Fundamentals Of ing 4wm6n

1. Explain the different branches of ing.(10 Marks) Answer: In order to meet the ever increasing demands made on ing by different interested parties (such as owners, management, creditors, taxation authorities and other govt. agencies etc.) the various branches of ing have come into existence. These branches are as follows: 1. Financial ing 2. Cost ing 3. Managerial ing The above three branches of ing are briefly discussed below: 1. Financial ing: The main purpose of financial ing is to ascertain the true result (profit or loss) of the business operations during a particular period of time and to state the financial position of the business on a particular point of time. Financial ing produces general purpose reports for the use by the great variety of people who are interested in the organization but who are not actively engaged in its day-today operation. 2. Cost ing: The main object of cost ing is to determine the cost of goods manufactured or produced by the business. It also helps the management of the business in controlling the costs by indicating avoidable losses and wastes. In order to set prices of the products of the companies, correct calculation of all manufacturing as well as non-manufacturing costs is necessary. Cost ing is also helpful to accomplish this task. 3. Managerial ing: The object of managerial ing is to communicate the relevant information periodically to the management of the business to enable it to take suitable decisions. Financial ing is the oldest and the other branches have developed from it according to the need of different parties. The objects of financial ing can only be achieved by recording business transactions in a systematic manner according to a set of principles.

2. Distinguish between the cash system and the accrual system of ing. (10 Marks) Answer: There are two main methods of ing used in the business: cash ing and accruals ing. The basic difference is the timing of income and expense recording. The choice of the method depends on the factors like the nature of the business, ease of use or regulations by the related laws. In cash ing income is recognized when cash is received or deposited and expenses are recorded when bills are paid. Therefore transactions are recorded only when cash is handed over. Consequently non-cash transactions are excluded (such as provisions and revaluations). In accruals ing, economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). Therefore accruals ing measures the performance and position of a company by combining current cash flows with future expected cash flows, giving a more accurate picture of current financial condition. The accruals concept and matching principle can be illustrated simply with the following example. Suppose a business had the following transaction at given times:  

Company purchases goods costing £100 on credit on 15 January. Bills are paid on 15 February for the goods purchased on 15 January.



These goods are sold on credit for £150 on 15 March.



On the 15 April Company receives payment for the goods sold on 15 March.

In the accruals ing transactions are recognized in the following months: 1. The cost of goods is incurred in January. 2. The sales revenue is earned in March. 3. There is no profit or loss in January, February or April. The only profit was earned in March which was £50 in total. The cost of goods is recorded as stock at the end of January and February. As opposed to the accrual method, cash ing would record same transactions in the following months: 1. The cost of goods is incurred in February. 2. The sales revenue is earned in April. 3. The profit is earned in April.

Accruals ing is perceived as the standard practice in the business. Only in the certain cases, the small companies still may prefer cash ing as they are less likely to operate on credits. Accrual method provides more accurate picture of company’s current financial condition and their financial statements are relatively more detailed. Accrual basis balance sheets have more items to be listed as they record non cash transactions. Following is an illustration of differences between cash basis and accrual basis financial statements. Take an example of a weekend school operating on donations. At the end of the fiscal year, school has recorded its transactions based on its check book to produce cash basis income statement and balance sheet: Cash basis statements Income statement as at 31 December XXXX

Income Grants

£3.000

Contributions

£4.500

Fees from students

£25.000

Total Income

£32.500

Expenses Salaries

£20,000

Food and supplies

£6.000

Insurance

£4.250

Utilities

£2.000

Telephone

£750

Printing and postage

£3.500

Total expenses

£36.450

Balance Sheet as at 31 December XXXX

Fixed assets Property and equipment

£120,000

Accumulated depreciation

<£100,000>

Current assets Cash

£2.500

Less: Current Liabilities Loan from founder

Net current assets

£10,000

£12. 500

All these activities have been taken from the check book, so these statements were produced on cash basis. This results in some of the pertinent information missing from the statements. Such as:  

Local government authorities had given a grant of £15.000 to provide scholarship for low-income students. There have been some students who attended school during last academic year and paid their fees in check, which has not been yet cashed. And this amounts £3.000 in total.



The school management did not pay the final installment for some of the goods that they bought last year. They still owe £2.000 to the creditors.



Company has already paid its insurance for the next 3 months in advance to the date of this statement is made. Therefore we can deduct (4250/12) x 3 = 1.062 from the insurance item.

If we want to take these factors into all transactions need to be recorded on accrual basis. In order to do this we’ll add new items to financial statements and reproduce it on accrual basis. Followings are accrual basis statements of this weekend school for the same fiscal year.

Accrual basis statements Income statement as at 31 December XXXX

Income Grants

£18.000

Contributions

£4.500

Fees from students

£28.000

Total Income

£50.500

Expenses Salaries

£20,000

Food and supplies

£6.000

Insurance

£3.188

Utilities

£2.000

Telephone

£750

Printing and postage

£5.500

Total expenses

£37.438

Balance Sheet as at 31 December XXXX

Fixed assets

Property and equipment

£120,000

Accumulated depreciation

<£100,000>

Current assets Cash

£2.500

s Receivable

£18.000

Prepaid Expenses

£1.062

Less: Current Liabilities Loan from founder

£10,000

s Payable

£2.000

Net current assets

£29.562

We have added three more items to reflect accruals on the balance sheet. These are “s receivables” for the transactions which have not yet received, “prepaid expenses” which have already paid and “s payable” for the items which company is liable to pay. It is obvious that, accruals ing requires more work to collect data and more resources are needed other than check book. We can say that cash ing is much easier in of populating data and to produce financial statements. This is why still some of the small companies prefer to use cash ing. The very obvious reasons for choosing cash ing can be summarized as follows: 1. Cash ing principles are easier to understand than that of the accrual ing principles. 2. Considering the costs involved in hiring ants for accrual ing, cash ing seems to be cheaper. 3. In of tax planning, cash ing is more attractive since the company is taxed on its current cash flow, not from the s receivables. Given these advantages there are still companies which might see cash ing more attractive for their business. However accrual ing is now regarded as a industry standards and also not all companies has the freedom of choosing any ing method since it is controlled by the governmental authorities.

3. Distinguish between a journal and a ledger. (10 Marks) Answer: The journal and the ledger are the most important books of the double entry system of ing. Following are the points of difference between these two types of books: 1. The journal is the book of first entry (original entry); the ledger is the book of second entry. It is the goal where all the entries in the journal find their ultimate destination. 2. The journal is the book of chronological record; the ledger is the book for the analytical record. 3. The journal, as a book of source entry, ordinarily has greater weight as legal evidence than the ledger. 4. The unit of classification of data within the journal is the transaction; the unit of classification of data within the ledger is the . 5. The process of recording in the journal is called journalising; the process of recording in the ledger is called posting. 4. Categorise the different types of expenditure. (10 Marks) Answer:

5. Journalising the following transactions in the books of Srinath. (10 Marks)

Date

Particulars

Debit (in Rs.)

1st Jan 2004

Cash A/C

20000 20000

To Capital A/C 4th Jan 2004

Good/Stock A/C

4000 4000

Mr. Kapil Dev A/C 5th Jan 2004

Mr. Srikant A/C

3000

To Good/Stock A/C

7th June 2004

Mr. Kapil Dev A/C

3000

500

To Good/Stock A/C 14th June 2004

To Good/Stock A/C Mr. Srikant A/C

Credit (in Rs.)

500 200 200

6. On 30th June 2010, Sanjay extracted the following balances from his book. (10 marks) Answer: Trail Balance of Mr. Sanjay as on 30th June 2010. Particulars

Debit Amount (in Rs.)

Capital A/C Salaries A/C

Credit Amount (in Rs.) 80000

4000

Sales A/C

50000

Machinery A/C Purchases A/C

30000

Sales Returns A/C

2000

Insurance A/C

600

Rent A/C

3000

Sundry creditors A/C

2000

Drawings A/C

10000

Bills payable A/C

5000

Bank A/C

9000

Cash A/C

4000

Stock A/C

10400

Debtors A/C

5000

Bills receivable A/C

3000

Set 2 1. Write short notes on the following: (10 Marks) a. Group depreciation method Answer: A method of calculating depreciation by amalgamating assets into a pool, or group, which is used for depreciation cost base. The assets grouped together should be similar in the way they function, or each asset should be small enough that it is not considered material on its own, which will make group depreciation more relevant for financial ing purposes. When pooling assets that are similar in nature, such as all of a company's delivery trucks that travel about the same distance every year, a company can simplify its depreciation calculation. However, before deciding to pool assets into one group, it is important to consider how each asset will be depreciated individually, and if it makes sense to group this asset with any others. b. Double declining balance method The double declining balance depreciation method is like the straight-line method on steroids. To use it, ants first calculate depreciation as if they were using the straight line method. They then figure out the total percentage of the asset that is depreciated the first year and double it. Each subsequent year, that same percentage is multiplied by the remaining balance to be depreciated. At some point, the value will be lower than the straightline charge, at which point, the double declining method will be scrapped and straight line used for the remainder of the asset’s life (got all that?). An illustration may help. In our straight-line example, we calculated that a $5,000 computer with a $200 salvage value and an estimated useful life of three years would be depreciated by $1,600 annually. The first year, we have to compare this to the total amount to be depreciated, in this case, $4,800 ($5,000 base - $200 salvage value = $4,800). Dividing $1,600 by $4,800, we discover the straight-line depreciation charge of $1,600 is 33.33% of the total depreciation amount of $4,800. Using this information, we double the 33.33% figure to 66.67%. In the first year, we would take $4,800 multiplied by .6667 to get a total depreciation charge of approximately $3,200. In the second year, we would take the same percentage (66.67%) and multiply it by the remaining amount to be depreciated. Continuing with the example, we find that $1,600 is the remaining amount to be depreciated at the start of the second year ($4,800 - $3,200 = $1,600). Multiply 1,600 by .6667 to get $1,066. This is the depreciation charge for the second year – or not! that once the depreciation charges dip below the amount that would be charged using the straight-line method, the double declining balance is scrapped and straight line immediately utilized. The straight line method called for charges of $1,600 per year. Obviously, the $1,066 charge is smaller than the $1,600 that

would have occurred under straight line. Thus, the deprecation charge for the second year would be $1,600.

For those of you who love algebra, you may find it easier to use this equation:

Double Declining Balance Depreciation Method Formula Depreciation Base * (2 * 100% / Useful Life of Asset in Years) 2. Distinguish between a trial balance and a balance sheet. (10 Marks) Answer: The following are the points of distinction/difference between trial balance and balance sheet: Trial Balance

Balance Sheet

► It is a list of balance extracted from the ledger s

► It is a statement of assets and liabilities

► It contains the balance of all s real, nominal and personal.

► It contains the balance of only those s which represents assets and liabilities.

► It is prepared before the preparation of trading and profit and loss .

► It is prepared after the preparation of trading and profit and loss .

► It does not contain the value of the closing stock of goods.

► It contains the value of closing stock, which appears on the assets side.

► Expenses due but not paid and incomes ► Expenses due but not paid appear on the due but not received do not appear in liability side and income due but not the trial balance received appear on the asset side of the balance sheet.

3. What are the key ing norms concerning borrowing costs and segment reporting. (10 Marks) Answer:

4. List out the advantages and disadvantages of single entry system. (10 Marks) Answer: In every business, you need to have a day to day record for all the financial transactions. Whether the business is small, medium or large, there must be records that include purchase, sales, income, and payment by an individual or in a organization. A bookkeeping service plays a big role in the business, it would help you records all the transaction that was done in your business. The one who does bookkeeping is what we called bookkeeper. These persons are the one who records all day to day transactions on what are called "daybooks", it includes the receipts, sales and payments or any record purposes. It is a systematic process that has two methods that can be used to simplify the task. These methods are Single-Entry System and Double-Entry System. The Single-Entry System works like a normal check book in that it documents all the expenses but this is only suitable for small companies with simple financial statement since it does not rely in equal debits and credits. It may be easy compared to double-entry system but it has lot of disadvantages. Two Disadvantages of Single-Entry System 1. Two fold aspects of transactions are generally ignored because in this system, only partial and incomplete record is maintained. 2. A trial balance cannot be drawn up to test the arithmetical accuracy of the records. As the two fold aspects of transactions are not recorded. The double-entry system is more sophisticated compared to single-entry system. This method needs to be accurate because its entries must balance. This system needs debits and credits and their amounts must be exactly the same to be able to extract accurate financial statement. This system is very reliable; the advantage here is that most of the double entry systems in the market will not let the proceed if the amounts do not match, thus forcing balanced entries. For those who have small business, they prefer to use this system because of its error prevention and at the same time it is easy to use when producing statements directly from the list.

5. The following errors were committed by the ant of Geetha Dye Chemicals: Solution: Assuming that the errors were deducted after preparing Trail Balance but before preparing final A/cs. (the difference being taken to Suspense A/c) JOURNAL a

b

C

D

e

Suspence A/C Dr. To Triman Chemicals A/c Stationery A/c Dr. To Suspence A/C Office Furniture A/C Dr. To Office Expenses A/C Trivedi & Co. A/C Dr. To Suspence A/C Sales A/C Dr. Purchase A/C To Mantri & Co.

180 180 150 150 260 260 600 600 240 420 660

6. The following balances have been extracted from the books of s of M\s. Jyothi Home Industries, Mysore. Prepare Trading and Profit and Loss for the year ending 31st December, 2010. (10 Marks) Solution To Opening Stock To Purchases Less: return outward To Carriage inwards To Wages To Gross Profit C/d

Salaries Trade expenses Sundry expenses Postage and Telegrams Insurance Printing and stationery Rent and Taxes Carriage Outwards Travelling expenses Bad debts To Net profit transferred to capital a/c

1,65,0 00 5,000

50,000 By Sales Less: sales inward 1,60,0 By closing 00 stock 4,000 30,000 51,000 2,95,0 00 By Gross Profit 8,000 B/d 1,000 Interest earned Commission 1,000 Earned Bad debts 1,000 recovered 1,000

2,75,0 00 15,000

2,60,0 00 35,000

2,95,0 00

51,000 4,000 3,000 50

500 2,000 2,000 3,000 500 38,050 58,050

58,050