NMIMS GLOBAL ACCESS

SCHOOL FOR CONTINUING EDUCATION (NGA-SCE)

COURSE: FINANCIAL ACCOUNTING & ANALYSIS

Q1.
Journal Entries
Date Particular L.F Dr. Amount Cr. Amount
3– Cash A/c 5,000
Dec Dr. 5,00,000
Bank A/c 5,05,000
Dr.
To Mrs. Veena A/c
(Being Business Commenced)
5– Furniture A/c 60,000
Dec Dr. 30,000
To Bank A/c 30,000
To Creditor A/c
(Being Furniture purchased and paid half
amount by bank)
7– Purchase A/c 3,15,000
Dec Dr. 3,15,000
To Bank A/c
(Being Goods purchased)
8– Bank A/c 5,00,000
Dec Dr. 5,00,000
To Sales A/c
(Being Golds Sold)
10 – Rent A/c 10,000
Dec Dr. 10,000
Electricity A/c 10,000
Dr. 30,000
Salary A/c
Dr.
To Bank A/c
(Being Rent, Electricity & Salary paid)
Q2.

INTRODUCTION: -
As in the case of the balance sheet, Certain basic principles or Concepts are followed
in the preparation of statement of profit & loss also to secure reliability, consistency and consistency
and comparability with other entities. The basic concepts underlying the preparation of statement of
profit and loss are

CONCEPT & APPLICATION: -

1. Accounting period concept – A business is expected to have a long-life and its exact profit or
loss can be determined only when the business is wound up. Measuring the performance over
a long period of time loses value because no corrective steps can be taken to improve it if it is
below the owner’s expectations. To track the business performance and to measure its
financial position from time to time, its life is divided into relatively small intervals of time,
usually a year. The “Accounting period” is also called as an “Accounting Year” or a
“Financial Year”.

2. Realization Concept – According to the realization concept, revenue should be recognized

when it is realized. Revenue from sales or service transactions is considered to be realized
only when certain requirements relating to performance (such as transfer of property or
transfer of risks & rewards of ownerships) are satisfied and at the time of performance there is
no significant uncertainty regarding the ultimate collection of revenue.

3. Matching Concept – To determine the income of an accounting period, revenues earned

during the accounting period are matched with the expenses incurred to earn the revenues.
The first step in the matching of revenues and expenses is to determine the revenue earned
during an accounting period, all expenses incurred to earn that revenue are deducted from the
revenue to determine the income of that accounting period. If the recognition of revenue is
deferred on the basis that it is not yet earned, all expenses pertaining to such revenue must
also be deferred. The question of matching arises because of accrual and periodicity concepts.

4. Accrual Concept – Concept where revenue is recognized when they are earned and expenses
are recognized when the related goods or services are used. The timing of receipt of revenues
and payment of expenses is immaterial. The accrual concept facilitates tests, the revenue
pertaining to an accounting period is recognized first. Then the expenses incurred to earn that
revenue are recognized. Income for the accounting period is them determined as the
difference between the revenue recognized and the matched expenses.

5. Materiality – The term ‘materiality’ refers to the relative importance of an item or event. An
item or event is considered material if its knowledge is likely to affect the decisions of the
users of financial statements. Accountants should ensure that all material items are properly
reported in the financial statements. In determining the materiality of an item, they need to
compare the value of information with the cost of providing such information. The value must
exceed the cost. For immateriality items, accountants can use estimated instead of keeping
 detailed records and can also disregard certain accounting principles. Professional judgment is
required to assess the materiality of an item.

CONCLUSION: -
A profit and loss account is also known as an income and expenditure statement. It has to be prepared
on a continuous basis and reviewed with caution to know the true profitability of the business. The
profit and loss account can also help the business organizational chalk out the money-draining areas
that affect the bottom line of the business and thereby help in streamlining the production and
operation process.
Q3. A
Balance sheet of Z & X pvt.ltd

LIABILITIES Amt. ASSETS Amt.

Retained Earnings 860 Accounts Receivable 250
Salaries Payable 150 Supplies 150
Accounts Payable 540 Equipment 1500
Unearned Revenue 200
Cash 550
Prepaid Insurance 300
Common Stock 1000

Q3. B
 A liquidity ration called the current ratio assesses a company’s capacity to settle short-term
debts or those that are due within a year.
 It explains to investors and analysts how a business can use its present assets to the fullest
extent possible to pay down its current liabilities and other payables.

Current Ratio = Current Asset/Current Liabilities

Current Asset = Cash
Current Liabilities = Accounts payable
Therefore,
Current Ratio = 550/540
= 1.018
Therefore, Current Ratio is 1.018. Hence, the company has the financial resources to remain solvent
in the short-term goals.