ACCOUNTINGS PDF

Q 1. Accounting:
ANS:- Meaning: Accounting is identifying, measuring, recording ,classifying and summarising
business transactions, analyzing and interpreting the results thereof, and communicating the results
of the interpretations to the end-users for decision making.

Accounting is concerned with the recording of business transactions in a set of books and
the presentation of the financial data recorded in the books of accounts through financial
statements like the profit and loss account and balance sheet to outsiders like creditors,
shareholders, bankers, government, debenture holders, prospective investors and so on. .

Uses or Advantages or Objectives of Accounting(Financial resources as important input)

1.Maintenance of permanent records of business /
Documentary evidence:
When a concern keeps accounting records of its financial
transactions, it has permanent records of its transactions for
present and future reference.
2. Ascertainment of profit or loss of the business:
When a business maintains a complete record of its business
transactions, it has complete information about its expenses and
losses, and incomes and gains. So it can easily and correctly
ascertain its net profit or net loss for any year.
3.Ascertainment of the progress of the business:
When a business concern has records of the transactions of its
business for each and every year, it can compare the results of its
business from year to year and watch the progress of its business.
4.Knowing the various sources of revenue and the various items of expenses which have
resulted in profit or loss
5.Ascertainment of the financial position of the business (i.e., the assets, liabilities, and
owner’s capital) at the end of accounting year by preparing the balance sheet.
6.Accounting records will disclose the amounts due to the business from its debtors and
the amounts due from the business to its creditors.
7.Helpful to the management in its planning and decision making functions.
8.Ensuring the effective control over the performance of the business:
Accounting reveals the actual performance of a business in terms of cost of production
and sales, profit or loss and book values of assets and liablities.This facilitates the
comparison of actual current performance with the planned performance. Such a
comparison will reveal the causes of strengths and weaknesses.
9. Protection of the properties of the business by keeping proper records of the various
properties of the business and by providing up-to-date information about the properties to
the management.
10.Prevention of errors and frauds by facilitating their quick detection and correction and
by introducing suitable measures for their prevention in future.
11. Satisfying legal requirements: Various laws like the Companies Act, the Income-tax Act,
the Sales tax Act, etc require a business concern to maintain necessary financial records and
submit to the government.
12.Making financial information available to various groups of persons such as the owners,
the lenders, the creditors, the employees, potential investors, consumers, government etc.

Fundamental of Accounting
A. Features of Accounting:
1.Identifying: means determining the business transactions to be recorded in the books of
accounts. This may involve reviewing paperwork, such as receipts, bills and purchase orders.
2.Measuring: means expressing the value of business transactions in terms of money.
3.Recording: means entering in terms of money, business transactions, as and when they
occur, in the books of original entry known as journal.
4.Classifying: refers to the grouping of entries of like nature in to appropriate heads by
posting them from the books of original entry to appropriate accounts in the ledger.
5.Summarising: means presentation of the information found in the ledger accounts in the
form of financial statements like the profit and loss account and the balance sheet at the
end of the accounting period.
6.Communicating:means communicating the results in the form of financial statements to
the end- users.
B. Branches of Accounting
1.Financial Accounting
Financial accounting is concerned with the recording, classifying and summarizing of the
business transactions with a view to determine the profit or loss of the business for a period
and to ascertain the assets and liabilities of the business at the end of the particular period
2.Cost Accounting
Cost accounting is primarily concerned with the ascertainment of
cost and profitability and control of cost.
3.Management accounting.
Management accounting is the accounting which provides necessary information to the
management for discharging functions such as planning, organizing, directing and
controlling more efficiently. It is the blending together of financial accounting, cost
accounting and financial management so as to serve as a good guide to management in
planning, coordinating, executing, controlling and motivating.

BASIC PRINCIPLES OF ACCOUNTING

Q 2 . Book-Keeping

ANS : Meaning: Book-keeping is a part of accounting. Book-keeping is the process of recording

business transactions in books of accounts. Book-keeping does not produce financial statements like
the profit and loss account and the balance sheet. Book-keeping is not concerned with the analysis
and interpretation of financial statements.

Book- keeping includes recording of journal, posting in ledgers and balancing

of accounts. All the records before the preparation of trail balance is the whole

Subject matter of book- keeping. Thus, book- keeping many be defined as the

science and art of recording transactions .

Features of Book-Keeping:

1.Book-Keeping is the recording of only the monetary or financial aspects of business transactions.

2.It is the recording of business transactions in the book of accounts in a systematic manner
according to the principles or rules.

3.The scope of book keeping is narrow. The preparation of financial statements and the analysis and
interpretation are not comprised in book keeping.

4.Book keeping is the first stage of maintenance of books of accounts

5.In practice, book keeping seems to be less important than accounting. But the importance

of book keeping cannot be denied. Just as finished product cannot be produced without

raw materials, accounting work cannot be done without the necessary accounting

information provided by book keeping.

Objects of book keeping:

1.To have permanent record of all the transactions of a business for future reference.

2.To know the exact reasons (i.e., the expenses and losses, and incomes and gains) leading to the net
profit or the net loss.

3.To ascertain what amounts are due to the business and from whom amounts are due.

4.To ascertain what amounts are due from the business and to whom the amounts are due.

Q3. Classification of accounts & Rules of debit and credit

ANS :- 1.Personal accounts:

• Accounts of natural or physical persons i.e., accounts of human beings, e.g., Rajesh’s a/c,
Ram’s a/c etc.

• Accounts of artificial or legal persons i.e., accounts of companies, clubs, banks, colleges etc
e.g., National Company Ltd’s a/c, National School’s a/c etc.

• Representative personal accounts: These accounts are called representative personal

accounts, as they represent certain persons behind them.

For instance, outstanding wages account represents all those workers to whom wages are to be
paid. Other examples are outstanding expenses account, prepaid expenses account, outstanding
incomes account ,incomes received in advance account etc.

2.Real,Asset or property Accounts: may be accounts of tangible assets such as cash account,
furniture account, vehicles account, machinery account and accounts of intangible assets such as
goodwill account, trade marks account.

3.Nominal or fictitious accounts: are the accounts of incomes such as commission earned, interest
received, discount received etc.and the accounts of expenses and losses such as salaries paid, rent
paid, discount allowed, bad debts.

Q 3. Journal

ANS:- Meaning: means a day book or a daily record. It is the book wherein all the transactions are
first recorded in the order of dates.

In the journal, each transaction is classified into its debit and credit aspect and both the debit and
credit aspects of each transaction are recorded together in one entry, with an explanation for the
entry.

The act of recording a transaction in the journal is called journalising.The record of a transaction in
the journal is called a journal entry.
{ ABT TABLE } THEORY

Date column is meant for recoding the date on which a particular transaction takes place.

The particulars column is meant for recording the names of the accounts to be debited and
credited for a particular transaction.

While filling up the particulars column, in the first line, the name of the account to be debited is
written. In the next line, the name of the account to be credited is written, after leaving a little space
to the left.

The third column i.e.., ‘L.F’ (ledger folio) column is meant for recording the page number of the
ledger where the journal entry will be posted or transferred later.

The fourth column i.e., Dr. column is meant for recording the amount to be debited. The fifth
column i.e., Cr. Column is meant for recording the amount to be credited.

Another point to be noted in the context of the form of journal is that, to separate one journal
entry from another, a line is drawn below every journal entry.

Q4.

Q. Rules for debiting and crediting various Accounts:

1.Rules for debiting & crediting PERSONAL ACCOUNTS:

Debit the receiver and credit the giver

(outsider who receives or gives only but not the name of the organisation or

person in whose book entries are made who receives or gives)

2.Rules for debiting and crediting REAL,ASSET OR

PROPERTY ACCOUNTS:

Debit what comes in and credit what goes out

3.Rules for debiting & crediting NOMINAL OR FICTITIOUS

ACCOUNTS (Accounts of Incomes & expenses)

Debit expenses and losses and credit income

and gains.

Q. Steps required for debiting and crediting:

1.Ascertaining the two accounts head involved in the transaction.(Rent a/c, salary a/c, Ganesh’s a/c,
Machinery a/c etc)

2.Finding the classes to which these two accounts belong.

 ( personal, real, nominal)

3.Application of relevant rules for debit and credit and find out which account is to be debited and
which account is to be credited.

Q 5 . LEDGER

ANS :- Meaning: It is the book where transactions of the same nature (i.e.., transactions pertaining to
a particular person, income, expenditure, asset or liability) are classified and grouped together in
one place in the form of an account through a process called posting (i.e., the transferring of entries
from the journal to the ledger) to know the position of balance of that account.

A ledger account is a summarised and classified record of transactions of the same nature.

For instance, all the transactions relating to cash are brought together in one place as cash
account. Similarly all the transactions relating to salary are recorded in salary account.

Points to be noted while preparing ledger accounts:

1.The word ‘Dr.’ (Debit) should be written at the left-hand top corner of each account to indicate the
debit side of the account and the word ‘Cr.’ (Credit) should be written at the right hand top corner
of each account to indicate the credit side of the account.

2. Every entry made on the debit side of an account should begin with the word

‘To’ in the particulars column to indicate that the account owes the amount to the other account ,
and every entry made on the credit side of an account should begin with the word ‘By’ in the
particulars column to indicate that the amount is owed by the other account to that account.

3.While posting to the debit side of an account, the name of the account which is credited in the
journal should be written in the particulars column. On the other hand, while posting to the credit
side of an account, the name of the account which is debited in the journal should be written in the
particulars column.

4.The difference between two sides of the ledger account should be ascertained .

Q 6 . Trial balance

ANS :- Meaning :- Trial balance is statement prepared with the debit and credit balances of ledger
accounts to test the arithmetical accuracy of the books. Trial balance is prepared by the accountant
as on the closing date of the accounting year.

Principles for the preparation of Trial balance:

Assets ------------- shows debit balance

Liablities ----------- shows credit balance

Expenditures ------------ shows debit balance

Incomes ------------------- shows credit balance

The total of debit balances should tally with the total of credit balances.
List of Assets showing debit balance:

Cash, bills receivable, plant and machinery, debtors, furniture, stock,, buildings,

bank balance, etc.

List of liablities showing credit balance:

Capital, creditors, bills payable, etc.

List of expenditures showing debit balance:

Purchases, rent paid, salaries, carriage, insurance, commission paid, discount

allowed, trade expenses, etc.

List of incomes showing credit balance:

Sales, discount received, rent received, etc.

Q 7 . Final Accounts

ANS:- Meaning of Final Accounts: Final accounts are prepared at the end of the accounting year to
ascertain the profit or loss of the business and to know the financial position.

Accounts and statement to be prepared:

1.Trading Account

2.Profit and loss Account

3.Balance sheet

Trading account

An account which shows merely the result of trading or buying and selling of goods. Trading account
is prepared to find out the Gross profit or Gross loss of the organization.

Profit & Loss account:

An account which shows net profit or net loss of the organization for the accounting year.

Balance Sheet: is a statement of assets and liablities

Principles related to treatment of Adjustments:

1.For each adjustment, there will be 2 treatment

2.Prepaid items should be deducted from the respective account head.

3.Outstanding items should be added to the respective account head.

4.Depreciation on asset should be deducted from the asset

5.Outstanding incomes and prepaid expenditures are treated as assets and Outstanding
expenditures and Income received in advance are treated as liabilities.
Nature of problems/ questions:

Trial Balance and Adjustments are available in the problem

Nature of solution:

Trading and Profit and loss account and Balance sheet is required to be prepared.

Q 8 . Sales budget:

ANS :- This budget is a forecast of quantities and values of sales to be achieved in a budget period.
The sales budget may be prepared according to products, sales territories, types of customers,
salesmen etc. While preparing sales budget, previous years sales figures and trends are taken in to
consideration.

Q 9. Ratios

ANS:- Meaning: Ratio analysis is the most widely used method for the analysis of financial
statements. It is the process of comparing the item found in the financial statements with another
item with the object of diagnosing the financial health or condition of a business.

For instance, the item of net profit will be meaningful, not when it is considered in isolation, but only
when it is compared with the capital employed in the business.

Current assets are compared with the current liablities to know the ability of a concern to meet its
short term obligations.

Uses or advantages of Ratio analysis:

1.Ratio analysis simplifies the understanding of financial statements.

2. Accounting ratios establish the inter-relationship between the various financial figures.

3.Ratio analysis is an instrument for diagnosing the financial health or condition of a business.

4.Ratio analysis is an invaluable aid to the management in the efficient discharge of its basic
functions of forecasting, planning, communication, control etc.

5. Ratio analysis provides the relevant data for the comparison of the performance of the different
departments or divisions of the same firm.

6. Ratios are very helpful in establishing standard costing system and budgetary control.

7. Ratio analysis is useful not only to the management but also to outsiders like creditors, investors.
A creditor can ascertain the extent of security that is available for the payment of the amount due
to him.
Q 10 . Contribution concept and Cost Volume Profit (CVP) analysis

Marginal costing

Meaning: Marginal cost is the difference between fixed and variable cost.

Marginal costing is the ascertainment of marginal costs and of the effect on profit( of changes in
volume or type of output) by differentiating between fixed costs and variable costs.

Concepts of Marginal costing:

1.Concept of contribution: The difference between selling price and variable cost is called
contribution. It helps in fixing the selling price and deciding the profitability of each product.

Contribution = selling price – variable cost

2.Profit volume ratio or p/v ratio:

The relation of contribution to sales is called profit volume ratio. Here the word profit means
contribution and the word volume indicates sales. p/v ratio measures profitability of products.

p/v ratio = contribution x 100

selling price

3.Break-even point: represents that volume of sales or production where there is no profit no loss.
At this point total sales revenue is just equal to total cost (i.e., variable costs plus fixed costs). Sales
below this point results in loss as the sales value is less than the total cost.

Break even point (units) = total fixed costs

contribution per unit

Break even sales (amount)= Fixed cost

p/v ratio

4.Margin of safety: The positive difference between actual sales and the break even sales is called
margin of safety. It is the excess of actual sales over the break even sales. The margin of safety is the
area of earning profit. It is the excess of production or sales over the break even point.

Margin of safety = sales – Break even sales

Q 11 . Financial Management

Meaning: Financial management refers to those specialized managerial activities or efforts which are
concerned with the estimation of the finance, long term as well as short term needed by a business
enterprise, determination of the sources suitable under given circumstances, the collection and
provision of funds in time and control over the utilization of funds.

It includes how to raise the capital, how to allocate it i.e. capital budgeting. Not only about long term
budgeting but also how to allocate the short term resources like current liabilities. It also deals with
the dividend policies of the share holders..
Financial Management means planning, organizing, directing and controlling the financial activities
such as procurement and utilization of funds of the enterprise. It means applying general
management principles to financial resources of the enterprise.

The six decision areas, functions or financial decisions are:

1.Funds requirements decision

2.Financing decision

3.Investment decision

4.Dividend decision

7.Financial control

1.Funds Requirements Decisions

This decision is concerned with the estimation of total funds required by the business,

taking in to account both the fixed and working capital requirements. The estimation can

be done by forecasting the physical activities of the concern.

A finance manager has to make estimation with regards to capital requirements of the

company. This will depend upon expected costs and profits and future programmes and

policies of a concern. Estimations have to be made in an adequate manner which

increases earning capacity of enterprise.

2.Financing decision

Financing decision involves the following:

• Identification of the sources from which funds can be raised

• Determination of the amount of funds that can be raised from each source

• Ascertainment of the cost of capital presently used

• Determination of expected cost of future financing

• Determination of the best available sources to be tapped and to what extent the amount
can be raised.

• Determination of the instruments to be employed to raise funds and the time of their issue.

• Determination of the underwriting agreements for the issue of securities and the

• terms of agreement.

• *Determination of the optimum or best financing mix or make-up of capital structure.

3.Investment Decision
It uses this collected finance to purchase fixed and current assets for the company.

The finance manager has to decide to allocate funds into profitable ventures so that

there is safety on investment and regular returns is possible.

4.Dividend Decision:

It is the determination of the percentage of profits earned to be paid to the shareholders

as dividend i.e.., the allocation of the profits of a firm between payments to shareholders

and retained earnings.

• The net profits decision have to be made by the finance manager. This can be done in two
ways: Dividend declaration - It includes identifying the rate of dividends and other benefits
like bonus.

• Retained profits - The volume has to be decided which will depend upon expansion,
innovational, diversification plans of the company.

5.Management of cash: Finance manager has to make decisions with regards to cash management.
Cash is required for many purposes like payment of wages and salaries, payment of electricity and
water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase
of raw materials, etc.

6.Financial controls: The finance manager has not only to plan, procure and utilize the funds but he
also has to exercise control over finances. This can be done through many techniques like ratio
analysis, financial forecasting, cost and profit control, etc.

Working capital Management

Meaning of working capital: Working capital refers to that part of total capital which is

used for carrying out the routine or regular business operations.

In other words it is the amount of funds used for financing the day-to-day operations .

Thus the capital locked up and invested in various current assets such as stock of raw

materials, work-in-progress, stock of finished goods, accounts receivables, cash and

bank balances constitutes the working capital.

Estimation of working capital

Working capital = current assets – current liablities + safety margin or provision