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FINANCIAL ACCOUNTING

[1st Year] Objective Type Questions [3 Marks]

1. What is transaction and what is an event ?

Ans: Transaction –An event which exchange or transfer value either in the form of money or goods or services
which are measured and expressed in terms of money. Some example of transaction are :-

(i) Sold goods in cash Rs. 2,000

(ii) Goods destroyed by fire Rs. 5,000

(iii) Purchased goods from Ramesh Rs. 4,000

Event –A bundle of financial activities or transactions of occurrence, happening, change or incident, which may
or may not bring any change in financial position of business concern.

“All transactions are event but all events are not transactions”.

2. Define debit and credit.

Ans: The term debit and credit comes from the latin word ‘Debitum’ and ‘Credere’ respectively. There are two
sides of an account. The left side of the account is called debit and right hand side of the account is called credit.
In short Dr. stands for debit and Cr. credit. Receiving aspect means debit and Giving aspect means credit.

3. What is debit note and what is credit note ?

Ans: Debit Note - The document relating to causes of debit, which is sent to a person or concern who is debited
by another person or concern is called debit note.

Credit Note – The document relating to causes of credit which is sent to a person or concern who is credited by
another person or concern is called credit note.

These documents contains the information of particular of goods, price, rate of discount, name and causes of
return etc.

4. What are golden rules for debit and credit ?

Ans: The golden rules of accountancy is invented by famous Lucus Paciolic in the year 1494 in his book Scripts De
Compuset which are as : - Golden Rules of Debit and Credit

(i) Personal Account : Debit the reciver, credit the giver.

(ii) Real Account : Debit what comes in, credit what goes out.

(iii) Nominal Account : Debit all expenses or losses, credit all incomes or gains.

5. Distinguish between Capital and Revenue Expenditure.

Ans: Capital Expenditure Revenue Expenditure

a. Expenditure which is incurred for acquiring the a. Revenue expenditure is incurred for day-to-day expenses
property of a permanent nature. of business and its maintenance.

b. It is a real account. b. It is a nominal account.

c. It is non-recurring in nature. c. It is recurring in nature.

d. It is shown balance sheet. d. It is shown in Profit & Loss A/c.

e. It increases the earning capacity of business e. It is incurred for maintaining the business and its assets.

f. Purchase of land, machinery and furniture are f. Wages, salary, rent, depreciation on assets are its

its examples. examples.

6. What kind of errors can be detected from trial balance ?

Ans: The following errors can be detected from trail balance :-

(i) Omission to post an account in the ledger

(ii) Wrong posting, casting in balancing in the ledger

(iii) Omission of account balance into trail balance

(iv) Wrong posting from ledger to trail balance

(v) Missing ledger balance to trail balance

7. Is balance sheet an account ?

Ans: No balance sheet is not an account. It is a statement in which the details of assets and liabilities of business
concern are given. In the account debit and credit must be written but it is not found in balance sheet. It indicates
the financial position of the concern. It is prepared at the end of the year after preparation of trading and
profit&losss account. It is also called language of business.

8. What is Journal Proper ?

Ans: Journal Proper is used to record all those transactions which are not recorded in special journals.

It is also known as ‘General Journal’. Transaction which are recorded in journal proper are as follows:-

(i) Opening Entries (ii) Closing Entries (iii) Adjustment Entries (iv) Transfer Entries (v) Rectification Entries

(vi) Residual Entries

9. Why sales day book is maintained by business firm ?

Ans: Sales day book is one of the most important part of special journal. It is used to record all the credit
transaction of sales of a firm. No cash is required in such books. Errors and omissions can be easily detected by
this book. That is why sales day book is maintained by business firm.

10. What is Consignment business ?

Ans: A consignment is process of sending or selling of goods from one place to another through agent on the
basis of commission. It is also known as commission business. The person who sends the goods is known as
consignor and the person who receives the goods is known as consignee. With the help of such type of business
consignor can sell more goods at far places indirectly.

11. What is del credere commission ?

Ans: Del Credere Commission:-An additional commission paid by consignor to consignee after ordinary
commission if the consignee undertakes to bear bad debts from credit sale is called del credere commission. It is
the credit insurance for consignor.

12. Define recurring and non-recurring expenses ?

Ans: Recurring expenses:- Recurring expenses under consignment refer to those expenses which should be
ignored for the variation of closing stock by the consignee relating to present value and location of goods. For
example selling expense, warehouse expenses, insurance premium, go down rent and indirect expenses etc.

Non-recurring resources:- Non- recurring expenses under consignment refer to those expenses which should be
added for the valuation of closing stock by the consignee relating to present value and custom duty and clearing
charges, etc.

13. How closing stock s valued in consignment business?

Ans:- It is necessary to calculate the present value of closing stock under consignment business. Because so many
expenses incurred by both the consignor and consignee. So it will increase the cost of unsold stock. It is valued as
follows:-

Goods send by consignor to consignee at cost - ***

Add:- All expenses paid by consignor - ***

Less:- Abnormal loss ( loss in transit, damage) - ***

Add:- Non recurring expenses paid by consignee - ***

Value of closing stock ***

14. Why closing stock is valued at cost price or market price which ever is lower ?

Ans: The stock of goods remaining unsold at the accounting period is called closing stock. Generally in business
closing stock is valued at cost price because profit cannot be charged until they are sold. But sometime it is seen
that market price is lower than cost price. In such case closing stock is taken as market price considering the loss
to be incurred at the time of selling the goods. So, it is said that “closing stock is valued at cost price or market
price whichever is lower”.

15. What is Proforma Invoice ?

Ans: A Proforma Invoice is a statement sent by consignor to consignee, in which details of goods like quality,
price of goods, commission and minimum sale price are given. It is not an invoice but looks like same. It is only
the invoice of information.

16. What is Accounts sales ?

Ans: Accounts sales is a statement sent by consignee to consignor. It shows the details of goods sold, gross sales
proceeds, expenses of the consignee deducted from net sales, commission and balance due to consignor.
17. Write two difference between ‘Hire purchase and Instalment payment system’.

Ans: Hire Purchase Instalment Payment System

a. The ownership or title of the goods passes to the a. The ownership of goods passes to the buyer as

buyer only at the payment of last instalment. soon as the sale transaction is made.

b. The buyer does not have any right to dispose of the b. The buyer can dispose of the goods as he gets

goods till he gets the ownership. immediate title of goods.

18.What is cash discount ?

Ans: A discount allowed by creditors to his debtors or amount receivable by creditors to encourage the prompt
payment. This type of payment is given for quick payment. There are two types of cash discount which are
recorded in the cash book. (A) Discount Allowed (B) Discount Received

19. What is Trade discount ?

Ans: Trade discount is a deduction by whole seller or manufacturer to his customer on list price or catalogue
price. Such discount is given for bulk purchasing or selling of goods. This type of discount is not recorded in the
cashbook.

20. What is compound journal entries ?

Ans: When two or more than two transactions are recorded by means of one journal entries instead of several
journal entries, such single entry is termed as compound journal entries. It is note that all the transaction must be
in same date and the total of debit and credit will be equal. In all transaction there is one account must be either
in debit or credit.

21. Is Trial Balance in dispensable ?

Ans: ‘Trial balance’ is statement of debit and credit of various ledger. It is not a part of accounts. It is just a
working paper and used to satisfy the arithmetic accuracy. But it is very helpful for preparing final account of the
concern. So, trail balance is not indispensible.

22. How ‘secret reserve’ is created ?

Ans: A reserve which is not shown in the balance sheet by concern or company is called secret reserve. This type

reserve kept separately by the concern. The following are the methods of creating secret reserve :-

23. Distinguish between depreciation and fluctuation.

Ans: Depreciation Fluctuation

a. It is a process of permanent fall in the value of a. It is process of temporary variation of an assets.

assets

b. Depreciation is concerned with book value. b. Fluctuation is concerned with market.

c. It is the process of fall in the price. c. It is process of fall or rise in price.


24. Explain the term depreciation and amortisations.

Ans: Depreciation: It means permanent decline in the value of the assets due to wear and tear or form any other
causes like obsolescence or defluxion of time.

Amortisation: The process of writing off intangible assets like goodwill, patents and trademarks etc which
cannot be seen or touched is known as amortisation.

25. “Balance Sheet is a sheet of balances”- Comment.

Ans: Balance Sheet is a sheet of balances because all the personal and real account appearing in the trial balance
comes in the balance sheet as the name of assets and liabilities. These are shown in the balance sheet in
systematic manner after the adjustment on a particular date. So, it is called ‘sheet of balances’.

-------------------------------------------- GAUTI’S INSTITUTE------------------------------------------


FINANCIAL ACCOUNTING

[1st Year] Short Type Questions [6 Marks]

1. What do you mean by ‘Two fold aspect of a transaction’ ?

Ans: The system of accounting under which both the aspect of a transaction are recorded in the books is called
‘Two fold aspect of transaction’. In accountancy transaction means transfer of money or money’s from one
person to another person or from one place to another place. A business transaction affects two aspects or parties
in the opposite direction. One party receives the benefit and other party gives the benefit. We cannot think of
giver without a receiver and vice-versa. The system of accounting which design to record the two fold aspect of
transaction. Is also known as ‘Double entry system’. It was first introduced by “Luca Pacioli” in the year 1494.
For example Rohit paid Rs. 500 to Aniket. Here, Aniket is the receiver and Rohit is the giver.

2. How do you distinguish between ‘Real Account’ and ‘Nominal Account’ ?

Ans: Real Account – Real Accounts are those accounts, which record the transactions relating to real things,
assets and properties. Example – Stock, Cash, Buildings etc.

Nominal Account – Nominal Accounts are those accounts, which record the transactions relating to losses or
expenses and incomes or gains. Example – Rent A/c, Interest A/c, Salary A/c etc.

The difference between real account and nominal account are :-

Real Account Nominal Account

1. The transactions relating to assets are recorded 1. The transaction relating to losses, expanses, inco-

in these accounts. -mes or gains are recorded in these account.

2. The accounts are closed at the end of the acco- 2. The accounts are transferred to profit and loss

-unting year and balance is carried forward. accounts.

3. Only debit balance arrive in this accounts. 3. Both debit and credit balance arise in this account

4. It is shown in the balance sheet. 4. It is shown in profit & loss account.

5. Land & Building, Machinery, Cash and Bank 5. Wages, Salary and Commission etc are the exam-

are example of real account -ple of nominal account.

6. Debit what comes in credit what goes out is the 6. Expenses or losses debit and incomes and gains

rule of real account. is the example of nominal account.

3. Can Journal be avoided ?

Ans: In a business concern all the financial statements are prepared with the help of ledger. For example Final
account is prepared with the help of trail balance. Trial balance is a statement of ledger.From the above
discussion, it is said that what is the use of journal in business concern. Because it is also laborious and
expensive. In spite of these, Journal entries is very necessary in business concern. It is very useful. Journal help
the business concern on following ways :--

1. There are less chances of errors. Because direct posting the transaction into ledger creates possibilities if

errors.

2. Every transactions are recorded in details.

3. Historical record of transaction.

4. Easy in posting in ledger.

5. Benefit of division of labour.

6. Less chances of omission in transaction.

So, Journal cannot be avoided.

4. Which transactions are recorded in Journal Proper ?

Ans: Journal Proper is used to record all those transaction which are not recorded in special journals. It is also
known as “General Journal”. It is the part of original entry.

The transactions which are recorded in Journal Proper are as follows :--

a. Opening Entries – The entry which is carried forward from previous year.

b. Closing Entries – The entry which are passed closed by transferring in Trading & P/L A.c. For example –
nominal account.

c. Transfer Entries – The entries by which the amount can be transferred from one account to another account.

d. Adjustment Entries – The entries which are passed to adjust outstanding or prepaid of expenses or incomes.

e. Rectification of errors – The entry by which errors can be prevented.

f. Purcahse and sale of assets on credit.

5. What do you mean by an Account ?

Ans: A book in which all the transaction of a firm or concern relating to money are recorded is called “Account”.

An Account is a summarised records of transactions relating to person, concern etc. For example - Cash paid to
wages will be recorded in Wages A/c and Cash A/c. In the accounting process accounts are divided into three
parts in generally by following ways :--

i) Personal Account – record the transaction of firm or person.

ii) Real Account – record all the assets.

iii) Nominal Account – record incomes of expenses or losses.

6. Explain the rules of ‘Debit and Credit’ ?


Ans: The term debit and credit comes from the latin word ‘Debitum’ and ‘Credere’ respectively. There are two
sides of every transaction. The left hand side of account is called Debit and the right hand side is called Credit.
The rules of debit and credit can be stated as follows :--

i) Traditional Approach :- Application of golden rule

Personal Account – Debit the receiver credit the giver.

Real Account – Debit what comes in credit what goes out.

Nominal Account – Debit expenses or losses and credit incomes and gains.

ii) Modern Approach :- Application for accounting equation

Total Debit = Total Credits

or, i) Assets = Liabilities

or, ii) Assets = Owners Equity + External Equity

or, iii) Expenses + Looses = Capital + External Liabilities + Incomes or Gains.

7. What are ‘bad debts’ and how they are treated ?

Ans: Bad debts :- The debts which cannot be realised from customer is called bad debts. It is also called
irrecoverable. Such loss is complete loss for the person or concern. Example :- A sold goods to B for Rs. 5,000. If
B fails to pay the money the amount of Rs. 5,000 will be called Bad debts for A and party B will be regarded as
bad debtors. The treatment of bad debts are as follows :--

1. Bad debts written off :--

Bad Debts A/c_____________Dr.

To Debtors A/c

(Being bad debts written off)

2. Bad debts transferred to Profit and Loss A/c :-

Profit and loss A/c_________Dr.

To Bad debt A/c

(Being bad debts transferred to P/L A/c)

3. If Bad debts transferred to provision A/c :-

Provision for Bad debts A/c _Dr.

To Bad debts A/c

(Being bad debts transferred to provision)


8. Is depreciation a source of fund ?

Ans: No, depreciation is not a source of fund because when we charge depreciation on assets, the amount of cash
is not affected. Depreciation is charge to write off the cost of an asset. Since depreciation is simply a book entry,
it has no outside connection. Just by passing the entry, it is not possible for business to generate a fund. No cash
is required for charging depreciation. So, depreciation is a non-cash expenses. So, it is clear that depreciation
does not create any type of funds. Since it is not a source of fund. With the help of charging depreciation, we
reduce the income of the concern and save income tax.

9. What do you mean by Straight line method of depreciation.

Ans: Straight line method :- The method of depreciation under which the amount of depreciation for every year
will be the same percentage on the cost of assets is called fixed method of depreciation. If this amount is point
out in graph paper than a straight line appears on the paper. So, it is also known as straight line method. When
the rate of depreciation is not given then the amount will be calculated as follows :--

Annual Depreciation = Assets + Expenses – Scrap Value

Estimated life of an asset

This type of depreciation is suitable for those assets which will not need much repairs. For example – Patents,
Copyrights, Trademark, and household assets etc. The following points should be considered while charging
straight line method depreciation :--

--The useful life and ‘scrap value’ estimated properly.

--Cost of repairs and maintenance will not be too much.

--Depreciation occurs due to efflux of time.

10. Distinguish between ‘General Journal’ and ‘Special Journal’.

Ans: In Business both cash and non-cash transaction take place. The book in which all non-cash transactions are
recorded is called ‘Special Journal’. The book in which special transactions are not recorded is called ‘General
Journal’. The difference between them are as follows :-

General Journal Special Journal

1. This book all those transaction which are not 1. In this book only special transaction are recoeded

recorded in special journal. like sales and purchase daybook.

2. All concerns have to keep their journal proper. 2. In case of small business, no need of this journal.

3. There is no need of total of the amount column. 3. There is need of total of the amount column.

4. Opening entries, Closing entries, Transfer entries 4. Purchase daybook and Sales daybook etc are exa-

etc are example of this. -mple of this book.

5. Two aspect of transactions are recorded in general 5. Only one aspect of transaction are recorded in

journal. this journal.


11.Why is journal called a “Book of original Entry” ?

Ans: Journal is the book of original entry in which transactions are recorded in order of date as soon as they take
place. The Journal has been derived from the French word ‘Jour’ meaning day. Therefore the journal means
daily record of business transactions.

Many people call Journal as ‘Book of original entry’, books of first entry because transaction are recorded in
journal originally or for the first time. At first transaction are recorded in journal and finally they are posted into
ledger accounts. It provides detail information with the help of narration. There is no chances omission of
recording of transactions and performs the functions historical records. A separate book is used for each kind of
transactions. So, Journal is also called “Books of original entry”.

12. Why trail balance is prepared ?

Ans: Trial balance : A statement which is prepared on definite date to determine the equality of posted debits and
credits for the purpose of arithmetic accuracy is called trail balance. It is prepared for following needs :--

i) Checking arithmetic accuracy : According to double entry, the total of debits is equal to total of credit if
arithmetic errors does not occurs. So, when the both side of trial balance is agreed then it is clear that there is no
mistake relating to arithmetic point of view.

ii) Preparing financial statement : With the help of trial balance financial statement can be prepared.

iii) Locating errors : If the trial balance does not agreed, attempts are made to detect the errors and rectify those.

iv) Summarise the ledger account : It is also shows short form of ledger.

13. What is Cashbook ? Why it is journal as well as ledger ?

Ans: Cashbook :- A book if original entry in which all the cash transaction of concern are recorded is called
cashbook. It is used to record cash receipts and cash payments, deposits of cash in the bank, withdrawal of cash
from bank and discount. In debit side all receipts and credit side all payments are recoded.

Cashbook a journal or a ledger : Cash plays dual role as a book of original entry as well as ledger. It can be
explained under following two headings :--

*Cashbook as journal :-

1. Like Journal every entry followed by a narration.

2. Like Journal column of ledger folio is necessary.

3. Like Journal entries are passed details wise.

4. Like Journal entry is a part of book of original entry.

*Cashbook as a ledger :-

1. Like ledger two date column, amount column is required.

2. Like ledger posting, casting and balancing are required.

3. Like ledger two separate ‘Dr. and Cr.’ and ‘To and By’ is required.

So, from the above discussion it is clear that cash book has both the feature of journal and ledger. So,
we can say that cashbook is a ‘Journalised Entry’.
14. What is del-credere commission ? Why it is given to consignee ?

Ans: Del – Credere Commission :- An additional commission paid by consignor to consignee after ordinary
commission if consignee undertakes to bear bad debts from credit sales is called del-credere commission. It is
credit instrument for consignor. Such commission is also given as a fixed percentage on total sales, otherwise
stated in the question. Once the del-credere commission is paid, the amount of bad debt will be born by
consignee. It is given to consignee on following basis :--

i) The consignee has to bear the loss of bad debts.

ii) The consignee has to also take the responsibility of selling all the goods sometimes.

iii) To remove the pressure of consignor.

iv) To increase the volume of sales.

15. What is Proforma Invoice ?

Ans: A proforma invoice is a statement sent by consignor to the consignee. It shows the details of goods sold,
gross sales proceeds, expenses of consignee deducted from net sales, commission and balance due to consignor. It
is an essential document. It intends to let the consignee know about the quality and price of goods. The proforma
invoice is only the document utilise for getting the clearance from the customs authority. It also serves as
important evidence in case of any controversy regarding the quality.

16. What is an ‘Account sales’ ? Prepare an account sales with imaginary data.

Ans: Account Sale : Account sale is a statement sent by consignee to consignor. It shows the details of goods
sold, gross sales proceeds, expenses of the consignee deducted from net sales, commission and balance due to
consignor. The following are the data for account sale :--

Example :- On 1.9.2000 Ganguli & Co. of Kolkata consigned 500 cricket bats to Tendulkar & Co. of Mumbai.
On 31.03.2001, Tendulkar & Co. forwarded an account sales :- (All bats are sold @ Rs.5,000)-Go down rent-
Rs.10,000

Tendulkar & Co., 31.3.2001 Shivaji Park, Mumbai, 40017

Accounts sale of cricket bats for the account of Ganguli

Net Proceeds

Gross proceeds –

500 bats @ Rs.5,000 each 25,00,000

Less: Godown rent 10,000 24,90,000

Enclosed : Bank draft no………dated………...

Date:………….. Signature

17. What is Joint bank account ?

Ans: Joint Bank Account :- Under the joint venture transactios, when the size of venture is large and there are so
many transactions made by partners then complete set of separate books of accounts may be maintained under
the double entry system. So, for the removal of problems relating to joint venture transactions, joint bank account
is maintained. It is opened for the better financial control of venture. The co-venturer operates this account
jointly by incurring expenses or receiving incomes of ventures. There are two column by the name of co-ventures
or more columns according to partners are opened. The co-venturer made the transactions and recoded by his
name in the joint bank account.

18. Distinguish between Consignment and Joint Venture ?

Ans: Consignment : A consignment is the process of sending and selling of goods from one place to another
place through an agent on the basis of commission.

Joint Venture : Joint Venture is a temporary partnership of more than one persons set up for a particular
business or venture.

The difference between them are as follows :--

Consignment Joint Venture

1. Consignment is permanent or long process of 1. Joint venture is temporary concept of business.

business.

2. There are two parties in consignment known 2. There may be two or more than two partners in

as consignor and consignee. venture known as co-venturers.

3. Profits and losses are taken by consignor after 3.Profit and losses, shared by the co-venturer in

deducting expenses of consignee. agreed ratio.

4. Funds for consignment is contributed by the 4. Fund for consignment is contributed by the

consignor. co-venturers.

5. There is one method of recording the transaction 5. There are three methods of recording transactions

6. Law of agency governs it. 6. The partnership act and contarct between parties

governs it.

7. All the risk of business is bear by consignor. 7. All the risk of venture bear by the co-venture in

an agreed ratio.

19. Distinguish between Cash basis and Accrual Basis of accounting.

Ans: Cash basis of accounting is prepared by those concern whose most of the transaction are made in cash.
Under this system only cash related transaction are recorded.

Under the accrual basis of accounting all the transaction are recorded either made in cash or not.

The difference between them are as follows :--

Cash basis of accounting Accrual basis of accounting

1. This basis of accounting used by those concern 1. This basis of accounting used by those whose
whose most of the transactions are made in cash. most of the transactions are made cash & credit.

2. Non-trading organisation ascertain their income 2. Trading and manufacturing concern ascertin

and expenditure under this system. their profit and loss under this system.

3. It is very less expensive and time consuming process. 3. It is expensive process of accounting.

4. Under this method only few books or ledger are op- 4. Under this system many ledgers are opened.

-ened.

5. Accurate surplus or deficit figure cannot be ascerta- 5. Accurate profit and loss can be ascertained under

-ined. this system.

6. It is simple by unscientific. 6. It is scientific but complex.

20. What are difference between ‘Reserves and Provisions’.

Ans: Reserves :- Reserve is a portion of profit which is set aside to meet a known or unknown necessity of
business. It is created at the time of preparation of final account.

Provisions :- A process of providing amount before determining the profit or loss of the concern for possible loss
or liability is known as provision.

The difference between reserve and provision are as follows :--

Reserve Provision

1. Reserve arises only in case of profit does not arise 1. It is charged against profit. It is created before

in case of loss. determining profits.

2. Reserve strengthen the financial position of 2. Provision is to adjust the future loss of the conce-

business. -rn.

3. It is created for any unknown liability or loss. 3. It is created to meet specific loss or liabilities.

4. The amount of reserve may be used to declare 4. Provision can be used to declare dividend.

dividend.

5. Creation of reserve is not compulsory for the 5. Creation of provision is compulsory for the con-

concern. -cern.

6. It shows liabilities side of a balance sheet. 6. It is shown in profit and loss account and deduc-

-ted from related assets.


21. What do you mean by general reserve and specific reserve ?

Ans: General Reserve :- The reserve which is created out of the profits for general purpose or meet the any type
of losses liability is called ‘General Reserve’. It is created for strengthening the financial position of the business.
It is also called free reserve.

It is used for 1) Strengthening the financial position 2) To increase the working capital 3) Payment for any known
or unknown liabilities

Specific Reserve :- The reserves which is created out of profits for a specific purpose or special purpose is called
specific reserve. Example – Debenture sinking fund, purchasing of new machinery. It cannot be used for any
other propose. It is also called special reserve.

It is used for those which it is created.

22. Which errors are not disclosed by trail balance ?

Ans: Trial Balance :- A statement which is created on definite date to determine the equality of posted debit and
credit ledger is called trail balance. Sometime trail balance does not disclose the errors which are as follows :-

i) Errors of omission :- Sometimes businessman or accountant forget forgot to record the transaction which do
not affect the trail balance.

ii) Errors of principle :- This type of errors arise due to mistakes regarding principle of account which do not
affect the trail balance.

iii) Compensating errors :- In this type of errors, one error is compensated by another error of an opposite nature
which do not affect the trial balance.

iv) Entries with wrong amount :- If transactions are recorded by wrong amount in the journal and also posted in
ledger then it do not affect the trail balance.

23. What is gross profit ? What are its importance ?

Ans: The Credit balance of trading account represents gross profits. It shows gross income of the owner. It is not
real profit of the owner. At the time of preparing profit and loss account, gross profit (if any) is brought to the
credit side of the profit and loss account.

Importance : The importance of gross profit are :--

a. It is the difference between sales and direct cost of goods.

b. It shows the profit of the concern regarding stock.

c. It is essential for profit and loss account and also help to find out the net profit or loss of the concer.

d. It does not include any income.

e. It is the measure of basic profit earning capacity of the business.

f. It is also helpful to find out the different types of ratios.

24. How do you value closing stock ?


Ans: The unsold goods lying in stock at the end of the accounting period are called closing stock. Stock is valued
at cost price or market price which ever is lower. Closing stock is shown on the credit side of the trading account
and asset side of the balance sheet. But in manufacturing company, there are there types of stock a) Raw
materials b) Work-in-progress c) Finished goods.
Raw materials and finished goods should be valued at lower price of cost. However, work-in-progress is valued at
factory cost which is also known as prime cost or factory overhead.\
25. Distinguish between “Gross Profit and Net Profit”.
Ans: Gross Profit :- The credit balance of trading account represent the gross profit. At the time of preparing
profit and loss account, gross profit (if any) is brought to the credit balance of profit and loss account.
Net Profit :- The credit balance of profit and loss account represent net profit.
The difference between gross profit and net profit are as follows :--
Gross profit Net Profit
1.Gross profit is determined by trading account 1.Net profit is determined by profit and loss account
2. Gross profit is transferred to profit and loss 2. Net profit is transferred to capital account.
account.
3. Direct expenses are considered at the time of 3.All indirect expenses are considered at the time of
valuation of gross profit. valuation of net profit.
4. Progress of business may not be measured by it 4. Progress of business can be measured by it.
5. It is found out before determining net profit. 5. It is found out after determining gross profit.
6. Gross profit is the part of first stage of final a/c 6. Net profit is the part of second stage of final a/c.
26. What is balance sheet ? Is it an account ?
Ans: Balance sheet :- A balance sheet may be defined as statement prepared with a view to measure the exact
financial position of business on a certain fixed date. It is prepared from the balance of the real and personal
account of the ledger.
Balance sheet is a statement of assets and liabilities. It is not an account. Because in a account, there are debit
and credit given. But in balance sheet only balances of real and personal account are given. It shows the financial
position of the business concern. It is divided in the two parts. Left hand sides denotes liabilities and right hand
side denotes assets. Balance sheet is also sheet of balances.
27. Write short note on renewal of bill ?
Ans: Renewal of bill :- When the acceptor of bill finds himself in financial difficulty to honour the bill on due
date, then he, instead of dishonouring the bill at the date of maturity, request to cancel the original bill and draw
another new bill to cancel renewal of bill.
Effects of renewal of bill :--
A. When a bill is renewal then amount of bill may be increase by the interest, noting charges and stamps etc.
B. It re-establishes the debt of the drawee.
C. If the holder of the bill received some cash then the amount of renewal bill will be decreased.
28. Distinguish between Hire-purchase sale and Ordinary sale.
Ans: Hire purchase sale and ordinary sale are not the same thing. Both are different from each other. The
difference between Hire purchase sale and Ordinary Sale are as follows :--
Hire Purchase Sale Ordinary Sale
1. Title or ownership of hire purchase sale transferred 1. Transfer of title passes to the buyer after complet-
to the buyer after the last payment is made. -ion of transaction.
2. The buyer makes his payment in form of instalment. 2. The buyer makes his payment at once.
3.The buyer can return the goods under this system. 3. The cannot return the goods.
4. The instalments include interest. 4. The price does not include interest.
5. The seller can repossess the goods due to non- 5. The seller cannot repossess the goods.
payment of instalment.
6. The buyer cannot dispose of the goods. 6. The buyer can dispose of the goods.
29. Distinguish between ‘Hire purchase ‘and ‘Instalment Payment System’.
Ans: Under the hire purchase system the buyer gets the possession of the immediately. Under instalment
payment system purchase purchaser gets possession and title of goods. The difference between these are :--
Hire Purchase System Instalment Payment System
1. The title of goods passes to the buyer only on 1. The title of the goods passes to the buyer as soon
payment of last instalment. as sale is made.
2. The Hire vendor can take back the goods if 2. The seller cannot take the goods back.
buyer becomes defaulter.
3. The buyer has option to return the goods and 3. The buyer has no such option.
terminate the agreement.
4. The buyer does not have any right to dispose 4. The buyer can dispose of the goods.
of the goods till he acquires the title of the goods.
5. Purchaser like a bailee in this system. 5. Purchaser is the owner of the asset in this system.
6. Vendor can forfeit the amount received from 6. Instalment payment cannot forfeited by the
purchaser on default of payment. vendor.

30. What are the rights of vendor ?


Ans: Under the Hire Purchase System, there are two parties namely purchaser and seller. In this system seller is
known as ‘Hire Vendor’ and purchaser is known as ‘Hire Purchaser’. Under the Hire purchase system the buyer
has the following rights :--
1. On the failure of any instalment by hire purchaser, the vendor can repossess the goods.
2. Under hire purchase system the vendor decide the amount of down payment.
3. Under hire purchase system the vendor decide the number of the instalment.
4. The vendor passes the title of goods at the last payment made by the purchaser.
5. Vendor can resold the repossess goods to another party.
31. What does ASI deal with ?
Ans: ASI deal with the significant accounting policies followed in presentation in final statement. For example:
valuation of inventories, methods of depreciation, valuation of goodwill etc. The accounting policies followed
vary from enterprise to enterprise. Disclosure of significant accounting policies followed is necessary if the view
presented is to be properly appreciated. Mostly going concern, consistency and accrual basis, underline this
financial statement. They are usually not specifically stated because their acceptance and use are assumed.
Disclosure is necessary if they are not followed.
32. Explain in brief four accounting concepts.
Ans: An accounting concept is an idea which has been formed in the minds of persons about an object.
Accounting concepts provide the necessary guide line on which accounting is based. It helps the various
interested parties of business in understanding accounting information. There are four accounting concepts :--
1. Entity Concept :- According to this concept, a business unit is considered separate from its owner. The owner
is treated as creditor to the extent of his capital.
2. Proprietary Concept :- According to this concept, the existence of the business depends on the proprietor.
Business cannot be shown separate from proprietor.
3. Materiality Concept :- It refers to the relative importance of the an item or event. It records only those
transactions which can be measured in terms of financial statement.
4. Going Concern Concept :- According to this concept, it is assumed that the business will continue for a long to
come. It has no intension or necessity of liquidation.
33. Discuss in brief convention of materiality.
Ans: It refers to the relative importance of an item or event. Whether something disclosed or not in the financial
statement depends on its materiality. An item should be regarded as material if there is reason to believe that
knowledge would influence the decision of investor. It is material for one concern but immaterial for other.
Accounting is manmade art designed to help man for achieving specific objects. Accountant’s professional
judgement is the best yardstick to decide what is material and what is immaterial.
34. What do you mean by matching concept ?
Ans: This concept is based on the accounting period concept. Every businessman has the main object to earn
more profits. So, when we ascertain the profit made by concern, it is necessary to match the revenues of that
period with the cost of that period. Revenue is considered to be earned on the date at which it is realised that is
on date when goods are delivered even though payment may be collected in future. That is why the adjustment is
made on all outstanding expenses, accrued income and income received in advance while preparing the final
account at the end of the financial year.
35. Write the significance of going concern.
Ans: According to this concept, it is assumed the business will continue for a long time to come. It has no
intention or necessity of liquidation. Under this concept assets are classified as fixed and current assets and
liabilities are classifies sort term and long term liabilities. The significance of going concern are as :--
1. To find out the present value of assets.
2. Forward looking direction.
3. Adjustments are taken for true picture of financial statements.
4. The deferred expenses or incomes will be adjusted in the next year.
5. Creation of reserve for strengthening the business.
6. Valuation of intangible assets like goodwill, patents, trademark and copyright.
36. Comment on the interrelationship between ‘Entity and Continuity Concept’.
Ans: Equity concept is considered separate from its owner and continuity is assumed that the enterprise will
continue for a long time to come. Entity concept is very useful for those concern whose most of the transaction
are made in cash and credit both. It is also useful for those whose business are based on long period of time. So,
continuity also adopt the entity concept because the owner may be changed in entity but business must be going
on. So, entity concept and continuity concept both are interrelated.

37. Difference between accounting assumptions and accounting policies.


Ans: Accounting assumptions are those broad concepts that develop generally accepted accounting principle. In
this system certain ideas are used to provide theoretical structure and logic of accounting. The assumptions are
the rules of the game and they have been developed from common accounting practices.
The accounting policies are referred to rules and principles and methods of business enterprise in the
preparation of financial statements. There are so many policies which are applicable according to situation. It is
very helpful in diverse and complex activity.

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