Accounts Questions.
5 Marks Questions.
(By Vishal M)
1) What do u mean by Understand by the Bank Reconciliation Statement ?
State cause difference between balance as per Bank Statement and Firms cash
book with the Bank Column.
A bank reconciliation statement is a summary of banking and business activity
that reconciles an entity's bank account with its financial records. The
statement outlines the deposits, withdrawals, and other activities affecting a bank
account for a specific period.
Diffrences.
✓ Cheques paid into bank but not yet collected :- The Cheque was Given to
the banker but the Not Collected the cheque. Means the cashier not yet given
to the Bank or Banker was not Collected Because of Some Issue.
✓ Cheques paid into bank but subsequently dishonored :- Here the banker
Dishonored the Cheque because the there is Insufficient Balance in the Bank
and some issues in the cheque.
Bills receivables collected and credited by banker :- The receivables are
collected by the banker Bill sent for collection account debit and Bill receivable
account will credit. There will no journal entry in the book of Creditor.
Mistakes or wrong entries in cash book or pass book :- There are some Wrong
entries or errors are made in the Cash book or pass book either the Banker had
made a error or a cashier made the error in the Cash Book. For instance, an entity
may incorrectly record the bank deposits or withdrawals in another accounting
ledger or it may record the entry by a wrong amount.
✓ Interest allowed by the bank :- Interest allowed by bank is interest
credited or interest debited by bank into our account ? Interest allowed by
the bank is interest credited to our account.
✓ Interest and dividend collected by the bank :-
All The items (e.g. interest on deposits, Interest and Dividend
collected by bank, directly deposited by debtors or any other increment
in Bank Statement) Which have been credited (added) in
the Bank Statement, but not recorded in the Cash Book have the same
effect on bank balance as mentioned in the example above.
✓ Direct payment through bank :- Direct Debit is an instruction to the bank
to transfer funds to another account on a recurring basis. The payment is
initiated by the payee himself although the account in which the funds will
be transferred needs to be first authorized by the payer.
✓ Bank charges and commission charged by the bank :- Using the cash
balance shown on the bank statement, add back any deposits in transit.
Deduct any outstanding checks. This will provide the adjusted bank cash
balance.
✓ Cheques paid into the bank for collection but dishonored by the bank :-
A dishonored cheque should be entered into the cash receipts as a
reduction in cash receipts.
2) What is Rectification of Errors ? State the Difference types of Error. Why
suspense Account is Opened ?
a) Rectification of errors is a procedure of revising mistakes in the
entries. These errors can be of two types, i.e., the errors committed on
both sides in an entry that does not influence the trial balance and can
be rectified by making a journal entry.
Different Types of Errors :-
Errors of omission: These errors occur in cases like when the entire
transaction has been omitted from the books of accounts. This might happen
due to the wrong balances in an account, wrong posting such other accounts,
the wrong carryforwards, wrong totaling, etc.
Error of commission is an error that occurs when a bookkeeper or
accountant records a debit or credit to the correct account but to the wrong
subsidiary account or ledger.
Compensating error. Accounting. a mistake when calculating or recording
accounts that is equal in amount to an opposite mistake so that neither affects
the final total.
Why Suspense Account is created ?
a) A suspense account is an account in the general ledger that is used to
temporarily store transactions that require further analysis before a
permanent assignment in the records can be made.
•
Return on Equity :- Net Income / Average Shareholders
Equity.
• Gross Margin Ratio :- Gross Margin = (Total Revenue – Cost of
Goods Sold)/Total Revenue x 100.
• Acid Test Ratio :- Current Assets – Inventories / Current Liabilities.
• Net Margin Ratio = Net Income / Net Sales
• Return on Investment :- Net Profit / Cost of Investment x 100
OR
• EBIT + Interest / Capital Employed
Capital Employed = Net Fixed Assets + Working Capital.
Accounts Concepts , Convections ?
a) Conservatism Conservatism refers to early recognition of unfavorable
events.
It believes in “understating gains and values” and “overstating losses and
liabilities”.
While preparing the financial statements it is necessary to provide for all
possible losses .
b) Consistency :- It required that once an entity has decided on one method, it
will treat all subsequent events of the same character in the same fashion
unless it has a sound reason to change the method of treatment of that event.
If a change is adopted , it has to be disclosed below the balance sheet as a
foot note.
c) Full disclosure: According to the Company Law , each item of expense &
income should be disclosed independently & separately .
All information of material importance should be disclosed in the Profit &
loss account & the balance sheet
Methods & policies of the firm has to be shown as the foot notes to the
balance sheet
d) Materiality: Materiality implies significance, substance, importance and
consequence.
Item is recorded only when it is considered to be useful or important to the
user of a financial statement.
The items of small value is not shown as asset but shown as an expense.
Concepts of Accounting :-
• Business entity
• Money measurement
• Going concern
• Accounting period
• Cost
• Dual aspect (or Duality)
• Revenue recognition (Realisation)
• Matching
• Accrual Concept.
❖ Business Entity Concept :- This concept considers business as a separate
and distinct entity from the owners of the enterprise.
Accounting records are kept only from the point of view of the business unit
and not the owners.
The owner is treated as an outsider or creditor of the business.
Transactions of private affairs of the owner are not recorded but the drawings
& additional capital related to the business are recorded in the books of the
enterprise .
Money Measurement Concept :- The money measurement concept states that a
business should only record an accounting transaction if it can be expressed in
terms of money.
The focus of accounting transactions is on quantitative information, rather than
on qualitative information.
Thus, a large number of items are never reflected in a company's accounting
records, which means that they never appear in its financial statements.
Examples of items that cannot be recorded as accounting transactions because
they cannot be expressed in terms of money include:
Employee skill level
Employee working conditions
Expected resale value of a patent
Value of an in-house brand.
❖ Going Concern Concept :-
This concept assumes that the business will continue in operation for a
indefinite period of time and will not be dissolved in the foreseeable future.
The benefit from a certain expenditure incurred in a particular year will accrue to
the business over a longer period of time.
❖ Cost concept implies that all transactions are recorded at cost & not at
the market value .
It is closely related to the going concern concept .
If the land is acquired for the operations of the business & would not be sold
shortly , Then it is immaterial to know the market value of the land.
This cost becomes the basis for computation of depreciation.
❖ Dual Aspect Concept :-
It states that every time a transaction takes place, there is always a two-sided
effect.
Benefit receiving and Benefit giving (Debit / Credit)
For example, when a business acquires an asset (receiving of benefit) it must
pay cash (giving of benefit).
The accounting equation is the basis for double entry system of accounting.
ASSETS=LIABILITIES + CAPITAL
❖ Accounting period :- Accounting period concept is based on
the theory that all accounting transactions of a business should be
divided into equal time periods, which are referred to as accounting
periods. ... Generally an accounting period is of 12 months (1 year).
While the time period is fixed, the month can vary from company to
company.
❖ Revenue recognition Concept :- The revenue recognition principle
states that one should only record revenue when it has been earned,
not when the related cash is collected.
❖ Matching :- Matching concept states that expenses that are incurred
in an accounting period should be matching with the revenue earned
during that period. As revenue and expenses are matched, the profit
or loss is not over or under-stated.
❖ Accrual Concept :- The accrual principle is an accounting concept
that requires transactions to be recorded in the time period in which
they occur, regardless of when the actual cash flows for the
transaction are received. The idea behind the accrual principle is that
financial events are properly recognized by matching revenues.
One Marks Answers :-
1) What do You Understand by Accounting ?
a) Accounting is the process of recording financial
transactions pertaining to a business. The accounting process includes
summarizing, analyzing and reporting these transactions to oversight
agencies, regulators and tax collection entities.
2) What are Special Journals ?
a) Special journals are specialized lists of financial transaction records
which accountants call journal entries. In contrast to a general journal,
3) What are the Rules of Posting ?
RULES FOR POSTING IN TO LEDGER
a) Entries must be posted from the day books or journal only.
b) Posting of the entries must be date wise.
c) Date of entry in day books must be the date of entry in ledger.
d) All amounts shown in debit side in journal must be posted in debit side
of a particular account.
4) What do you Mean by the Debit Balance and Credit Balance ?
a) A debit entry in an account represents a transfer of value to that
account, and a credit entry represents a transfer from the account.
5) What don you Mean by the Contra Entry ? Give Example
a) Contra entry is a transaction which involves both cash and bank. Both
debit aspect and credit aspect of a transaction get reflected in the cash
book. For example: Cash received from debtors and deposited into
bank.
6) Distinguish Between Bad Debts and Book Debts ?
a) Bad Debt refers to the sum due from the debtors, which remains
unrealized, and so they are written off in the company's books of
accounts.
A book debt is a sum of money due to a business in the ordinary course
of its business.
7) What are Adjustment Entries ?
a) Adjusting entries, or adjusting journal entries (AJE), are made to update
the accounts and bring them to their correct balances.
8) Define Depreciation ?
a) Depreciation is a decrease in the book value of fixed assets.
Depreciation involves loss of value of assets due to the passage of time
and obsolescence. Depreciation is an ongoing process until the end of
the life of assets.
9) What do u Understand by Inventory valuation ?
a) The process of inventory valuation helps determine the value at which
we will record the inventories in the final accounting statements of the
company. The correct inventory valuation is essential to have a fair
representation of the company's finances.
10) What do you Mean by the Analysis of the financial Statements ?
a) Financial statement analysis is the process of analyzing a company's
financial statements for decision-making purposes. External stakeholders
use it to understand the overall health of an organization as well as to
evaluate financial performance and business value.
11) What are Common Size Statements ?
a) A common size balance sheet is a statement in which balance sheet items
are being calculated as the ratio of each asset in relation to the total assets.
For the liabilities, each liability is being calculated as a ratio of the total
liabilities.
12) State the Objectives of Accounting ?
❖ To ascertain profit or loss of the business: Business is run to earn
profits
❖ To depict financial position of the business:
❖ To provide accounting information to the interested parties:
13) State the Debit and Credit Rules for the Assets and Liabilities ?
a) A debit increases asset or expense accounts, and decreases liability,
revenue or equity accounts
b) . A credit is always positioned on the right side of an entry. It increases
liability, revenue or equity accounts and decreases asset or expense
accounts.
14) What do you Mean by the Accrued Incomes ?
a) Accrued income is money that's been earned but has yet to be
received. ... Individual companies can also generate income without
actually receiving it, which is the basis of the accrual accounting
system
15) What is Adjusted Trading Account ?
a) Adjustment entries are the journal entries that converts an entity's
accounting record in an accrual basis of accounting. Such, accrued
incomes, Incomes received in advance, outstanding and prepaid
expenses require an adjustment in the books of accounts.
16) What are the Main Objectives of IFRS ?
a) Make the Accounting Statements Credible and Transparent.
b) Make the International Comparison and Analysis of Easy Task.
c) Establishing universal Language for Companies to Prepare accounting
Statements.
17) How is Net worth is Calculated ?
a) Net worth is calculated by subtracting all liabilities from assets. An
asset is anything owned that has monetary value, while liabilities are
obligations that deplete resources, such as loans, accounts payable
(AP), and mortgages.
18) Difference between the Comparative Statement and Common Size
Statement ?
a) Comparative financial statement is a document that represents the
financial performance of the business by comparing them at different
time periods. ... Common size statements are financial statements that
are expressed in the form of percentage.
19) What is Valuation of Ratio State Any One Valuation of ratio ?
a) A valuation ratio shows the relationship between the market value of a
company or its equity and some fundamental financial metric (e.g.,
earnings). The point of a valuation ratio is to show the price you are
paying for some stream of earnings, revenue, or cash flow (or other
financial metric).
20) Difference between SLM and WDV method in Charging the
Depreciation ?
a) The Straight-Line Method (SLM), an equal amount of depreciation is
written off every year. Conversely, in the written down value method
(WDV), there is a fixed rate of depreciation which is applied to the
opening balance of the asset every year.
By Vishal M Global Business School Hubli
Read Extra also Don’t Depend on this Notes
