`Unit-I

FINANCIAL ACCOUNTING

1. What is Accounting?
Accounting serves several purposes of business such as recording of
transactions , classifying ,summarizing and analysing these transactions for vital
decision making by various users.
2. What is Bookkeeping?

Bookkeeping is a part of accounting and is concerned with recording or

maintaining the books of accounts, which is a routine activity. It covers the
activities of identifying the transactions and events, measuring ,classifying and
summarizing the accounting data.

3.What are the two system of Accounting?

There are two system of recording the transactions.

1.Single Entry system of Book-Keeping.

2.Double Entry System of Book Keeping.

4.What is Double Entry System of Book- keeping?

A transaction has two aspects one is receiving aspect and the other is giving
aspect. In double entry system the receiving aspect is denoted as Debit aspect
and the giving aspect is denoted as credit aspect. Therefore the basic principle
under this system is that for every debit there must be a corresponding credit
and every credit there must be a corresponding and equal debit.

5.Explain the Golden Rules of Accounting or Book-keeping

Personal Accounts Debit the Receiver

Credit the Giver
Real Accounts Debit What comes in
Credit What Goes out
Nominal Accounts Debit all Expenses and Losses

Credit all Income and Gains

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6.Explain the Rules of the Double Entry System.

Classification of Accounts in Double Entry System.

1.Personal Accounts-These accounts record a business dealings with persons

or firms. The person receiving something is given debit and the person giving
something is given credit.

2.Real Accounts-These are the accounts of assets. Assets entering the business
is given debit and asset leaving the business is given credit.

3.Nominal Accounts-These accounts deal with expenses ,incomes, profits and

losses. Accounts of expenses and losses are debited and accounts of incomes
and gains are credited.

7.Explain the Accounting Concepts in detail

Accounting is the language of business. The basic assumptions of conditions

upon which the science of accounting are based on the concepts of accounting.
The different concepts of accounting are given below:

1.Business Entity Concept-This concept denotes that a business unit is

separate and distinct from the owners. Therefore it is necessary to record the
business transactions separately to distinguish from the owners personal
transactions. This concept has now been extended to accounting for various
divisions of a firm in order to ascertain the results of each division.

2.Going Concern Concept-It is assumed that the business will exist for a long
time and transactions are recorded from this point of view. That people may
come and go, but business remains, is the principle of this concept. Hence,
proper classification of expenses (capital and revenue) is to be made.

3.Money Measurement Concept- Accounting records only those transactions

which are expressed in terms of money. The use of building and the use of
clerical services can be added up only through money values and not otherwise.

4.Cost Concept-The transactions are entered in the books of accounts at the

amounts actually involved .For example: if a firm purchases a land for
Rs.2,00,000 but considers it as worthy Rs.4,00,000 the purchase will be
recorded at Rs.2,00,000 and not at any more. This is one of the most important
concepts.

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5. Dual Aspect Concept-Each transactions has two aspects. If a business has
acquired an asset, the asset which comes in this is one aspect .To acquire the
asset the business has to pay money which goes out- this is another aspect. If it
is acquired for credit, a liability arises to that extent. Thus if there is an increase
in assets there will be an increase in liability.

Assets = Liabilities + Capital (or) Capital =Assets Liabilities.

6. Realisation Concept-Accounting is a historical record of transactions. It

records what has happened. Unless money has been realised-either cash has
been received or legal obligation to receive from the customer- no sale can be
said to have taken place and no profit or income can said to have arisen.

7.Accounting Period Concept-A business is assumed to continue indefinitely.

In order to ascertain the state of affairs of the business at different intervals, we
have to choose the intervals foe ascertaining the financial position and the
operational results at each such interval, which is known as accounting periods.
Usually a period of 52 weeks or 365 days is considered as the accounting
period.

8.Explain the Accounting Conventions in detail.

The term convention implies customs or traditions which guide the accountant
while preparing the accounting statements.The following are the accounting
conventions:

1.Conventions of Consistency

2.Convention of Full Disclosure

3.Convention of Conservatism

1.Convention of Consistency-The accounting practices should remain the same

for all years to come. The rules and practices should not be changed from time
to time. For example: the stock- in trade must be valued on the basis of the same
method in all the years.

2.Convention of full disclosure- Apart from legal requirements, good

accounting practice also demands that all significant information should be
disclosed. For example:the values of assets have to be stated along with the
mode of valuation.

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3.Convention of Conservatism- Anticipation of future losses like reserve for
bad and doubtful debts etc but not the future profits or gains like raise in the
value of stock or reserve for discount on creditors is the basic rule of
conservatism.

9.What do you mean by Journal?

Journal is derived from the French word Jour which means a day. Journal means
a daily record .It is a book of original record to record every transactions in the
first instance before it is posted to the ledger. The form in which it is recorded is
called Journal Entry.

10.Explain Cash Discount and Trade Discount.

Cash Discount-This discount is allowed by a creditor to a debtor when the

latter pays the amount of goods purchased by him either immediately or within
a specific period. It is an incentive given to a debtor for making an early
payment.

Trade Discount-It is a deduction on the gross value or list price of goods.It is

allowed by the manufacturer to the wholesaler or a wholesaler to a retailer.It
enables him to sell goods further at list price to the consumer and yet earn a
profit

11.What is a Ledger?

Ledger is a register with of pages numbered consecutively. Each account is

allotted one or more pages in the Ledger. If one page is completed, the account
will be continued in the next or some other page. An index of various accounts
opened in the ledger is given at the beginning of the Ledger for the purpose of
easy reference.

12.What is Subsidiary Books?

Subsidiary Books are those, which are maintained by the large concerns to keep
the general ledger free from the unnecessary details. Separate books are kept for
sales, purchases, Sales Return or Return Outwards and Return Inwards, Bills
Receivable and Bills payable.

13.Explain the Objectives of preparing the Subsidiary books.

1. To make the recording work easy and quick.

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2.To have the division of labour.

3.To provide information relating to a particular aspect of the business.

4.To reduce the clerical work.

14.What is a Trial Balance?

A financial statement needs to be prepared on a regular period.To facilitate

making the financial statements, a trial balance prepared.A trial balance is a
statement that shows the balance of all accounts in the ledger including the cash
book and the bank book.The trial balance is prepared as on a particular date and
not for a particular period.

15.Explain the objectives of preparing a Trial Balance.

1.The trial balance is prepared to check the arithmetic accuracy of accounts.

2.Errors in the accounts are disclosed.But there are some errors that are not
disclosed by trial balance.

3.It is useful in the preparation of the final account.

4.It helps to prepare the trading ,profit and loss account.

5.It also helps to prepare the Balance sheet.

6.It is the lucid form to the accounts prepared.

16.What is a Trading Account?

Trading refers to the activity of purchase and the sale of goods. The trading
account is prepared to ascertain the trading profitability of the business. Only
direct expenses and direct incomes are shown in the trading account. Direct

expenses are those expenses which are directly connected to the production or
purchase of goods. It is prepared to ascertain the gross profit or gross loss
during the accounting period.

17.What is Profit and Loss Account?

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The profit and loss is a nominal account, which is prepared for the entire year.
All indirect expenses are debited to the profit and loss account and indirect
incomes are credited to the profit and loss account.It is prepared to ascertain the
operating profit for the current accounting year and is prepared on the accrual
basis.All expenses related to the current year whether paid or payable should be
debited and all incomes related to the current year whether received or
receivable should be credited.

18.What is Balance Sheet?

The balance sheet is a statement which sets out the assets and liabilities of a
firm or an institution as on a certain date.

19.What is Depreciation?

Depreciation is the reduction in the value of fixed assets due to wear and tear
or passage of time. Depreciation is a gradual and permanent loss in the value of
assets. Since an asset loses in the books, in terms of value of fixed assets. This
permanent loss in the value of the asset has to be provided for in the profit and
loss account.

20. Explain the Need or Objectives of Providing Depreciation

1.Ascertainment of true profits

When a particular asset is used for earning income of the business, the reduction
in the value of asset should be provided from the income in order to calculate
the correct and true income of the business. Depreciation is an invisible
expense. So it must be charged to the profit & loss account.

2.Presentation of true financial position

If depreciation is not provided the balance sheet will not disclose a true and fair
view of the firms ,state of affairs ,since the assets will be shown at figures
which are in excess of their true value.

3.Replacement

The amounts debited in the profits &loss Account are retained in the business.
These are available for replacement of the asset when its life is over. So, by

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 making an annual charge for depreciation, a concern would be accumulating
enough resources to enable it to replace an asset when necessary.

21.Explain the Methods of Providing Depreciation.

1.Straight Line Method- Under this method an equal amount of depreciation is

written off every year during the useful life of an asset. The depreciation is
charged on the original cost of the asset every year.

2.Written Down Value Method- A fixed percentage of the diminishing value

of the asset is written off each year. Depreciation is charged on written down
value every year.The rate of depreciation remains constant whereas the amount
of depreciation goes on decreasing. This method is also known as Reducing
Balance Method.

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Unit-II,III,IV,V

1.What are Non-Trading Concerns?

Non-Trading concerns or associations are those concerns which are established

for the purpose of rendering services to the public. They are also called as non-
profit motive concerns or organisations. Example. Schools, Colleges, Library,
Sports clubs, Social clubs, Hospitals etc.

2.What are the accounts that are prepared by the Non-trading concerns?

1.Receipts and Payments Account.

2.Income and Expenditure Account.

3.Balance Sheet.

3.Distinguish between Receipts and Payments Account and Income and

Expenditure Account

S.No Receipts and Payments Income and Expenditure Account

Account

1. It is a summary of cash It is a summary of income and

transaction expenditure.

2. It is a real account It is a nominal account

3. It starts with opening balance It does not start with opening balance.
of cash and bank.

4. It is like a cash book It is like a profit &loss account

5. All receipts are entered on the All incomes are entered on the credit
debit side side

6. All payments are entered on All expenditures are entered on the

the credit side. debit side

7. It takes into account both It takes into account only the revenue
revenue and capital receipts. expenditure.

8. It takes into account both It takes into account only the revenue
revenue and capital expenditure

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 expenditure

9. It takes into account the It takes into account the incomes

receipts relating to relating to current year only whether
previous,current and received or not.
subsequent years.

10. It takes into account the It takes into account the expenditure
payments relating to previous, relating to previous year only, whether
current and subsequent years. paid or not.

11. The purpose is to find either The purpose is to find either surplus or
the opening or closing balance deficit.
of cash/bank.

12. It ends with the closing It does not end with closing balance.
balance of cash and bank.

4.What is Bill of Exchange?

It is a document used in commercial transactions for monetary dealings. They

are freely transferable and had a good title. These documents are made payable
to order/bearer and the provisions of the Negotiable Instruments Act of 1881
was applied.

5. Define Bill of Exchange.

As per section 5 of Negotviable Instruments Act. It is an instrument in writing

containing an unconditional order, signed by the maker ,directing a certain
person, to pay a certain sum of money only to or to the order of a certain person
or to the bearer of the instrument.

6.Explain the terms Discounting and Endorsing a bill.

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1.Discounting the Bills.

The drawer of the bill instead of keeping the bill with him, discount the bill with
banker and obtained cash. The process of transferring ownership to the banker
is known as Discounting of bills.

2.Endorsing the Bills.

The process of transferring the bills received by the drawer to another person is
known as endorsement. Drawee can make use of his bill to settle his debt with
another person.

7.What is Average Due date?

Average due date is a arithmetic averages of several due dates. When a person
owes to another person several amounts on different dates and they desired to
settle the debts on a single date without any loss of interest to any one is termed
as average due date.

8. Explain Consignment.

Consignment is an agency arrangement under which a manufacturer or a

wholesaler sends his goods at his own risk to his agent in a different place for
the purpose of sale. The person who sends the goods is called Consignor and the
person to whom goods are sent consignee. Under consignment the ownership of
the goods remains with the consignor until they are sold.

9.What is an Over-Riding Commission?

Ordinary commission is calculated as per terms agreed between consignor and

consignee. In addition to the ordinary commission, sometimes an extra
commission is allowed to the consignee, in case the sales exceed a specific
amount. Such commission is termed as overriding commission. It is calculated
on total sales.

10.What is Del-credere Commission?

Del-credere commission is an additional reward or extra commission paid to the

consignee for his agreeing to bear the risk of bad debts and is usually calculated
of total sales. However, they may specifically agree to allow the Del-credere
commission on credit sales only.

11. What is Joint Venture?

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Joint venture is a temporary partnership without any firm name. Two or more
persons joined to undertake and agreed to execute a specific work /business is
known as Co-venturers, they agreed to contribute capital and share profit and
losses in the agreed ratio with the completion of the task, the relationship comes
to an end.

12.Define a Joint Venture.

When two or more persons join together to conduct a trading operations and
contribute capital in an agreed proportion and sharing the profit or losses arised
is known as Joint Venture.

13.Distinguish between Joint Venture and Partnership.

S.No Joint Venture Partnership

1. It is created without a firm name. It is under a firm name.

2. It is temporary in nature. It is continuous in nature.

3. It is restricted with a particular job No such restrictions.

4. Persons carrying the business are Persons carrying the business

called co-ventures. are called partners.

5. Co-venturers liability depends on Partners have joint and several

their agreement. liability.

14.What is Single Entry?

Single entry is an incomplete system of accounting. Under this system books of

subsidiary records and ledgers are not maintained except cash account and
personal account. This system is followed by sole trading of small concerns.

15.What are the Features of Single Entry System?

The following are the features of single entry system:

1.It is adopted by sole trader and partnership firms, because they maintain
minimum number of books.

2.It keeps only personal accounts.

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3.It keeps one cash book for both personal and business transactions.

4.There is no specific rules of operation. Accounts are maintained depending

upon the original vouchers.

16.Distinguish between Single Entry and Double Entry System.

S.No Single Entry System Double Entry System

1. Single aspect of transaction Double aspects are recorded.

is recorded.

2. Only personal and cash All personal, real, and nominal

accounts are prepared. accounts are opened.

3. Not acceptable by tax Accepted by tax authorities.

authorities.

4. Suitable only for sole Suitable to all business/

trading and partnership concerns.
firms.

5. Internal check is not Internal check is possible

possible

6. Difficult to ascertain the Financial position can be easily

financial position of the ascertained.
business.

17.What is Statement of Affairs?

A statement of affairs is like a balance sheet shows the assets and liabilities. The
balancing figure of the assets and liabilities are taken as net worth or capital of
the business. It is a collection of estimated assets and liabilities are taken as net
worth or capital of the business. It is a collection of estimated assets and
liabilities made by the proprietor. It is prepared to know the capital at the
beginning or at the end, which is utilised in the calculation of profit or loss
made by the owner under net worth method.

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18.What do you mean by Partnership?

Partnership is the relationship between persons who have agreed to share the
profit of them acting for all. Each person of partnership is called as partner,
collectively called as Firm. The name under which their business is carried on
is called Firms name.

19.What is Partnership Deed?

Partnership is an outcome of an agreement created orally or in writing between

two or more persons. It is not essential that agreement must be in writing ,but to
avoid any dispute between the parties in future, it is better to put in writing. This
document which contains the terms and conditions of the partnership in writing
is called as Partnership deed.

20.Define Partnership.

According to Indian Partnership Act of 1932,under section 4,Partnership is

defined as the relation between persons who have agreed to share profits of a
business carried on by all or any of them acting for all.

21.What are the essential features of partnership?

1. Existence of business

An association of persons will become a partnership only when it is meant to do

some kind of business.

2.Plurality of persons

At least two persons must persons must join together for a partnership business.

3.Contractual relationship

There must be an agreement between the partners.

4.Objective

The objective should be to run a lawful business.

5.Profit Motive

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The purpose of partnership should be to earn profits and there must be an
agreement to share them.

6.Principal Agent relationship

Partnership business is carried on by all or any of them on behalf of all .Thus

every partner is both an agent and principal of the other partners.

7.Number of Persons

The minimum number of persons required to make a partnership is two. The

maximum is twenty but in case of banking business, the maximum is ten.

22.Define Goodwill.

Goodwill is defined as The present value of a firms anticipated excess earnings.

23.What is the need for admission of a new partner?

The partners of an existing firm admit a new partner for various reasons.

a. To increase the capital

b. To increase the managerial talents of the firm
c. To avail the technical skill of the new comer
d. To avail the business reputation of a person
e. To expand the Business
f. To transmit the right of one partner to his legal heir.

24. Who is a Retiring partner?

A partner who wish to leave from the partnership firm due to some personal
reasons like old age, bad health, illness, etc. is called retiring partner.

25. What are the bases for determining the share of profit to the deceased
partners?

The deceased partners share of profit upto the date of death is determined on
the basis of partnership dead. If the partnership deed is silent about it, then the
accounts have to be prepared to find out the profit or loss upto the date of death.

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