30503144 accounts assignment mba1

8/6/2019 30503144 Accounts Assignment MBA1

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

The Accounting Cycle: The accounting cycle refers to a series of sequential steps or

procedures performed to accomplish the accounting process. The steps in the cycle arc

as follows:

Step 1 Transactions

are recorded in the journal

Step 2 Journal Entries are posted in the Ledger

Step 3 Preparation of a Trial Balance

Step 4 Adjusting journal entries are journalized and posted

Step5 Preparation of the worksheet

Step 6 Preparation of the financial statements

Step 7 Closing journal entries are journalized and posted

Step 8 Preparation of the post-closing trial balance

Step 9 Reversing journal entries are journalized and posted

The Journal

The journal is a chronological record of the entity's transactions. A journal entry shows all

the effects of a business transaction in terms of debits and credits. Each transaction is

initially recorded in a journal rather than directly in the ledger. A journal is called the book of

original entry. Of only two accounts are affected- one account is debited and the oilier

account is credited- it is called a Simple Journal entry. When three or more accounts arerequired in a journal entry, the entry is referred to as a Compound entry.

The Ledger

A grouping of the entity's accounts is referred to as the ledger. Although some firms may

use various ledgers to accumulate certain detailed information, all firms have a general

ledger. A general ledger is the reference book of the accounting system and is used to

classify and summarize transactions, and to prepare data for the basic financial

statements.

The Trial Balance

The Trial Balance is a list of all accounts with their respective debit orcredit balances. It is

prepared to verily the equality of debits and credits in the ledger at the end of each
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accounting period or at any time the postings are updated.


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1. A. Bring out the difference between Indian GAAP and US GAAP norms?

There are significant differences between Indian GAAP and US GAAP. US GAAP stipulate

stringent accounting treatment as well as disclosure norms, whereas their Indian GAAP

in many cases have relaxed requirements ( AS 18,17,AS 3). Similarly, there are several

areas where no Accounting Standard have been issued by ICAI . These differences lead

to wide variations when Financial Results of Indian Companies are computed under US

GAAP and it is found that Profits computed under US GAAP are generally lower

Some of these major differences between US GAAP and Indian GAAP which give

rise to differences in profit are highlighted hereunder:

1. Underlying assumptions: Under Indian GAAP, Financial statements are

prepared in accordance with the principle of conservatism which basically

means Anticipate no profits and provide for all possible losses. Under US

GAAP conservatism is not considered, if it leads to deliberate and

consistent understatements.

2. Prudence vs. rules : The Institute of Chartered Accountants of India

(ICAI) has been structuring Accounting Standards based on the

International Accounting Standards ( IAS) , which employ concepts and

`prudence' as the principle in contrast to the US GAAP, which are "rule

oriented", detailed and complex. It is quite easy for the US accountants to

handle issues that fall within the rules, while the International Accounting

Standards provide a general framework of accounting standards, which

emphasise "substance over form" for accounting. These rules are less

descriptive and their application is based on prudence. US GAAP has thus

issued several Industry specific GAAP , like SFAS 51 ( Cable TV), SFAS

50 (Record and Music Industry) , SFAS 53 ( Motion Picture Industry) etc.

3. Format/ Presentation of financial statements: Under Indian GAAP,


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financial statements are prepared in accordance with the presentation

requirements of Schedule VI to the Companies Act, 1956. On the other

hand , financial statements prepared as per US GAAP are not required to

be prepared under any specific format as long as they comply with the

disclosure requirements of US GAAP. Financial statements to be filed with

SEC include

4. Consolidation of subsidiary companies: Under Indian GAAP (AS 21),

Consolidation of Accounts of subsidiary companies is not mandatory. AS

21 is mandatory if an enterprise presents consolidated financial statements.

In other words, the accounting standard does not mandate an enterprise to

present consolidated financial statements but, if the enterprise presents

consolidated financial statements for complying with the requirements of

any statute or otherwise, it should prepare and present consolidated

financial statements in accordance with AS 21.Thus, the financial income

of any company taken in isolation neither reveals the quantum of business

between the group companies nor does it reveal the true picture of the

Group . Savvy promoters hive off their loss making divisions into separate

subsidiaries, so that financial statement of their Flagship Company looks

attractive .Under US GAAP (SFAS 94),Consolidation of results of

Subsidiary Companies is mandatory , hence eliminating material, inter

company transaction and giving a true picture of the operations and

Profitability of the various majority owned Business of the Group.

5. Cash flow statement: Under Indian GAAP (AS 3) , inclusion of Cash

Flow statement in financial statements is mandatory only for companies

whose share are listed on recognized stock exchanges and Certain

enterprises whose turnover for the accounting period exceeds Rs. 50

crore. Thus , unlisted companies escape the burden of providing cash flow

statements as part of their financial statements. On the other hand, US

GAAP (SFAS 95) mandates furnishing of cash flow statements for 3 years

current year and 2 immediate preceding years irrespective of whether


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the company is listed or not .

6. Investments: Under Indian GAAP (AS 13), Investments are classified as

Current and Long term. These are to be further classified Government orTrust securities ,Shares, debentures or bonds Investment properties

Others-specifying nature. Investments classified as current investments are

to be carried in the financial statements at the lower of cost and fair value

determined either on an individual investment basis or by category of

investment, but not on an overall (or global) basis. Investments classified

as long term investments are carried in the financial statements at cost.

However, provision for diminution is to be made to recognise a decline,

other than temporary, in the value of the investments, such reduction being

determined and made for each investment individually. Under US GAAP

( SFAS 115) , Investments are required to be segregated in 3 categories

i.e. held to Maturity Security ( Primarily Debt Security) , Trading Security

and Available for sales Security and should be further segregated as

Current or Non current on Individual basis. Debt securities that the

enterprise has the positive intent and ability to hold to maturity are

classified as held-to-maturity securities and reported at amortized cost.

Debt and equity securities that are bought and held principally for the

purpose of selling them in the near term are classified as trading securities

and reported at fair value, with unrealised gains and losses included in

earnings. All Other securities are classified as available-for-sale securities

and reported at fair value, with unrealised gains and losses excluded from

earnings and reported in a separate component of shareholders' equity

7. Depreciation: Under the Indian GAAP, depreciation is provided based

on rates prescribed by the Companies Act, 1956. Higher depreciation

provision based on estimated useful life of the assets is permitted, but must

be disclosed in Notes to Accounts.( Guidance note no 49) . Depreciation

cannot be provided at a rate lower than prescribed in any circumstance.

Similarly , there is no compulsion to provide depreciation at a higher rate,


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even if the actual wear and tear of the equipments is higher than the rates

provided in Companies Act. Thus , an Indian Company can get away with

providing with lesser depreciation , if the same is in compliance to

Companies Act 1956. Contrary to this, under the US GAAP , depreciation

has to be provided over the estimated useful life of the asset, thus making

the Accounting more realistic and providing sufficient funds for replacement

when the asset becomes obsolete and fully worn out.

8. Foreign currency transactions: Under Indian GAAP(AS11) Forex

transactions ( Monetary items ) are recorded at the rate prevalent on the

transaction date .Year end foreign currency assets and liabilities ( Non

Monetary Items) are re-stated at the closing exchange rates. Exchange

rate differences arising on payments or realizations and restatements at

closing exchange rates are treated as Profit /loss in the income statement.

Exchange fluctuations on liabilities incurred for fixed assets can be

capitalized. Under US GAAP (SFAS 52), Gains and losses on foreign

currency transactions are generally included in determining net income for

the period in which exchange rates change unless the transaction hedges a

foreign currency commitment or a net investment in a foreign entity .

Capitalization of exchange fluctuation arising from foreign liabilities incurred

for acquiring fixed assets does not exist. Translation adjustments are not

included in determining net income for the period but are disclosed and

accumulated in a separate component of consolidated equity until sale or

until complete or substantially complete liquidation of the net investment in

the foreign entity takes place . US GAAP also permits use of Average

monthly Exchange rate for Translation of Revenue, expenses and Cash

flow items, whereas under Indian GAAP, the closing exchange rate for the

Transaction date is to be taken for translation purposes.

9. Expenditure during Construction Period: As per the Indian GAAP

(Guidance note on Treatment of expenditure during construction period' ) ,

all incidental expenditure on Construction of Assets during Project stage


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are accumulated and allocated to the cost of asset on completion of the

project. Contrary to this, under the US GAAP (SFAS 7) , such expenditure

are divided into two heads direct and indirect. While, Direct expenditure

is accumulated and allocated to the cost of asset, indirect expenditure are

charged to revenue.

10. Research and Development expenditure: Indian GAAP ( AS 8)

requires research and development expenditure to be charged to profit and

loss account, except equipment and machinery which are capitalized and

depreciated. Under US GAAP ( SFAS 2) , all R&D costs are expenses

except intangible assets purchased from others and Tangible assets that

have alternative future uses which are capitalised and depreciated or

amortised as R&D Expense. Under US GAAP, R&D expenditure incurred

on software development are expensed until technical feasibility is

established ( SOP 81.1) . R&D Cost and software development cost

incurred under contractual arrangement are treated as cost of revenue.

11. Revaluation reserve : Under Indian GAAP, if an enterprise needs to

revalue its asset due to increase in cost of replacement and provide higher

charge to provide for such increased cost of replacement, then the Asset

can be revalued upward and the unrealised gain on such revaluation can

be credited to Revaluation Reserve ( Guidance note no 57). The

incremental depreciation arising out of higher book value may be adjusted

against the Revaluation Reserve by transfer to P&L Account. However for

window dressing some promoters misutilise this facility to hoodwink the

shareholders on many occasions. US GAAP does not allow revaluing

upward property, plant and equipment or investment.

12. Long term Debts: Under US GAAP , the current portion of long term debt

is classified as current liability, whereas under the Indian GAAP, there is no

such requirement and hence the interest accrued on such long term debt in

not taken as current liability.


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13. Extraordinary items, prior period items and changes in accounting

policies: Under Indian GAAP( AS 5) , extraordinary items, prior period

items and changes in accounting policies are disclosed without netting off

for tax effects . Under US GAAP (SFAS 16) adjustments for tax effects are

required to be made while reporting the Prior period Items.

14. Goodwill: Under the Indian GAAP goodwill is capitalized and charged to

earnings over 5 to 10 years period. Under US GAAP ( SFAS 142) , Goodwill and

intangible assets that have indefinite useful lives are not amortized ,but they are

tested at least annually for impairment using a two-step process that begins with

an estimation of the fair value of a reporting unit. The first step is a screen for

potential impairment, and the second step measures the amount of impairment, if

any. However, if certain criteria are met, the requirement to test goodwill for

impairment annually can be satisfied without a remeasurement of the fair value of a

reporting unit.

15. Capital issue expenses: Under the US GAAP, capital issue expenses are

required to be written off when incurred against proceeds of capitals, whereas

under Indian GAAP , capital issue expense can be amortized or written off against

reserves.

16. Proposed dividend: Under Indian GAAP , dividends declared are accounted for

in the year to which they relate. For example, if dividend for the FY 1999-2000 is

declared in Sep 2000 , then the corresponding charge is made in 2000-2001 as

below the line item . Contrary to this , under US GAAP dividends are reduced from

the reserves in the year they are declared by the Board. Hence in this case under

US GAAP , it will be charged Profit and loss account of 2000-2001 above the line.

17. Investments in Associated companies: Under the Indian GAAP( AS 23) ,investment in associate companies is initially recorded at Cost using the Equity

method whereby the investment is initially recorded at cost, identifying any

goodwill/capital reserve arising at the time of acquisition. The carrying amount of

the investment is adjusted thereafter for the post acquisition change in the


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investors share of net assets of the investee. The consolidated statement of profit

and loss reflects the investors share of the results of operations of the investee.are

carried at cost . Under US GAAP ( SFAS 115) Investments in Associates are

accounted under equity method in Group accounts but would be held at cost in the

Investors own account.

18. Preoperative expenses: Under Indian GAAP, (Guidance Note 34 - Treatment

of Expenditure during Construction Period), direct Revenue expenditure during

construction period like Preliminary Expenses, Project related expenditure are

allowed to be Capitalised. Further , Indirect revenue expenditure incidental and

related to Construction are also permitted to be capitalised. Other Indirect revenue

expenditure not related to construction, but since they are incurred during

Construction period are treated as deferred revenue expenditure and classified as

Miscellaneous Expenditure in Balance Sheet and written off over a period of 3 to 5

years. Under US GAAP ( SFAS 7) , the concept of preoperative expenses itself

doesnt exist. SOP 98.5 also madates that all Start up Costs should be expensed.

The enterprise has to prepare its balance sheet and Profit and Loss Account as if it

were a normal running organization. Expenses have to be charged to revenue and

Assets are Capitalised as a normal organization. The additional disclosure include

reporting of cash flow, cumulative revenues and Expenses since inception. Upon

commencement of normal operations, notes to Statement should disclose that the

Company was but is no longer is a Development stage enterprise. Thus , due to

above accounting anomaly, Accounts prepared under Indian GAAP , contain

higher charges to depreciation which are to be adjusted suitably under US GAAP

adjustments for indirect preoperative expenses and foreign currencies.

19. Employee benefits: Under Indian GAAP, provision for leave encashment is

accounted based n actuarial valuation. Compensation to employees who opt for

voluntary retirement scheme can be amortized over 60 months. Under US GAAP,

provision for leave encashment is accounted on actual basis. Compensation

towards voluntary retirement scheme is to be charged in the year in which the

employees accept the offer.

20. Loss on extinguishment of debt: Under Indian GAAP, debt extinguishment


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premiums are adjusted against Securities Premium Account. Under US GAAP,

premiums for early extinguishment of debt are expensed as incurred.

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

The Matching principle is a culmination ofaccrual accounting and the revenue recognition

principle. They both determine the accounting period, in which revenues and expenses are

recognized. According to the principle, expenses are recognized when obligations are (1)

incurred (usually when goods are transferred or services rendered, e.g. sold), and (2) offset

against recognized revenues, which were generated from those expenses (related on the

cause-and-effect basis), no matter when cash is paid out. In cash accountingin contrast

expenses are recognized when cash is paid out, no matter when obligations are incurred

through transfer of goods or rendition of services: e.g., sale.

If no cause-and-effect relationship exists (e.g., a sale is impossible), costs are recognized

as expenses in the accounting period they expired: i.e., when have been used up or

consumed (e.g., of spoiled, dated, or substandard goods, or not demanded services).

Prepaid expenses are not recognized as expenses, but as assets until one of the qualifying

conditions is met resulting in a recognition as expenses. Lastly, if no connection with

revenues can be established, costs are recognized immediately as expenses (e.g., general

administrative and research and development costs).

Prepaid expenses, such as employee wages or subcontractor fees paid out or promised,

are not recognized as expenses (cost of goods sold), but as assets (deferred expenses),

until the actual products are sold.

The matching principle allows better evaluation of actual profitability and performance

(shows how much was spent to earn revenue), and reduces noise from timing mismatch

between when costs are incurred and when revenue is realized.
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3. Prove that the accounting equation is satisfied in all the following transactions of Mr. X

(1) Commence business with cash Rs.50000

(2) Paid rent in advance Rs.1000

(3) Purchased goods for cash Rs.18000 and Credit Rs.20000

(4) Sold goods for cash Rs.25000 costing Rs.22000

(5) Paid salary Rs.5000 and salary outstanding is Rs.3000

(6) Bought moped for personal use Rs.20000

Sr. No. Assets = Liabilities + Capital1 50000 = 0 + 50000

2 -1000

+1000

50000 = 0 + 50000

3.1 -18000

+18000

50000 = 0 + 50000

3.2 + 20000 =

70000 = 20000 + 50000

4 - 22000

+ 25000 =

73000 =

0 + 3000

20000 + 530005 - 5000 =

68000 =

+ 3000 + (-) 8000

23000 + 450006 - 20000 =

48000 =

0 + (-) 20000

23000 + 25000End

Equation48000 = 48000

Sr.No.Asset = Liabilities + Capital

Cash Debtors Rent Goods Salary Personal Creditor Capital1 50000 50000


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2 -1000 +1000

3.1 -18000 +18000

3.2 20000 20000

4 +25000 -22000 +3000

5 -5000 3000 -8000

6 - 20000 -20000

End

Equation

56000 1000 16000 -5000 - 20000 23000 25000

= 48000 = 48000


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4. Following are the extracts from the Trial Balance of a firm as on 31st March 20X7

Dr Cr

Sundry Debtors 2,05,000

Provision for Doubtful Debts 10,000

Provision for Discount on Debtors 1,800

Bad Debts 3,000Discount 1,000

Additional Information:

1) Additional Bad Debts required Rs.4,000

2) Additional Discount allowed to Debtors Rs.1,000

3) Maintain a provision for bad debts @ 10% on debtors

4) Maintain a provision for discount @ 2% on debtors

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

final accounts.

Journal entries as on 31st March 20X7

Particulars LF Debit

(Rs.)

Credit

(Rs.)

Bad Debt account DR

To Sundry Debtor account

4000

4000

Provision for Doubtful Debts account DR

To Bad Debts account

7000

7000

P&L account DR

To Provision for Doubtful Debt

17100

17100

Provision for Discount account DR

To Discount on Debtors account

1000

1000

P&L account DR

To Provision for Doubtful Debts account

2818

2818


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Provision for Doubtful Debts account

Particulars Amount

(Rs.)

Particulars Amount

(Rs.)

To Bad Debts account 7000 By Balance b/d 10000To Balance c/d 20100 By P&L account 17100

27100 27100

Provision for Discount on Debtors account

Particulars Amount

(Rs.)

Particulars Amount

(Rs.)To Discount on Debtors account 1000 By Balance b/d 1000

To Balance c/d 3618 By P&L account 2818

4618 4618

Bad Debts accountParticulars Amount

(Rs.)

Particulars Amount

(Rs.)

To Balance b/d 3000 By Provision for Doubtful Debts account 7000

To Sundry debtors 4000

7000 7000

Calculation of Provision required

Debtors as per Trial Balance 205000

Less additional Bad Debt - 4000

201000


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10% on 201000 20100

Opening balance in Provision account 10000

Less Bad Debts w/o - 7000

3000

Provision needed 20100

Therefore Provision required to be made 20100 3000 = 17100

Calculation of Provision for Discount

Debtors as per Trial Balance 205000

Less additional Bad Debts - 4000

201000

Less additional Provision - 20100

180900

2% of 180900 3618

Profit & Loss account

Particulars Amount

(Rs.)

Amount

(Rs.)

Particulars Amount

(Rs.)

Amount

(Rs.)To Bad Debts 3000

+ New Bad Debts 4000

+ New R.D.D 20100

27100

- Old R.D.D -10000

17100

Discount as per Trial Balance 1000+ New Provision 3618

4618- Old Provision -1800

2818

Balance Sheet

Particulars Amount Amount Particulars Amount Amount


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(Rs.) (Rs.) (Rs.) (Rs.)C.A

Sundry Debtors 205000

- Bad Debts - 4000

- R.D.D - 20100

180900

- Reserve for Discount on

Debtors

- 3618

177282


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

Cash

DiscountTrade Discount

Is a reduction granted by supplier from

the invoice price in consideration of

immediate or prompt payment

Is 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

services

As an incentive in credit management

to encourage prompt paymentAllowed to promote the sales

Not shown in the supplier bill or

invoice Shown by way ofdeduction in the invoice itself

Cash discount account is opened in

the ledgerTrade discount account is not opened in the ledger

Allowed on payment of money Allowed on purchase of goods

It may vary with the time period within

which payment is received

It may vary with the quantity of goods purchased or

amount of purchases made

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

In financial accounting, assets are economic resources. Anything tangible or intangible that

is capable of being owned or controlled to produce value and that is held to have positive

economic value is considered an asset. Simplistically stated, assets represent ownership of

value that can be converted into cash (although cash itself is also considered an asset).[1]

The balance sheet of a firm records the monetary[2] value of the assets owned by the firm.

It is money and other valuables belonging to an individual or business.[3] Two major asset

classes are tangible assets and intangible assets. Tangible assets contain various

subclasses, including current assets and fixed assets.[4] Current assets include inventory,

while fixed assets include such items as buildings and equipment.[5] Intangible assets are

nonphysical resources and rights that have a value to the firm because they give the firm
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some kind of advantage in the market place. Examples of intangible assets are goodwill,

copyrights, trademarks, patents and computer programs,[5] and financial assets, including

such items as accounts receivable, bonds and stocks.

In financial accounting, a liability is defined as an obligation of an entity arising from

past transactions or events, the settlement of which may result in the transfer or

use of assets, provision of services or other yielding of economic benefits in the

future.

All type of borrowing from persons or banks for improving a business or

person income which is payable during short or long time.

They embody a duty or responsibility to others that entails settlement by

future transfer or use of assets, provision of services or other yielding of

economic benefits, at a specified or determinable date, on occurrence of a

specified event, or on demand;

The duty or responsibility obligates the entity leaving it little or no discretion

to avoid it; and,

The transaction or event obligating the entity has already occurred.

Liabilities in financial accounting need not be legally enforceable; but can be based

on equitable obligations or constructive obligations. An equitable obligation is a

duty based on ethical or moral considerations. A constructive obligation is an

obligation that can be inferred from a set of facts in a particular situation as

opposed to a contractually based obligation.

The accounting equation relates assets, liabilities, and owner's equity:

Assets = Liabilities + Owner's Equity
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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.

Particulars Debit CreditCapital 7,670

Cash in Hand 30Purchases 8,990

Sales 11,060Cash at bank 885

Fixtures and Fittings 225

Freehold premises 1.500

Lighting and Heating 65

Bills Receivable 825

Return Inwards 30

Salaries 1.075

Creditors 1890Debtors 5,700

Stock at 1st April 2007 3,000Printing 225

Bills Payable 1,875Rates, taxes and insurance 190

Discount received 445

Discount allowed 200

21,175 21,705

Adjustments:

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

2) Depreciate fixtures and fittings by Rs.25

3) Rs.35 was due and unpaid in respect of salaries

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

Trading Account for the year ended 31-03-2008

ParticularsAmount

(Rs.)

Amount

(Rs.)Particulars

Amount

(Rs.)

Amount

(Rs.)

To Opening stock 3000 By Sales 11060

To Purchase 8990 Less Sales Returns 30 11030


20/21

To G/P closed 840 By closing stock 1800

12830 12830

P&L Account for the year ended 31-03-2008

ParticularsAmount

(Rs.)

Amount

(Rs.)Particulars

Amount

(Rs.)

Amount

(Rs.)

To Lighting and heating 65 By G/P balanced 840

To Salaries 1075 By Discount received 445

Add outstanding 35 By N/L closed 490

To Printing 225

To Rates taxes & insurance 190 1775

- Less prepaid - 40

To Discount Allowed 200

To depreciation fixture &

fittings 25

1775

Balance Sheet as on 31-03-2008

ParticularsAmount

(Rs.)

Amount

(Rs.)Particulars

Amount

(Rs.)

Amount

(Rs.)

Capital 7670 Freehold premises 1500

- Less Net Loss - 490 7180 Fixtures & Fittings 225

- Less Depreciation -25 200Creditor 1890 1700

Bills Payable 1875

Outstanding salaries 35 Stock 1800

Debtors 5700


Cash at Bank 885

Cash in hand 30

Prepaid Rates 40

10980 10980

Redrafted Trial Balance

Particulars Debit Credit

Capital 7,670


21/21

Cash in Hand 30

Purchases 8,990

Sales 11,060

Cash at bank 885

Fixtures and Fittings 225

Freehold premises 1.500

Lighting and Heating 65


Return Inwards 30

Salaries 1.075

Creditors 1890

Debtors 5,700

Stock at 1st April 2007 3,000

Printing 225

Bills Payable 1875

Rates, taxes and insurance 190

Discount received 445

Discount allowed 200

22940 22940

30503144 accounts assignment mba1

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