SET 1.

Q.1 Explain any two accounting concepts with example?

Ans:
Concepts are the basic assumptions or conditions up on which the science of
accounting is based. There are five basic concepts of accounting namely –

• Business entity concept,

• Going concern concept,
• Money measurement concept,
• Periodicity concept and
• Accrual concept.

Business separate entity concept:

The essence of this concept is that business is a separate entity and different
from the owner or the proprietor. This is true in the case all forms of
organization. If X starts business, he should not mix up his personnel properties
with that of the business. When he invests his funds into the business, it is
regarded as capital to the business and capital is a liability from the business
point of view. If X withdraws any money from the business, it is detectable
form the capital and to that extent the liability of the business towards the owner
is reduced. On the other hand, if the proprietor withdraws money from the
business for business purposes, then it is treated as expenditure to the business.
This legal separation between business and ownership is kept in mind while
recoding the transactions in the books of business.

Going concern concept:

The fundamental assumption is that the business entity will continue fairly for a
long time to come. There is no reason why an enterprise should be promoted for
a short period only to liquidate the business in the foreseeable future. This
assumption is called “Going concern concept”. For this reason accountants
value fixed assets on historical cost method. Had the business been setup to last
for short period, fixed assets should have been valued at a market price.
Besides, going concern concept provides for amortization of the cost of fixed
assets over the lifetime of the assets. For example, an entrepreneur purchases a
plant for Rs. one crore and it has a life of 10 years. During this period, he sets
aside every year certain funds from the income of the business so that it would
help him for replacement of the asset at the end of ten years. This process of
amortization presupposes that the enterprise will continue to do business fairly
for long time.

Q.2 Prove that accounting equation is satisfied in all the following

transactions of Mr. X
1. Commenced business with cash – Rs 80,000
2. Purchased goods for cash –Rs 40,000 and on credit Rs. 30,000
3. Sold goods for cash –Rs. 40,000 costing Rs. 25,000
4. Paid salary – Rs. 2,000 and salary outstanding Rs. 1,000
5. Brought scooter for personal use for cash at Rs. 20,000

Solution: The accounting equation is,

Equity [Working Capital] + Liabilities + Assets

i. Commenced business with cash – Rs 80,000

In the first transaction, the business receives a capital of Rs. 80,000 cash and so
capital account and cash accounts are affected.
Capital is a liability and cash is an asset to the business.
This is shown in the transaction number 1, in the table.

ii. Purchased goods for cash –Rs 40,000 and on credit Rs. 30,000

In this transaction, cash account, goods account and liabilities account gets
affected.
Cash account reduces by Rs. 40,000
Goods account increases by Rs. 40,000
Liabilities account increases by Rs. 30,000
This is shown in the transaction number 2, in the table.

iii. Sold goods for cash –Rs. 40,000 costing Rs. 25,000

In this transaction, goods account, cash account and profit account gets affected.
Cash account increases by Rs. 40,000
Goods account reduces by Rs. 25,000
Profit account being owner’s account, it gets credited with Rs 15,000
This is shown in the transaction number 3, in the table.

iv. Paid salary – Rs. 2,000 and salary outstanding Rs. 1,000
In this transaction, cash and salary accounts are affected.
Cash account reduces by Rs. 2,000 and salary account gets credited by Rs.
2,000
Outstanding salary is Rs. 1,000 which is not paid yet, hence any of the accounts
gets affected.
This is shown in the transaction number 4, in the table.

v. Brought scooter for personal use for cash at Rs. 20,000

The scooter is for personal use, the liability of the business on owner’s capital
decreases.
Cash account and capital account decreases by Rs. 20,000

This is shown in the transaction number 5, in the table.

 Liabilities and owner's
Assets equity
Transaction Cash Goods Salary Mr.X's
Number a/c a/c a/c Liabilities Capital
1 80000 80000
- 70,00
30000
2 40000 0
-
40000 15000
3 25000
4 -2000 2000
-
-20000
5 20000
58000 45000 2000 30000 75000
105000 105000

Q.3 Show the rectification of entries for the following:

a. The sales account is under cast by Rs.15, 000

b. Goods returned by customer Mr. X of Rs.5650 has been posted in return
inward account as Rs.5560 and in Mr. X’s account as Rs. 6550
c. Salary paid Rs.6, 000 has been posted to rent account.
d. Cash received from Ram posted to Shyam account Rs. 7000
e. Cash received from jadu Rs. 8640 has been posted to the debit of
Madhu’s account.
Solution:
The below table shows the rectification of entries

Particulars Debit [Rs.] Credit [Rs.]

Suspense account Dr 15,000

To Sales account 15,000

Suspense account Dr 90

To Return account 90

Mr. X’s account Dr 900

To Suspense account 900

Salary account Dr 6000

To rent account 6000

Shyam account Dr 7000

To Ram account 7000

Jadu account Dr 8640

To Madhu account 8640

Q.4 The following balances are extracted from the books of Kiran Trading
Co on 31st March 2000. You are required to prepare trading and
profit and loss account and a balance sheet as on that date:
 Opening Stock 5,000 Commission received 2,000
B/R 22,500 Return Outward 2,500
Purchases 1,95,000 Trade Expenses 1,000
Wages 14,000 Office furniture 5,000
Insurance 5,500 Cash in hand 2,500
Sundry Debtors 1,50,000 Cash at bank 23,750
Carriage Inwards 4,000 Rent and Taxes 5,500
Commission Paid 4,000 Carriage Outward 7,250
Interest on Capital 3,500 Sales 2,50,000
Stationery 2,250 Bills Payable 15,000
Return Inwards 6,500 Creditors 98,250
Capital 89,500

The closing stock was valued at Rs.1, 25,000

Solution:
Trading account of M/s Kiran Trading Co

Trading Account
Dr Cr
Opening stock 5,000 Sales - Return Inward 243,500
Purchases - Return Outward 192,500 Closing Stock 125,000
Carriage Inwards 4,000
Wages 14,000
Gross Profit 153,000
368,500 368,500

Profit and Loss Account of M/s Kiran Trading Co

Profit and Loss Account

Dr Cr
Rent and Taxes 5,500 by Trading a/c Gross Profit 153,000
Insurance 5,500 Commission Received 2,000
Trade Expenses 1,000
Commission Paid 4,000
Interest on Capital 3,500
Stationary 2,250
Carriage Outward 7,250
Net Profit 126,000
155,000 155,000

Balance Sheet Account of M/s Kiran Trading Co

 Balance Sheet
Capital and Liabilities Assets
Bills Payable 15,000 Sundry Debtors 150,000
Capital 89,500 Office Furniture 5,000
Creditors 98,250 Cash in Hand 2,500
Net Profit from P & L Account 126,000 Cash in Bank 23,750
B/R 22,500
Closing Stock 125,000
328,750 328,750

Q.5 Write a note on:

a. outstanding expenses
b. prepaid expenses
Ans:
a. Outstanding expenses:
Expenses due but not paid are known as outstanding expenses. Wages,
salaries, rent, commission etc payable in the current month are paid in the
following month. If the final accounts are prepared for the year ending 31st
December, then the expenses payable for December will be paid in January of
next year. The extent to which the amount belongs to the current year but
payable in the next year is called outstanding expenses. To record that aspect,
the journal entry drawn in the journal proper is:
 Concerned Expenses account Dr
To outstanding expenses account.
Outstanding expenses account indicates liability for the current year and it will
appear in the balance sheet.

b. Prepaid expenses:
Expenses paid in advance are regarded as prepaid expenses.
Prepaid expenses form an asset and therefore prepaid expenses account is
debited. For example, insurance premium is paid from April, 2004 to March,
2005; and the amount is Rs. 3600. The financial year ends by 31st December,
2004. Therefore the premium relating to Jan, Feb. and March of 2005 Rs. 900 is
said to have been paid in advance. To record this internal adjustment, the entry
is:
Prepaid Expenses account Dr 900
To insurance account 900
Note that outstanding or prepaid expenses accounts are regarded as personal
accounts.