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SEMESTER 2
BBA203 FINANCIAL ACCOUNTING
Question 1-Explain the accounting process. What are the objectives of accounting?
Answer 1-Accounting is the process of identifying the transactions and events, measuring the transactions and events in terms of money, recording them in a systematic manner in the books of accounts, classifying or grouping them and finally summarizing the transactions in a manner useful to the users of accounting information.
ACCOUNTING ENCOMPASSES
–IDENTIFICATION
-MEASURING
-RECORDING
-CLASSIFYING
-SUMMARISING
-ANALYSING
-INTERPRETING
-COMMUNICATING
The basic objective of accounting is to provide full, accurate and meaningful financial information about the financial activities of a business to all those who have a right and a need to have such information.
The main objectives of accounting include:
– Systematic recording of all business events or transactions and subsequent posting to ledger, to finally prepare financial statements – profit and loss account and balance sheet.
– Reporting the results to management, shareholders, creditors, bankers, investors, stock brokers, stock exchanges, employees, government etc.
-Satisfying the statutory requirements, especially Registrar of Companies (ROC), Securities Exchange Board of India (SEBI), tax authorities (sales tax, excise, customs and income tax) and government in order to protect the interest of general public.
-Protecting the properties of business by recording them on the date of acquisition and showing their accounts in the balance sheet.
– Planning, controlling and decision making functions become easy where books of accounts are maintained properly. This helps in internal control by holding concerned persons responsible for any errors, lapses or under performance.
-Accounting is a tool for effective planning. Current year’s financial performance becomes the basis for future predictions and estimations. Since it is a tool for planning, it also acts as a tool for controlling. Preparation of budgets, cost analysis, tax planning, auditing are some of the functions of accounting.
Question 2- Define accounting concept and explain different types of accounting concepts.
Answer – In order to maintain uniformity and consistency in preparing and maintaining books of accounts, certain rules or principles have been evolved. These rules/principles are classified as concepts and conventions. Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts.Some of the important accounting concepts are “Business entity concept, Money measurement concept, Going concern concept, Accounting period concept,Accounting cost concept,Duality aspect concept,Realization concept,Accrual concept,Matching concept.
1. Business entity concept
According to this concept the entity is separate and distinct from the person who owns or controls it. The amount of capital invested by the owner and his share in the profit of the business is treated as a liability of the entity.
2. Money Measurement Concept
Each transaction and event must be expressible in monetary terms. The advantages of monetary expression are that (a) it provides a simple measuring device to represent many facts in a common denominator and (b) it is amenable to summarization. If an event cannot be expressed in monetary terms, it cannot be considered for accounting purposes.
3. Going Concern Concept
According to this concept, it is assumed that the business will exist for a long time. This concept forms the basis for the distinction between expenditure that will yield benefit over a long period of time and expenditure whose benefit will be exhausted in the short-term.
4. Accounting Period Concept
All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. This period, known as the accounting period, is usually the calendar year (January 1 to December 31) or the financial year (April 1 to March 31).
5. Cost Concept
Accounting cost concept states that assets such as land, building, plant and machinery should be recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation. The cost of the asset is systematically reduced from year to year by charging depreciation on the asset for its usage and wear and tear. The justification for using cost concept is that it can be objectively verifiable.
6. Dual Aspect Concept
It is the heart of whole accounting process. It is an expression of entity concept because it shows that the business itself owns the assets and in turn owns the various claimants. This is technically stated as ‘for every debit, there is a credit’.
7. Realization Concept
This concept states that to recognize revenue from any business transaction it has to be ‘realized’. The term realization means creation of legal right to receive money. Selling goods is realization, receiving order is not.
8. Accrual Concept
Accrual concept suggests that incomes and expenses should be recognized as when they are earned and incurred, irrespective of whether the money is received or paid in connection thereof.
9. Matching Concept
The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. The determination of profit of a particular accounting period is essentially a process of matching the revenue recognized during the period and the cost to be allocated to the period to obtain the revenue.
Question 3- Journalize the following transactions –
i. Jan 1st – Mr. Harshit started his business with Rs. 80,000/- which he
brought as his capital in cash.
ii. Jan 10th – He purchased goods worth Rs.30,000/- in cash and
Rs. 20,000/- on credit.
iii. Jan 12th – He paid wages Rs. 500/-
iv. Jan 15th – Sold goods for Rs. 20,000/- in cash and Rs. 25,000/- on credit
v. Jan 16th – Paid to suppliers Rs. 8,000/- for goods purchased on credit
vi. Jan 20th – Received Rs. 15,000/- from his debtors
vii. Jan 31st – Paid rent Rs. 1,000/- in cash
Answer 3-
| DATE
|
PARTICULARS | L.F | DEBIT | CREDIT | |
| 1-JAN
|
Cash A/C Dr
To Capital A/C (Being Capital brought in by Harshit) |
80,000.00 |
80,000.00 |
||
| 10-JAN | Purchase A/C Dr
To Cash A/C To Creditor A/C (Being goods purchased in cash and on credit) |
50,000.00 |
30,000.00 20,000.00 |
||
| 12-JAN | Wages A/C Dr
To Cash A/C (Being wages paid in cash) |
500.00 |
500.00 |
||
| 15-JAN | Debtor A/C Dr
Cash A/C Dr To Sales A/C (Being goods sold in cash and on credit) |
20,000.00
5,000.00 |
25,000.00 |
||
| 16-JAN | Creditor A/C Dr
To Cash A/C (Being cash paid to creditor against goods purchased) |
8,000.00 |
8,000.00 |
||
| 20-JAN | Cash A/C Dr
To Debtor A/C (Being cash received from debtor against goods sold) |
15,000.00 |
15,000.00 |
||
| 31-JAN | Rent A/C Dr
To Cash A/C (Being rent paid in cash) |
1,000.00 |
1,000.00 |
||
Question 4- On 1st Jan 2009, Ramanathan opened a Bank Account by depositing Rs.6,000/- in cash. All remittances are to be paid into bank on the same day on which they are received and all payments are made by cheques. Enter the followingtransactions in three columnar cash book.
Jan 2 Goods sold to Mohan for cash Rs.250
Jan 5 Settled Hari’s account of Rs.200 at a discount of 5%
Jan 7 Received from Shyam a cheque for Rs.725. Discount allowed Rs.25
Jan 10 Purchased a calculator for Rs.200.Spent Rs.50 on the cover
Jan 12 Shyam’s cheque was returned dishonoured
Jan 15 Received a money order for Rs.25 from Hari
Jan 20 Shyam settled his account by means of a cheque for Rs.755, Rs.5
being for interest charged
Jan 27 Purchased machinery from Rajiv for Rs.5000 and paid him by means
of a bank draft purchased from bank for Rs.5,005
Hint Balance b/d – Bank 1585
Answer 4-
|
DATE |
Particulars
|
L.F
|
Dis
|
Cash
|
Bank
|
Date
|
Particulars
|
L.F
|
Dis
|
Cash
|
Bank
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Jan-1
|
To Capital a/c | 6000 | Jan-1 | By bank a/c | C | 6000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Jan-1
|
To Cash | C | 6000 | 2 | By bank | C | 250 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2
|
To sales | 250 | 5 | By Hari | 10 | 190 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2
|
To Cash | C | 250 | 10 | By calculator a/c | 200 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 7
|
To Shyam | 25 | 725 | 10 | By calculator a/c | 50 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 15
|
To Hari | 25 | 12 | By Shyam | 25 | 725 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 15
|
To Cash | C | 25 | 15 | By bank | C | 25 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 20
|
To Shyam | 750 | 27 | By Machinery | 5000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 20
|
To Interest | 5 | By Draft Commission | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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31
|
By balance c/d
|
|
|
|
1585
|
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|
|
|
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25
|
6275
|
7755
|
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|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Feb1
|
To Balance b/d
|
– | – | 1585
|
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Answer 5- Trial balance as on 31/12/2003
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Question 6– What is the meaning and characteristics of Final Accounts?
Answer 6- Final accounts are the summaries of ledger accounts organized in such a manner as to show the profit or loss of the business for the accounting year and the financial position of the business at the end of the accounting year.
After ascertaining the arithmetical accuracy of ledger accounts a business concern has to proceed to prepare financial statements or final accounts. To determine the profit or loss of a concern, income statement or trading and profit and loss a/c is prepared. Balance sheet or statement of financial position will portray the financial condition of the organization on a particular date. These two statements are collectively called final accounts.
Final accounts are required to be prepared by every business concern at the end of accounting year, because they provide valuable accounting information to all interested key parties such as management, shareholders, creditors, government, employees, customers etc. They provide a concise picture of profitability and financial position of the business. They are the end products of accounting process. They summarize all the accounting information recorded in the books of original entry and ledger.
Qualitative characteristics of financial statements include:
Relevance·
Understandability·
Reliability·
Comparability·
True and Fair View/Fair Presentation·
The main characteristics are:
1. Relevant financial information: This simply means the information is able to directly influence the decision making process of the user. To be relevant, financial information should contain the past as well as present records and be able to provide a yardstick for the future. Relevance is also measured in relation to materiality. If an item or event is material, it is probably relevant to the user of financial statements.
2. 2. Understandability: In addition to relevance, the users of financial statements will be able to make informed and better decision if they can be able to interpret the contents of financial statements. Understandability is about communicating an intended meaning. This depends on both the accountant and the decision maker. Accountants should produce financial information and present it in a form, which can be easily understood and interpreted by their intended users.
3. Reliable information: According to IASC’s Conceptual framework, to be reliable, information must be neutral, that is free from bias. Financial statements are not neutral, if by the selection or presentation of information, they influence the making of a decision or judgment in order to achieve a pre-determined result or income.
4. 4. Comparability: Another important character of accounting information is comparability. Financial statements of the organization must be capable of being linked with other non-financial information within the enterprise. User should also be able to compare financial statements of an enterprise through time in order to assess the trend in performance and financial position.
True and Fair View/Fair Presentation: It must exhibit the true and fair view of the financial position of the organization.
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