SMU

ASSIGNMENT
SEMESTER – 1
MBO025

FINANCE AND MANAGEMENT

ACCOUNTING

SUBMITTED BY:
MUSHTAQ AHMAD PARA
MBA
ROLL NO.- 520950361
 MBA- I semester

MB0025- Financial & Management Accounting

Book ID- ( B0907 )

Assignment Set 1

Q1. Explain any two concepts of accounting with examples

Answer
✔ Introduction:

Accounting is the language of business and it is used to communicate financial information. In order for that information to
make sense, accounting is based on 12 fundamental concepts. These fundamental concepts then form the basis for all of the
Generally Accepted Accounting Principles (GAAP). By using these concepts as the foundation, readers of financial statements
and other accounting information do not need to make assumptions about what the numbers mean.
For instance, the difference between reading that a truck has a value of $9000 on the balance sheet and understanding what
that $9000 represents is huge. Can you turn around and sell the truck for $9000? If you had to buy the truck today, would you
pay $9000? Or, perhaps the original purchase price of the truck was $9000. All of these assumptions lead to very different
evaluations of the worth of that asset and how it contributes to the company’s financial situation. For this reason it is imperative
to know and understand the eleven key concepts.

✔ Eleven key Accounting concepts:

• Entity:

Accounts are kept for entities and not the people who own or run the company. Even in
proprietorships and partnerships, the accounts for the business must be kept separate from those of
the owner(s).

• Money-Measurement:
For an accounting record to be made it must be able to be expressed in monetary terms. For this
reason, financial statements show only a limited picture of the business. Consider a situation where
there is a labor strike pending or the business owner’s health is failing; these situations have a huge
impact on the operations and financial security of the company but this information is not reflected in
the financial statements.
• Going Concern:
Accounting assumes that an entity will continue to operate indefinitely. This concept implies that
financial statements do not represent a company’s worth if its assets were to be liquidated, but rather
that the assets will be used in future operations. This concept also allows businesses to spread
(amortize) the cost of an asset over its expected useful life.
• Cost:
An asset (something that is owned by the company) is entered into the accounting records at the
price paid to acquire it. Because the “worth” of an asset changes over time it would be impossible to
accurately record the market value for the assets of a company. The cost concept does recognize that
assets generally depreciate in value and so accounting practice removes the depreciation amount
from the original cost, shows the value as a net amount, and records the difference as a cost of
operations (depreciation expense.) Look at the following example:
Truck $10,000 purchase price of the truck. Less depreciation $ 1,000 amount deducted as a
depreciation expense Net Truck: $ 9,000 net book-value of the truck.
The $9000 simply represents the book value of the truck after depreciation has been accounted for.
This figure says nothing about other aspects that affect the value of an item and is not considered a
market price.
• Dual Aspect:

This concept is the basis of the fundamental accounting equation:

Assets = Liabilities + Equity
1. Assets are what the company owns.
2. Liabilities are what the company owes to creditors against those assets
3. Equity is the difference between the two and represents what the company owes to its
investors/owners.
All accounting transactions must keep this equation balanced so when there is an increase on one side
there must be an equal increase on the other side or an equal decrease on the same side.
• Objectivity:
The objectivity concept states that accounting will be recorded on the basis of objective evidence
(invoices, receipts, bank statement, etc…). This means that accounting records will initiate from a
source document and that the information recorded is based on fact and not personal opinion.
• Time Period:
This concept defines a specific interval of time for which an entity’s reports are prepared. This can
be a fiscal year (Mar 1 – Feb 28), natural year (Jan 1 – Dec 31), or any other meaningful period such as
a quarter or a month.

• Conservatism:
This requires understating rather than overstating revenue (income) and expense amounts that
have a degree of uncertainty. The rule is to recognize revenue when it is reasonably certain and
recognize expenses as soon as they are reasonably possible. The reasons for accounting in this
manner are so that financial statements do not overstate the company’s financial position. Accounting
chooses to err on the side of caution and protect investors from inflated or overly positive results.
• Realization:
Revenues are recognized when they are earned or realized. Realization is assumed to occur when
the seller receives cash or a claim to cash (receivable) in exchange for goods or services. This concept
is related to conservatism in that revenue (income) is only recorded when it actually occurs and not at
the point in time when a contract is awarded.
• Matching:
To avoid overstatement of income in any one period, the matching principle requires that
revenues and related expenses be recorded in the same accounting period. If you bill $20,000 of
services in a month, in order to accurately represent the income for the month you must report the
expenses you incurred while generating that income in the same month.
• Consistency:

Once an entity decides on one method of reporting (i.e. method of accounting for inventory) it
must use that same method for all subsequent events. This ensures that differences in financial
position between reporting periods are a result of changed in the operations and not to changes in the
way items are accounted for.
• Materiality:
Accounting practice only records events that are significant enough to justify the usefulness of the
information. Technically, each time a sheet of paper is used, the asset “Office supplies” is decreased
by an infinitesimal amount but that transaction is not worth accounting for. By understanding and
applying these principles you will be able to read, prepare, and compare financial statements with
clarity and accuracy. The bottom-line is that the ethical practice of accounting mandates reporting
income as accurately as possible and when there is uncertainty, choosing to err on the side of caution.

✔ Basic Accounting Concepts:

• Balance Sheet Accounts:
The three so-called Balance Sheet Accounts are Assets, Liabilities, and Equity. Balance Sheet Accounts are used to track the
changes in value of things you own or owe. Assets are the group of things that you own. Your assets could include a car, cash, a
house, stocks, or anything else that has convertible value. Convertible value means that theoretically you could sell the item for
cash. Liabilities are the group of things on which you owe money. Your liabilities could include a car loan, a student loan, a
mortgage, your investment margin account, or anything else which you must pay back at some time. Equity is the same as "net
worth." It represents what is left over after you subtract your liabilities from your assets. It can be thought of as the portion of
your assets that you own outright, without any debt.
• Income and Expense Accounts:
The two Income and Expense Accounts are used to increase or decrease the value of your accounts. Thus, while the balance sheet
accounts simply track the value of the things you own or owe, income and expense accounts allow you to change the value of
these accounts. Income is the payment you receive for your time, services you provide, or the use of your money. When you
receive a paycheck, for example, that check is a payment for labor you provided to an employer. Other examples of income
include commissions, tips, dividend income from stocks, and interest income from bank accounts. Income will always increase
the value of your Assets and thus you’re Equity. Expenses refer to money you spend to purchase goods or services provided by
someone else. Examples of expenses are a meal at a restaurant, rent, groceries, gas for your car, or tickets to see a play. Expenses
will always decrease your Equity. If you pay for the expense immediately, you will decrease your Assets, whereas if you pay for
the expense on credit you increase your Liabilities.

Q2: Prove that accounting equation is satisfied in all the following transactions of Mr.X?

1. Commenced business with cash – Rs.80,000

2. Purchased goods for cash – Rs.40,000 and on credit Rs.30,000
3. Sold goods for cash – Rs.40,000 costing Rs.25,000
4. Paid salary – Rs.2,000 and salary outstanding Rs.1,000
5. Bought scooter for personal use for cash at Rs.20,000

Answer

Transactio Assets Liabilities

n

Cash Goods Scooter Salary Outstandi Credito Capital

ng Salary rs

Commenced
business
with cash– +80,000 +80,000
Rs.80,000

Purchased
goods for
cash– -40,000 +40,000 +30,000
Rs.40,000
and on +30,000
credit
Rs.30,000

Sold goods
for cash –
Rs.40,000 +40,000 -25,000 +15,000
costing
Rs.25,000

Paid salary –
Rs.2,000 and
salary +1,000 +2,000 +1,000 -2,000
outstanding
Rs.1,000

Bought
scooter for
personal use +20,000 +20,000
for cash at
Rs.20,000

Total 81,000 45,000 20,000 2,000 1,000 30,000 1,13,000

Grand Total 1,46,000 1,46,000

Hence Accounting Equation has been proved.

Q 3. : Show the rectification entries for the following

a. Sales account is under cast by Rs.15, 000.

b. Goods returned by the customer Mr. of Rs.5650 has been posted in the Return Inward Account
as Rs.5560 and in Mr. A/c as Rs.6, 550.

c. Salary paid Rs.6, 000 has been posted to rent account.

d. Cash received from Ram posted to Shyam account Rs.7, 000.

e. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhu’s a/c
Answer

a. The Sales account is under cast by Rs.15,000

Suspense A/c Dr 15,000

To Sales A/c 15,000

Statement- Being under casting of Sales A/c by 15,000 now rectified.

 b. Goods returned by the customer Mr. of Rs.5650 has been posted in the Return Inward Account as Rs.5560 and in
Mr. a/c as Rs.6,550

X A/c Dr 990
To Suspense A/c 990

Statement- Being over casting of X A/c by 990 now rectified.

c. Salary paid Rs.6,000 has been posted to Rent account

Original Entry Wrong Entry Rectified Entry

Salary A/c Dr 6,000 Salary A/c Dr 6,000 Rent A/c Dr 6,000

To Cash A/c 6,000 To Rent A/c 6,000 To Cash A/c 6,000

Statement- Being Salary A/c had been wrongly credited to Rent A/c now rectified.

d. Cash received from Ram posted to Shyam account Rs.7,000

Original Entry Wrong Entry Rectified Entry

Cash A/c Dr 7,000 Cash A/c Dr 7,000 Shyam A/c Dr 6,000

To Ram A/c 7,000 Shyam A/c 7,000 Ram A/c 6,000

Statement- Being cash wrongly credited to Shyam’s A/c now rectified.

e. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhu’s a/c
Original Entry Wrong Entry Rectified Entry

Cash A/c Dr 7,000 Cash A/c Dr 7,000 Madhu A/c Dr 6,000

To Jadu A/c 7,000 Madhu A/c 7,000 Jadu A/c 6,000

Statement- Being cash wrongly credited to Madhu’s A/c now rectified.

Q.4 : 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:

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:

The first step in preparing the trading account, profit and loss account and balance sheet is to prepare
the trial balance. And for interest on capital it is assume that the interest had been already paid. So, it
will give its effect on Profit and Loss Account at the debit site.

• TRIAL BALANCE OF KIRAN TRADING CO AS ON 31ST MARCH 2000

PARTICULARS DEBIT CREDIT

Opening Stock 5,000

B/R 22,500

Purchases 1,95,000

Wages 14,000

Insurance 5,500

Sundry Debtors 1,50,000

Carriage Inwards 4,000

Commission Paid 4,000

Interest on Capital 3,500

Stationery 2,250

Return Inwards 6,500

Commission received 2,000

Return Outward 2,500

Trade Expenses 1,000

Office furniture 5,000

Cash in hand 2,500

Cash at bank 23,750

Rent and Taxes 5,500

Carriage Outward 7,250

Sales 2,50,000

Bills Payable 15,000

Creditors 98,250

Capital 89,500

Total 457, 250 457, 250

• Trading account of Kiran Trading Co as on 31st March 2000

Dr. Cr.

PARTICULARS AMOUNT PARTICULARS AMOUNT

To Opening stock 5,000 By Sales 2,50,000

To Purchases 1,95,000 Less return Inwards 6,500

Less Return Outward Less Carriage Outward 7,250 2,36,250

2,500

Add Carriage In 4000 1,92,500 Closing Stock 1,25,000

To Wages 14,000 Total 3,61,250

Gross Profit 1,45,750

Total 3,61,250

• Profit and loss account of Kiran Trading Co as on 31st March 2000

PARTICULAR AMOUNT PARTICULAR AMOUNT

To Insurance 5,500 By Gross Profit 1,45,750

To Commission paid 4,000 By Commission Received 2,000

To Interest on Capital 3,500 Total 1,47,750

To Stationery 2,250
To Trade and Expenses 1,000

To Rent and Taxes 5,500

Net profit 1,26,000

Total 147,750

• Balance Sheet of Kiran Trading Co as at 31st March 2000

LIABILITIES AMOUNT ASSETS AMOUNT

Capital 89,500 Cash in Hand 2,500

Add Net Profit 1,26,000 2,15,500 Cash at Bank 23,750

Bills Payable 15,000 Bills Receivable 22,500

Creditors 98,250 Debtors 1,50,000

Furniture 5,000

Closing Stock 1,25,000

Total 3,28,750 Total 3,28,750

Q.5: Write short notes on:

Answer

5 a)

✔ Accrued/ Outstanding Expenses:

Top of Form

Bottom of Form
Certain expenses may have been incurred during the financial year, but will only be paid in the next
financial year. Examples of such expenses is where accounts or invoices have been received for
accounting fees, advertising, rent, rates and taxes, water and electricity, etc., which is applicable to
the financial year but which is not yet paid at the end of the financial year. The expense account must
be adjusted so that the expense account represents the expenses for the full financial year or 12
consecutive months (accounting periods or reporting periods). The amount by which the expense
account is outstanding will increase the amount of the expense at the end of the financial year. At the
end of the financial year a liability is created - Accrued or outstanding expenses because the amount
of the expense is consumed or used but not yet paid. It is owed to the party who has supplied the
expense item, which is already used up in the financial year.

✔ To Identify, Enter the Transaction and to Post the Transaction to the

Ledger:
For example, when analyzing the figures on the pre-adjustment trial balance, it is discovered that the telephone expenses
paid for the current financial year is R (£) 3 300. The telephone account for R (£) 300 of the last month of the financial year is
received, but not yet paid. Enter the transaction in the General Journal. Enter the transaction in the batch. After entering the
transactions in the general journal, the transactions is as follows:
The expense for the telephone is recognized and recorded in the expense accounts which will result that the net profit will be
decreased by the expense of R(£) 300, which is not yet paid as at the end of the financial year (29 February). It has also
increased the current liabilities, as it is an expense which is payable in the new financial year. An amount of R 3 600 will be
recognized as an expense and not R (£) 3 300.
The amount that should have been paid for the financial year is the amount on the pre-adjustment trail balance plus the amount
of the outstanding expense not yet paid. The expenses are increased (debited) and current liabilities are increased (credited).
Once these transactions have been processed and you have done the Year-end process in the Tools - Global Processes - Do
Year-end menu option, you need to reverse these adjustments in the new financial year. The reason for this is that these
adjustments have served its purpose in the old financial year to assist you to generate the correct final financial statements.
5b)

✔ Prepaid expenses:

• What Does Prepaid Expense Mean?

A type of asset that arises on a balance sheet as a result of business making payments for goods and
services to be received in the near future. While prepaid expenses are initially recorded as assets,
their value is expensed over time as the benefit is received onto the income statement, because
unlike conventional expenses, the business will receive something of value in the near future.

• Investopedia explains Prepaid Expense

Due to the nature of certain goods and services, they must be prepaid expenses. For example,
insurance is a prepaid expense, because the purpose of purchasing insurance is to buy proactive
protection in case something unfortunate happens. Clearly, no insurance company would sell
insurance that covers the occurrence of an unfortunate event, after the fact, so insurance expenses
must be pre-paid.

Prepaid expenses are those expenses which have been paid in advance. In other words, these are the expenses which have been
paid during the accounting period for which the final accounts are being prepared but they relate to the next period. As the
benefit of such expenses is received in the subsequent years, it will be treated as expenses of the coming years and not the year in
which it is paid.
Examples: Insurance premium has been paid in advance. Rent has been paid for the next year.
• Treatment of prepaid expenses in final account:
If prepaid expenses are given in the trial balance they are recorded in the assets side of Balance sheet only. But if they are given
in the adjustments they are subtracted from concerned expenses in the debit side of profit and loss account and again are shown
in the assets side of Balance Sheet.