Answer of Q.N.1.
Accounting concepts:
In order to make the accounting language convey the same meaning to all people & to make it more meaningful, most of the accountants have agreed on a number of concepts which are usually followed for preparing the financial statements. These concepts provide a foundation for accounting process. No enterprise can prepare its financial statements without considering these concepts. The term ‘concept’ is used to denote accounting postulates, i.e., basic assumptions or conditions upon which the accounting structure is based.
The characteristics of Accounting Concepts are:
Ø Accounting Concepts are made and developed by men (accountants) and, as such, they do not have the authoritativeness of universal principles, like other natural sciences, viz. Physics, Chemistry, Mathematics etc. It is an empirical science i.e. based on what is experienced or seen.
Ø The general acceptance of an accounting principle usually depends on how well it satisfies three criteria: Relevance, Objectivity and Feasibility. The word ‘relevant’ implies that the information will be useful to the users. The word ‘objectivity’ implies that the recorded data are reliable and verifiable. The word ‘feasibility’ implies that the implementation of the principle in practice will be without much complexity and cost.
Ø Accounting principles cannot be validated /proved by reference to natural laws, as in the case of physical sciences. They are the best possible suggestions based on practical experiences, reasons and observations which have been developed by the persons/authorities engaged in the accounting profession over the years.
Ø Accounting principles are developed for common usage to ensure uniformity and understandability.
Ø Accounting principles are in the process of evolution, i.e., they are not in their finished form. On the other hand, they are fast developing.
Ø They are not rigid.
Various Accounting Concepts
The following are the common accounting concepts adopted by many business concerns.
a) Business Entity Concept
b) Money Measurement Concept
c) Going Concern Concept
d) Dual Aspect Concept
e) Periodicity Concept
f) Historical Cost Concept
g) Matching Concept
h) Realisation Concept
i) Accrual Concept
a) Business Entity Concept: Business entity concept implies that the business unit is separate and distinct from the persons who provide the required capital to it. This concept can be expressed through an accounting equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself owns the assets and in turn owes to various claimants. 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.
b) Money Measurement Concept: According to this concept, only those events and transactions are recorded in accounts which can be expressed in terms of money. Facts, events and transactions which cannot be expressed in monetary terms are not recorded in accounting. 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.
c) Going Concern Concept: Under this concept, the transactions are recorded assuming that the business will exist for a longer period of time. Keeping this in view, the suppliers and other companies enter into business transactions with the business unit. This assumption supports the concept of valuing the assets at historical cost or replacement cost. For example, a company purchases a plant and machinery of Rs.100, 000/ and its life span is 10 years. According to this concept every year some amount will be shown as expenses and the balance amount as an asset.
d) Dual Aspect Concept: According to this basic concept of accounting, every transaction has a two-fold aspect, Viz., 1. giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry system is that every debit has a corresponding and equal amount of credit. This is the underlying assumption of this concept. 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.
e) Periodicity Concept: Under this concept, the life of the business is segmented into different periods and accordingly the result of each period is ascertained. Each segmented period is called “accounting period” and the same is normally a year.
f) Historical Cost Concept: According to this concept, the transactions are recorded in the books of account with the respective amounts involved. For example, if an asset is purchases, it is entered in the accounting record at the price paid to acquire the same and that cost is considered to be the base for all future accounting.
g) Matching 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.
h) Realisation Concept: According to this concept profit, should be accounted for only when it is actually realized. Revenue is recognized only when sale is 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.
i) Accrual Concept: According to this concept the revenue is recognized on its realization and not on its actual receipt. Similarly the costs are recognized when they are incurred and not when payment is made.
Answer of Q.N.2 (a).
Journal Entries
Date
|
Particulars
|
L.F.
|
Amount (Dr.)
|
Amount (Cr.)
|
i.
|
Suspense A/c Dr.
To Commission Account
(Being the Commission of Rs. 275 wrongly debited as Rs.375, now rectified)
|
100
|
100
| |
ii.
|
Sohan Lal’s Account Dr.
To Suspense A/c
(Being the goods of Rs.200 purchased from Sohan lal wrongly posted to his account as Rs.250, now rectified)
|
50
|
50
| |
iii.
|
Suspense A/c Dr.
To Sales Return Account
(Being the total of sales return book overcast by Rs. 475, now rectified)
|
475
|
475
| |
iv.
|
Mahesh’s Account A/c Dr.
To Sales Account
To Purchases Account
(Being the goods sold to Mahesh wrongly entered in purchases book, now rectified)
|
300
|
300
|
Suspense Account
Particulars
|
Amount
|
Particulars
|
Amount
|
To Commission A/c
To Sales Return A/c
|
100
475
|
By Balance B/d
By Sohan Lal’s A/c
|
525
50
|
575
|
575
|
Answer of Q.N.2 (b).
Proforma of Trading, Profit and Loss account and Balance sheet with imaginary figures
Trading and Profit & Loss Account of Sh. Rama Nand Sagar
For the year ended 31st December, 2010
Particulars
|
Amount (Dr.)
|
Particulars
|
Amount (Cr.)
|
To Opening Stock
To Purchases 80,000
Less: Purchase Return 4,000
To Wages 42,000
Add: Wages Outstanding 3,000
To carriage Inward
To Gross Profit
|
20,000
76,000
45,000
3,600
1,43,400
|
By Sales 2,70,000
Less: Sales Return 6,000
By Closing Stock
(Cost or market price whichever is lower)
|
2,64,000
24,000
|
288000
|
288000
| ||
To Carriage Outward
To Salaries 27,500
Add: Outstanding 2,500
To Travelling Expenses
To Lighting
To Rent and Taxes
To General Expenses
To Insurance 1,500
Less: Prepaid 300
To Depreciation on P/M
To Depreciation on Furniture
To Net Profit
|
800
30,000
3,700
1,400
7,200
10,500
1,200
4,500
1,600
87,700
|
By Gross Profit
By Discount
|
1,43,400
5,200
|
1,48,600
|
1,48,600
|
Balance Sheet as on 31st December, 2010
Liabilities
|
Amount
|
Assets
|
Amount
|
Capital 75,000
Add: Net Profit 87,700
Less: Drawings 18,000
Sundry Creditors
Bills Payable
Wages Outstanding
Salaries Outstanding
|
1,44,700
25,000
1,800
3,000
2,500
|
Plant and Machinery 90,000
Less: Depreciation @5% 4,500
Furniture 8,000
Less: Depreciation @20% 1,600
Sundry Debtors
Bills Receivable
Cash in hand
Closing Stock
Prepaid Insurance
|
85,500
6400
52,000
2,500
6,300
24,000
300
|
1,93,200
|
1,93,200
|
Answer of Q.N.3 (a).
Journal Entries
In the Books of A (Consignor)
Particulars
|
LF
|
Amount (Dr.)
|
Amount (Cr.)
|
Consignment to Mumbai account
|
Dr.
|
28600
| |
To Goods sent on consignment account
(Being the Goods sent on consignment to mumbai)
|
28600
| ||
Consignment to Mumbai account
|
Dr.
|
1045
| |
To Bank/Cash account
(Being the expenses incurred by Consignor)
|
1045
| ||
Bank account
|
Dr.
|
15000
| |
To B's account
(Being the Advance Received from B)
|
15000
| ||
B's account
|
Dr.
|
26000
| |
To Consignment to Mumbai account
(Being the 80% goods sold by B)
|
26000
| ||
Consignment to Mumbai account
|
Dr.
|
1956
| |
To B’s account
(Being the Commission due to B)
|
1956
| ||
Stock on consignment account
|
Dr.
|
5889
| |
To Consignment to Mumbai account
(Being the Stock unsold with B transferred to Consignment A/c)
|
5889
| ||
Goods Sent on Consignment account
|
Dr.
|
7500
| |
To Consignment to Mumbai account
(Being the loading on goods sent on consignment transferred to consignment account)
|
7500
| ||
Consignment to Mumbai account
|
Dr.
|
1500
| |
To Stock Reserve account
(Being the loading included in stock transferred to stock reserve)
|
1500
| ||
Consignment to Mumbai account
|
6488
| ||
To Profit and Loss account
(Being the profit on consignment transferred to profit and loss account)
|
6488
| ||
Goods sent on consignment account
|
Dr.
|
7500
| |
To Trading account
(Being the cost of goods sent on consignment transferred to trading account)
|
7500
| ||
Bank account
|
Dr.
|
9044
| |
To B’s account
(Being the final payment received from consignee)
|
9044
|
In the Books of A
Consignment to Mumbai Account
Particulars
|
Amount
|
Particulars
|
Amount
|
To Goods Sent on Consignment A/c
To Bank (Freight)
To B’s A/c (Commission)
To Stock Reserve
To Profit and Loss Account
|
28400
1045
1956
1500
6488
|
By B’s A/c
By Consignment Stock
By Goods Sent on Consignment A/c (Loading)
|
26000
5889
7500
|
39389
|
39389
|
B’s Account
Particulars
|
Amount
|
Particulars
|
Amount
|
To Consignment to Mumbai A/c
|
26000
|
By Bank A/c (Advance)
By Consignment to Mumbai A/c
By Bank A/c (Final Payment)
|
15000
1956
9044
|
26000
|
26000
|
W.N. 1. Calculation of Unsold Stock
20% of goods sent on consignment = (28400 * 20%) = 5680
Add: 20% of expense of consignor = (1045 * 20%) = 209
= 5889
Answer of Q.N.3 (b).
Joint Venture
A joint venture is the combination of two or more persons into a single activity. It is a form of partnership which is limited to a specific venture. It is exactly the same as partnership, with the exception that it is one of a business that is to be terminated.
Since the business is to be terminated after completion of the venture, a firm name is not generally used. Thus the joint venture is like a temporary partnership without a firm name. It can also be said a particular partnership or partnership for a particular object.
Difference between Consignment and Joint Venture:
Basis of Difference
|
Consignment
|
Joint Venture
|
a) Parties
|
There are two parties i.e. the principal and the agent.
|
The numbers of parties are two or more where all the parties are of equal status i.e., each is principal and agent at the time like partners.
|
b) Relationship
|
The relationship between consignor and consignee is principal and the agent.
|
Co-ventures are principal as well as agent.
|
c) Term (Period):
|
Consignment is not confined to any specific term or period.
|
Joint venture is confined only to a specific venture.
|
d) Accounting Methods
|
Accounts are prepared only by single method.
|
Accounts are prepared by four methods.
|
e) Ownership
|
The ownership of consignment is always with consignor and the agent has no right of ownership in the goods.
|
In case of joint venture, all the co-ventures are the joint owner.
|
f) Sharing of Profit or Loss
|
The profit on the consignment belongs to the principal (Consignor).
|
The profit or loss is shared equally by all the concerned parties, unless otherwise decided.
|
g) Account Sale
|
Account sale is prepared
|
No need to prepare account sale
|
h) Valuation of Stock
|
In case of consignment if goods are unsold with consignee, valuation of stock is essential.
|
In case of joint venture there is no need of valuation of unsold stock as the joint venture is closed down.
|
Answer of Q.N.4.
Single Entry System
It is difficult to define single entry system because, in fact, there exists no system like single entry system. Broadly speaking, it is a defective double entry system. Any system that falls short of complete double entry method is called single entry system. Under this method, sometimes both the aspects of transactions are recorded, sometimes only one aspect is recorded or sometime no aspects of transactions is recorded in the books. As a general rule under the single entry practice only the personal aspects of the transactions are recorded and the nominal and real aspects are omitted altogether. As the name implies, the single entry system does not take into account the double affect of every transaction. The ledger contains only the personal accounts of debtors and creditors, all impersonal accounts such as purchases, sales, wages, carriage, rent etc., are not recorded. Thus the system does not consider the two fold aspect of every transaction. In short single entry system may be called a mix of double entry, single entry and no entry.
Single entry system may be defined as a system which does not strictly conform to the double entry system of bookkeeping. Under this system what is found in practice is an intermixture of single entry, double entry and no entry.
According to Arthur Fieldhouse, "single entry is faulty, incomplete, inaccurate, unscientific and unsystematic style of account keeping". For this reason many persons call the single entry system as accounting from incomplete records.
In simple words, it is defined as the method of accounting which does not follow the principle of double entry system .Under this method only one account is given debit or credit for each transaction. From the above explanation, we get the following characteristics of single entry system:
Characteristics of Single Entry System
Ø This system is a mixture of (i) double entry (ii) Single entry and (iii) no entry.
Ø This system is suitable for small business.
Ø In this system, generally personal Account are kept but real and Normal Account are ignored.
Ø In the absence of record of the two-fold aspect of every transaction, it is not possible to prepare a trial balance and check the arithmetical accuracy of the books of account.
Ø Under this system the profit or loss can be found out but its composition will not be available.
Merits of Single Entry System
Single entry system is quite useful for small enterprises. It is a conventional accounting system. It is simple to understand as compared to double entry system. Some of the advantages of single entry system are given below:
Ø It is an easy and simple method of maintaining books of accounts.
Ø It is conventional and economical.
Ø It is less time consuming.
In spite of the above advantages, single entry system is suffers from some serious limitations which make it unscientific, incomplete and unsystematic.
The following are the notable disadvantages of single entry system:
1. Unscientific and Unsystematic: The single entry system is unsystematic and unscientific system of recording financial transactions. It does not have any set of fixed rules and principles for recording and reporting the financial transactions.
2. Incomplete System: Single entry system is incomplete system because it does not record the two aspects or accounts of all the financial transactions of the business. It does not maintain any record of the transactions relating to the nominal account and real account except cash account.
3. Lack of Arithmetical Accuracy: Single entry system is not based on the principles of debit and credit. It fails to provide the arithmetical accuracy of the books of accounts. Trial balance cannot be prepared under this system to check the arithmetical accuracy of books of accounts.
4. Does Not Reflect True Profit Or Loss: Under single entry system, the true amount of profit or loss cannot be ascertained because it does not maintain the nominal accounts.
5. Does Not Reflect True Financial Position: The single entry system does not maintain real accounts except cash book. Therefore, it cannot reveal the true financial position of the business.
6. Frauds and Errors: The single entry system of book-keeping is incomplete, inaccurate and unscientific. It does not help to check the arithmetical accuracy of the books of accounts. Therefore, there is always a possibility of committing frauds and errors in the books of accounts.
7. Unacceptable for Tax Purpose: The single entry of book keeping has incomplete records of the financial transactions of the business. Hence, the tax office cannot accept the account maintained under this system for the purpose of assessment of tax.
Answer of Q.N.5 (a).
Machinery Account
Date
|
Particulars
|
Amount
|
Date
|
Particulars
|
Amount
|
1-7-2009
|
To Bank A/c
|
40000
|
31-12-2009
31-12-2009
|
By Depreciation A/c
(On 40000 @ 10% for 6
months)
By Balance C/d
|
2000
38000
|
40000
|
40000
| ||||
1-1-2010
|
To Balance B/d
|
38000
|
31-12-2010
31-12-2010
|
By Depreciation A/c
(On 38000 @ 10%)
By Balance C/d
|
3800
34200
|
38000
|
38000
| ||||
1-1-2011
1-10-2011
|
To Balance B/d
To Bank A/c
|
34200
15000
|
1-10-2011
1-10-2011
1-10-2011
31-12-2011
31-12-2011
|
By Bank A/c
By Depreciation A/c
(1/4 of 34200 @10% for 9
months)
By Profit and Loss A/c
By Depreciation A/c
- (3/4th of 34200 @ 10%)+(On
15000 @10% for 3 Months)
By Balance C/d
|
6000
641.25
1908.75
2940
37710
|
49200
|
49200
| ||||
1-1-2012
|
To Balance B/d
|
37710
|
31-12-2012
31-12-2012
|
By Depreciation A/c
(On 37710 @ 10%)
By Balance C/d
|
3771
33939
|
37710
|
37710
|
Working Note: Calculation of Loss on Machinery Sold
Cost of Assets as on 1-7-2009
Less: Depreciation @ 10% on 31-12-2009
|
10000
500
|
Book value as on 1-1-2010
Less: Depreciation @ 10% on 31-12-2010
|
9500
950
|
Book Value as on 1-1-2011
Less: Depreciation @ 10% on 1-10-2011
|
8550
641.25
|
Book Value as on 1-10-2011
Less: Sale Value
|
7908.75
6000
|
Loss on sale of Assets
|
1908.75
|
Answer of Q.N.5 (b).
Meaning of Provision
A provision is the sum of amount set aside by charging against the profit and loss account. It is created for meeting a known loss or liability. Provision is maintained for meeting an anticipated loss or liability of uncertain amount. Such amount of anticipated loss or liability can only be estimated. If the present regular transactions undoubtedly bring certain losses or liabilities of unknown amount in further then provisions should be made for them in current year's book. Such provisions should be made every year by debiting the profit and loss account without considering whether the business is in profit or loss. A provision is always created for the specific purpose. It is not for the distribution to the shareholders. The provision, in fact, reduces the figure of profit and not the figure of divisible profit. Generally, a business maintains different types of provisions with some specific purposes. They are as follows
Ø Provision for doubtful debts
Ø Provision for discount on debtors
Ø Provision for taxation
Ø Provision for repairs and renewals
Importance of Provision
A business firm in general, and a corporate enterprise in particular may consider it proper to set up some mechanism to protect itself from the consequences of known liabilities and losses it may be required to bear in future. It may also regard it as more appropriate in certain cases to reduce the amount that can be drawn by the proprietors as profit in order to conserve business resources to meet certain significant demands for them in future. An example of such a demand is the much-needed expansion in the scale of business operations. This is presented as the justification for the role of provisions and reserves in business activities and in accounting. The amount so set aside may be meant for the purpose:
Ø To Meet Anticipated Losses and Liabilities: Provisions are created for meeting anticipated losses and liabilities such as provision for doubtful debts, provision for discount on debtors and provision for taxation.
Ø To Meet Known Losses And Liabilities: Provisions are created for meeting known losses and liabilities such as provision for repair and renewals.
Ø To Present Correct Financial Statements: In order to present correct financial statements and to report true profit and financial position, the business must maintain provision for known liabilities and losses
Ø Fulfilling some specific requirements like repairs and renewals of an asset;
Ø Strengthening the general financial position of an undertaking;
Post a Comment
Kindly give your valuable feedback to improve this website.