Friday, April 25, 2014

Accounting Concepts AND IMPORTANT QUESTONS


The following are the generally accepted Accounting Assumptions.
1)     Concepts at the recording stage. These are concepts to be observed at the recording stage of transaction i8n books of account. They are discussed in brief below.
a)    Business Entity Concept.
Accounting treat business as different from the person who owns it. Without such a distinction the affairs of the business would be mixed up with private affairs of the owners and the true picture of the financial position of the business and it’s profit will not be available.
b)   Dual Aspect Concept.
Each transaction in accounts has two aspects which are expressed as Debits and Credits and are recorded in the books of the account accordingly. This principle is the Core of Double Entry System of Book Keeping and if it is observed strictly, the system of recording transactions in books of account is called Double Entry System of Book Keeping
c)     money measurement Concept.
Accounting records only those transactions which can be recorded in monetary terms.
d)   Cost concept.
As per this concept  transactions are recorded at the amount involved while assets are always recorded at cost. For eg one book of Rs50/ is bought for Rs100/ by mistake then also the entry in the books of the books of account is to be made at the cost price ie Rs100/
e)    Objective evidence concept.
According to this concept all transactions recorded in the books of accounts should be evidenced and supported by objective documentary evidence.
f)     Historic record concept.
Transactions are recorded in the books of account as and when they take place. Ie in chronological manner date wise.






2)    Concept at reporting stage
These are concepts to be observed at the reporting stage ie the time of preparation of final accounts from the transactions recorded in the books of account. They are
a)    Matching cost against Revenue concept.
Accounting records at the same time and at the same period not only the income but all the expenses incurred to earn the income. Thus it matches the income with the cost incurred to earn it before showing any profit or loss of that activity.
b)   Accrual concept.
Accounting is normally done on accrual basis. Ie income and expenses are recorded as and when they become due and not as and when they are actually paid and received. However this concept is not followed by Banks to day. Bans recognize interest income on loans only when cash is received from the borrower.
c)    Going concern concept.
Accounting presumes that the business will exist for a long time and it’s owners are not desirous of closing it.
d)   Accounting period concept.
When accounts are prepared generally for a period of 12 months in India, this period is normally 1st April to 31st March of the next colander year. This concept is important as it provides a cut off for measurement of profits in the otherwise continues business process.
3)    Accounting conventions.
This is an accepted accounting principle. The following are the Accounting conventions.
a)    Consistency,
Accounting systems should be consistent Let us say a company is adopting straight line method of depreciation then it should  follow  the same method consistently all the years.
b)    Disclosure.
Significant accounting systems should be disclosed while preparing accounts.
c)    Conservatism.
All future losses should be accounted in the year itself. But all the expected income are not accounted for till realization.
d)   Materiality
A good accounting practice  should disclose all  the material events, policies etc used in the preparation of financial statement.



Common Accounting system for Primary Agricultural  Credit Society (PACS)
PACS is a business entity undertaking credit and non credit business.
Non Credit business of PACS are divided into five broad groups   depending up on the nature of activities and materials the PACS deal in. These groups are for trading in
i)             Agricultural inputs.
ii)            PDS commodities
iii)           Non PDS consumer items
iv)          Food grains and other commodities under procurement schemes
v)            Socially relevant schemes like Mid Day Meal Scheme.
 Double entry system.
Every business transactions involves transfer of money from one account to another and thus  the transfer necessarily involves two accounts in opposite directions. The Double entry systems of Book Keeping records both aspects of  every transaction and therefore follows the rule that every debit must have a corresponding credit and vice versa. This rule helps to check the arithmetical accuracy of records by preparing the Trial Balance statement. Accounts maintained under the single entry system record only one aspect of the transaction and the record is therefore incomplete.
Certain rules must be observed in recording transactions under double entry system. The two elements of every transaction must be grouped under three types of accounts and each type of account has it’s ru8le for recording the debit and credit aspect of the transaction.
The two principal type of accounts are   one personal accounts and other Impersonal accounts. Personal accounts are subdivided into a) Real or asset accounts and b) nominal accounts. Personal account contains record of transaction with a person that could be an individual group or society banks etc. Real accounts are accounts of properties or assets and contain a record of purchases and sales of the properties or assets like land building goods cash etc. Nominal accounts are accounts of expenditure and income and record gains and losses. The accounting rules to be followed for the three types of accounts are.

Type of Accounts
Rules of entry.

Debit
Credit.
Personal
Receiver
Giver
Real
What comes in
What goes out
Nominal
Expenses and losses
Incomes and gains.

 The following are the most important aspects in any double entry accounting system, 
·         Trial Balance,
·         Trading Account and Profit and Loss Account, 
·         General Ledger  
·         Capital,
·         Assets,
·         Liabilities,
·         Creditors,
·         Debtors,
·         Sales,
·         Purchases,
·         Drawings,
·         Purchase
·         Returns,
·         Sales Returns,
·         Stock, Income,
·         Expenses etc.,
·         Various Assumptions viz   Accounting Entry, Money Measurement, Accounting period, Going concern.
·         Basic concepts like   Double Entry, Revenue Realization concept, Historical cost concept, Period matching concept,  Full disclosure concept, Evidence concept etc.,
·         Modifying principles like   Cost benefit, consistency, materiality, etc.,
·         Double entry concept like   Debit Aspect, Credit Aspect



·         Golden rules of Accountancy viz

Type of Accounts
Rules of entry.
                                
Debit
Credit.
Personal
Receiver
Giver
Real
What comes in
What goes out
Nominal
Expenses and losses
Incomes and gains.



Some questions with answers on Accountancy
Write down Journal entries. 
1)    Mr Rama gives a cheque to LIC for Rs 1000/- in his SB account. The cheque is presented by LIC who are also having a current account with your branch.

DEBIT- SB Account of Rama-------Rs1000
CREDIT- Current account of LIC—Rs1000

2)    Mr.Naren deposits Rs 2000 in his RD account

Debit     --------- cash a/c  Rs2000
Credit    ----------RD a/c Rs2000
    3) M/s Varma &co remit cash Rs 10000 into their current a/c.
             Debit------------------cash a/c Rs10000
            Credit----------------- Current a/c of Varma & co Rs10000
    4) John gives a cheque for Rs 500 in his SB account and wants cash

Debit-----SB a/c of John Rs 500
Credit-----cash a/c   Rs500

1)    VOC College maintain  SB a/c. issues a  cheque for RsTwo Lakhs with instructions to credit  SB accounts of ten Lecturers a/c with Rs20000 each.

Here we have to debit  VOC College a/c with Rs 2 Lakhs and credit the SB a/c of 10 Lecturers with Rs20000/ each. In this one transaction gives rise to 11 changes.

1)    A company may give instruction to debit their current a/c and credit salary for 1000 employees. Here one debit may give rise to 1000 credits under Double Entry.

2)    Mr .Navin remits Rs 1025 for buying a Demand Draft payable at Chennaii.
Debit      Cash Rs1025/
Credit     NBO Rs1000/
Credit Commission (Exchange) on DDS issued Rs 25/

3)    The Bank want to  buy a Tube light for your branch at a cost of Rs 150/
Debit- Charges – Expenditure A/c-Rs150/
Credit cash a/c Rs 150/(The bills from the shop should be attached to the Debit voucher. Later on all entries may undergo Inspection or Audit. This is Evidence).

In all the above one transaction have  given  rise to many changes in different accounts also.
The following learning points may be discussed during Group presentation on the case study. 
Case study on preparation of a Balance sheet.
From the following particulars extracted from the books of accounts of M/s XYZ PAC at the  close of the year ended 31.3.2010 prepare a Balance Sheet as on that date in order of liquidity.

Particulars
Amount in Rs
Savings Deposit
50000
Business Premises
25000
Furniture and Fixtures
8000
Sundry Debtors
1200
Sundry Creditors
1500
Current Deposit 
15800
Bills purchased
9700
Investments
10,000
Cash on Hand
250
Balance with SBI
1500
Term Deposit
11050
Cash Credit
6000
 Term Loan
16700


Solution of Balance sheet case study
Balance Sheet of XYZ PAC  as on 31.3.2010.


Liability
Amount in Rs
Asset
Amount in Rs
Savings Bank account

50000
Cash in Hand
250


Balance with SBI
1,500
Current Deposit Account.
15800
Investment 
10,000
Term Deposit
11050
Loans and advances
16,700
Sundry Creditors
1500
Cash Credit
6,000


Bills purchased
9,700


Sundry Debtors
1,200


Business premises
25,000


Furniture and Fixtures
8,000
Total
78350
Total
78350

  Questions with Answers  for few  questions. 
1)    Dual aspect  concept means recording of ------------ effect5 of a transaction  (Ans Double)
2)    In Business transactions are  --------- is the common unit of measurement (Ans Money)
3)    Single entry system of recording transactions in Books is not a scientific one. True or false   (Ans True. )
4)    Account in the name of Shri Mukesh is ----- Account (Ans Personal)
5)    Motor car account is --------- (Ans Real )
6)      debit  what comes in is the rule for real accounts as per Golden Rule of Accountancy
True or false   ( Ans True)
7)    In respect of personal; accounts the rule is debit the receiver and credit the giver. True or false (ans True)
8)    In Double entry accounting system all transactions are recorded in cash book. True or false
(Ans True) .
9)    Bank account is a personal account True or false   (Ans True)
10) Journal is Book of original entry.  True or false (Ans True)
11) Accounting refers to the art of recording the business transactions in an analytical form. True or false   Ans True
12) Accountancy and book keeping are the same  True or false Ans False.
13) In -------- method of accounting profit represents excess of receipts over expenditure.   Ans Cash

Questions
Answers.
Book keeping means
System of maintaining book of accounts.
Accounting
Includes Book keeping balancing of books /accounts , preparation of final accounts and drawing conclusion.
Cost accounting
Process of accounting for cost
Management Accounting
Concerned with supply of useful information to the Management to enable to take useful decision.
Business entity
Business is treated as a separate entity from the owners/ proprietor.
Money measurement
All business transactions are measured in terms of money.
Objective evidence
Bills , Cash memo Cheque book , vouchers etc are objective evidence for recording an entry.
Dual aspect
Each transactions have two effect.
Going concern
Business entity has indefinite life of existence.
Journal
Book of original entry.
Journalising
The process of recording transactions in a journal. 
Capital account is ---- Account
Personal Account
Amount invested in business by it’s owner is known as
Capital.
A book which contains all accounts
Ledger
A process of transferring transactions from Journal into ledger account
Posting
A statement as on a particular date showing all the ledger balances.
Trial Balance


1)    Ledger is the ----- book of accounts.    Ans Principal
2)    Every entry must be posted into  ------  Ans ledger
3)    The difference between the two sides ofn account is called --- Ans Balance
4)    A person who owes some thing is called ----- Ans Debtor.
5)    A person to whom   some thing is owed is called --- Ans Creditor.
6)    The left hand side of the account is called   ---- Ans Debit side    
7)    The right  hand side of the account is called   ---- Ans credit  side    
8)    A debit in the nominal account  denotes --- Ans Expenses.
9)    Balancing of all the accounts must be done at   end of ---- Ans Same day.
10) Total of debit side is greater than credit side.This means Ans Debit balance





Question on Trial Balance.
On 31st march , the total bebit and Credit sides of various ledger accounts and receipts and payment sides of Cash and Bank column of cash book of Shri Baghavan Das were as under

Total of Debit side.
Name of the account.
Total of Credit side.
10,000
Bhagavan Das Capital
1,35,000
25,000
Drawings

15000
Stock on 31.3 1996

1,90,000
Purchases
4,000
Nil
Purchase returns
18,000
6,000
Sales
2,45,000
13,000
Sales returns
--
12,000
Expenses
nil
3,05,000
Customers
2,50,000
2,00,000
Suppliers
2,35,000
1,00,000
Car
-
2,81,000
Central Bank
2,75,000
43,000
Cash
38,000

You are asked to prepare a Trial Balance of Shri Baghavan Das as on that date.
Solution.  Gross Trial Balance as on 31.3.1996

Name of the account
LF
Debit
Credit.
Bhagavan Das Capital

10,000
1,35,000
Drawings

25,000
--
Stock on 31.3 1996

15000
--
Purchases

1,90,000
4,000
Purchase returns

---
18,000
Sales

6,000
2,45,000
Sales returns

13,000
--
Expenses

12,000
---
Customers

3,05,000
2,50,000
Suppliers

2,00,000
2,35,000
Car

1,00,000
-
Central Bank

2,81,000
2,75,000
Cash

43,000
38,000
 Total

12,00,000
12,00,000





Entry level and Exit level Test.
1)    Dual aspect  concept means recording of ------------ effect5 of a transaction  
2)    In Business transactions are  --------- is the common unit of measurement 
3)    Single entry system of recording transactions in Books is not a scientific one. True or false                                                                                                                             
4)    Account in the name of Shri Mukesh is ----- Account
5)    Motor car account is --------- 
6)      debit  what comes in is the rule for real accounts as per Golden Rule of Accountancy
True or false  
7)    In respect of personal; accounts the rule is debit the receiver and credit the giver. True or false 
8)    In Double entry accounting system all transactions are recorded in cash book. True or false .
9)    Bank account is a personal account True or false  
10) Journal is Book of original entry.  True or false 



Answers to the Entry level Test questions. 
14) Dual aspect  concept means recording of ------------ effect5 of a transaction  (Ans Double)
15) In Business transactions are  --------- is the common unit of measurement (Ans Money)
16) Single entry system of recording transactions in Books is not a scientific one. True or false   (Ans True. )
17) Account in the name of Shri Mukesh is ----- Account (Ans Personal)
18) Motor car account is --------- (Ans Real )
19)   debit  what comes in is the rule for real accounts as per Golden Rule of Accountancy
True or false   ( Ans True)
20) In respect of personal; accounts the rule is debit the receiver and credit the giver. True or false (ans True)
21) In Double entry accounting system all transactions are recorded in cash book. True or false
(Ans True) .
22) Bank account is a personal account True or false   (Ans True)
23) Journal is Book of original entry.  True or false (Ans True)