MBA- I semesterMB0025- Financial & Management Accounting – 3 Credits

Book ID- ( B0907 )Assignment Set 1- (60 Marks)

Note: Answer all the questions.

1. Explain any two concepts of accounting with examples. (10 marks)

Accounting Concepts:

Accounting is the language of business and it is concerned with measurement of financial performance of a business by recording, analyzing and reporting the business results for the sake of stakeholders. Since all stakeholders should understand the accounting language in the same sense, certain principles, concepts and policies of accounting have been laid down. Principles are basically the rules of action adopted by the accountants universally while recording accounting transactions. The principles are doctrines associated with theory and procedures and current practices of accounting. These principles may be classified as concepts and conventions. While concepts are in the form of assumptions or conditions, conventions are those customs and traditions which guide the accountants while preparing accounting statements. For instance business is started with an assumption that it shall be continued for a long period of time and no body promotes a business organization to close it down within a short period. Basing on this assumption, business man purchases fixed assets, uses them and values them from time to time. This is a strong assumption that any businessman approaches with. Such assumption is called a concept. To give an example for convention, inventory (stock) in a business is valued at the end of an accounting period, at cost or market price which ever is lower. This is an accepted convention or a practice or a principle in accounting. On the other hand, an accounting policy is one which is adopted by management, relevant to the situations. For example, every asset should be depreciated (this is a concept) at the end of an accounting period. The practice is to adopt fixed installment or diminishing balance method or any other method of depreciation.(this is a convention). The policy of the management may be to adhere to fixed installment method of depreciation and it is their choice. Therefore no management can exercise discretion regarding fundamental presumptions of accounting. But every management has a choice of making an accounting policy.

It is not out of place to mention that in order to bring uniformity in terminology, accounting concepts, conventions, and assumptions, the Institute of Chartered Accountants of India (ICAI) established Accounting Standards Board (ASB) in 1977. The principal objective of ASB is to formulate accounting standards so that such standards will be established by the council of ICAI. While formulating the accounting standards, ASB will give due consideration to the International Accounting Standards and try to integrate them to the extent possible. It also considers the customs, practices, laws and usages prevailing in Indian business. There are altogether 30 accounting standards issued by ASB which have to be adopted by management of different enterprises to improve the quality of presentation of financial statements in our country.

Concepts are the basic assumptions or conditions upon which the science of accounting is based. There are five basic concepts of accounting, namely –

Business entity concept, which is also termed as Separate entity concept, Going concern concept Money measurement concept Periodicity concept Accrual concept.

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 enterprise should be promoted for a short period only to liquidate the business in the foreseeable future. This assumption is called “going concern concept”. For this reason accountants value fixed assets on historical cost method. Had the business been set up to last for a short period, fixed assets should have been valued at a market price. Besides, going concern concept provides for amortization of the cost of fixed assets over the life time of the assets.

For example, an entrepreneur purchases 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 the business so that it would help him for replacement of the asset at the end of ten years. This process of amortization presupposes that the enterprise will continue to do business fairly for long time.

Accrual Concept

Profit earned or loss suffered for an accounting period is the result of both cash and credit transactions. It is possible that certain incomes are earned but not received and similarly expenses incurred but not yet paid during an accounting period. But it is relevant to consider them while computing the financial results just because they are related to the specific accounting period.

For example, interest receivable on Fixed deposit for the year ending 31-12-2006 is Rs. 12000 but it is actually credited to the bank account only in February 2007. For calculating the income from interest, the amount Rs.12000 is considered even though it is not received before 31-12-2006. This amount is called accrued interest. Similarly the expenses which are incurred for the accounting period, might be paid only after the accounting period. Such accrued expenses are deducted while calculating the profit for the accounting period. This is the accrual concept.

2. Prove that accounting equation is satisfied in all the following transactions of Mr.X1. Commenced business with cash – Rs.80,000 (10 marks)2. Purchased goods for cash – Rs.40,000 and on credit Rs.30,0003. Sold goods for cash – Rs.40,000 costing Rs.25,0004. Paid salary – Rs.2,000 and salary outstanding Rs.1,0005. Bought scooter for personal use for cash at Rs.20,000

ParticularsMr. X Capital + Liabilities = Assets

Cash a/c

Goods a/c

Salary a/c

1. Commenced business with cash – Rs.80,000 (+) 80000 80000

2 a) Purchased goods for cash – Rs.40,000

(-) 40000 40000

2 b) Purchase on credit Rs.30,000 (+) 30000 (+) 30000

3 a) Sold goods for cash – Rs.40,000 (+) 40000

3 b) Costing Rs.25,000 (+) 15000 (-) 25000

4 a) Paid salary – Rs.2,000 (-) 2000(+) 2000

4 b) Salary outstanding -Rs.1,000 (-) 1000 (+) 1000

5. Bought scooter for personal use for cash at Rs.20,000 (-) 20000 (-) 20000

74000 + 31000 = 58000 45000 2000

Total Amount105000 105000

3. Show the rectification entries for the following: (10 marks)a. The Sales account is undercast by Rs.15,000b. Goods returned by the customer Mr.X of Rs.5650 has been posted in the Return Inward

Account as Rs.5560 and in Mr.X a/c as Rs.6,550.c. Salary paid Rs.6,000 has been posted to Rent accountd. Cash received from Ram posted to Shyam account Rs.7,000e. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhu’s a/c.

Answer: Journal Proper

Date Particulars LF Debit

Rs.

Credit

Rs.a Suspense account Dr

To Sales account

(Being under casting of sales book rectified)

15,000

15,000

b Mr. X account Dr

Return Inward A/c

To Suspense a/c

(Being less debit given to returns inwards account to the extent of Rs90, and excess credit given to Mr. X, now rectified)

900

90

990

c Salary A/c Dr

To Rent A.c

(Being salary paid and account debited to rent a/c, now rectified)

6000

6000

d Shyam a/c Dr

To Ram account

(Being cash recd. From Ram but credited to Shyam now rectified)

7000

7000

e Suspense a/c

To Madhu a/c

To Jadu

17280

8640

8640

1. The following balances are extracted from the books of Kiran Trading Co on 31st March 2000.

You are required to prepare trading and profit and loss account and a balance sheet as on that

date: (20 marks)

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

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

Answer:

Trading Account

Particulars Amount Particulars AmountOpening Stock 5000 Closing Stock 125000Purchases 195000Return Outward -2500

192500 Sales 250000Return Inward -6500

243500

Wages 14000Carriage Inwards 4000

Gross Profit 153000TOTAL 368500 TOTAL 368500

Profit and Loss Account

Particulars Amount Particulars AmountInsurance 5500 GP 153000Commission Paid 4000 Commission Recd. 2000Stationary 2250Rent and Tax 5500Carriage Outward 7250Trade Exp 1000Interest on Capital 3500Net Profit 126000TOTAL 155000 TOTAL 155000

Balance Sheet

Liabilities Amount Assets AmountCapital 89500 Stock 125000Bills Payable 15000 B/R 22500Creditors 98250 S. Debtors 150000Net Profit 126000 Furniture 5000

Cash 2500Bank 23750

TOTAL 328750 TOTAL 328750

2. Write short notes on : (10 Marks)a. Outstanding Expensesb. Prepaid Expenses

Outstanding expenses

Expenses due but not yet paid are known as outstanding expenses. Wages, salaries, rent, commission etc payable in the current month are paid in the following month. If final accounts are prepared for year ending 31st December, then the expenses payable for December 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 is called 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 year and it will appear in the balance sheet.

Example: Advertisement expenses for year 31-12-2003 outstanding is Rs.5000. The journal entry is

Advertisement expenses account Dr 5000

To Outstanding expenses account 5000

Prepaid Expenses

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

For example, insurance premium is paid from April, 2004 to March, 2005 and the amount is Rs.3600. The financial year ends by 31st December, 2004. Therefore the premium relating to Jan, Feb and Mar 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 900