Important questions from past papers for BBA (1)

Financial Accounting (1)

Q#1.Define depreciation, why it is calculated?
Depreciation is the process of spreading out the cost of a long-term asset (like machinery,
buildings, or vehicles) over its useful life. Instead of recording the full cost of an asset when it's
bought, depreciation allows a business to gradually expense a portion of that cost each year.
Why it's calculated and accounted for:
1. To match costs with income: As an asset is used, it loses value over time. Depreciation
helps businesses match the expense of using the asset with the income it helps generate.
2. Tax purposes: Depreciation can reduce the taxable profit of a business, lowering the
amount of taxes the business has to pay.
3. Reflect true value: It shows the real value of the asset on the company's financial
statements, as it becomes less valuable over time.
In short, depreciation helps businesses spread the cost of an asset over time and ensures their
financial records are more accurate.
Q#2. Purpose of a Worksheet in Accounting
WORKSHEET

A worksheet is a tool accountants use to organize and check financial data before preparing final
financial statements. It helps:

1. Identify Errors: Catch mistakes in recording transactions.

2. Prepare Adjustments: Plan adjusting entries for accruals and deferrals.

3. Summarize Data: Combine all necessary information in one place for easy reference.

4. Simplify Financial Reporting: Ensure smooth preparation of financial statements.

Q#3 Procedure of the Accounting Cycle (in Easiest Words)

The accounting cycle involves a series of steps to record, process, and report financial transactions. Here
are the steps in order with an example:

1. Identify Transactions:

Recognize business activities that involve money.

• Example: A company sells goods worth $1,000.

2. Record Transactions in Journal:

Write down the transactions in a journal (book of original entry).

2. Record Transactions in Journal:

Write down the transactions in a journal (book of original entry).

• Example:

• Debit: Cash $1,000

• Credit: Sales Revenue $1,000

3. Post to Ledger:

Transfer journal entries to individual accounts in the ledger.

• Example: Update the “Cash” and “Sales Revenue” accounts.

4. Prepare a Trial Balance:

Add up all accounts to ensure debits = credits.

• Example:

• Cash: $1,000 (Debit)

• Sales Revenue: $1,000 (Credit)

5. Make Adjusting Entries:

Adjust for expenses or revenues not yet recorded.

• Example: Record depreciation or prepaid expenses.

6. Prepare an Adjusted Trial Balance:

Update the trial balance to include adjustments.

7. Create Financial Statements:

Use the adjusted trial balance to prepare:

• Income Statement (shows profit/loss)

• Balance Sheet (shows financial position)

• Cash Flow Statement (shows cash movement)

8. Close the Books:

Transfer revenues and expenses to retained earnings to prepare for the next accounting period.

Q#4. What is the Accounting Equation?

The accounting equation is the foundation of accounting. It shows the relationship between a
company’s assets, liabilities, and equity, ensuring that everything is balanced.

Accounting Equation:

ASSETS=LIABILITIES+ EQUITY

• Assets: What the company owns (cash, equipment, inventory, etc.).

• Liabilities: What the company owes (loans, accounts payable, etc.).

• Equity: The owner’s investment and retained earnings.

Examples of the Accounting Equation

Example 1: Starting a Business

1. A person starts a business by investing $10,000 in cash.

• Assets: Cash increases by $10,000.

• Liabilities: No liabilities.

• Equity: Owner’s equity increases by $10,000.

Accounting Equation:

10000=0+10000

Example 2: Buying Equipment with a Loan

2. The business buys equipment worth $5,000, paying $2,000 in cash and taking a loan of
$3,000.

• Assets: Equipment increases by $5,000, cash decreases by $2,000.

• Liabilities: Loan increases by $3,000.

• Equity: No change in equity.

(10000-2000+5000)=3000+10000

13000=13000

Accounting Equation:

In both examples, the equation stays balanced. This balance is essential in accounting!

Q#5. What are Bad Debts?

Bad debts are amounts owed to a business by customers that are unlikely to be paid. These are
considered losses because the company won’t recover the money.
 • Why do bad debts happen?

Customers may not pay because of financial difficulties, disputes, or bankruptcy.

• How are they recorded?

The company writes off the amount as an expense in the income statement.

Example of Bad Debts

A company sells goods worth $5,000 on credit. If a customer fails to pay $1,000, that amount is treated
as bad debt expense.

• Record:

• Debit: Bad Debt Expense $1,000

• Credit: Accounts Receivable $1,000

Q#6: WHICH FINANCIAL STATEMENT DEPICTS THE STILL PICTURE OF THE

BUSINESS AND WHY
The balance sheet depicts the “still picture” of a business at a specific point in time. It shows the
company’s financial position by summarizing its:

• Assets: What the business owns.

• Liabilities: What the business owes.

• Equity: The residual interest of the owners after liabilities are subtracted from assets.

The balance sheet provides a snapshot of the business’s financial condition as of a particular date,
making it the most static of the financial statements.

Q#7: DESCRRIBE EASH TYPE OF ADJUSTING ENTRY WITH EXAMPLE

Adjusting entries are accounting journal entries made at the end of an accounting period to update
accounts and ensure financial statements are accurate. Here are the types, explained simply with
examples:

1. Prepaid Expenses (Deferred Expenses)

• What it is: Payments made in advance for goods or services that will be used in the
future.

• Adjustment: Record the part that has been used or expired.

• Example:

• A business pays $12,000 for a one-year insurance policy in January. Each month, $1,000
worth of insurance is used.

• Adjusting Entry:
 • Debit: Insurance Expense $1,000

• Credit: Prepaid Insurance $1,000

2. Unearned Revenue (Deferred Revenue)

• What it is: Money received in advance for services or goods not yet delivered.

• Adjustment: Record the part of the revenue that has been earned.

• Example:

• A company receives $6,000 in December for a service to be provided over 6 months. By

the end of January, one month of service is complete.

• Adjusting Entry:

• Debit: Unearned Revenue $1,000

• Credit: Service Revenue $1,000

3. Accrued Revenues

• What it is: Revenue earned but not yet recorded or received in cash.

• Adjustment: Record the revenue and the receivable.

• Example:

• A business provides $2,000 worth of consulting services in December but hasn’t billed
the client yet.

• Adjusting Entry:

• Debit: Accounts Receivable $2,000

• Credit: Service Revenue $2,000

4. Accrued Expenses

• What it is: Expenses incurred but not yet recorded or paid.

• Adjustment: Record the expense and the payable.

• Example:

• A company owes $500 in wages to employees for work done in December but hasn’t
paid them yet.
 • Adjusting Entry:

• Debit: Salaries Expense $500

• Credit: Salaries Payable $500

Depreciation#8

What it is Depreciation and why adjustment is needed, explain with examples?

Allocation of the cost of a tangible asset over its useful life.

• Adjustment: Record the portion of the asset’s cost used during the period.

• Example:

• A machine costing $12,000 is expected to last 4 years. Each year, $3,000 of depreciation
is recorded.

• Adjusting Entry:

• Debit: Depreciation Expense $3,000

• Credit: Accumulated Depreciation $3,000

Adjusting entries ensure that revenues and expenses are recognized in the correct period, following the
accrual basis of accounting.

Q#9, UNDERSTANDING ABOUT MATCHING RECOGNIZATION PRINCIPLE Example?

The Matching Recognition Principle is an accounting rule that ensures expenses are recorded in the
same period as the revenues they help to generate. This principle is a key part of accrual accounting,
ensuring financial statements show an accurate picture of a company’s performance.

Simple Explanation:

• Expenses should be recognized (recorded) when they are incurred, not when cash is
paid.

• These expenses should match the revenues they contributed to earning during the same
period.

Example:

Imagine a company provides consulting services in December and earns $5,000, but the consultant hired
to do the work will only be paid $2,000 in January.

• Revenue Recognition: The $5,000 revenue is recorded in December because the service
was provided then.
 • Expense Recognition: The $2,000 consulting expense is also recorded in December
because it was necessary to earn the December revenue, even though the payment will be made in
January.

Adjusting Entry for December:

• Debit: Consulting Expense $2,000

• Credit: Consulting Payable $2,000

This principle ensures that the income statement reflects the true profit or loss for the period by aligning
revenues with their related costs.

Q#10: DEFINE DIFFERENT TYPE OF ENTRY SYSTEMS

In accounting, there are two main types of entry systems: single-entry and double-entry systems. Here’s
a simple explanation of each, with examples:

1. Single-Entry System

• What it is: A basic system where each transaction is recorded only once, either as
income or expense.

• Used by: Small businesses or individuals who want a simple way to track cash flow.

• Example:

• You sell a product for $100. You record:

“Cash Received: $100”

• No other account is updated.

• Limitations:

• Does not track assets, liabilities, or equity properly.

• Not suitable for complex businesses.

2. Double-Entry System

• What it is: A system where every transaction affects at least two accounts, maintaining
the accounting equation:

Assets = Liabilities + Equity

• Used by: All businesses that follow standard accounting practices.

• Key Rule:
 • For every debit, there must be an equal credit.

• Example:

• You sell a product for $100 (cash).

• Debit: Cash $100 (increase in cash)

• Credit: Sales Revenue $100 (increase in revenue)

• Advantages:

• Tracks all aspects of a business (assets, liabilities, equity, income, expenses).

• Helps detect errors and ensures accurate financial statements.

Comparison:

Feature Single-Entry System Double-Entry System

Complexity Simple and easy to use Detailed and more complex

Accounts Covered Only cash and personal accounts Tracks all accounts (assets, liabilities,
equity)

Error Detection Difficult to detect errors Easier to detect and fix errors

Example User Sole proprietors or small businesses Larger businesses or formal entities

Conclusion: MOST OF THE BUSINESS PREFER DOUBLE ENTRY SYSTEM Because it PROVIDE AN
ACCURATE AND COMPLETE VIEW OF THEIR FINANCIAL POSITION

Q#12: DIFFERENCE BTW CAPITAL AND REVENUE EXPENDITURE

Here’s a simple explanation of the difference between Capital Expenditure and Revenue Expenditure,
with examples:

1. Capital Expenditure (CapEx)

• What it is: Money spent on acquiring or improving long-term assets that will benefit the
business for a long time (more than one year).

• Purpose: To buy or upgrade assets that generate future income.

• Examples:

• Buying machinery, buildings, or vehicles.

• Renovating an office.

Example:

A company buys a new delivery van for $20,000. This is a capital expenditure because the van will be
used for years to deliver products.
 • Effect: Recorded as an asset on the balance sheet and depreciated over time.

2. Revenue Expenditure (RevEx)

• What it is: Money spent on day-to-day operations or maintaining assets. These expenses
benefit only the current period.

• Purpose: To cover routine costs or repairs.

• Examples:

• Paying salaries, rent, or utility bills.

• Repairing an old machine.

Example:

The company spends $500 on servicing the delivery van. This is a revenue expenditure because it
maintains the van for the current period.

• Effect: Recorded as an expense on the income statement and reduces profit for the
period.

Key Differences

Feature Capital Expenditure Revenue Expenditure

Purpose Long-term benefit Short-term benefit

Recorded As Asset (on the balance sheet) Expense (on the income statement)

Duration Benefits multiple years Benefits the current year only

Examples Buying equipment, constructing a building Salaries, repairs, rent

In simple words:

• Capital Expenditure: For buying or improving big things that last long.

• Revenue Expenditure: For daily running costs or small fixes.

Most businesses prefer the double-entry system because it provides a complete and accurate view of
their financial position.
Q#13: IMPORTANCE Of BRS IN BUSINESS

A Bank Reconciliation Statement (BRS) is important for a business because it helps ensure that the
records in the company’s books match the bank’s records. It identifies any differences between the two
and ensures the financial records are accurate.

Why is it important?

1. Detects Errors: It helps catch mistakes in the company’s books or the bank’s records, like
incorrect entries or wrong charges.

2. Prevents Fraud: It can uncover unauthorized transactions or fraud.

3. Ensures Accuracy: Keeps the cash balance in the books accurate, which is essential for
decision-making.

4. Helps Track Transactions: Identifies missed or forgotten transactions like bank charges,
interest, or bounced checks.

5. Improves Financial Control: Maintains transparency and builds trust in financial records.

Example:

Suppose your business books show a bank balance of $10,000, but the bank statement shows $9,700.
After preparing a BRS, you find:

• A check for $500 you wrote hasn’t been cleared by the bank yet.

• The bank charged a $300 service fee that you forgot to record in your books.

Reconciliation:

• Add the $500 (outstanding check) to the bank balance.

• Subtract the $300 (service fee) from your book balance.

After adjustment, both balances match at $9,700.

In simple words: A BRS is like double-checking your cash account with the bank to ensure everything is
correct. It helps avoid errors, fraud, and confusion in managing money.