MB0041 Financial and Management Accounting Set1

Financial and Management Accounting | Set 1 Page 1 of 14

Sikkim Manipal University | MBA-Spring 2010 | MB0041 Financial and Management Accounting | Sem 1

ASSIGNMENT – 01/02NameAyaz Anis AnsariRegistration No.511025251Learning CentreKarrox Technologies

(Borivali Centre, Mumbai) Learning Centre Code03092CourseMBASubjectFinancial and Management Accounting - Set 1SemesterSemester 1Module No.MB0041Date of SubmissionMay 8,

2010Marks AwardedDirectorate of Distance EducationSikkim Manipal UniversityII Floor, Syndicate House,

Manipal – 576 104

_________________Signature of Coordinator

__________________

Signature of Center

_________________

Signature of Evaluator


Q. 1. What is accounting cycle? List the sequential steps involved in

Accounting cycle?

Ans. Accounting cycle (Accounting Process)

Accounting is the process of identifying the transactions and events, measuring the transactions and events

in terms of money, recording them in a systematic manner in the books of accounts, classifying or grouping

them and finally summarizing the transactions in a manner useful to the users of accounting information.

List of the sequential steps involved in Accounting cycle as follows.

ACCOUNTING

ENCOMPASSESIDENTIFICATIONMEASURINGRECORDINGCLASSIFYINGSUMMARISINGANALYSINGI

NTERPRETINGCOMMUNICATING

Identifying the transactions and events: This is the first step of accounting process. It identifies the

transaction of financial character that is required to be recorded in the books of accounts. Transaction is transfer

of money or goods or services from one person or account to another person or account. Events happen as a

result of internal policies or external needs. Events of non financial character cannot be recorded even though

such events may have an impact on the operational results of the firm.

Measuring: This denotes expressing the value of business transactions and events in terms of money (in terms

of rupees in India).

Recording: It deals with recording of identifiable and measurable transactions and events in a systematic

manner in the books of original entry that are in accordance with the principles of accountancy.

Classifying: It deals with periodic grouping of transactions of similar nature that appear in the books of original

entry into appropriate heads by posting or transfer entries. For Eg: All purchases of goods made for cash or on

credit on different dates are brought to purchase account.

Summarizing: It deals with summarizing or condensing transactions in a manner useful to the users. This

function involves the preparation of financial statements such as income statement, balance sheet, statement of

changes in financial position and cash flow statement.

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Analyzing: It deals with the establishment of relationship between the various items or group of items taken

from income statement or balance sheet or both. Its purpose is to identify the financial strengths and

weaknesses of the enterprise. The above six process in the present day scenario are generally performed using

software packages.

Interpreting: It deals with explaining the significance of those data in a manner that the end users of the

financial statement can make a meaningful judgment about the profitability and financial position of the

business. The accountants should interpret the statement in a manner useful to the users, so as to enable the

user to make reasoned decision out of the alternative course of action. They should explain various factors on

what has happened, why it happened, and what is likely to happen under specific conditions.

Communicating: It deals with communicating the analyzed and interpreted data in the form of financial reports/

statements to the users of financial information e.g. Profit and loss account, Balance Sheet, Cash flow and

Funds Flow statement, Auditors report etc.



Q.2. A. Bring out the difference between Indian GAAP and US GAAP

norms?

B. What is Matching Principle? Why should a business concern

follow this Principle?Ans. A. Difference between Indian GAAP and US GAAP norms

US GAAPINDIAN GAAPIt is established under FASB and AICPAIt is established under ICAI

Balance Sheet, Income Statement & Funds Flow Statement are mandatoryBalance Sheet and income statement are alone mandatory

Any change in foreign exchange fluctuations cannot be capitalized but the difference can be shown or debited to Income statementAny difference in foreign exchange can be capitalized.

Financial accounting, Management accounting and income tax accounting are prepared separatelyOnly financial accounting and Income tax accounting are prepared.

The basic tenets is globalization of businessThe basic tenet is localization

Any long term loan repayable is the current financial year is shown separatelyLong term loans maturing in the current financial year need not be disclosed separately

In lease contract, lessee is more beneficiary because he can claim depreciation allowanceIn lease contract, lessor is eligible for depreciation allowance and not the lessee.

It is more transparent and accepted worldwide. More disclosure is requiredIt is comparatively less transparent. For listing the securities in other country’s stock exchange USGAAP is mandatory



B. Principle of Matching Cost and Revenue:

Revenue earned during a period is compared with the expenditure incurred to earn that income, whether the

expenditure is paid during that period or not. This is matching cost and revenue principle, which is important to

find out the profit earned for that period. Here costs are reported as expenses in the accounting period in which

the revenue associated with those costs is reported.

Sales revenue in 2005- Rs.50 Lakhs

Expenses incurred during the period – Rs.30 Lakhs

It is assumed that some of these costs might be payable in 2006

Yet, they are considered for the period 2005, when the sales revenue was earned

While preparing the final accounts adjustments are made for outstanding expenses, prepaid expenses,

outstanding income and income received in advance.



Q.3. Prove that the accounting equation is satisfied in all the following

transactions of Mr. X

a) Commence business with cash Rs.50000

b) Paid rent in advance Rs.1000

c) Purchased goods for cash Rs.18000 and Credit Rs.20000

d) Sold goods for cash Rs.25000 costing Rs.22000

e) Paid salary Rs.5000 and salary outstanding is Rs.3000

f) Bought moped for personal use Rs.20000

Ans.

Accounting EquationAsset = Liabilities + CapitalA 50,000 = 0 + 50,000

B

50,000 = 0 + 50,000(-) 1,000(+) 1,000 New Equation 50,000 = 0 + 50,000C

(-) 18,000 (+) 38,000 = 20,000 + 0 New Equation 70,000 = 20,000 + 50,000D

(-) 22,000(+) 25,000 = 0 + 3,000 New Equation 73,000 = 20,000 + 53,000E (-) 5,000 = (+) 3,000 + (-) 8,000 New Equation 68,000 = 23,000 + 45,000 F

(-) 20,000 = 0 + (-) 20,000New Equation 48,000 = 23,000 +

25,000



Q.4. Following are the extracts from the Trial Balance of a firm as on 31st

March 20X7

Dr.Cr.Sundry Debtors2,05,000Provision for Doubtful Debts10,000Provision for Discount on debtors

1,800Bad Debts3,000Discount1,000Additional Information:

Additional Bad Debts required Rs.4,000

Additional Discount allowed to Debtors Rs.1,000

Maintain a provision for bad debts @ 10% on debtors

Maintain a provision for discount @ 2% on debtors

Required: Pass the necessary journal entries and show the relevant accounts including final account.

Ans. DateParticularDr/CrAmountAmount31.03.20X7Bad Debt ------------A/c. To, Sundry Debtors -------------A/c(Being Additional bad debt written off)DrCr4000400031.03.20X7Discount Allowed ------------A/c. To, Sundry Debtors----------------A/c(Being Goods Purchased from X)DrCr1000100031.03.20X7Provision for Bad Debt ------------A/c. To, Bad Debt --------------------------A/c(Being bad debt written off against existing reserve)DrCr7000700031.03.20X7Profit & Loss - ------------A/c. To, Provision for Bad Debt ----------------A/c(Being Addition to provision for bad debts, to make new provision equal to 10% of Rs.2,00,000)DrCr170001700031.03.20X7Provision for Discount on Debtors----------A/c. To, Discount Allowed --------------------------A/c(Being Goods Purchased from Z list price is Rs.30000 and trade discount is 10%)DrCr2000200031.03.20X7Profit & Loss - ------------A/c. To, Provision for Discount on Debtors ---------------A/c(Being Addition to provision for Discount, to make new provision equal to 2% of Rs.1,80,000)DrCr3800

3800



Ledger Accounts in books of ……………….. as on 31st March 20X7.

Dr. Sundry Debtors A/c Cr.DateParticularsJFRs.DateParticularsJFRs.31/03/20X7To Balance b/d 205000.0031/03/20X7By Bad Debts A/c 4000.00 31/03/20X7By Discount A/c 1000.00 31/03/20X7By

Balance c/d 200000.00 205000.00 205000.00

Dr. Provision for Doubtful Debts A/c Cr.DateParticularsJFRs.DateParticularsJFRs.31/03/20X7To Bad

Debts A/c 7000.0031/03/20X7By Balance b/d 10000.0031/03/20X7To Balance c/d 20000.0031/03/20X7By

Profit & Loss A/c 17000.00 27000.00 27000.00

Dr. Provision for Discount on Debtors A/c Cr.DateParticularsJFRs.DateParticularsJFRs.31/03/20X7To

Discount A/c 2000.0031/03/20X7By Balance b/d 1800.0031/03/20X7To Balance c/d 3600.0031/03/20X7By

Profit & Loss A/c 3800.00 5600.00 5600.00Dr. Bad Debts A/c Cr.DateParticularsJFRs.DateParticularsJFRs.31/03/20X7To Balance b/d 3000.0031/03/20X7By Provision for Doubtful Debts A/c 7000.0031/03/20X7To Sundry

Debtors A/c 4000.00 7000.00 7000.00

Dr. Discount A/c. Cr.DateParticularsJFRs.DateParticularsJFRs.31/03/20X7To b Balance

/d 1000.0031/03/20X7By Provision for Discount on Debtors A/c 2000.0031/03/20X7To Sundry Debtors

A/c 1000.00 2000.00 2000.00



Extract of Final Accounts:

Dr. Profit & Loss A/c Cr.DateParticularsJFRs.DateParticularsJFRs.31/03/20X7To Provision for Doubtful

Debts 17000.0031/03/20X7By Balance c/d 20800.0031/03/20X7To Provision for Discount on Debtors

A/c 3800.00 20800.00 20800.00

Balance Sheet (Extract) of ……….. As on 31st March 20X7

LiabilitiesRs.Rs.AssetsRs.Rs. Fixed Assets Investments Current Assets Sundry

Debtors200000.00 Less : Provision for Bad Debts20000.00 Provision for Discount on Debtors

3600.00176400.00 Miscellaneous Expenditure Profit & Loss A/c 20800.00



Q.5 A. Bring out the difference between trade discount and cash discount.

B. Explain the term (1) assets (2) liability, with the help of examples.

Ans. A. Difference between trade discount and cash discount

Cash DiscountTrade DiscountIs a reduction granted by supplier from the invoice price in consideration of immediate or prompt paymentIs a reduction granted by supplier from the list price of goods or services on business consideration re: buying in bulk for goods and longer period when in terms of servicesAs an incentive in credit management to encourage prompt payment

Allowed to promote the salesNot shown in the supplier bill or invoiceShown by way of deduction in the invoice itselfCash discount account is opened in the ledgerTrade discount account is not opened in the ledgerAllowed on payment of moneyAllowed on purchase of goodsIt may vary with the time period within which payment is receivedIt may vary with the quantity of goods purchased or amount of purchases made

B. Explanation of the term 1) assets 2) liability, with examples.

Assets: An asset is a resources legally owned by the enterprise as a result of past events and from which

future economic benefits are expected to flow to the enterprise. Eg: Land and buildings, plant and machinery,

furniture and fixtures, cash in hand and at bank, debtors and stock etc., are regarded as assets, Assets may be

fixed, current, liquid or fictitious.

Fixed assets are those which are held for use in the production or supply of goods and services. Ex:

plant and machinery, which is used fairly for long period.

Current assets are those which are held or receivable within a year or within the operating cycle of the

business. They are intended to be converted into cash within a short period of time. Ex: Stock in trade,

debtors, bills receivable, cash at bank etc.,

Liquid assets are those which can be easily converted into cash and for instance, cash in hand, cash

at bank, marketable investments etc.,

Fictitious assets are in the form of such expenses which could not be written off during the period of

their incidence. For example, promotional expenses of a company which could not be treated as

expenditure in the year of incidence are shown as fictitious asset.



Liability: It is a financial obligation of an enterprise arising from past event the settlement of which is expected

to result in an outflow of resources embodying economic benefit. E. g. Loans payable, salaries payable, term

loans.

Current liability: is that obligation which has to be satisfied within a year. For example, payment to be

made sundry creditors for the goods supplied by them on credit; bills payable accepted by the

businessman; overdraft raised by the businessman in a bank etc.

Equity: Equity is the residual interest in the asset of the enterprise after deducting all its liabilities. The

equity of a company is called shareholders’ equity. Its components include share capital, share premium

and retained earnings



Q. 6. A fresh MBA student joined as trainee was asked to prepare Trial

balance. He was unable to submit a correct trial balance. You, as a senior

accountant find out the errors and rectify them. After redrafting the trial

balance prepare trading and Profit and loss account.ParticularDebitCreditCapital7670Cash in Hand30Purchase8990Sales11060Cash at Bank885Fixtures and

Fittings225Freehold premises1500Lighting and Heating65Bills Receivable825Return

Inward30Salaries1075Creditors1890Debtors5700Stock at 1st April 20073000Printing225Bills

Payable1875Rates, taxes and insurance190Discount Received445Discount Allowed20021,17521,705

Adjustments:-

Stock on hand on 31st March 2008 was valued at Rs.1800

Depreciate fixtures and fittings by Rs.25

Rs.35 was due and unpaid in respect of salaries

Rates and insurance had been paid in advance to the extent of Rs.40

Ans. Continued on next page…



Trail Balance of-----------------as on 31st March 2008

ParticularDebitCreditCapital7670Cash in Hand30Purchase8990Sales11060Cash at Bank885Fixtures and

Fittings225Freehold premises1500Lighting and Heating65Bills Receivable825Return

Inward30Salaries1075Creditors1890Debtors5700Stock at 1st April 20073000Printing225Bills

Payable1875Rates, taxes and insurance190Discount Received445Discount Allowed20022,94022,940

Trading AccountsParticularAmountAmount ParticularAmountAmount To, Opening Stock3000By,

Sales11060To, Purchase8990By, Closing Stock1800To, Return Inward30 To, Lighting & Heating65 To,

Gross Profit c/d775 12860 12860



Profit & Loss AccountsParticularAmountAmount ParticularAmountAmount To, Salary1075 By Gross Profit b/d775Add:- Outstanding Salary35

1110By, Discount Received445 To, Painting225 To, Rate, Taxes & Insurance190 Less:- Rate & Insurance paid

in Advance40150 To, Discount Allowed200 To, Depreciate fixtures & fittings25By, Net

Loss490 1710 1710


Documents

MB0041 Financial and Management Accounting Set1