Set- 1 Questions

1. Explain the different types of accounting concepts in detail. 10

Accounting concepts refer to the basic assumptions and rules or principles

which work as the basis of recording business transactions and preparing accounts the

different types of accounting concepts are

● Business entity concept : A business entity is distinct and separate from a person

who owns or controls it, and the amount of capital invested by the owner and their

share of the profits are treated as liability of the entity

● Money measurement concept : This concept emphasizes that all transactions must

be expressed in monetary terms before they are considered for accounting. If they

cannot be expressed, they cannot be considered. As a simple measuring device,

monetary transactions provide a common denominator for representing many

facts at the same time and can be summarized easily.

● Accounting period concept : This concept involves recording all transactions in

the accounting books on the assumption that profits from these transactions are to

be calculated for a specific period called 'Accounting period'.

● Accounting cost concept : Basically, the concept of accounting cost states that

tangible assets such as land, machinery, plants, etc, must be recorded in books of

accounts at their purchase prices, which include acquisition costs, transportation

costs, installation costs, etc. By charging depreciation for the use, wear and tear,

and other expenses associated with the assets, the cost of assets is systematically

reduced year-by-year.

● Going concern concept : Using this concept, a business is assumed to exist and

operate for a long time, and it is also used to distinguish between spending that

yields benefits over the long run from spending that will yield benefits in the short

run.

● Duality aspect concept : It expresses entity concept because it shows that the

business itself owns assets and the assets are owned by various claimants. Duality

aspect concept is central to the whole accounting process

● Realization concept: According to this concept, Revenue must be recognized after

receive money

● In accordance with the accrual concept, incomes and expenses should be

recognized at the time they are earned or incurred, regardless of whether the

money was received or paid in connection with them. A distinction is also made

between accrual receipts of cash and the right to receive cash in relation to

revenues, as well as actual payment of cash and obligations to pay cash in relation

to expenses.

● Matching concept : According to the matching concept, revenue earned and

expenses incurred to earn revenue must be incurred in the same accounting

period. Revenue is offset (matched) by all expenses incurred during that

accounting year to generate the revenue. This measure shows how profitable the

economic activity is as a whole.

2. From the following details, pass the necessary closing entries. 10

Stock on 1-1-2003 4,000 Freight 800

Purchases 15,000 Factory rent 1,000

Bad debts 500 Office rent 2,400

Sales 30,000 General expenses 500

Returns to suppliers 2,000 Heating and

lighting

700

Returns from

customers

1,000 Discount allowed 300

Wages and salaries 5,000 Discount received 400

Carriage on
purchases

1,000 Commission (Cr.) 500

Cartage on sales 200 Insurance 200

Depreciation on

Machinery

1,000 Closing stock 6,000

Date Particulars Ledger Folio Debit Credit

1-1-2003 Opening stock 4000

Purchases 15000

bad debts 500

Saless 30000

Returns to suppliers 2000

Returns from customers 1000

Wages and salaries 5000

Carriage on purchases 1000

Cartage on sales 200

Depreciation on machinery 1000

Frieght 800

Factory rent 1000

Office rent 2400

Genera;l expenses 500

Heating and lighting 700

Discount allowed 300

Discount received 400

Commision 500

Insurance 200

Closing stock 6000

3. Define Bank Reconciliation Statement. Discuss various reasons for difference in balance

of cash book and passbook. 2+8

Reconciliation statements reconcile all deposits, and other financial

activity within a specified period between a company's bank account and its financial

records. They are compiled from bank accounts and business accounts. A cash book

is maintained by the business concerned to record cash and bank transactions. All

bank transactions are recorded in the bank column, while all cash transactions are

recorded in the cash column. All deposits/receipts will be recorded on the debit side

of the cash book, while all withdrawals/payments will be recorded on the credit side.

Banks also maintain accounts for each customer. In accordance with the bank books,

all deposits are recorded on the credit side of the customer's account and all

withdrawals are recorded on the debit side. The bank sends a copy of this account on

a regular basis to the customer, called a "Pass Book" or "Bank Statement".

Reconciliation statements must be prepared to identify the reasons for non-agreement

and the reasons behind it. Such a statement is called a “Bank Reconciliation

statement.

There are many reasons that can cause differences in the balances between

cashbook and pass book, some significant ones are :

● There is a possibility of errors arising from cheques issued to suppliers but not yet

presented for payment. This is because banks may require some time to process

checks and if recorded before presenting them, an error may result

● The bank will record the receipts side of the bank column in the cash book when

the checks are deposited, but only the entry in the passbook will be done after the

check has been picked up. In general, this process may take a few days, and for

outstation checks, it may take an additional few days, resulting in a difference in

balances on a particular date.

account of a business. The bank will immediately enter the amount as soon as the

customer deposits it. However, the firm won't be aware of it until they receive a

bank statement.

● It is possible that the customer received a check from a third party, entered it into

the cash book, but forgot to send it to the bank for collection. Due to the fact that

the check has not been deposited in the bank for collection, no entry has been

made into the ledger or pass book for this transaction. In such a case, if the two

balances are compared, they will not agree with each other.

● In the cash book, checks issued and entered are automatically entered on the

credit side of the bank column. However, when they were presented for payment,

they were dishonored for some technical reason. When the bank does not make an

entry in the ledger nor the pass book of the account, in such a case the balance of

the account will differ from the balance of the pass book.

● From time to time, the bank charges fees or commissions for varying services

provided from the customer's account without the firm's knowledge, and the firm

records these charges after receiving the bank's notification.

● Occasionally, interest on debentures or dividends on shares held by the account

holder are directly deposited on their account by the company through an

electronic clearing system (ECS). As a result, the firm does not receive the

information until it receives the bank statement, thus entering it in its cash book

after the bank has recorded it. As a result, the balances in the cash book and

passbook will differ.

● A bank may make direct payments on behalf of its customers if they have

standing instructions. For example, telephone bills, rent, insurance premiums,

taxes, and so on. Despite the fact that these expenses are directly paid by the bank,

the firm records them upon receiving information from the bank in the form of a

pass book or bank statement thereof. Thus, the balance of the pass book is lower

than the bank column in the cash book.

4. Describe in detail different types of shares. 10

Shares refer to the indivisible units of a fixed amount comprising a

company's capital. Each share has a unique number. There are two main broad

categories of shares :

● Equity shares - This type of share, also referred to as ordinary or common shares,

constitutes the bulk of shares issued by a company. They are shares that are

distributed to the general public and are transferable, traded actively by investors,

and do not have preferentials or redemption provisions. Balance of profit is only

distributed in this type after dividing among preferential shares, and in the case of

a winding up, the company pays its creditors and preference share capital, then

any remaining shares are distributed to equity shareholders.

● Preference shares - Preference shares are those shares on which there is a

preferential right as (a) Payment of periodic dividends (b) distribution of assets on

liquidation of the company. In addition, preferential shareholders are paid off

before ordinary shareholders in the event of a company's liquidation. The different

types of shares in this category are :

a. Cumulative preference shares : These shares allow the shareholders to

carry forward unpaid dividends and have a provision mandating that

dividends be paid, including those missed previously.

b. Non-Cumulative preference shares: these shares do not entitle

shareholders to reap missed dividends, so the company is not required to

pay unpaid dividends to them.

c. Participating preference shares : The shareholders holding this type of

shares receive a fixed dividend rate and have the right to participate in

company profits after equity shareholders receive a certain rate of

dividends..

d. Non-Participating preference shares : Holders of non-participating

preference shares can only receive the fixed dividend and have no right to
participate in profits or assets remaining after paying equity shareholders'

dividends

e. Redeemable preference shares : This type of share can be redeemed after

the period of holding the share certificate, where the shareholders are

entitled to receive the par value of the share, a redemption premium,

proportionate dividends for the current year, and dividends in arrears.

f. Irredeemable preference shares : The Irredeemable preference shares are

those that can only be redeemed at the end of the company's life.

g. Convertible preference shares : An individual that holds convertible

preference shares has the right to convert those shares into equity shares at

a predetermined ratio.

5. Define debentures and summarize the classification of debentures. 2+8

When a company intends to borrow money from the public, it issues a

Debenture as an acknowledgement of the loan it received, which equals the nominal

value of the Debenture. Debentures are issued by companies when they intend to raise

a loan from the public. The holder of a debenture is known as a debenture holder and

is the company's creditor. According to section 2(4) of the Companies Act 1956, a

debenture may be a stock, bond, or any other security of the company, regardless of

whether it is secured by the company's assets.

Debentures are classified as under

● From a security point of view

a. Secured or mortgaged debentures : A secured debenture is secured by a

charge on the company's assets. Secured debenture holders have the right

to recover their principal amount, along with any unpaid interest on the

bonds, out of the company's mortgaged assets.

b. Naked or simple debentures : These are unsecured debentures that lack

any security regarding the principal amount or unpaid interest.

a. Redeemable debentures : A redeemable debenture is one which is issued

for a specified period, whose principal amount is paid to holders upon

expiration, or which can be bought in the open market to redeem it.

b. Irredeemable debentures : The irredeemable debentures are the debentures

that cannot be redeemed during the company's lifetime and are repaid after

the company is liquidated..

● Basis of records

a. Registered debentures : A registered debenture is one that is registered

with the company and the amount of the debenture is payable only to

those debenture holders whose names appear in the register of the

company

b. Bearer debentures : These are debentures which are not recorded in

company records. They can be transferred only by delivery, and the

holders are entitled to receive interest on them.

● Basis of convertibility

a. Convertible debentures :A convertible debenture is a debt instrument that

can be converted into shares of the company upon expiration of a

predetermined period of time. The terms and conditions of conversion are

generally announced when the debt instrument is issued.

b. Non-convertible debentures : The holders of such debentures don not

enjoy the provision to convert their debentures into shares of the company.

● Basis of priority

a. First debentures : This type of debentures are redeemed before other

debentures.

b. Second debentures : this type of debentures are redeemed after the

redemption of first debentures.

The method of depreciation is applied consistently to provide

comparability of the results of the operations of the enterprise from period to period

and Just like fixed assets, the same depreciation method cannot be applied to all fixed

and one must select the most appropriate depreciation method based on its type,

nature, use and circumstance that prevail in the business or sometimes a combination

of more than one method is used. The commonly used methods for depreciation are :

● Straight line method (SLM) :Based on the straight line method, depreciation is

calculated by dividing the original cost of the asset less any estimated salvage

value by the number of years that the asset should last. It is also known as the

fixed installment method or the original cost method. Under the straight line

method (SLM), a uniform amount is deducted in each accounting period for

depreciating every fixed asset. Until the asset reaches its estimated useful life or

its salvage value, this uniform amount is deducted.

● Written down value method (WDV) : In the written down value method (WDV),

a fixed percentage of depreciation is charged to the net asset balance at the end of

each accounting period. Net balance is simply the value of the asset after

subtracting accumulated depreciation, and the amount of depreciation varies from

year to year and decreases over time. In addition to the diminishing value method,

it is also referred to as the reducing installment method. A method like this is

most appropriate for plant and machinery as there are so many additions and

extensions and so many repairs to consider.

● Annuity method : Using this method, an asset purchase is viewed as an

investment that earns interest at an agreed upon rate. Until the asset's book value

is zero or its breakup value is exhausted, the asset's cost and interest are written

down by equal installments every year. An annual charge is to be made by means

of Depreciation Is Determined From Annuity Tables and The Annual Charge For

Depreciation and will be credited to assets and debited to depreciation accounts.

accounts.

● Depreciation fund method : In the depreciation fund method, a fund called a

sinking fund or depreciation fund is created every year and a sum is debited from

the profit and loss account each year and credited to the fund account. As long as

the annual sum is accumulated throughout the life of the asset, it may equal the

amount required to replace the old asset. This method is also known As Sinking

Fund Method or amortization fund method