCS (ii) Artificial persons or legal bodies: Firms accounts, limited companies accounts, educational institutions accounts, bank account, co-operative society account etc., are known as artificial persons, accounts. (iii) Representative personal accounts: All accounts representing outstanding expenses and accrued or prepaid incomes are personal accounts. b) Real Accounts: Accounts in which the business records the real things owned by it. i.e., assets of the business are known as real accounts. Real accounts are of two types i.e., tangible real accounts and intangible real accounts. There are some intangible real accounts, which cannot be toughed because they have no physical shape such as trademark, goodwill, patents and copyright etc. c) Nominal Accounts: It relates to the items which exist in name only. Expenses, incomes etc., are there in business activities. Accounts which record expenses, losses, incomes and gains of the business are known as nominal accounts. 8. Describe any two accounting concepts? (Nov/Dec) There are the necessary assumptions or conditions upon which accounting is based. Accounting concepts are postulates, assumptions or conditions upon which accounting records and statement are based. The various accounting concepts are as follows: Money measurement concept: As per this concept, in accounting everything is recorded in terms of money. Events or transactions which cannot be expressed in terms of money are not recorded in the books of accounts, 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 are recorded in the accounting books however events like death of an executive, resignation of a manager are such events which cannot be expressed in money. 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 cost, 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. 9. Prepare a three column cash book from the following( April 2012) 2011 Rs March 1 Cash balance 20,000 Bank balance 23,000 RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 7 of 13

8 ACADEMIC YEAR: REGULATION CBCS Paid rent by cheque 5,000 4 cash received on a/c of sales 6,000 5 deposited into bank 8,000 9 Bought goods by cheque 7, withdrew from bank for office use 5, Paid into bank 3, Paid salaries 10, Journalise the following transactions (Nov/Dec 2013) March sold goods to Ragavan for cash 9,500 2 Sold goods to Mukundan 7,000 3 Cash sales 12,000 4 Murthy bought goods 3, Record the following transactions in the Personal account of Kapil: 2000 Rs Apr 1 sold goods to kapil 6,000 5 Cash received from kapil 5,800 And allowed him discount Kapil puchased goods 8, received cash from kapil on account 4,500 May 1 balance from last month b/d 3, sold goods to kapil 12, received cash from kapil 4,850 And allowed him account Received cash in full settlement of Kapil s account 10,250 PART C ANSWERS 1. Explain the difference between Journal with ledger? (April/May) Primary: Journal is the book of original entry; ledger is dependent on journal for data. 2. Recording: In the journal, recording is in chronological order as and when transactions take place. In ledger recording is analytical. Transactions relating to particular accounts are entered in those accounts. No specific order is followed. 3. Evidence Value: As book of primary entry, journal has better evidence value is case of legal problems. However, ledger is the primary source for assessing business results. RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 8 of 13

9 ACADEMIC YEAR: REGULATION CBCS Focus: In journal the focus is on transaction. Both aspects debit and credit of a transaction are to be recorded. In ledger, the focus is on account. All dealings relating to an account must be recorded in the account. 5. Terminology: Recording in journal is called journalising. Recording ledger is called posting. 6. Importance: Ledger is the main book of accounts. Journal is subsidiary which means secondary. 7. Timing: Journalising is a continuous process. It has to be done day after day, as and when transactions take place. Ledger can be intermittent. It can be done any time either daily or once in a while, according to need convenience. 2. Briefly explain the various accounting concepts? (April/May) There are the necessary assumptions or conditions upon which accounting is based. 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). One can sell goods to himself, but all the transactions are recorded in the book of the business. This concept 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 books 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 Acti vity): It is assumed that the business concern will continue for a fairly long time, unless and until has entered into a state 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 transactions which cannot be expressed RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 9 of 13

10 ACADEMIC YEAR: REGULATION CBCS in terms of money are not recorded in the books of accounts, 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 are recorded in the accounting books however events like death of an executive, resignation of a manager are 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 as asset is ordinarily recorded at the price paid to acquire it i.e. at its cost, and 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 cost, power and other overhead expenses. These costs have a capacity to merge or attach when they are brought 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 the 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 measuring 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 for only when it is actually realized. Revenue is recognized only when sale is RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 10 of 13

11 ACADEMIC YEAR: REGULATION CBCS affected or the services are rendered. However, in order to recognize revenue, receipt of cash us not essential. Even credit 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. 3. Prepare purchase returns book sales returns book from the following data (April 2012) 2010 Rs Dec 1 purchased goods returned to Arun received goods returned by Ram goods returned to Kumar 1,600 7 Sales returns of Rs.2520 by mohan 15 Returned defective goods to Ravi 2, Damaged goods returned by Mani 2, Outward returns to Kumar Inward returns by samy 1, Returned inferior goods to sasi 1, Sekar returned goods to us 2, What is single entry system? Distinguish between single entry system and double entry system? (April 2012) Single Entry System: There is no system of accounts called Single Entry System. The term single entry is vaguely used to refer to any method of maintain accounts which does not conform to strict principles of double entry. Single entry does not mean that there is only one entry for each transaction. In fact, single entry is a combination of (a) Double entry for some transactions like cash collected from debtors (b) single RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 11 of 13

12 ACADEMIC YEAR: REGULATION CBCS entry for transactions like cash sales and (c) No entry for transactions like depreciation. Difference between single entry and double entry system Sl. No. Basis of Difference Double Entry System Single Entry System 1. Recording of Both aspects of all In some cases, both transactions transactions are recorded. aspects, in some others a single aspect or no aspect is recorded. 2. Opening of Accounts All personal, real and nominal accounts are opened. Only personal accounts and cash account are opened. 3. Preparation of Trial Balance Trial Balance prepared. can be Trial Balance cannot be prepared 4. Ascertaining profit and loss 5. Revealing financial position Accurate profit or loss can be found, through trading and profit and loss a/c. Reliable financial position can be found through balance sheet. Profit or loss cannot be found normally, in the absence of trading and profit and loss a/c. Balance sheet cannot be prepared. So, financial position is difficult to ascertain. 6. Acceptability Acceptable for Income tax and other tax purposes, for raising of bank loans etc. 7. Acceptable evidence In case of disputes, accounting records can be produced in courts of Not acceptable for taxation, claims, raising of loans. etc. The accounting records are not acceptable as RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 12 of 13

13 ACADEMIC YEAR: REGULATION CBCS law. 8. Utility Suitable for any type of business of any size. evidence. It can be followed by small business men who can exercise personal control over the business. 9. Internal check Internal check is possible. Internal check is not possible. 5. Enter the following transactions in Rehan s cash book with discount and cash columns 1999 Rs Jan 1 cash balance 18,500 3 Cash sales 33,000 7 Paid dravid 15,850 Discount allowed by him sold goods to manohar on credit 19, cash withdrawn for personal expenses 2, Purchased goods from Charles on credit 14, Paid into bank 22, Cash received from Monohar 19,000 Allowed him discount Drew a cheque for office use 17, Paid cash to saravanan 2,950 Discount received from him Paid cash to Charles less discount 14, Cash purchases 13, Paid for advertising Paid salaries 12, RAAK/B.B.A/V.ARUNAGIRI/IYR /II Sem/UBA 32/FIN. ACC/UNIT-1 QB/VER 1.0 Unit 1 Answers Page 13 of 13

14 UBA 32 FINANCIAL ACCOUNTING Unit-2 TRAIL BALANCE AND DEPRECIATION Type:20% Theory 80% Problem Question Bank Syllabus: [Regulation: 2012] UNIT II: Trial balance-depreciation-need for depreciation-straight line and WDV methods of charging depreciation only. PART A QUESTIONS 1. Short Note on Trial Balance? (Nov/Dec.2013) A trial balance is a list of all the General ledger accounts (both revenue and capital) contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit balance value. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the trial balance. 2. Define Trial Balance? According to Carter Trial balance is the list or debit and credit balances, taken out from ledger; it also includes the balances of cash and bank taken from cash book. 3. What are the methods of preparation of Trial Balance? A trial balance may be prepared according to either of the following two methods: Total method: If the total of debit sides of all accounts in the ledger is placed in one column of the list and similarly total of credit sides of all the accounts in the ledger is placed in another column of the list then list of total will be known to have been prepared with the total methods. Balances method: According to this system a trial balance is prepared on the basis of balances of accounts. It is based on the mathematical maxim that if equals are taken away from equals, results are equal. This method is simple and requires less work. RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 1 of 13

15 4. Is trial balance a conclusive proof of the accuracy of books of accounts? No, Trial balance is not being the conclusive proof of the accuracy of books of accounts, because there are certain errors which are not disclosed by the trial balance even if it tallies. 1. Errors not disclosed by trial balance. 2. Errors disclosed by trial balance. 5. How do you compute depreciation rate under straight line method? (April 2012) In straight line depreciation method, depreciation is charged uniformly over the life of an asset. We first subtract residual value of the asset from its cost to obtain the depreciable amount. The depreciable amount is then divided by the useful life of the asset in number of accounting periods to obtain depreciation expense per accounting period. Due to the simplicity of the straight line method of depreciation, it is the most commonly used depreciation method. Formula The formula to calculate the straight-line depreciation of an asset for a full accounting period is: Depreciation = Cost Salvage Value Life in Number of Periods 6. What is written down value method of depreciation? (Apr/May 2013) In Written downvalue method, the rate of depreciation is predetermined. This is done by deducting the amount of depreciation charged before from the balance of cost of asset (Cost of Asset-Estimated Scrap Value). In simple words, in the first year the amount of depreciation charged is high and it gradually starts decreasing during the subsequent years. 7. Explain fixed instalment method of depreciation? (Apr/May 2014) According to the fixed instalment method or cost price method, a fixed amount of depreciation is written off annually (therefore the amount of depreciation will be same every year.) It is calculated according to the life span of a fixed asset. 8. What is depreciation? Depreciation is a permanent decline in the value of an asset. The gradual decrease, both in the value and usefulness, of an asset due to its nature and usage is termed as depreciation. RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 2 of 13

16 9. What is the need for depreciation? Ascertainment of true profit or loss Ascertainment of true cost of production True valuation of assets Replacement of assets Keeping capital intact 10. What are the types of depreciation? 1. Straight Line Method or Fixed Instalment Method or Original Cost Method 2. Diminishing Balance Method or Reducing Instalment Method or Written Down value method. 3. Annuity Method 4. Depreciation Fund or Sinking Fund Method 5. Insurance Policy Method 6. Revaluation Method 7. Depletion or Output Method 8. Machine Hour Rate Method 11. What is Error of Principle? An accounting mistake in which an entry is recorded in the incorrect account, violating the fundamental principles of accounting. An error of principle is a procedural error, meaning that the value recorded was the correct value but placed incorrectly. 12. What is Error of Complete Omission? When no entry is made for a transaction in journal or in the subsidiary books, trial balance will tally. Such errors are known as errors of omission, which are not disclosed by trial balance. 13. What is Error of Duplication? Such errors arise when an entry in a book of original entry has been made twice and has also been posted twice. 14. What is Error of Commission? Posting of correct amount but to a wrong side of the proper account Posting of wrong amount to the correct side of proper account Posting to the correct side of the proper account but twice A customer s account may be debited twice for a sale of goods RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 3 of 13

17 15. What is Error of Partial Omission? While posting from journal to ledger, omission of posting to some account is made, e.g., furniture purchased for cash Rs In this case Rs may be recorded in the debit side of furniture account but not recorded in the credit side of cash account. 16. What is Error of Casting? This type of mistake may occur in the subsidiary books. While totaling purchases book or sales book or sales returns book or purchase returns book, higher or lower amount maybe written. 17. What is Error in Balancing? While balancing the ledger accounts, this type of error may occur. The balance shown in an account may be more or less than the correct figure. 18. Define Depreciation? According to International Accounting Standards Committee Depreciation is the allocation of the depreciable amount of an asset over its estimated useful life.depreciation for the accounting period is charged to income either directly or indirectly. 19. Mention any three causes for depreciation? (i) Use (ii) Lapse of time (iii) Obsolescence 20. Mention the various methods of providing for depreciation? (a) When a provision for Depreciation Account is not maintained (b) When a provision for depreciation Account is maintained. 21. What is Revaluation Method? A method of calculating the depreciation of assets, by which the asset is depreciated by the difference in its value at the end of the year over its value at the beginning of the year. 22. Explain the meaning of (a) Obsolescence (b) Amortisation? (a)amortisation: Refers to the expensing of intangible capital assets (intellectual property: patents, trademarks, copyrights, etc.) in order to show their decrease in RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 4 of 13

18 value as a result of use or passage of time. This could be because of consumption, expiration or (b) Obsolescence:Loss of usefulness occasioned by improved production methods is known as obsolescence. 23. What are the merits of Annuity Method? Advantages: Useful method to use in respect to long-term lease which generally involve considerable capital outlay. Interest on capital investment is taken into account. This method is perceived to the most exact, precise and scientific form from the point of view of calculations. 24. What is Machine Hour Rate Method? Machine hour rate is useful for calculating the value of different overheadsfastly. Because depreciation is one of main overhead of the business, so, we can use machine hour rate method for calculating the value of depreciation. As per machine hour rate method of depreciation, we calculate the total life of any fixed asset on the basis of its working hour s life. After this, we divide actual cost of fixed assets with life of fixed assets in hours. After dividing, we will obtain the depreciation rate per hour. 25. A company purchased a plant for Rs The useful life of the plant is 10 years and the residual value is Rs Find out the rate of depreciation under the straight line method. Solution: Cost Estimated Scrap Value Amount of Depreciation = No. of years of expected life = 50,000 10, = Rs. 4, Years Depreciation Rate of Depreciation = x100 Original cost of plant = 4, X ,000 = 8 % RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 5 of 13

19 PART B QUESTIONS 1. An asset is purchased for Rs. 25,000.Depreciation is to be provided annually according to the straight line method. The useful life of the asset is 10 years and the residual value is Rs.5, 000. Your are required to find out rate of depreciation and prepare the Asset A/C for the first three years.(april/may 2013) 2. Prepare Trial Balance:(April/May 2013) Rs Opening stock 10,600 Wages 2,200 Carriage 200 Commission (Dr) 300 Purchases 12,000 Return inward 440 Trade expenses 580 Rent 200 Plant 2,600 Repairs to plant 460 Cash in hand 200 Cash at Bank 1,000 Debtors 3,000 Income tax Prepare trial balance from the following data of Nathan year ended (Nov/Dec 2013) Capital 40,000 Sales 25,000 Creditors 1,000 Purchases 15,000 Salaries 2,000 Rent 1,500 Insurance 300 Machineries 28,000 Drawings 5,000 RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 6 of 13

20 Bank 4,500 Cash 2,000 Opening Stock 5,200 Debtors 2, Explain the difference between Trial Balance and Balance Sheet? (Nov/Dec. 2013) S.No. Trial Balance Balance Sheet 1. A Trial Balance is prepared to check the arithmetical accuracy of the books of accounts. 2. A Trial Balance can be prepared frequently. It may be prepared at the end of a month or a quarter. A Balance Sheet is prepared to know the financial position of the business enterprise on a given date. A Balance Sheet is generally prepared at the end of the accounting period. 3. The heading of the two columns are Debit Balances and Credit Balances. 4. All types of accounts find their place in the Trial Balance. 5. Generally, the opening stock appears in the Trial Balance, whereas the closing stock does not. 6. In a Trial Balance, it is not possible to have information about net profit or net loss. The headings of the two sides are Liabilities and Assets. In a Balance Sheet, accounts of assets, liabilities, capital and those accounts which are remained open after the preparation of Trading and Profit and Loss account. In a Balance Sheet, only the closing stock appears on the assets side. In the Balance Sheet, information about net profit earned or net loss incurred is provided. RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 7 of 13

21 7. A Trial Balance can be prepared without making adjustments regarding prepaid expenses, income received in advance, accrued income, etc. A Balance Sheet cannot be prepared without making adjustments regarding prepaid expenses, outstanding expenses, income received in advance or accrued income, making provisions for possible losses, etc. 5. A machine purchased on for as 90,000 immediately spend Rs. 10,000 on its erection change. Prepare machine account for 5 Years under written down value method. Depreciation 10% per annum. (Apr/May. 2014) 6. What are the factors affecting the amount of depreciation? (April 2012) There are four main factors to consider when calculating depreciation expense: The cost of the asset: The cost of asset includes the invoice price of the asset less any trade discount plus costs essential to bring the asset to a usable condition, such as freight, insurance and installation charges. The estimated salvage value of the asset: Salvage value (or residual value) is the amount of money the company expects to recover, less disposal costs, on the date the asset is scrapped, sold, or traded in. Estimated useful life of the asset: Useful life refers to the window of time that a company plans to use an asset. Useful life can be expressed in years, months, working hours, or units produced. Obsolescence should be considered when determining an asset's useful life and will affect the calculation of depreciation. For example, a machine capable of producing units for 20 years may be obsolete in six years; therefore, the asset's useful life is six years. 7. A firm purchased a plant for Rs.2,00,000. The useful life of the plant is 10 years and the residual value is Rs.40,000. Find out the rate of depreciation under the straight line method.(april 2012) RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 8 of 13

22 8. What are the causes for depreciation? The following are the main causes of depreciation: (i) Use: Wear and tear is an important cause of depreciation in the case of a tangible fixed asset. It is due to use of the asset. (ii) Lapse of time: Assets such as, lease, copyright, patent etc. have a fixed number of years of legal life, after the expiry of which, they are rendered useless. As such, their cost is written off over their legal life and the amount charged against revenue every year is known as depreciation. This is true of acquired goodwill also. In these cases, depreciation is known as amortization. (iii) Obsolescence:Loss of usefulness occasioned by improved production methods is known as obsolescence. (iv) Accidents: An asset may reduce in value because of an accident. Accidental loss may be permanent but it is not continuing and gradual. (v)disuse: A machine remaining continuously idle becomes potentially less and less useful with the passage of time. In fact, certain machines life farm implements and machinery used in farming kept in the open, may depreciate more rapidly from disuse than from use. (v) Inadequacy: It refers to the termination of the use of an asset because of growth and changes in the size of the firm. (vii) Depletion: An asset may get exhausted through working as in the case of mines, quarries, oil fields and forests etc. The natural resources such as minerals, granite, oil and timber get exhausted because of extraction and exploitation, and the asset becomes useless. 9. Explain the errors which are disclosed by the Trial balance? A trial balance may not tally because of the following errors: 1. Errors of Commission: There are clerical errors committed by the staff in the accounting department. Such mistakes arise in the following ways: (a) Posting of correct amount but to a wrong side of the proper account. For example, instead of crediting a supplier who has supplied goods on credit, his account might have been debited. RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 9 of 13

23 (b) Posting of wrong amount to the correct side of proper account: Instead of debiting Rs. 200 in customer s account, he may be debited with Rs. 2,000. (c) Posting to the correct side of the proper account but twice. A customer s account may be debited twice for a sale of goods. (ii) Errors of partial omission: While posting from journal to ledger, omission of posting to some account is made, e.g., furniture purchased for cash Rs. 1,000. In this case Rs. 1,000 may be recorded in the debit side of furniture account but not recorded in the credit side of cash account. (iii) Errors in Casting: This type of mistake may occur in the subsidiary books. While totaling purchases book or sales book or sales returns book or purchase returns book, higher or lower amount may be written. For example, if the actual total of purchases book if Rs. 2,000, it may wrongly be totaled as Rs. 2,200. This is known as over casting. If the amount is wrongly totaled as Rs. 1,800, it is known as under casting. Such mistakes will get transferred to ledger and ultimately to the trial balance. As result, trial balance will not tally. (iv) Errors in carrying or bringing forward: While transferring the total amount from one page to another, this type of error may occur. For example, the total of the sales book Rs. 698 on page 15 may be taken to page 16 as Rs (v) Error in balancing: While balancing the ledger accounts, this type of error may occur. The balance shown in an account may be more or less than the correct figure. 10. Messrs.SarojiniBalu& Co purchased a machine for Rs. 22,000 on January The estimated life4 of the machine is 10 years after which its break up value will be Rs.2000.Depreciation has to be charged at 21 % on the diminishing balance. There was an addition to the original plant on January to the value of Rs You are required to prepare machinery account for the first three years. 11. A Company purchased a plant for Rs. 1, 00,000.The useful life of the plant for Rs.1, The useful life of the plant is 5 years and the residual value is Rs. 10,000. Find out the rate of depreciation under this straight line method.(apr/may2015) 12. Prepare Trial Balance from the following: (Apr/May 2015) Capital 1,00,000 Debtors 50,000 Creditors 60,000 Purchase 60,000 RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 10 of 13

24 Sales 1,20,000 Opening stock 70,000 Land and Buildings 1,00,000 PART C QUESTIONS 1. Prepare trail balance for the year ended (Nov/Dec 2013) Capital 1,24,000 Land and Building 84,000 Purchases 81,350 Stock( ) 11,520 Debtors 29,000 Machinery 40,000 Furniture 15,000 Sales 1,97,500 Sales returns 1,350 Creditors 30, A machine was purchased for Rs. 90,000 and spend installation expenses of Rs. 15,000. The machine size is 5 years with the scrap realizable worth Rs.5,000 at the end of the year. The depreciation is calculated on straight line method. Calculate (a) Amount of depreciation (b) Rate of Depreciation (Apr/May 2014). (c) 3. A machine was bought on for Rs.60,000 and installation expenses amount to Rs. 15,000.Depreciation was provided at 10% on the reducing balance method. It was sold on for 36,250. Show the machine account (April 2012) 4. On , Machinery was purchase for 30,000. Depreciation at the rate of 10% on the original cost was written off during the first two years. For the next two years, 15% was written off the diminishing balance method. The machinery was sold for Rs.15, 000. Write up the machinery account for four years and give journal entries. (Apr/May 2015) 5. What are the guidelines to locate the errors when trial balance is not tallied? When the trial balance disagrees, it is necessary to find out immediately where the mistake lies. A routine procedure for this may be stated as under. RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 11 of 13

25 (i) Total thedebit and credit sides of the trial balance once again. (ii) Find out whether there is any item in thetrial balance with an amount equal to half of the difference and if there is any;check up whether the amount is written in the correct column. e.g., if sales returns amount say Rs, 200 is entered in the credit column, the difference in the trial balance would be Rs, 400 excess credit. (iii) See whether any ledger balance is left out of the trial balance. (iv) Check up the ledger balances in the accounts with the balances shown in the trial balance. (v) If totals of different ledger accounts are taken collectively in the trial balance, as in case of sundry creditors account, see whether the total of the balances of all the individual ledger accounts tallies with the collective total taken in the trial balance. (vi) Compare the present trial balance with that of a previous year to ascertain whether the name of some ledger account appeared therein is inadvertently omitted from the present trial balance. (vii) If the error remains still undetected, check all the subsidiary books with particular attention to the posting to ledger accounts. (viii) Check all carry forwards, particularly where accounts have opening balances. Check them with the help of previous balance sheet and other schedules. (ix) Recast all the ledgers, taking utmost care to see that the correct balances have been carried down and that the accounts are accurately balanced. 6. Explain straight line method of providing for depreciation and its merits and demerits? In straight line depreciation method, depreciation is charged uniformly over the life of an asset. We first subtract residual value of the asset from its cost to obtain the depreciable amount. The depreciable amount is then divided by the useful life of the asset in number of accounting periods to obtain depreciation expense per accounting period. Due to the simplicity of the straight line method of depreciation, it is the most commonly used depreciation method. Formula The formula to calculate the straight-line depreciation of an asset for a full accounting period is: Merits: Depreciation = Cost Salvage Value Life in Number of Periods RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 12 of 13

26 1. This method is very simple and easy to calculate. 2. The value of asset can be reduced to zero (or its scrap value) under this method. 3. This method is suitable, for these assets whole working life can easily be estimated. 4. It is recognized by the Companies Amendment Act of Demerits: 1. The same amount of depreciation is charged every year irrespective of the use of the asset. Thus, it does not take into account the effective utilization of the asset. 2. In this method, it becomes difficult to calculate the depreciation on additions made during the particular year. 3. It does not make any provision for the interest on capital invested in fixed asset. 4. As the amount of depreciation remains fixed even during the inflation period, maintenance of capital becomes difficult. 5. This method tends to report an increasing rate of return on investment in the asset on account of the fat that net balance of the asset account is taken RAAK/B.B.A/V.ARUNAGIRI/I YEAR/VI Sem/UBA 32/FIN. ACC/UNIT-2 QB/VER 2.0 Unit 2Answer Page 13 of 13

27 UBA21 FINANCIAL ACCOUNTING Unit-III FINAL ACCOUNTS Type: 20% Theory 80% Problem Question & Answer Bank Syllabus: [Regulation: 2012] UNIT III: Preparation of trading, profit and loss account and balance sheet. PART A 1. What is profit and loss account? (Apr. /May 2013 May 2015,2016) Profit and Loss account is an account into which all gains and losses are collected in order to ascertain the excess of gains over the losses or vice versa. Profit and loss account is prepared in order to calculate the net profit and net loss of the business. 2. Balance Sheet? (Nov. /Dec. 2013) According to R.N. Antony Balance sheet is a screen picture of the financial position of a going business at a certain moment. 3. Net Loss? (Nov. /Dec. 2013) When total of all the expenses is more than gross profit and other income, there remains a deficit and this is called net loss. 4. Drawings? (Nov. /Dec. 2013) Drawing means any amount withdraws from business for personal use. Not only cash but if we withdraw any product from business or any asset of business for personal use that will be drawing. It surely reduces the capital of any business. It is shown on the liability side of the balance sheet and it is reduced from the capital. 5. What do you understand by final accounts? (April 2012) The manner in which the amount of profit or loss has been arrived at is disclosed in the statement of accounts, prepared at the end of the accounting period. 6. What is gross profit? (April 2012) Gross profit is the difference between actual sale proceeds and the cost of goods sold. [Gross profit = Excess of sale proceeds over cost of goods sold]. RAAK/B.B.A/V.ARUNAGIRI/II Sem/UBA21/FIN. ACC/UNIT-III ANS/VER 2.0 Unit 3 Answer Page 1 of 8

28 7. What are Non-Operating expenses? These expenses are not related to the operation of the business and include capital losses as loss on the sale of furniture etc., writing off fictitious assets as preliminary expenses, underwriting commission etc., writing off intangible assets as goodwill, copyright, patents etc. 8. What are Operating expenses? It refers to those expenses which are incurred in order to operate the business efficiently and smoothly. These include administration, selling, distribution, finance and maintenance expenses. 9. When do you prepare a Manufacturing Account? Those concerns which convert raw materials into finished goods and then sell the finished goods are required to prepare manufacturing account. This account is prepared to calculate the cost of goods manufactured, which is transferred to the trading account. 10. Pass necessary adjusting entries in Mr. X s journal on 31 st December 1988: (i) Rs. 20,000 for wages was outstanding. (ii) Write off depreciation on machinery Rs. 50,000. (iii) Rs. 15,000 was received in advance as interest. Ans: S.N. Particulars Debit Credit (i) Wages a/c Dr 20,000 To Outstanding Wages a/c 20,000 (Being wages outstanding) (ii) Depreciation a/c Dr 50,000 To Machinery a/c 50,000 (Being depreciation on machinery) (iii) Interest a/c Dr 15,000 To Interest received in advance a/c 15,000 (Being interest received in advance) 11. What is a final account? In short, the businessman wants to know the profitability and the financial soundness of the business. The final accounts are prepared at the end of the year from the trial balance. These two statements i.e., trading and profit and loss account and balance sheet are prepared to give the final results of the business. RAAK/B.B.A/V.ARUNAGIRI/II Sem/UBA21/FIN. ACC/UNIT-III ANS/VER 2.0 Unit 3 Answer Page 2 of 8