Solved Financial Accounting Printed Question Paper SOLUTION BCOM 2022
Q1.Define Accounting Explain it Nature and Scope of Accounting.
Ans: Accounting
may be defined as the process of collecting, recording, summarizing and communicating
financial information.
Accounting
is nothing but a means of communicating the results of business operations to
varies parties interested in or connected with the business, viz., the owner,
creditors, investors, government, financial institutions and other agencies.
Accounting is, therefore, rightly called as the language of business.
The basis
purpose of a language is to serve as a means of communication. Accounting also
serve this purpose. Accounting is not only associated with business but also
with every body who is interested in keeping an account for the money received
and money spent.
American
Institute of Certified Public Accountants (AICPA) defined accounting in 1961 as
follows :
Accounting
is the art of recording, classifying and sum marising , in a significant
manner, and in terms of money, transactions and events which are, in part at
least of a financial character, and interpreting the results thereof Accounting
Principles Board (APB) defined following words.
Nature and
Scope of Financial Accounting: The nature and scope .of accounting is described
in the traditional definition of amounting given 1961 by the AICPA as
Accounting is the art of recording,
classifying and sum marising significant manner
and in terms of money transactions
and event with are part at least, of a financial and interpreting the result
thereof.
Identifying
the Transaction and Events: Accounting identifies transaction and event, which
can be expressed ion term of money and bring change in the financial position
of a business unit. An event (whether internal or external ) is a happening of
a consequence to an entity (e.g, use of raw material for production ) An entity
means an economic unit that performs economic activities (e.g, Birla Industries
Ltd. TISCO).
Measuring
the identified Transaction and Events:
Accounting measures the transaction and events in term of money.
Recording:
It is the process of entering the transaction and events in the books of
original entry in the chronological manner e.g, date wise.
Classifying:
It is the process of posting of entries in the ledger so that transaction of
similar type are accumulated at one place.
Summarizing:
It is concerned with the preparation of
Financial Statement such as Income Statement, Balance Sheet and Cash Flow
Statement.
Analyzing: It is concerned with the establishment of
relationship between the various item or group of items taken from Income
statement or Balance Sheet or both. Its purpose is to identify the financial
strengths and weakness of the enterprise. It provides the basis for
interpretation.
Interpreting:
Interpreting is the last stage of accounting process. It is concerned with
explaining the meaning and significance of the relationship established by the
analysis. In fact, interpretation is the main function of accountant in the
present condition since the routine work of recording, classifying and
summarizing business transaction business transaction can be easily handled by
the electronic devices like computers.
Communicating:
It is concerned with the transmission of summarized, analyzed and interpreted
information to the user to enable them to make reasoned decisions.
Q2. Difference between Book keeping &
Accounting.also Explain
the Concept of GAAP.
Ans:
| Bookkeeping | Accounting |
| Bookkeeping is a foundation/base of accounting. | Accounting uses the information provided by bookkeeping to prepare financial reports and statements. |
| Bookkeeping is one segment of the whole accounting system. | Accounting starts where the bookkeeping ends and has a broader scope than bookkeeping. |
| The result of the bookkeeping process is providing input for accounting. | The result of accounting is preparing financial statements for making informed decisions and judgments. |
| The purpose of bookkeeping is to maintain a systematic record of financial activities and transactions chronologically. | The purpose of accounting is to report the financial strength and obtain the results of the operating activity of a business. |
| The objective of bookkeeping is to summarise the effect of all financial transactions of a business for a given period. | The objective of accounting is to interpret and analyse financial information for informed decisions. |
| The person responsible for bookkeeping is called a bookkeeper. | The person responsible for accounting is called an accountant. |
| Bookkeeping is clerical in nature. The bookkeepers do not require any special knowledge or skill. | Accounting requires the skills of an accountant and knowledge of various accounting practices and policies. |
| The financial statements are not a part of the bookkeeping process. | The financial reports and statements are prepared under the accounting process. |
| The bookkeeping process is in accordance with the accounting conventions and concepts. | Accounting procedures and methods for interpreting and analysing financial reports can vary from one entity to another. |
GAAP compliance makes the financial reporting process transparent and standardizes assumptions, terminology, definitions, and methods. External parties can easily compare financial statements issued by GAAP-compliant entities and safely assume consistency, which allows for quick and accurate cross-company comparisons.
Because GAAP standards deliver transparency and continuity, they enable investors and stakeholders to make sound, evidence-based decisions. The consistency of GAAP compliance also allows companies to more easily evaluate strategic business options.
Q3.Explain the Following
A)Separate Entity Concept
B)Conventions OF Conservatism
C)Accounting Period Concept
d)Matching Principle
Ans:The separate entity concept states that we should always separately record the transactions of a business and its owners. The concept is most critical in regard to a sole proprietorship, since this is the situation in which the affairs of the owner and the business are most likely to be intermingled.
B)Conventions OF Conservatism
Accounting conservatism is a set of bookkeeping guidelines that call for a high degree of verification before a company can make a legal claim to any profit. The general concept is to factor in the worst-case scenario of a firm’s financial future. Uncertain liabilities are to be recognized as soon as they are discovered. In contrast, revenues can only be recorded when they are assured of being received.
C)Accounting Period Concept
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.
The purpose of such a time period is that financial statements can be prepared and presented to the investors and also help in comparing performance of the business with each time period.
By preparing financial statements within a particular time period, a company is able to determine the profit and loss that occurred during the period for the business.
The lack of a proper accounting period will result in variation of results and makes it difficult to determine the financial position of the company at that time.
Generally an accounting period is of 12 months (1 year). While the time period is fixed, the month can vary from company to company.
d)Matching Principle
The matching principle requires that revenues and any related expenses be recognized together in the same reporting period. Thus, if there is a cause-and-effect relationship between revenue and certain expenses, then record them at the same time. In some cases, it will be necessary to conduct a systematic allocation of a cost across multiple reporting periods, such as when the purchase cost of a fixed asset is depreciated over several years. If there is no cause-and-effect relationship, then charge the cost to expense at once.
Q4.Accounting Standard V/S IFRS
Accounting Standard
Companies make many transactions on a daily basis in order to run and engage in their businesses.
- They have to make many statements in this regard, particularly for banks and creditors to make evaluations before lending them funds. The most important statements are the balance sheet and the profit and loss account (also known as the income statement).
- These statements reveal the financial health of the company and enable banks and financial institutions to make sound evaluations.
- Accounting is an intricate process and this allows companies to alter their accounting principles to suit themselves.
- This does not allow other entities to make any comparisons.
- This is precisely the reason accounting standards are recommended.
- Recognised accounting bodies set standards of accounting so that there is a harmonised accounting principle for companies to adhere to.
IFRS
IFRS stands for International Financial Reporting Standards, It is prepared by the IASB (International Accounting Standards Board). It is used in around 144 countries and is regarded as one of the most popular accounting standards.
IND AS is also known as Indian Accounting Standards or Indian version of IFRS. Indian AS or IND AS is used in the context of Indian companies.
Let us look at some of the points of difference between the IFRS and IND AS.
| IFRS stands for International Financial Reporting Standards, it is an internationally recognised accounting standard | IND AS stands for Indian Accounting Standards, it is also known as India specific version of IFRS |
| IASB (International Accounting Standards Board) | MCA (Ministry of Corporate Affairs) |
| 144 countries across the world | Followed only in India |
| Companies complying with IFRS have to disclose as a note that the financial statements comply with IFRS | Such a disclosure is not mandatory for companies complying with Indian Accounting Standards or IND AS |
| It includes the following 1. Statement of financial position 2. Statement of profit and loss 3. Statement of changes in equity for the period 4. Statement of cash flows for the period | It includes the following: 1. Balance Sheet 2. Profit and loss account 3. Cash flow statement 4. Statement of changes in equity 5. Notes to financial statements 6. Disclosure of accounting policies |
| Companies complying with IFRS need have specific guidelines for preparing balance sheet with assets and liabilities to be classified as current and non-current | Companies complying with IND AS need have no such requirements for balance sheet format, but the guidelines are defined for presenting balance sheet |
Meaning of Capital Expenditure
The expenditures that are incurred by an organisation for long-term benefits are known as capital expenditures. These expenditures serve the purpose of increasing the capacity or capabilities of the long-term asset by either enhancing or adding new assets to the organisation.
These expenditures are added on the asset side of the balance sheet. It is done mostly on assets such as land, equipment, furnishings, or vehicles that help to drive benefits for the organisation by increasing the operating capability.
Meaning of Revenue Expenditure
Revenue expenditure is referred to as the expenditure incurred by an organisation to manage the day-to-day functions of a business, which include employee wages, inventory, rent, electricity, insurance, stationery, postage, and taxes.
These are the expenditures that neither help in the creation of assets nor in reducing the liabilities of a business. It is recurring in nature and very essential to maintain the daily operations of a business or an organisation.
Revenue expenditures can be divided into two categories
1. Expenditures for generating revenue for a business: These are the expenditures that are essential for meeting the operational cost of a business, hence these are classified as operating expenses.
2. Expenditures for maintaining revenue-generating assets: Such expenses are incurred by business towards repair and maintenance of the assets of an organisation to keep them in working condition without enhancing their lifespan. Such expenses can be towards repairing and repainting of assets.
Let us look into the key differences between capital expenditure and revenue expenditure to develop a clear understanding of their functions in a business.
Capital Expenditure | Revenue Expenditure |
Definition | |
| Expenditure incurred for acquiring assets, to enhance the capacity of an existing asset that results in increasing its lifespan | Expense incurred for maintaining the day to day activities of a business |
Tenure | |
| Long Term | Short term |
Value Addition | |
| Enhances the value of an existing asset | Does not enhance the value of an existing asset |
Physical Presence | |
| Has a physical presence except for intangible assets | Does not have a physical presence |
Occurrence | |
| Non-recurring in nature | Recurring in nature |
Availability of Capitalisation | |
| Yes | No |
Impact on Revenue | |
| Do not reduce business revenue | Reduce business revenue |
Potential Benefits | |
| Long-term benefits for business | Short-term benefits for business |
Appearance | |
| Appears as assets in the balance sheet and some portion in the income statement | Always appears in the income statement |
In India, all the aspects and functions of the partnership are administered under ‘The Indian Partnership Act 1932’. This specific law explains that partnership is an association between two or more individuals or parties who have accepted to share the profits generated from the business under the supervision of all the members or behalf of other members.
Features of Partnership:
Following are the few features of a partnership:
- Agreement between Partners: It is an association of two or more individuals, and a partnership arises from an agreement or a contract. The agreement (accord) becomes the basis of the association between the partners. Such an agreement is in the written form. An oral agreement is evenhandedly legitimate. In order to avoid controversies, it is always good, if the partners have a copy of the written agreement.
2. Two or More Persons: In order to manifest a partnership, there should be at least two (2) persons possessing a common goal. To put it in other words, the minimal number of partners in an enterprise can be two (2). However, there is a constraint on their maximum number of people.
3. Sharing of Profit: Another significant component of the partnership is, the accord between partners has to share gains and losses of a trading concern. However, the definition held in the Partnership Act elucidates – partnership as an association between people who have consented to share the gains of a business, the sharing of loss is implicit. Hence, sharing of gains and losses is vital.
4.Business Motive: It is important for a firm to carry some kind of business and should have a profit gaining motive.
5. Mutual Business: The partners are the owners as well as the agent of their firm. Any act performed by one partner can affect other partners and the firm. It can be concluded that this point acts as a test of partnership for all the partners. - 6. Unlimited Liability: Every partner in a partnership has unlimited liability.
Fixed capital account is that form of capital account where the business maintains two different accounts which are related to the different kinds of transactions that take place in the capital of the partners. These two accounts are 1) Capital account and 2) Current account
Capital account is related to the basic transactions related to the partners capital whereas the current account is related to all the other capital related transactions like interest on drawings, interest on capital, salary to employees apart from initial investment, addition of new capital and withdrawal of capital.
Fluctuating means one that is not stable or one that is changing frequently. The same can be said about the fluctuating capital account. Under the fluctuating capital account, the capital of the partners keeps on fluctuating.
The partners of the firm will have separate capital accounts and the capital accounts of each partner will be credited with the initial capital investment that is made individually by them and any additional capital investment done by them during the accounting period.
There will be increase or decrease in the capital of the partners which is associated with the activities such as interest received and drawings by partners.
Let us look at some of the points of difference between the Fixed Capital Account and Fluctuating Capital Account.
| Fixed capital account is that form of capital account where the business maintains two different accounts which are related to the different kinds of transactions that take place in the capital of the partners | Fluctuating capital account is that form of capital account where the capital of the partners keep on fluctuating |
| Fixed capital account has two accounts which are capital account and current account | Only one account that is capital account |
| This type of capital account remains constant | This type of capital account fluctuates |
| Needs to be mentioned specifically in partnership deed | No need to be mentioned in partnership deed |
Q3.Explain The Revaluation & Realization Accounts And Also Explain the What amount are Recoded in debit and Credit Side of a Revolution Accounts
Meaning of Revaluation Account:-
The revaluation account is prepared to get the profit or loss on the revaluation of assets and reassessment of liabilities at the time of the reconstitution of the partnership firm. We have to revaluate the assets when there is a reconstruction of the firm like a change in the profit-sharing. The difference amount if increased then it will be posted on the debit side of the revaluation account and if decreased then it will be posted on the credit side of the revaluation account.
Meaning of realisation account: –
The realisation account is prepared at the time of the dissolution of the firm to know the profit or loss on realizing assets and repay the liabilities of the firms. This amount of profit or loss will be transferred to the partners’ capital or current account. In the case of capital fixed in nature, we will transfer the amount of profit/loss to the partners’ current account or in the case of the capital account is fluctuating in nature then transfer to the partners’ capital account.
If the credit side is more than the debit side of the revaluation account, it means there is profit on revaluation and is transferred to the partner's capital account.
Account
Basis of Difference Revaluation Account Realisation AccountMeaning It records the effect of revaluation ofIt records the actual realisation of assets and liabilities.of assets and settlement of all liabilities.Time of preparation It is prepared at the time of admission, It is prepared at the time of retirement and death of a partner. dissolution of a firm.Items to be recorded In this account, only the items thatIn this account, all the items - all assets cause change in the value ofand liabilities are recorded. assets and liabilities are recorded. Number of times This may be prepared on a numberThis is prepared only once, i.e., of occasions during the lifetime of the firm.at the time of dissolution of the firm.Aim or objective Its main objective is to makeIts main objective is to determine necessary adjustment and liabilities.the net profit/loss on realisation of assets and settlement of liabilities.
Account
Basis of Difference Revaluation Account Realisation AccountMeaning It records the effect of revaluation ofIt records the actual realisation of assets and liabilities.of assets and settlement of all liabilities.Time of preparation It is prepared at the time of admission, It is prepared at the time of retirement and death of a partner. dissolution of a firm.Items to be recorded In this account, only the items thatIn this account, all the items - all assets cause change in the value ofand liabilities are recorded. assets and liabilities are recorded. Number of times This may be prepared on a numberThis is prepared only once, i.e., of occasions during the lifetime of the firm.at the time of dissolution of the firm.Aim or objective Its main objective is to makeIts main objective is to determine necessary adjustment and liabilities.the net profit/loss on realisation of assets and settlement of liabilities.
Q1. Mention four features of Hire-Purchase System. Distinguish between Hire-purchase System and Instalment Purchase System.
Hire purchase is defined as an arrangement between the hirer (buyer or User) and seller of an asset whereby the seller allows the hirer to use the asset for a regular payment of installment for the purchase price. The buyer also has the option to purchase the goods on payment of all the installments. Whereas installment purchase is defined as another method of financing the capital goods/assets whereby the goods are purchased by the buyer but the payment is made in smaller installments. Let us see more about the difference between hire purchase vs. installment purchase system
Q2. Define Royalty. Discuss its various types. Also distinguish between royalty and rent.
•The term Royalty refers to the payment made for exclusive use for both tangible and intangible assets whereas Rent refers to the payment made towards use of tangible assets only.
•The payment of Royalty is made on the basis of output or sale, whereas Rent is paid for a specific period.
•The payment of Royalty varies as per sales or output whereas Rent is always fixed
•The parties involved in Royalty are known as lessee, lessor, patent holder, patentee, publisher author etc whereas there are only two parties involved in Rent landlord and tenant.
•In case of Royalty agreement there is a clause of making minimum payment whereas in case of Rent there is nothing like minimum rent.
Q3. Explain the following items in relation to Royalty Accounts:
Minimum rent
Minimum rent is a rent that is also known as fixed rent, dead rent, contract rent, rock rent, or flat rent. It is the minimum sum that is given to the lessor of a property by the lessee so that the lessor receives a minimum amount of sum for a specific period. And the situation where he gets a benefit from or not is called the minimum rent. Minimum rent is known as the pre-determined rent that usually remains disclosed in the agreement where all the parties give their consent.
b) Shortworkings
Short working is that amount by which the minimum rent exceeds actual royalty. in other words, whenever the minimum rent is more than the actual royalty, the difference is called short working or redeemable dead rent. Short working is also called 'royalty suspense' by lessor.
C) sublease
A sublease is the re-renting of property by an existing tenant to a new third party for a portion of the tenant’s existing lease contract. The sublease agreement may also be called a sublet.
Subleasing may or may not be permitted in the terms of the original lease, and may be subject to additional restrictions by jurisdiction. Even if a sublease is permitted, the original tenant is still liable for the obligations stated in the lease agreement, such as the payment of rent each month.
Unit IV
Q1. What is Voyage Accounts? What items are Usually Recoded in Debit And Credit Side of Voyage Accounts. Explain the Specimen's of Voyage Accounts
Meaning of Voyage Account:
The method of accounting followed by shipping companies is known as voyage accounting. Shipping companies prepare their accounts periodically and also prepare the results of each voyage separately. Shipping companies carry goods from one place to another. Some companies carry passengers also in addition to goods from one place to another place.
In order to ascertain the result of operating a ship’s voyage, Voyage Account is prepared. The Voyage Account is a revenue account. It is important to note that there is no difference in the manner of preparing accounts period-wise and voyage-wise.
Following are some of the items of income and expenditure peculiar to Voyage Accounts.
Voyage Account is debited usually with the following items:
1. Bunker Cost:
This is the expenditure incurred on fuel oil, diesel, coal and fresh water used during the voyage. Now-a-days oil and diesel are used in place of coal. The bin or storing place of coal is referred to as bunker. Hence the name bunker costs.
2. Port Charges:
Port is used by the shipping companies for loading and unloading of goods and parking of ships, hence the charges paid for these purposes are known as port charges.
3. Depreciation:
Depreciation of the ship for the period of voyage is calculated and charged to the Voyage Account.
4. Insurance:
Insurance premium of cargo must be entirely debited to the concerned Voyage Account whereas the insurance charges of the ship are charged proportionately to each voyage on the basis of time of voyage.
5. Address Commission and Brokerage:
This is payable to the brokers and agents who help the shipping company in procurement of cargo, i.e., freight or business. This is calculated at a certain per cent of the freight earned including the primage or surcharge and debited to Voyage Account. Address commission is payable to the Charterer whereas brokerage is payable to the agent of the charterer.
6. Stevedoring Charges:
The expenses which are incurred in loading of goods on the ships and unloading of goods from the ships are known as stevedoring charges.
7. Port Charges:
These are the charges paid to port authorities for allowing the ship to use the port either for loading or unloading the cargo.
8. Salaries and wages of the crew, captain and other staff.
Voyage Account is credited usually with the following items:
1. Freight:
The amount which is charged by the shipping companies for taking goods or cargo from one place to another is called freight. It is an income.
2. Primage:
It is additional freight just like surcharge on freight originally collected for the captain of the ship, now-a-days it is treated as income of the shipping company.
3. Passage Money:
Fare collected from the passengers travelled in addition to the fare collected for merchandise.
4. Closing Stocks of Stores, Provisions, Coal, Fuel etc.
Generally, voyage profit represents the excess of voyage incomes earned over the expenses incurred for this purpose. But if, however, the voyage is in progress, the incomes and expenses relating to the unfinished voyage are carried forward to the next year.
Excess of credit side of Voyage Account over its debit side is profit on the voyage. Excess of debit side of Voyage Account over its credit side is loss on the voyage. This profit or loss is transferred to General Profit and Loss Account of the shipping company.
Q2.What is the Meaning of Loss of Profit Policy how the Amount of claim to be Find out Under the loss of profit policy.
The effect of outbreak of fire on a firm not only causes the destruction of properties but also disorganizes the business to a stage of dislocation. During the dislocation period, there is a loss of profit which the business would have earned during the period, had there been no accident of fire.
When the business is dislocated, the profit-earning capacity is also reduced. This reduced capacity continues till the destroyed portion is restored as before. During the period, i.e. from the date of fire to the date of restoration, there may be no profit or very low profit. Profit reduces because of the reduced production capacity and in turn sales is affected.
As long as the abnormal state continues, a businessman experiences reduction in sales, non-recovery of fixed expenses, sharp decline of earnings etc. Consequence of fire accident is thus a loss of profit which the firm would have otherwise earned. This loss of profit is not covered by ordinary fire policy insuring existing items.
The loss of profit policy normally covers the following items:
(1) Loss of Net Profits
(2) Standing Charges
(3) Any increased cost of working
Terms Used in Loss of Profit Insurance:
The following are the important terms used in Loss of Profit insurance and a knowledge of the terms will be advantageous:
1. Indemnity Period:
Indemnity period means the period which commences on the date of damage by fire and ends on the date when normality is restored. The indemnity period is generally stipulated in the insurance policy. This period is selected by the insured himself.
The policy is taken generally for a period of one year and can be renewed annually, whereas the indemnity period commences on the day on which the accident takes place and runs up to a period of twelve or more months. It is necessary that the policy must be in force at the time of fire accident.
2. Standard Turnover:
ADVERTISEMENTS:
It is the turnover during the period in the twelve months immediately preceding the date of the hazard which corresponds with the indemnity period.
3. Short Sales:
The term “Short Sales” refers to the loss of sales due to the dislocation of business. That is, short sale is the difference between standard turnover and actual turnover during the period of fire.
4. Standing Charges:
Standing charges refer to those fixed expenses which are incurred irrespective of the reduction in turnover. Examples of standing charges are salaries to permanent staff, rent, rates, taxes, insurance premium, interest on bank overdraft, debentures etc. Only those standing charges, which are insured, can be claimed.
5. Increased Cost of Working:
The insured may have to incur some additional or special expenses in order to keep the business, during the post-fire period and to avoid reduction in sales. Expenses in excess of what is essentially required may be unreasonable expenditure.
6. Rate of Gross Profit:
The term “Gross Profit” has got a different meaning when it is calculated for loss of profit policy and is different from the normal rate of Gross Profit as described under “Loss of Stock”. The rate of Gross Profit is calculated by taking previous year’s figures.
Loss due to reduction in turnover is calculated by applying the gross profit rate to reduction in turnover.
Q3.Define Branch, Also Explain the Types of Branch Accounts.
Branch Accounting
Branch accounting is a bookkeeping system in which separate accounts are maintained for each branch or operating location of an organization. Typically found in geographically dispersed corporations, multinationals and chain operators, it allows for greater transparency in the transactions, cash flows and overall financial position and performance of each branch.
Branch Accounting Methods
There are several different methods for keeping branch accounts, depending on the nature and complexity of the business and the operational autonomy of the branch. The most common include:
Debtor system
Income statement system
Stock and debtor system
Final accounts system
Meaning of Branch:
In order to increase the volume of profit, it is the primary aim of all business enterprises to increase their volume of sales. For this purpose, many firms open their shops in different parts of the locality/country. (The parent establishment is known as ‘Head Office’ and its offshoots are termed as ‘Branch’.)
Besides, if branches are opened, particularly in developed regions, both the local consumers and the firms are benefited.
Practically, it is an extension of an existing firm. It should be remembered that a branch has its separate existence but does not possess any separate legal entity. That is why, it is said that it is nearly an extension and a profit centre of an existing firm. Needless to say that all activities of the branches are controlled by the Head Office.
Types of Branches:
There are different types of branches according to their nature and magnitude of operation, although all the branches are operated under the instruction of Head Office. As a result, the system of branch accounting is not the same in all the cases.
However, branches may be classified as
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