13-Theory (85-89)

ACCOUNTING
PAST PAPERS THEORY

YEAR – 1996 (PRIVATE) QUESTION # 1:
Explain the following accounting principles and concepts, and illustrate effects of their violation:
(i) Concept of going concern.
(ii) Concept of business entity.
(iii) Principle of consistency.
(iv) Principle of conservatism.
(v) Principle of adequate disclosure.

SOLUTION 1
Accounting Past Papers Theory – Principles of Accounting – B.Com Part – I (Sameer Hussain)
(i) Going Concern Concept:
One of four fundamental accounting concepts. It is the assumption that an enterprise will continue in
operation for the foreseeable future, i.e. that there is no intention and necessity to liquidate or
significantly curtail the scale of the enterprise’s operation. The implication of this principle is that assets
are shown at cost, or at cost less depreciation, and not at their break-up values; it also assumes that
liabilities applicable only on liquidation are not shown. The going concern value of a business is higher
than the value that would be achieved by disposing of its individual assets, since it is assumed that the
business has a continuing potential to earn profits. This assumption will underline the preparation of
financial statements. If an auditor thinks that a business may not be a going concern, the auditors’ report
should be qualified.
(ii) Concept of Business Entity:
The unit for which accounting records are maintained and for which financial statement are prepared is
known as business entity. The business entity concept is the principle that financial records are prepared
for a distinct unit or entity regarded as separate from the individuals that own it. This will often be an
incorporated company, whose treatment as a separate accounting entity is required by law. For sole
traders and partnerships accounts are also prepared to reflect the transactions of the business as an
accounting entity, not those of the owner(s) of the business. Changing the boundaries of the accounting
entity can have a significant impact on the accounts themselves, as these will reflect the purpose of the
accounts and for whom they are prepared.
(iii) Principle of Consistency:
The concept requires the consistency of treatment of like items within each accounting period and from
one period to the next; it also requires that accounting policies are consistently applied. Rather, an entity
is required to implement those principles that are judged most appropriate to its circumstances for the
purpose of giving a true and fair view. Comparability is held to be a more important characteristic of
financial statements than consistency.
(iv) Principle of Conservatism:
The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it
does not allow a similar action for gains. For example, potential losses from lawsuits will be reported on
the financial statements or in the notes, but potential gains will not be reported. Also, an accountant may
write inventory down to an account that is lower than the original cost, but will not write inventory up to
an amount higher than the original cost.
(v) Principle of Adequate Disclosure:
The accounting concept confirming that all essential information is included in a financial statement.
Adequate disclosure refers to the ability for financial statements, footnotes and/or supplemental
schedule to provide a comprehensive and clear description of a company’s financial position. Readers of a
company’s financial statements, including investors and creditors, should be able to ascertain the
company’s financial health by reviewing a financial statement with adequate disclosure. Adequate
disclosure in accounting practice mandates that all readers of a financial statement have access to
pertinent data that would be deemed essential to understanding a company’s financial position. Adequate
disclosure requires that key facts are included within the financial statements to help investors and
creditors adequately access the financial situation of a particular company.

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Prepared by: Sir Sameer Hussain
YEAR – 1997 (REGULAR) QUESTION # 1:
Define “Concept” and “Principle” from the view-point of accounting. List out the different concepts and
principles used in accounting. Also explain any TWO concepts and any TWO principles.

SOLUTION 1
• Concept:
Ground rules of accounting that are (or should be) followed in presentation of all accounts and financial
statements. Four important accounting concepts underpin the presentation of any set of accounts:
Going concern, consistency, prudence and accrual.
• Principle:
A principle that governs current accounting practice and that is used as a reference to determine the
appropriate treatment of complex transactions is called accounting principles. For example, the Financial
Accounting Standards Board (FASB) uses the basic accounting principles and guidelines as a basis for
their own detailed and comprehensive set of accounting rules and standards.

(a) Explain the methods of depreciation based on acceleration principle.

SOLUTION 3 (a)
Methods of Depreciation:
1. Straight Line Method:
A method of calculating the depreciation of an asset which assumes the asset will lose an equal amount of
value each year. The annual depreciation is calculated by subtracting the salvage value of the asset from
the purchase price, and then dividing this number by the estimated useful life of the asset. It is also called
fixed installment method because the amount of depreciation remains fixed during the whole life of asset.
Usually this method is used for those fixed assets whose life does not affect it its production.
Yearly depreciation = Cost – Scrap value
Estimated Life in years

2. Diminishing Balance Method:
A common depreciation-calculation system that involves applying the depreciation rate against the non-
depreciated balance is known as diminishing balance method. Instead of spreading the cost of the asset
evenly over its life, this system expenses the asset at a constant rate, which results in declining
depreciation charges each successive period. It is also known as declining balance method or reducing
balance method. Usually this method is used for those fixed assets whose life can effect on its production.
Yearly depreciation = Cost/Book value x Rate (%)

3. Sum of the Years’ Digit Method:
Sum of the year’s digit method is a system for calculating the annual depreciation expense for a capital
asset. The calculation involves identifying the number of years over which the asset will be depreciated
and summing all of the numbers while counting back to one. This becomes the denominator in the ratio
used to determine annual depreciation. The numerator is the number of years remaining in the life of the
asset.
Yearly depreciation = Depreciable cost x Yearly fraction

4. Unit Production Method:
Accounting method where a provision for depreciation is computed at a fixed rate per unit of product,
based on an estimate of the total number of units the property will produce during its service life. This
method is useful only when the total number of units of production can be accurately estimated.
Rate per unit = Cost – Scrap value
Estimated life in units
Yearly depreciation = Units produced x Rate per unit

5. Working Hours Method:
Accounting method where a provision for depreciation is computed at a fixed rate per hour of machine,
based on an estimate of the total number of hours the machine will work during its service life. This
method is useful only when the total number of hours can be accurately estimated.
Rate per hour = Cost – Scrap value
Estimated life in hours
Yearly depreciation = Hours worked x Rate per hour
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YEAR – 1999 (REGULAR & PRIVATE) QUESTION # 5:
(a) Define depreciation, amortization and depletion from the view point of accounting. Give one
example of the assets which are subject to depreciation, amortization and depletion.

SOLUTION 5 (a)
Depreciation:
A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence, for
example reduction in value of equipment. Most assets lose their value over time (in other words, they
depreciate), and must be replaced once the end of their useful life is reached. There are several
accounting methods that are used in order to write off an asset's depreciation cost over the period of its
useful life. Because it is a non-cash expense, depreciation lowers the company's reported earnings while
increasing free cash flow.
Amortization:
The process followed in allocating the cost of long-lived assets to the periods in which their benefits are
derived. Examples are amortized expenses on intangible assets such as goodwill. Amortization is same as
the depreciation process. Depreciation is used for tangible fixed assets while amortization is normally
used for intangible fixed assets.
Depletion:
Systematic and rational allocating of the cost of a natural resource over the period of exploitation or the
using up of an asset, especially a mineral asset is known as depletion. For example, a quarry is depleted by
the extraction of stone.

(a) Indicate in each case whether or not the item has been handled in accordance with Generally
Accepted Accounting Principles. If so, indicate which of the basic concept/principle has been
followed. If not, indicate which concept/principle has been violated and why? Explain in one or
two sentences.
(i) Included on the balance sheet of the Swift Shop is the personal automobile of Mateen the
owner.
(ii) Each year the Sheraz Co. values its investment in Land at the current market price.
(iii) Feroz Company makes furniture. The cost of particular chair is Rs.35. However, when the
inventory figure is counted for the balance sheet the amount used for this chair is Rs.68,
which is normal selling price.
(iv) Samad Co. owns office equipment that was purchased seven years ago. It is still carried
in the firm accounting records at the original cost. No depreciation has ever been taken
on the equipment.
(b) State the effects on income statement and balance sheet if a revenue expenditure was wrongly
treated as capital expenditure.
(c) Define GAAP and enumerate atleast four of these.

SOLUTION 7 (a)
(i) This transaction violated the concept of business entity which indicates that owner is separate
from the business entity and no personal assets can be shown in the business’ balance sheet.
(ii) This transaction violated the going concern principle which states that assets of the company
should be valued at its costs rather than its market price.
(iii) This transaction violated the principle of conservatism which states that inventory must be
reported at cost, but not at its selling price.
(iv) This transaction violated the matching principle which states that expenses should be offset
against revenue.

SOLUTION 7 (b)
Net profit will increase in the income statement. Assets section of the balance sheet will also increase and
owner’s equity will also increase.

SOLUTION 7 (c)
Generally Accepted Accounting Principles (GAAP):
In the USA, the rules, accounting standards, and accounting concepts followed by accountants in
measuring, recording, and reporting transactions. There is also a requirement to state whether financial
statements conform with GAAP. In the UK the term is more loosely used but is normally taken to mean
accounting standards and the requirements of company legislation and the stock exchange. GAAP are the
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common set of accounting principles, standards and procedures that companies use to compile their
financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply
the commonly accepted ways of recording and reporting accounting information. Some of the principles
are:
• Conservatism.
• Consistency.
• Disclosure principle.
• Going concern principle.

(a) What do you understand by “IAS”?
(b) Describe the qualitative characteristics of financial statements as specified by IAS.

SOLUTION 10 (a)
• International Accounting Standards (IAS):
A set of international accounting and reporting standards that will help to harmonize company financial
information, improve the transparency of accounting and ensure that investors receive more accurate
and consistent reports is called international accounting standards (IAS). Accounting standards are
issued by the board of the International Accounting Standards Committee (IASC) between 1973 and 2001.
In 2001 the IASC was replaced by the International Accounting Standards Board (IASB), which announced
that its accounting standards would be designated International Financial Reporting Standards (IFRS). The
IASB stated that all of the accounting standards issued by the IASC would continue to be applicable unless
and until they were amended or withdrawn by the new body.

SOLUTION 10 (b)
Qualitative Characteristics of Financial Statements:
The qualitative characteristics of financial statements are a set of attributes which together make the
information in the financial statements useful to users:
(a) Relevant:
Financial information is relevant if it can assist users’ decision-making by helping them to evaluate past,
present or future events or by confirming, or correcting, their existing evaluations. Relevant information
may have predictive value or confirmatory value. That is, it helps users in assessing the future of the
business or confirming past predictions.
(b) Reliable:
Information is obviously of limited use if it is unreliable. To be reliable, it must be free from bias and
error. Some contingent items may by their nature be bound to be unreliable. IAS 37 gives guidance as to
the extent to which such items should be recognized or disclosed.
(c) Comparable:
Comparability means that the financial statements should be comparable with the financial statements of
other companies and with the financial statements of the same company for earlier periods. To achieve
comparability we need consistency and disclosure of accounting policies. IAS 1’s requirement that
companies disclose their accounting policies helps with adjustments to allow for differences between
companies. Also, if a company changes its accounting policies there must be full disclosure of the effect of
the change.
(d) Understandable:
Companies differ greatly in the extent of the efforts they make to enable users to understand their
financial statements. Understandability is dependent upon users’ abilities, and the framework suggests
that a reasonable knowledge of business and accounting has to be assumed here.

Distinguish between the following:
(1) Owner’s equity and Creditor’s equity.
(2) Book value and Market value.
(3) Trade discount and Cash discount.
(4) Cash dividend and Stock dividend.

SOLUTION 1 (b)
(1) Difference between Owner’s Equity and Creditor’s Equity:
The right of the owner in the business is known as owner’s equity. The owner has the right to make
investment in the business and only he has the right to make withdrawals from business. So he has right
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to enjoy the profit of the business. This right is owner’s equity. It is calculated by subtracting total
liabilities from the total assets of the firm. It is also called as Capital.
Creditor’s equity means the total amount of liabilities in a firm. It is that portion of the business which is
claimed by the creditors. It is obtained by subtracting total owner’s equity from the total assets.
(2) Difference between Book Value and Market Value:
The value at which an asset appears in the books of an organization (usually as at the date of the last
balance sheet) is called book value. This is the purchase cost or latest revaluation less any depreciation
applied since purchase or revaluation.
The value of an asset if it were to be sold on the open market at its current market price is known as
market value.
(3) Difference between Trade Discount and Cash Discount:
Trade discount is issued by deduction in list price. It is given with the aim to purchase at high quantity.
Trade discount is shown as deduction in invoice. There is no any accounting treatment for trade discount.
Trade discount is related to quantity of the goods purchased. There is no need to give cash discount with
trade discount.
Cash discount is issued by deduction in payable amount of debtors. It is given with the aim to get payment
fastly and before payment date. Cash discount is not shown as deduction in invoice. There is accounting
treatment for cash discount both in vendor and buyer’s day book. Cash discount is related to the amount
of payment but not to the quantity of goods. If seller has given trade discount, cash discount can be given
after trade discount.
(4) Difference between Cash Dividend and Stock Dividend:
A dividend paid in cash rather than shares is called cash dividend. Cash dividends are paid net of income
tax, credit being given to the shareholder for the tax deducted.
A dividend paid as additional shares of stock rather than as cash is called as stock dividend. When a
company issues a stock dividend, rather than cash, there usually are not tax consequences until the shares
are sold.

(a) Distinguish between capital expenditures and revenue expenditures.

SOLUTION 8 (a)
Differences between Capital Expenditure and Revenue Expenditure:
BASIS OF DIFFERENCE CAPITAL EXPENDITURE REVENUE EXPENDITURE
1. Purpose It is incurred for the It is incurred for the maintenance of
purchase of fixed assets. fixed assets.
2. Earning Capacity It increases the earning It does not increase the earning
capacity of the business. capacity of the business.
3. Periodicity of Its benefits are spread over a Its benefit is only for one accounting
Benefit number of years. period.
4. Placement in It is an item of balance sheet It is an item of trading and profit and
Financial and is shown as an asset. loss account and is shown on the debit
Statements side of either of the two.

(a) Name the accounting principles indicated by each of the following statements:
(i) Every business unit has a separate existence from its owner.
(ii) To use the same accounting principle without changing it and practice year after year.
(iii) The assumption that an entity will continue indefinitely.
(iv) Recording the assets at their acquisition cost.

(b) Which of the following is not a correct form of the accounting equation?
(1) Assets = Liabilities + Owner’s Equity.
(2) Assets = Equities.
(3) Assets + Owner’s Equity = Liabilities.

(c) Briefly explain and illustrate any six of the following:
(i) Accounting – the language of business.
(ii) Accelerated depreciation methods.
(iii) Limited company.
(iv) Operating cycle.
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(v) Extra ordinary repairs.
(vi) Cash short and over.
(vii) Credit balance at a customer account.

SOLUTION 1 (a)
(i) Principle of business entity.
(ii) Principle of consistency.
(iii) Concept of going concern.
(iv) Principle of cost.

SOLUTION 1 (b)
(i) Assets = Equities.
(ii) Assets + Owner’s Equity = Liabilities.

SOLUTION 1 (c)
(i) Accounting – The Language of Business:
Accounting is the process of communicating financial information about a business entity to users such as
shareholders and managers. The communication is generally in the form of financial statements that
show in money terms the economic resources under the control of management; the art lies in selecting
the information that is relevant to the users and is reliable. Today accounting is called “the language of
business” it is the vehicle for reporting information about a business entity to many different groups of
people.
(ii) Accelerated Depreciation Method:
As the name suggests, this method allows companies to write off more of their assets in the earlier years
and less in the later years. The biggest benefit of this method is the tax benefit. By writing off more assets
against revenue, companies report lower income and thus pay less tax. The common method of
accelerated depreciation is called declining balance method.
(iii) Limited Company:
A company in which the liability of the members in respect of the company’s debts is limited is known as
Limited Company. It may be limited by shares, in which case liability of the members on a winding-up is
limited to the amount (if any) unpaid on their shares. This is by far the most common type of registered
company. The liability of the members may alternatively be limited by guarantee; in this case the liability
of members is limited by the memorandum to a certain amount, which the members undertake to
contribute on winding-up.
(iv) Operating Cycle:
The average time between acquiring inventory and receiving cash from its sale is called operating cycle
expressed as an indicator (days) of management performance efficiency. It is calculated by:
Operating cycle = Inventory turnover in days + Receivable turnover in days – Payable turnover in days.
(v) Extra Ordinary Repairs:
A major repair such as an engine overhaul, which will extend the useful life of the asset, is called extra
ordinary repairs. The amount should be recorded in the asset account and then depreciated over the
remaining life of the asset.
(vi) Cash Short and Over:
A miscellaneous expense account used to record the difference between the amount of cash in a cash
register and the amount of cash that should be on hand according to the records is called cash short and
over account.
(vii) Credit Balance at a Customer’s Account:
Credit balance in customer’s account means that the customer has paid in advance or overpayment by
customer. It is a liability to the company that a customer’s account shows credit balance. It is adjusted by
increasing accounts receivable (debit) and increasing liability as advance from customer (credit).

(a) Differentiate between Crossed Cheque and Bearer Cheque.

SOLUTION 4 (a)
Crossed Cheque:
In a crossed cheque two parallel lines across the face of the cheque indicate that it must be paid into a
bank account and not cashed over the customer (a general crossing). A Special Crossing may be used in
order to further restrict the negotiability of the cheque, for example by adding the name of the payee’s
bank. Under the Cheques Act 1992 legal force is given to the words “account payee only” on cheques,
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making them non-transferable and thus preventing fraudulent conversion of cheques intercepted by a
third party.
Bearer Cheque:
When the words “or bearer” appearing on the face of the cheque are not cancelled, the cheque is called a
bearer cheque. The bearer cheque is payable to the person specified therein or to any other else who
presents it to the bank for payment. However, such cheques are risky, this is because if such cheques are
lost, the finder of the cheques can collect payment from the bank.

(a) Briefly describe any five of the following:
(i) Contra asset. (ii) Adjunct account.
(iii) Book of original entry. (iv) Discount lost.
(v) Book of final entry. (vi) Discount expense.

SOLUTION 1 (a)
(i) Contra Asset:
Contra asset is that account which reduces its main account balance. For example allowance for bad debts
reduces the balance of accounts receivable and allowance for depreciation reduces the balances of fixed
assets.
(ii) Adjunct Account:
Adjunct account is an account that accumulates either additions or subtractions to another account. Thus
the original account may retain its identity. Examples include premium on bonds payable, purchase
discount and sales discount.
(iii) Book of Original Entry:
Book of original entry is a book or record in which certain types of transactions are recorded before
becoming part of the double entry book-keeping system. The most common books of prime entry are the
day books, the cash book, and the journal.
(iv) Discount Lost:
When cash discount is allowed by supplier, means that if the payments were made in specifics days, a
certain discount will be given on purchase and the company has recorded that discount but the payment
is made after the discount period, it is known as discount lost.
(v) Book of Final Entry:
The accounts in which the data are transferred from the book of original entry is called book of final
entry. Income statement and balance sheet are books of final entry.
(vi) Discount Expense:
Discount granted by a company to a client is called discount expense or sales discount or discount
allowed. It is shown as an expense in the income statement.

(i) Differentiate between the books of original entry and books of final entry. Explain each of them
with three examples.
(ii) Define any two of the following accounting concepts:
(a) Matching (b) Cost (c) Consistency (d) Going concern
(iii) Why does business prepare trial balance, income statement, and balance sheet? Make
comparison between any two.
(iv) Describe the differences between capital expenditures and revenue expenditures.
(v) a) Why do businesses spend a lot of money on accounts department?
b) Who are possible stakeholders of a business?

SOLUTION 8 (i)
(a) Books of Original Entry:
A book or record in which certain types of transactions are recorded before becoming part of the double-
entry book-keeping system is called books of original entry or books of prime entry. The most books of
original entry are:
• Sales day book – This records the day to day sales invoices to customers.
• Sales returns day book – Also known as the return inwards day book. This records any returns
made by the customer to the business which will result in a credit note being issued.
• Purchase day book – This record the day to day purchase invoices made by the company from
their supplier.
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• Purchase returns day book - Also known as the return outwards day book. This records any
returns sent back to the supplier also resulting in a credit note.
• Cash book – This is used to record all bank and cash payments and receipts and is also a main
book of account within the ledgers as well as book of original entry.
• Petty cash book – Records all small cash payments recorded using the petty cash voucher.
• Journals – Used to record transactions that are not covered in the books of original entry. It is
used to explain corrections or unusual entries that do not have documents to support them.
(b) Books of Final Entry:
A book or record in which information are transferred from books of original entry is known as books of
final entry. Books of final entry may include:
• Income Statement – Income statement shows the financial performance of the business. It
shows the result of operations for a period. It consists of revenue and expenses. When total
revenues exceed the total expenses, the resulting amount is net profit. When expenses exceed
revenues, the resulting amount is net loss.
• Balance Sheet – Balance sheet shows the financial position of business. It is listing of firm’s
assets, liabilities and owner’s equity on a given date. It is a quantitative summary of company’s
financial condition at a specific point in time, including assets, liabilities and net worth. The first
part of balance sheet shows all the productive assets a company owns, and the second part shows
all the financing methods (such as liabilities and owner’s equity).
• Cash Flow Statement – Cash flow statement is a statement showing the inflows and outflows of
cash and cash equivalents for a business over a financial period. The inflows and outflows are
classified under the headings of operating activities, taxation, capital expenditure, and financial
investments, acquisitions and disposals, equity dividends paid, management of financing.

SOLUTION 8 (iii)
(1) Trial Balance:
A Trial Balance is a statement of ledger account balances within a ledger, at particular instance.
Its main purpose is to check mathematical\arithmetic accuracy of accounting. It is not an account. After
the closing process of footing and balancing of each and every account, and all the ledger accounts are
summarized into a statement known as trial balance. Since equal amounts of debit and credit are
recorded in the ledger accounts of each transaction, therefore, the sum of debit and credit must be equal,
if the balances had been extracted correctly.
(2) Income Statement:
Income statement shows the financial performance of the business. It shows the result of operations for a
period. It consists of revenue and expenses. When total revenues exceed the total expenses, the resulting
amount is net profit. When expenses exceed revenues, the resulting amount is net loss.
(3) Balance Sheet:
Balance sheet shows the financial position of business. It is listing of firm’s assets, liabilities and owner’s
equity on a given date. It is a quantitative summary of company’s financial condition at a specific point in
time, including assets, liabilities and net worth. The first part of balance sheet shows all the productive
assets a company owns, and the second part shows all the financing methods (such as liabilities and
owner’s equity).
Income statement shows the financial performance of the business at the end of the period while the
balance sheet shows the financial position of the business at a particular date.

SOLUTION 8 (v)
(a) The main goal of any business is to make money by developing, marketing and selling products
or services. It makes sense, therefore, that companies spend significant money on researching
and developing products and the marketing process that produces sales transactions. The
money-making parts of a company are not the only elements of successful business. Record
keeping and constant review of the information contained in those records makes it possible to
improve the money-making process, report progress to investors and plan strategies that will
result in tax savings. The central component of business record keeping is accounting. In order to
file for tax returns, apply for a loan to expand your business, or for certain legal purposes,
accounting is necessary. Accounting for your small business is also important so you are able to
assess your financial performance. The financial statements such as the balance sheet and cash
flow statement show financial information that is important in the success of your business. The
balance sheet shows how much your business is worth and what your assets are. The cash flow
statement shows where the future cash needs of your business are. Without any of these financial
statements your business would not be able to account for the revenues and profits made from
day to day, which results in mistakes and inaccurate records.
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(b) Stakeholders can be broadly categorized into three groups:
• Internal Stakeholders – Internal stakeholders are intimately connected to the organization, and
their objectives are likely to have strong influence on how it is run. Internal stakeholders may
include: Employees, Managers/Directors.
• Connected Stakeholders – Connected stakeholders can be viewed as having a contractual
relationship with the organization. It may include: Shareholders, Customers, Suppliers, Finance
Providers.
• External Stakeholders – External stakeholders will have quite diverse objectives and have
varying ability to ensure that the organization meets their objectives. It may include: Government,
Local Authority, Community at Large, Environmental Pressure Groups.

Describe the four types of adjusting entries with examples of adjusting entries.

SOLUTION 2 (b)
1 – ADJUSTMENT FOR BAD DEBTS EXPENSE
An amount owed by a debtor that is unlikely to be paid is called bad debts or uncollectible. The full
amount should be written off to the income statement of the period or to a provision for bad debts as
soon as it is foreseen.
Bad debts expense DR.
Allowance for bad debts CR.
(To adjust the bad debts expense for the period)

2 – ADJUSTMENT FOR DEPRECIATION EXPENSE
Depreciation is the measure of the cost or revalued amount of the economic benefits of a tangible fixed
asset that have been consumed during an accounting period. This includes the wearing out, using up, or
other reduction in the useful economic life of a tangible fixed asset. The depreciation reduces the book
value of the assets and is charged against income of an organization in the income statement.
Depreciation expenses DR.
Allowance for depreciation CR.
(To adjust the depreciation expense for the period)

3 – ADJUSTMENT FOR ACCRUED EXPENSES
An estimate in the accounts of a business of a liability that is not supported by an invoice or a request for
payment at the time the accounts are prepared. In other words, expenses due but not paid is called
accrued expenses. An example of an accrual would be telephone expenses, which are billed in arrears.
Salaries expense DR. (with unpaid amount)
Salaries payable CR. (with unpaid amount)
(To adjust the unpaid salaries)
There could be any other expense in place of salaries like interest, insurance and rent.

4 – ADJUSTMENT FOR ACCRUED INCOME
Income that has been earned during an accounting period but not received by the end of it is known as
accrued income.
Commission receivable DR. (with receivable amount)
Commission income CR. (with receivable amount)
(To adjust the accrued commission income)
There could be any income in place of commission like interest and rent.

(a) Define accounting and differentiate it from book keeping.

(b) Define the following accounting concepts:
(1) Matching (2) Cost (3) Consistency (4) Going Concern

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SOLUTION 8 (a)
DIFFERENCE BETWEEN ACCOUNTING AND BOOK-KEEPING:
Bookkeeping is part of accounting. It is the recording of the day to day transactions of a business.
Therefore, bookkeeping can play an important role in the efficient running of a business: A business
needs to pay its bills and it must therefore keep a record of those bills so that the correct amounts can be
paid at the correct times and also so that bills are not paid twice by mistake. Similarly, a business needs to
keep track of cash and cheques received from customers. Generally, all these things are the concern of
bookkeeping.
Accounting builds on the bookkeeping information, interpreting it, compiling reports, year-end accounts,
and tax returns, budgeting and carrying out financial analysis and so on.

a) Define: (i) Depreciation (ii) Book value (iii) Trade in allowance

SOLUTION 2 (a)
(i) Book Value:
The value at which an asset appears in the books of organization (usually as at the date of the last balance
sheet) is called book value. This is the purchase cost or latest revaluation less any depreciation applied
since purchase or revaluation.
Book value = Cost – Allowance for depreciation
(ii) Trade in Allowance:
Trade in allowance is the amount the dealer agrees to pay for a used, trade-in vehicle, which consumers
often apply towards the purchase of a new vehicle.

(1) Why bank reconciliation statement is prepared?
(2) Is the bank reconciliation a part of financial statement?
(3) Briefly explain: (i) Outstanding cheque (ii) unpresented cheque (iii) NSF
cheque

SOLUTION 6 (a)
(1) Bank Reconciliation Statement is prepared in every organization after receiving the bank
statement is not supposed to agree. After of the said statement, the balance should be equal. Bank
reconciliation statement is prepared to reconcile the cash book balance with the bank statement
balance.
(2) No, bank reconciliation statement is not a part of financial statements. Financial statements
include income statement, balance sheet, cash flow statement, statement of changes in equity.
(3) Outstanding Cheque: Cheques written by an entity that have not yet cleared the bank.
Unpresented Cheque: Cheques issued by the company to the supplier but have not yet been
presented to the bank by the supplier.
NSF Cheque: A cheque which is not paid by a bank when it is presented for payment
because there is not enough money in the person's account to pay the
cheque called not sufficient fund.

a) Why do most companies that use perpetual inventory system also take an annual physical
inventory?

SOLUTION 4 (a)
Perpetual Inventory System:
Perpetual systems offer companies inventory records that update in real time. Purchasing and planning
can rely on the inventory records to make decisions regarding material purchases and work scheduling.
The business is not required to shut down at the end of each month to physically count the inventory.
Annual Physical Inventory Count:
Companies that use a perpetual system may still conduct an annual physical inventory. In the periodic
inventory system, physical counts are used to determine the amount of goods sold. In the perpetual
system, a year-end physical inventory validates the inventory records.

99
What is a source document? Describe any three source documents used to record entries in cash book.
OR
Distinguish between bank statement and bank reconciliation statement.

SOLUTION 4 (a)
Source Documents:
A source document is the original record containing the details to substantiate a transaction entered in
an accounting system.
(1) Payment Voucher:
In an organization every payment must be supported by a payment voucher. Examples are payment
vouchers for salary and wages, and petty cash vouchers etc.
Payment voucher is an authorizing document for payment for a particular expense or service. The
voucher must be checked and authorized by a responsible or authorizing officer before cash can be paid.
(2) Bank Pay-in-Slip:
This serves as evidence of cheque and cash paid into the bank by an organization and individuals. It is the
major source documents for recording in the bank column of cash book (debit side).
(3) Receipts:
Receipts are issued for cash and cheques received from a customer for goods sold or service rendered to
him. The original is issued to the buyer, it represents the document for recording cash paid in his cash
book. The seller retains the duplicate, which is the document for recording cash received in the cash book
of the seller.
OR
Difference Between Bank Statement and Bank Reconciliation Statement:
• A bank statement is a statement issued by the Bank showing the transactions customer’s bank
account while a bank reconciliation statement is one that organization prepare comparing the
transactions in the Bank statement with the transactions as per organization’s records.
• Bank statement is prepared by the bank while bank reconciliation statement is prepared by the
organization.

What concept pertains to the process of “stock taking” at the end of accounting period?
OR
In the economic environment of inflation, which method of valuing inventory will yield higher cost of
ending inventory – FIFO or LIFO? How will this affect net profit of the firm for that particular year?

SOLUTION 6 (a)
Stock taking is the counting of on-hand inventory. This means identifying every item on hand, counting it
and summarizing these quantities by item. There may also be a verification step, where the count results
are compared to the inventory unit counts in a company's computer system. Stock taking is a common
requirement of a periodic inventory system, and may also be required as part of a company's annual
audit.
In short, a basic stock taking results in a summary-level document that contains a list of the quantities on
hand for every inventory item as of a specific point in time.

OR
In the economic environment of inflation, FIFO method of valuing inventory will yield higher cost of
ending inventory. As a result of increase in cost of ending inventory as compared to LIFO method, the net
profit of the firm will also increase.

As an accountant of partnership firm, why would you like to sign a Partnership Deed? Enumerate
(describe) three important items of a Partnership Agreement.
OR
Describe five important impacts for an accountant if a “Partnership Deed” does not exist.

SOLUTION 8 (a)
The partnership deed provides for the accepted method of accounting for the cash flow, profit and loss,
and assets and liabilities of the business; it also defines the fiscal year to be used in accounting statements
and how these statements will be distributed among the partners.
10
(a) Capital Contribution:
Partnership deed states the amount of capital to be contributed by each partner. Also, whether the capital
accounts shall be fixed or fluctuating.
(b) Interest on Capital:
Partnership deed states the rate of interest on capital contributed by partners, if any.
(c) Settlement of Accounts:
Partnership deed states the manner in which account of partner(s) shall be settled in case of his
retirement or death.
OR
Impact of Partnership Deed:
(a) Partnership deed defines the accounting period of the firm. If accounting period is not defined, an
accountant cannot prepare financial statements of the firm.
(b) In the absence of partnership deed, it is difficult for an accountant to determine the amount of
goodwill at the time of admission, retirement, death of a partner, or change in profit sharing ratio.
(c) Partnership deed states the amount of capital contributed by each partner. It is important for an
accountant to know the capital and share of each partner in the partnership.
(d) Partnership deed also states the matter relating to operate bank account(s), whether bank
account is opened in the name of the firm or in the name of any partner, who is responsible for
signing the cheque and other banking related matters.
(e) Partnership deed states the provision regarding audit of accounts of the firm.

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ACCOUNTING

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