Ques.1: Define Accounting.

Briefly explain the Entity

Concept and
Money Measurement Concept of
accounting.
Ans.1: Accounting is basically meant for recording valuable
information for future reference and use. It is the process of
identifying the transactions, measuring it in terms of money,
recording them in a systematic manner in the books of
accounts, classifying them and finally summarizing the
transaction on a manner useful to the users of accounting
information.
Certain ground rules known as accounting conventions or
concepts were initially set for financial accounting, that are
very vital in the process of accounting namely,
The Entity Concept
According to this concept, a business is an artificial entity
distinct from its proprietor(s). A business entity is an economic
unit which owns its assets and has its own obligations. The
owner(s) may have personal bank accounts, real estate, and
other assets, but these will not be considered as assets of the
business.
The amount of capital invested by the owner and his share in
the profit of the business is treated as a liability of the entity.
For example, Lovely Florist Co. should have a bank account
separate from the account of Mrs. Lily, the proprietor. She may
own a home, car and other property also may have a personal
debt but these are not debts of Lovely Florist Co.
A business entity may be in the form of:
Sole proprietorship: Considered fully responsible for the
welfare of the entity.
Partnership: Has more than one owner who agreed to
share profits of a business.
Corporate entity: A separate legal entity.
Money Measurement Concept
According to this concept, each transaction and event must be
expressible in monetary terms. The advantages of monetary
expression are that
a. It provides a simple measuring device to represent many
facts in a common denominator and,
b. It is amenable to summarization.

If an event cannot be expressed in monetary terms, it cannot

be considered for accounting purposes.
For example, brand image, business networks, and talent of
manpower are not affected in the accounting records so will not
be counted in monetary terms. On the other hand, if someone
was robbed of Rs. 1,000 in a train journey, the loss suffered can
definitely be expressed in monetary terms.
This concept implies that the legal currency of a country should
be used for such measurement.

Ques.2: What is rectification of errors? List and explain

the stages where the errors are deducted for
rectification.
Ans.2. Rectification of Errors
In financial accounting, every single event occurring in
monetary terms is recorded. Sometimes, some events are
either not recorded or recorded in the wrong head of account.
These errors in accounting require rectification.
Rectification of errors entries are passed when errors are
discovered in accounting records.
When the errors affecting The Trial Balance are made, the
normal Practice is to put the difference to an A/c called as
Suspense A/c.
Rectification of errors depends on the stage at which the errors
are detected.
There are mainly two stages in the accounting process
when errors can be detected:
Stage 1: Before preparation of the Trial Balance.
Stage 2: After the Trial Balance but before preparation of the
final accounts.
Stage1. Before preparation of the Trial Balance
If errors are detected before the preparation of trial balance,
the effect of each error should be known.
The errors are of two types:
a. Double sided error
b. Single sided error
a. Double sided error
The following principles should be followed for the purpose.
What was the correct entry?
What entry had been done?
Rectify entry
Example:
Purchase a building for Rs. 5, 00,000 wrongly passed through
purchase a/c.
Solution:
Particulars
Dr.
Cr.
i. Building A/c. ......................Dr.
5,00,0
To cash A/c
00
5,00,0

00
ii. Purchase A/c. ...................Dr.
To cash A/c.

5,00,0
00

iii Building A/c. .....................Dr.

.
To purchase A/c.

5,00,0
00

5,00,0
00
5,00,0
00

b. Single sided error

No separate entry required but the affected account should
be rectified by appropriate posting.
Example:
Purchase account was overcast by Rs. 10,000.
Solution:
The correction to be made in Purchase account:
Dr.
Purchase Account
Cr.
Particulars
Rs. Particulars
Rs.
By Error- Wrong
10,0
posting
00
So purchase a/c. should be credited by Rs. 10,000.
Stage2. After the Trial Balance but before preparation of
the final accounts
If the errors are detected after the preparations of trial balance
but before preparation of the final accounts, the following
procedure should be followed:
a. Double sided error
b. Single sided error
a. Double sided error
Same as Stage 1
Single sided error
Relevant a/c to be rectified by applying Suspense a/c
Example:
Sales Day Book was overcast by Rs. 1,000.
Solution:
Particulars

Dr.

Cr.

i.

Sales A/c. ..........Dr.

To Suspense A/c.

1,000
1,000

Ques.3. Explain the various steps in financial planning.

Ans.3. Financial Planning involves various steps mainly:
Estimate capital requirements: It is the first step in
financial planning. Some factors may be used to determine
the capital namely:
Requirement of fixed assets.
Investment intangible assets like patents, copyrights,
etc.
Amount required for current assets like stocks, cash,
bank balances, etc.
Cost of set-up and likely expenses to be incurred on
the new issue of shares and debentures.
Determine the type of sources to be acquired and
their proportion: The Finance Manager has to decide on
the form in which the money is to be sourced, that is, debt,
equity, preference shares, loans from banks and the
proportion in which these are to be procured.
Steps in Financial Planning:
The financial planning process involves the following steps:
1. Projection of financial statements: Financial
statements are the companys profit and loss
account and the balance sheet. These two
statements can be prepared for a certain period of
future time and they help the manager to determine
the amount of fund requirements.
2. Determination of funds needed: Once the
projections are drawn in terms of sales of products,
the cost of production, marketing activities, etc., the
Finance Manager can draw up a plan as to the fund
requirement based on the time factor. It is useful to
know whether the funds are to be procured on a
short term basis or on a long term basis.
3. Forecast the availability of funds: A company
will have a steady flow of funds. If the manager is
able to forecast these amounts properly, then the
moneys to be borrowed can be reduced, thus saving
on the interest payments.
4. Establish and maintain control system: Control
system is ineffective without adequate planning and

the adequacy of planning can be gauged only

through proper control measures. Both these
activities are essential for effective utilization of
funds.
5. Develop procedures: Procedures should be
developed for basic plans how they should be
achieved.

Ques.no.4: What is inventory management and explain

the following
a. Economic Order Quantity
b. Reorder Point
Ans.4: Inventory Management
Inventory basically refers to the stockpile of products. It
comprises of those assets which will be sold off in the near
future and moneys recovered.
Inventory consists of three types of assets:
Raw materials
Semi -finished goods i.e. work in progress, and
Finished goods.
Raw materials consist of those items which are purchased by
the firm to be converted into finished goods.
Work in progress consists of partially complete goods, that is,
items currently being used in the production process.
Finished goods stock represent completed products ready to be
sold.
Inventory management is the control of all these assets to
obtain the goal of minimizing total costs direct and indirect
that are associated with holding inventories.
There are some Inventory management techniques namely:
Economic Order Quantity: EOQ refers to the optimal
order size that will result in the lowest ordering and
carrying costs for an item of inventory based on its
expected usage. Answers to questions such as: What
should be the quantity ordered for each replenishment of
stock, how many orders should be placed to get the raw
materials or should the entire requirement be procured
once or in installments and if installments, how many of
them these are sought to be explained by the EOQ
model. The optimum level of inventory is referred to as the
Economic Order Quantity. It is the economic lot size. EOQ
is defined as that level of inventory order that minimizes
the total cost associated with the inventory management.
It is that level one unit beyond which is additional cost to
the firm and one unit below may hamper production
process.
Reorder Point: The re-order point for replenishing the
stocks occurs at the level when the inventory level drops

to zero and because of instant delivery by suppliers, the

stock levels bounce back. There is always a lead time
between ordering date and receipt of materials. Due to
this, the reorder level is always higher than zero. The firm
places a fresh order before the stocks go down to zero and
by the time they hit the zero levels, new stocks would
have arrived and the business is smooth.

Ques.no.5: Explain the different steps

preparation of Fund Flow Statements.

involved

in

Ans.5: Steps in Preparation of Fund Flow Statements:

1. Preparation of schedule changes in working capital (taking
current items only)
Format of schedule of changes in working Capital:
Particulars
Current Assets
Cash in hand
Cash at bank
Bills receivable
Debtors
Inventory
Prepaid expenses
Short-term
investment
Total (A)
Current Liability
Bills Payable
Creditors
Outstanding
expenses
Accrued expenses
Income received in
advance
Bank overdraft
Cash credit from
banks
Short-term loan
Short-term deposit
Provision for taxation
Proposed dividend
Provision against
current assets
Total (B)
Working Capital (C)
(C = A - B)
Increase in W/c
Decrease in W/c

Previous
Year

Current
Year

Increase
in W/c

Decreas
e in W/c

2. Preparation of adjusted profit and loss account (to know

fund from [or] fund lost in operations).
Fund from operation can be ascertained by preparing
adjusted P&L a/c.
Format of Adjusted Profit and Loss Account:
To Bal. B/d (P&L Account Dr. Bal.)
To Non-Operating Exp.
To Depreciation on Fixed assets
To Goodwill return off
To patent & trademark off
To Preliminary expenditure
To Discount on issue of shares &
Debentures
To Loss on sale of investment
To Loss on sale of fixed assets
To damages paid under law
To premium on redemption of profit
share and debentures
To interim dividend
To Dividend declared
Total (A)

By Bal. B/d (P&L Account Cr.

Bal.)
By Non-operating incomes
By Profit on sale of investment
By profit on sale of fixed assets
By dividend on investment
By interest on investment
By rent received, gift received
By Damages received under
law
By Transfer from general
reserve

3. Preparation of accounts for non-current items (ascertain

the hidden information).
To ascertain the hidden information, one have to prepare
accounts for all non-current items of assets and liabilities,
whether adjustment is given or not; then only it will be easier
to find the inflow and outflow of funds.
4. Preparation of the fund flow statement.
Format of Fund Flow Statement:
Sources

Applications

Fund From operation

Non-trading incomes
Issue of shares

Fund Lost in operation

Non-operating expenses
Redemption of redeemable preference
share
Redemption of debentures
Repayment of loans
Repayment of deposits

Issue of debentures
Borrowing of loans
Acceptance of deposits

Sale of fixed assets

Sale of long term investments
Decrease in working capital

Purchase of fixed assets

Purchase of long term investments
Increase in working capital

Ques.no.6: What is cost? Discuss the factors involved in

estimating the cost.
Ans.6: Cost:
Cost is classified:
On the basis of behaviour of cost
On the basis of elements of cost
On the basis of behaviour of cost
Behaviour means change in cost due to change in output. On
the basis of behaviour cost is classified into the following
categories:
Fixed cost: Cost which remains constant even
though there is change in the level of output.
Variable cost: Cost which changes according to
the changes in output.
Semi variable cost: Cost which remains constant
up to a certain level and registers change
afterwards.
On the basis of elements of cost
Elements mean nature of items. On the basis of elements cost
is classified into the following categories:
Direct Cost: Cost which is directly chargeable to
the product manufactured. It is easily identifiable.
Consists of:
Direct material:
Cost of basic raw material used for manufacturing
a product.
Direct Labour:
Cost of wages paid to those workers who are
engaged on the manufacturing line for conversion
of raw materials into finished goods.
Direct Expenses:
Cost of expense which is directly chargeable to the
product manufactured.
Indirect cost: It is that portion of the total cost
which cannot be identified and charged direct to the
product. Consists of:
Indirect material: Cost of material which
cannot be charged to the product directly.

 Indirect Labour: Cost of wages paid to those

workers who are not engaged on the
manufacturing line.
Indirect Expenses: Cost of expense which is
not chargeable to the product directly.
Estimation of cost:
For the purpose of estimating the cost it is necessary to know
every elements of cost and their nature of behaviour. Following
factors involves in estimating the cost namely:
a. Fixed cost
b. Variable cost
c. Semi variable cost
a. Fixed Cost: Fixed cost remains fixed at all the levels
of output and do not get affected even though there
is change in the level of output.
b. Variable Cost: Variable expenses change directly in
relation to change in level of output on the same
proportion in which proportion the level of output
changes.
c. Semi variable Cost: These expenses change in the
same direction in which the level of output changes.
Thus these expenses are partly fixed and partly
variable in nature.