acconts theory

8/3/2019 Acconts Theory

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ACCOUNTING PRINCIPLES, CONCEPTS & CONVENTIONS AND

ACCOUNTING STANDARDS

Q. What is Accounting ?

Ans. Accounting is a language of business. Accounting is an art of indentifying, classifying,

recording, summarizing, and interpreting the business transactions of financial nature. It is a means

of communication between entity and outside agencies through which the affairs of an organization

is reported to the interested users of the accounting information.

According to R.N.Anthony, Accounting system is a means of collecting, summarising,

analyzing and reporting in monetary terms the information of business.

According to Derbin, Accounting may be defined as the identifying, measuring, recording

and communicating financial information

According to American Accounting Association, Accounting is the process of

identifying, measuring and communicating economic information to permit informed judgements

and decisions by the users of accounting information.

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Q. Discuss the need of accounting .

Ans. Accounting is a language of business. It is a medium of communication through which the

affairs of the business can be reported to the interested users for their decision making purpose. Thus

accounting is needed for :-

1.

Determination of operating result and financial position :- Operating results of anundertaking for a particular period and its financial position at the end of a period are to be

ascertained and communicated through an income statement and a position statement.

2. Ascertainment of changes in working :- Accounting shows the changes in working capitalof an enterprise during a particular period.

3. Communication of significant accounting policies :- Accounting is needed in order tocommunicate to outside users significant accounting policies and their application through

periodical financial statements.

4. Recognition and presentation of assets :- Accounting principles provide guidelines for therecognition of assets and liabilities and the preservation of those assets of a business

enterprise.

5. Future reference :- Accounting generates financial information which is to be preserved forcurrent and future users.

6. Assessment of tax liability :- Accounting is needed for the assessment of tax liabilities of abusiness enterprise.

7. Audit requirements :- Accounting is needed to get the financial statements audited andcertified by auditors.

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Q. What is GAAP ? Explain its accounting implications ?

Q. Give a brief account of the structure of generally accepted accounting principle (GAAP)

Ans. GAAP means Generally Accepted Accounting principles. Generally accepted means the

accounting principle generally approved by accounting professions. It means principles which are

generally regarded as permissible or legitimate by the accounting professions. GAAP guide the

accounting profession in the choice of accounting techniques and in the preparation of financial

statements in a way considered to be a good accounting practice. These principles are applied inrecording business transactions, preparing accounts and presenting them before the users of

accounting information.

GAAP are based on accounting assumptions, concepts, conventions etc. which have been

evolved and used in accounting practices over the years. So an accountant should follow these

assumptions, concepts, conventions, etc. honestly consistently in recording business transactions and

in preparing financial statements in order to make them uniform, reliable and comparable.


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Structure of GAAP

The structure of GAAP refers to the forms of elements of GAAP. Traditionally these are

known by various names viz. assumptions, principles, concepts, conventions etc. Based on the recent

development in the theory base of accounting, the traditional structure of GAAP has been modified

into the following four broad heads :-

(a)Assumptions(b)Principles(c)Modifying principles(d)Accounting standards.

(a)Assumptions : Assumptions are the traditions and customs which have been developed over aperiod of time and are well accepted by the profession. Basic accounting assumptions provide a

foundation for recording the transactions and preparing the financial statements therefrom. The

following five assumptions are considered as basic assumptions of accounting. These are :

(1)Accounting entity(2)Accrual(3)Going concern(4)Money measurement(5)Accounting period.

(b)Principles : Basic accounting principles are the general decision rules which govern thedevelopment of accounting techniques. These principles do not violate or conflict with the basicaccounting assumptions. Following are the basic accounting principles :

(1)Dual aspect(2)Revenue recognition(3)Cost(4)Matching(5)Full disclosure(6)Objectivity

Modifying principles : generally , the financial statements are prepared keeping in view the basic

principles and assumptions of accounting . However difficulties are faced in the application of

accounting principles in certain situations which call for the modified application of the principles

and assumptions of accounting. These constraints are referred to as modifying principles which

are given below :-(1)Materiality(2)Conservatism (Prudence )(3)Cost benefit(4)Timeliness(5)Consistency(6)Substance over legal form(7)Industry practice.

(d) Accounting standards : Accounting standards are the established and accepted models which

aim at providing excellent , adequate and unbiased treatment of accounting transaction or

information and reporting the same in the financial statements to facilitate their users in forming

rational and judicious decision.

*************************Q. What is accounting concept ?

Ans. Accounting concepts may be defined as the postulates, basic assumptions or conditions upon

which the science of accounting is based.. Accounting concepts are certain rules of general

application. They are basic to the subject of accounting and provide guidelines in selecting

accounting methods in certain situations. Its object is to make accounting uniform, objective and

understandable. Accounting assumptions and accounting principles are traditionally termed as

accounting concepts. Examples Dual aspect concept, realization concept, etc.

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Q. Explain the main features of Accounting principles .

Ans. Following are the main characteristics / features of accounting principles :-

1. Accounting principles are man made and have developed through the process of evolutionover the years. These principles are subject to changes according to the changing economic

situations.

2. Accounting principles are the process of evolution and are developing fast. It means that theyare not in a finished form.

3. Accounting principles must fulfill three criteria, relevance, objectivity, and feasibility.4. Accounting principles are not rigid and are flexible in nature. They are subject to changes

from industry to industry and accountant to accountant.

5. Accounting principles are developed for common usage to ensure uniformity andunderstandability.

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Q. Discuss the need / role for introducing and developing generally accepted accounting principles.

Ans. Accounting should communicate those information which are useful to a group of users.

Therefore , accounting information should incorporate in the financial statement in such a away that

it becomes meaningful, clear, uniform and understandable to all. The role of accounting principles in

incorporating those information are discussed below :-

1. Systemic development of accounting science : Accounting is the language of accountants.For its proper and systematic growth, it needs some principles to be followed. Accountingprinciples function like the rules of grammar of a language in accounting.

2. Uniformity : Accounting as a language to be understandable to all , must follow certainprinciple uniformly over the world. Therefore accounting principles bring about the desired

uniformity in accounting practices.

3. Comparability : Accounting information must satisfy the criteria of comparability.Accounting principles , if consistently followed will make the information comparable.

4. Reliability of accounting : Accounting statements show operational performance andfinancial position for the users, both insiders and outsiders. This information must be uniform

and reliable for any decision making purpose. Accounting principles will make the statements

reliable, objective and non-biased.

5. Assessment of income and expenditure : For proper assessment of income and allocation ofexpenditure, certain accounting principles must be rigidly followed.

6. Recognition of assets and liabilities : Accounting principles are the guidelines for theaccountants in recognition and presentation of assets and liabilities of an enterprise.

7. Presentation of financial statements : Accounting principles require to present the financialinformation in a way as will disclose full information of the enterprise to help the users for

their decision making purpose.

8. Material information : Accounting principles guide the accountants to incorporate all thoseinformation which are material in character.

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Q. Discuss various accounting concepts

Ans. The various accounting concept or accounting principles are as follows:

1. Business Entity concept :This concept implies that a business unit is separate and distinct from the persons

who supply capital to it. Irrespective of the from of organization, a business unit has got its own

individually as distinguished from the persons who own or control it. Business is kept separate

from the proprietor so that transactions of the business, may be recorded with him. In case this

concept is followed affairs of the business will be mixed up with the private affairs of the

proprietor and the true picture of the business will not be available.

It should be mentioned that legally , a sole proprietor or a partner of partnership

firm are not separate from their business units but from accounting point of view these are

assumed to have separate entity.


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Principles or role of this concept :

(a) It facilitates the recording of transactions between the business and the proprietor e.g.capital account drawing account.

(b) It enables the accountant to prepare the financial statements of an enterprise to showthe performance and the financial position of the enterprise only.

(c) Entity concept defines the range and boundaries of the accountants activity and limitsthe type of transactions that are to be recorded in the books of an enterprise.

2. Money measurement concept :According to this concept, the transactions which can be expressed in terms of

money will only be recorded in accounting. It means that transactions that can be measured and

expressed in terms of money are only recorded in accounting. A transaction , however important

it may be to the business, will not be recorded in accounting if it cannot be expressed in terms of

money. Therefore, qualitative or quantitative feature of transactions are not recorded in

accounting.

Under this concept one important assumption taken is that the value of money

remains constant throughout the year. The effect of inflation on the value of money is completely

ignored. This concept has some limitations:

(a) It does not consider the changes in the purchasing power of money and qualitative orquantitative aspects of the transactions are not recorded either in the journal or in the ledger

and thus ignores the effect of inflation.(b)It excludes qualitative aspect of an event.(c) It does not consider the development of human resource accounting.(d)It ignores the change in the real value of money due to a change in price level.3. Going concern concept :

According to this concept, accounting system assumes that a business entity will

continue to exit indefinitely. It means that it will continue for a long period and will not be

dissolved immediately. So the business entity will be considered as a going concern and its

resources will be utilized to fulfill the long term objectives of the concern and therefore

transactions are to be recorded from that point of view. Accounts are carried forward to the

following year on the presumption that the business will be carried out in the years to come. This

is called going concern assumption. However this concept does not apply in case of sick or

saleable or insolvent firms.Principles or role of this concept :

(a) Under this concept, business resources will be utilized to attain long tem objectivesand transactions are, therefore to be recorded from that point of view.

(b) It facilitates the division of expenditure between capital and revenue on the basic ofduration of benefit.

(c) It provides the basis of valuation of assets. Fixed assets are valued at cost price andnot at market price as they are not intended for resale.

(d) It provides a basis for measurement of income because it divides expenditure betweenasset and expenses.

Limitations of this concept :

(a)This concept does not hold good in sick industries where historical cost is notrelevant.

(b)It does not apply in case of insolvent business units where the realizable value and notthe cost the is relevant.

4. Dual aspect concept :-Dual aspect is another important concept applied in recording and presenting

accounting information. Dual aspect concept means that for every debit, there is a

corresponding credit. In every transaction , there are two aspect namely receiving aspect

and giving aspect. Receiving aspect means the debit aspect and the giving aspect means the

credit aspect. Receiving aspect is debited to the account which receives the benefit and giving


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aspect is credited to the account which gives the benefit. This simultaneous recording of the

two fold aspects of a transaction for the same amount is known as the Double entry system of

book keeping. This concept is the vary foundation of present accounting mechanism double

entry system of book keeping.


(a) This concept has given birth to the double entry system of book keeping according towhich each transaction is recorded with its two fold effect scientifically.

(b) It records the events affecting the wealth of an entity. It shows the source of wealth andthe form it takes.

(c) It has given birth to the accounting equation e.g. A = E .5. Accounting period concept :-

Accounting period refers to the period of time at the end of which books of accounts

of business entity are to be closed and financial statements are to be prepared. Under this

principle, to facilitate supply of accounting information, the life span of the business is divided

into shorter and convenient period, which is known as accounting period. An accounting period

is usually of one year. Profit and loss account is prepared for an accounting period to determine

the operational results of that period and a balance sheet is drawn at the closing date of the

accounting period so as to assess the financial position of the business on that date.


(a)A business unit exits for a long period. This life of a business is divided into a number ofsmall periods usually one year.

(b)Periodical profit and loss account and balance sheet are to be prepared in order to assessprofit or loss made by the firm and financial position of the business respectively.

(c)On the basis of accounting period expenditure are divided between capital and revenue.(d)It is the basis of accrual accounting where outstanding items are considered.6. Cost concept :

Cost concept states that all accounting entries shall be made at cost as and when the

transaction takes place. Cost means monetary price paid or to be paid for the acquisition of an

asset or a service. If an asset does not require any cost for its acquisition, it is not to be recorded

in accounting. It is based on historical cost and is the basis for all subsequent accounting for such

an asset. Under this concept the fair market value which constantly changes is to be ignored.

Principles or role of this concept :(a)This concept makes the information of the financial statement highly objective.(b)Recording of assets at cost makes the value of assets truth full and stable.(c) It provides for recording of depreciation of fixed assets for determining loss arising for their

use in business.

7. Matching concept :-Matching concept implies that the expenses incurred to earn a revenue are to be

matched with that revenue in order to ascertain the net profit or net loss made in a period. It

means relating the revenues earned with the expenses incurred to earn those revenues in a given

period. Thus it is the process of measurement of performance with reference to specific

accounting period. Profit of a business depends on two elements Revenue and expenses

incurred to earn these revenues. Determination and comparison of these two elements give birth

to net profit or net loss. This comparison between the revenue earned and expenses incurred isknown as matching principle.


(a)The matching concept measures income for a given period and relates expenses which areincurred to earn that income. Thus it helps us to determine the income for a given period.

(b)This concept shows the close relationship between the incomes and expenses.(c)According to this concept, all costs incurred during the period are not taken but only the costs

relating to the accounting period are taken into account though they are not directly related to

revenues.


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8. Revenue recognition concept :-This concept also known as realization concept. Revenue recognition principle is

important when the income statement is prepared. This principle deals with the determination of

the point of time when a revenue is to be recognized. A revenue is deemed to be earned or

realized when goods have been transferred or services have been rendered to the customers

legally and cash has been realized or the customers have accepted a legal obligation to pay. In

simple words, revenue recognition principle tells us the procedure of determining the income and

expenses for incorporation in profit and loss account. Under this concept , anticipated profits are

not considered though anticipated adverse effects are recorded.


(a)This concepts helps the accountants to determine the point of time at which the revenue is tobe recognized or considered. So it plays an important role in preparing a correct income

statement.

(b)This concepts enables us to prepare the income statement in a prudent way taking future lossinto account while ignoring future profits.

(c)This concept gives birth to accrual principle according to which the outstanding incomes andexpenses are included in the income statement.

9. Full disclosure concept :-Accounting information are required for decision making purpose by various users.

Therefore to be useful as the basis of decision making process, there should be full disclosure inthe financial statements of all significant information. Under this principle, all accounting

statements should be honestly prepared and all information of material interest to proprietors,

creditors, investors etc. should be disclosed in the accounting statements. Moreover books of

accounts should be prepared in such a way that they become reliable , informative and

transparent.


(a) Full disclosure principle ensures that financial statements contain full and fair information ofthe enterprise for decision making purpose of the different classes of users.

(b)According to this principle, it is obligatory for the accountant to report full facts in thefinancial statements. So it eliminates his personal choice in the matter of reporting.

(c) As all assets and liabilities and incomes and expenditure are shown under proper heads withexplanatory notes, it becomes easier for the users to understand the significant of thefinancial statements.

(d)As assets and liabilities are to be shown under proper heads , any deliberate omission of anitem is not possible.

10.Objectivity concept :-The objectivity principle states that accounting should be definite, verifiable,

reliable and free from manipulation and personal bias of the persons engaged in the process of

recording and presenting accounting data. For this reason , accounting must be carried out on an

objective and factual basis. Every entry in the books of account must be based on documentary

evidence i.e. sources documents, viz.vouchers and receipt. Where no vouchers or receipt are

available as in the case of provision for doubtful debt, certificate from the competent authority of

the business firm must be obtained. Verifiability and objectivity means accounting information

is supported by proper documentary evidence e.g. cash memos etc.Principles or role of this concept :

(a)This concept has given rise to audit practices.(b)This principle make financial statements free from personal bias.

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Q. What is accounting information ?

Or

Q. Write notes on Accounting information

Ans. Accounting information means the data provided in the financial statements. Financial

statements include: (a) trading account, (b) profit and loss account (c) balance sheet, (d) cash flow

statement and (e) fund flow statement. The first three are the basic financial statements and the later

two are prepared on the basis of the former three statements. Trading account and profit & loss

account are together called revenue statement or income statement and the balance sheet is known as

position statement. Both income statement and position statement contains five elements, these are

(a) assets, (b) liabilities, (c) equities (capital) , (d) incomes and gains, and (e) expenses and losses.

Information regarding these elements of financial statements is called accounting information.

Accounting information gives benefit to its users. The benefit of accounting information are

the same as to the advantages of financial statements. Basically , the accounting information is used

for decision making purpose by users. The users of accounting information have their own interests

in the financial statements and accordingly they expect information from their point of view.

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Q. Name the different parties interested in accounting information and explain why they want it.

Ans. There are various parties interested in accounting information to make use of the same for their

respective purposes. These parties are :-

1.

Owners : Owners provide capital fund to the business and bear all the risk of the business.Therefore , they are interested to know the operating profit earned or loss sustained and

financial position of an entity. Accounting information helps the owners to achieve their

information for the purpose they need.

2. Managers : Accounting information is useful to managers for the purpose of planning,decision making, controlling, motivating, directing and monitoring the working of a business

entity.

3. Creditors: Creditors and suppliers of materials use accounting information to ascertain theshort term liquidity , long term liquidity or solvency position, the ability of the entity to repay

the amount in scheduled time and the earning capacity.

4. Bankers and lenders : Bankers and lenders who advance money to a business entity areinterested in financial statements to ascertain short term and long term debt repaying and debt

servicing capacity of the business entity.5. Employees : Employees are interested in financial accounting in order to assess the stability

of their employment, to lodge their claim for hike in wage, share in profit, bonus etc.

6. Consumers :- Consumers use accounting information to safeguard their interest in regard toquality of products, price level maintained , price charged and to uphold the consumer

movement.

7. Prospective Investors : Prospective investors are interested in accounting information todetermine safety of their investment in the business. They are also interested to know earning

capacity and dividend policy of the business.

8. Government and regulatory agency : Government and other regulating authority areinterested in financial statements in order to assess, levy and collect sales tax, excise duty,

custom duty , income tax, wealth tax etc. They also require accounting information in order

to regulate the activity of the enterprise where necessary and to determine economic policies.9. Trade association and chambers of commerce : This group of users make use of

accounting information to frame various types of industry demands to be placed before the

concerned authority, and also to formulate business policy.

10.Researchers : Research scholars make use of financial statements for making analysis andinterpretation of data to derive new findings. Financial data are also used for creating

information database about industry performance.

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Q. Explain the purpose of accounting/ financial information ? What purpose in your opinion is the

most important and why ? [ GU 1994 ]

Ans. Purposes / objectives of accounting / financial information : Accounting information

provided in the financial statements serves the following objectives :-

1. Decision making : Accounting provided information regarding profit or loss of the business.It also shows the causes of profits or losses. Therefore, management of the business can take

decisions regarding appropriate remedial measures on the basis of those information.

2. Owners decision : Owners provide capital to the business and bear all the risk of thebusiness. They want to know whether their funds have been properly utilized or not.

Therefore, financial statements provides informations to the owner to ensure whether their

investment is safe or not.

3. Performance of the business :- Accounting information shows the performance of theenterprise during a given period. The investors of the business can assess the efficiency or

otherwise of the management.

4. Financial position : Accounting information provides information about the financialposition of the business. These financial position is useful for predicting , comparing and

evaluating enterprises earning power.

5. Government policy : Accounting information helps the government in determiningeconomic policy and planning.

6.

Economic activity : Financial statements should contain such information as will serveprimarily those users who have limited authority or ability to obtain information .

7. Information for forecasting : Financial statements provide actual and interpretiveinformation about transactions and other events for predicting, comparing and evaluation

enterprises earning power.

8. Supply of strategic information : Among all the purposes mentioned above , the mostimportant purpose served by accounting information is to provide adequate information to

outside users in their decision making process , because accounting in the only link between

the business and the outsiders.

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Q. Explain modifying accounting principles.

Q. Explain any three modifying accounting principles. [ GU 2004 ]

Q. briefly explain the accounting conventions which guide the accountant at the recording stage.Ans. In the application of accounting principles and assumptions in certain situations some have

been modified for preparation of financial statement. These constraints are referred to as modifying

principles. The modifying principles are considered as accounting conventions. These modifying

principles are as follows :-

1. Cost benefit :- Modifying cost benefit principle states that the cost of generating aninformation should not exceed the benefit to be derived from it. This principle weeds out non

significant information from financial statements. It is to be noted that this principle is

primarily used where the information to be generated is a supplementary one. However, the

cost is not a factor to be considered where such information is a significant one..

2. Materiality :- The term materiality refers to the relative importance of an item. Thismodifying principle states that only material information should be incorporated in the

financial statement and non material information should not be stated in those statements. Anitem of information should be judged as material, if the knowledge of that item has an

influence on its users in their decision making process. For example instead of writing pen,

pencils, rubber, register etc. we may write stationery a/c.

3. Consistency :- The principle of consistency implies that a method decided once to treat agiven event should be consistently followed from one period to another. It means that the

same accounting procedure should be followed for similar items over the periods. For

example if written down value method of depreciation is followed in a particular year the

same method should be followed in subsequent years.


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4. Conservation ( prudence ) :- This principles states that all unfavourable events should berecognized at the earliest and favourable events should be recorded only when they actually

takes place. In other words, accountants should preferably report the highest values of

liabilities and expenses, and the lowest values of assets and revenues. This principle is called

modifying principle since it may not be applied in all cases.

5. Timeliness : An information is useful for a decision maker if it is relevant and reliable.Information becomes useful, relevant and reliable if it is made available in time. The

principle of timeliness states that information should be disclosed timely. The Companies Act

1956 requires that the annual reports must be submitted to the Registrar of companies and

made available to the users within a specified period of time after the closure of accounting

year.

6. Substance over legal form : The modifying principle of substance over legal form impliesthat the accountant should record and present in financial statements, transactions and events

in such a way that the substance of the transactions and not their legality is communicated to

the users. Thus in certain cases, transactions may be presented in the financial statements

without observing the legal position where it becomes necessary.

7. Industry practice :- Industries have to work under various situations. Some situation may beunique to only one industry. Therefore , sometimes practice prevailing in a particular industry

is given precedence over generally accepted accounting principles. For example generally

in case of all business, the result of operation i.e. profit/loss is ascertained annually whereasin case of life insurance business it is done once in every two years after actuarial valuation.

This is because of unique industry practice.

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Q. Distinguish between Accounting concept and Accounting conventions.

Ans. Distinction between Accounting concepts and accounting conventions are as follows :

Points Accounting concept Accounting conventions

1.Meaning

2.Nature

3.Source

4.Use

5. Rules of

application

6.Mandatory by

regulating agency

Accounting concepts are

certain rules of general

application. They provide

guidelines in selecting

accounting methods in certain

situations.Accounting concepts are

generally agreed principle

followed by accountant.

Accounting concepts are

products of the deliberation of

the accounting professionals.

These are primarily used in

recording, classifying,

analyzing and communicating

financial information of a

business.Accounting concepts refers to

the propositions upon which

accounting work. It means

certain rules of application.

Accounting concepts are made

mandatory in a specific

accounting standard enforced

by a regulating agency.

Accounting conventions are some

reporting standards applied for

fair presentation of financial

statement. These are based on

local needs and traditions.

Accounting conventions have no

general applicability. These are

flexible, optional and provides

several alternative practice.

Accounting conventions are the

product of economical, social and

legal forces.

These are primarily used to

preparing financial statements.

Convention does not constitute a

stipulated rule.

Conventions are not mandatory

to be enforced by any regulating

agency.


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Q. Discuss the limitations of Accounting Standards .

Ans. Following are the limitations of Accounting standards :

1. Non applicability to non members : Accounting standards are the guidelines of accountingtreatment. They are to be followed by the members of the institute but non-members have no

obligation to follow them. Thus the desired uniformity in the preparation of financial

statements may not be achieved.

2. Disregard to Minority views : Standards are the majority views of the members and theminority views, though ideal, will not be incorporated in the standards. Thus the desired

results may not be achieved.

3. Unsuitable in changing economic situations : Accounting standards are event specific andtime specific and they may become obsolete in changing economic situations.

4. Discourage innovations: Standards stifle innovative ideas of accountants and makeaccountants regimented.

5. Non-responsive to peculiar units: Standards cannot obviate altogether the scope ofsubjective views in the preparation and presentation of financial statements because of

peculiar situations prevailing in different industrical units.

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Q. Distinguish between Accounting Principles and Accounting Standard.

Ans. Distinction between Accounting Principles and Accounting Standard are as follows :

Points Accounting Principles Accounting standard1.Nature

2. Legal

binding

3.Alternative

treatment

4.Problem in

implementation

5.Formation

process

6.Precedence

Accounting principles are

fundamental or basic rule

governing the accounting

system. These are broad

guidelines established through

discussion.

Accounting principles termed

as generally accepted

accounting principles are not

binding upon the accountant.

Accounting principles provide

a large number of alternativetreatment to a given accounting

item like revenues, costs, assets

and liabilities.


generally difficult to be

implemented into practice.


based on certain basic

assumptions and do not require

any public opinion.

Accounting principles are not

preceded by any other conceptstatement.

Accounting standards are

professional opinion and guidelines

formulated and recommended by

the institute of chartered

accountant.

Accounting standards bear

professional stamp or authority of

the ICAI established under the act

of parliament namely ICAI Act

1949.Accounting standard try to reduce

the alternatives and reduce the

flexibility of opinion.

Accounting standards can be easily

enforced by the professional

institute.

Accounting standards are based on

the opinion of different

professional bodies and public in

general

Accounting standards are always

preceded by a concept statement orconceptual framework.


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Q. Write notes on Accounting standard in India. GU 2004 ]

Or

Q. What progress has been made in India regarding standardization of accounting practices.

Ans. Recognising the need to harmonise the diverse accounting policies and practices in India and

keeping in view the international development in the field of accounting, the institute of chartered

accountants of India constituted the Accounting Standard Board (ASB) in April,1977. The

accounting standard board gives adequate representation to the related and interested groups of

bodies in the line of business, industry, finance , audit , taxation etc. The accounting standards

formulated by the ASB are thus finally established by the council of the ICAI. The ASB is entrusted

with the following functions :-

1. To formulate accounting standards, while formulating standards, the ASB is required to takeinto consideration the applicable laws, customs and usages and business environment.

2. To propagate the accounting standards and persuade the concerned parties to adopt them inthe preparation and presentation of financial statements.

3. To issue guidance notes on the accounting standards and give clarifications on issues arisingthere from.

4. To review the accounting standards at periodical intervals.Till April,2004 , the ASB have issued 29 Accounting standards covering different aspects of

Accounting. The Accounting Standards are as follows :

1. AS 1 = Disclosure of accounting policies2. AS 2 = Valuation of inventories

3. AS 3 = Cash flow statements

4. AS 4 = Contingencies and events occurring after the balance sheet date

5. AS 5 = Net profit or loss for the period, prior period and extraordinary items

and changes in accounting policies.

6. AS 6 = Depreciation accounting

7. AS 7 = Accounting for construction contracts.

8. AS 8 = Accounting for research and development

9. AS 9 = Revenue recognition.

10. AS 10 = Accounting for fixed assets.

11. AS 11 = The effects of changes in foreign exchange rate

12. AS 12 = Accounting for government grants.13. AS 13 = Accounting for investments

14. AS 14 = Accounting for amalgamations.

15. AS 15 = Accounting for retirement benefits in the financial statement of

employers.

16. AS 16 = Borrowing costs.

17. AS 17 = Segment reporting.

18. AS 18 = Related party disclosures.

19. AS 19 = Leases

20. AS 20 = Earnings per share.

21. AS 21 = Consolidated financial statements.

22. AS 22 = Accounting for taxes on income

23. AS 23 = Accounting for investments in associates in consolidated financialstatements.

24. AS 24 = Discontinuing operations.

25. AS 25 = Interim financial reporting

26. AS 26 = Intangible assets.

27. AS 27 = Financial reporting of interests in joint ventures.

28. AS 28 = Impairment of assets.

29. AS 29 = Provisions, contingent liabilities and contingent assets.

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Q. Give a brief account of the accounting standard setting procedure in India. [ GU 2005 ]

Ans. The institute of chartered accountants of India (ICAI) is an associate member of the

international accounting standard committee (IASC). Accounting standard setting procedure, its

issue and implementation are performed by this institute of chartered accountants of India (ICAI). In

order to recognise the need to harmonise the diverse accounting policies and practices in India and

keeping in view the international development in the field of accounting, the institute of chartered

accountants of India constituted the Accounting Standard Board (ASB) in April 1977. The

accounting standard board gives adequate representation to the related and interested groups of

bodies in the line of business, industry, finance, audit, taxation etc. Thus it gives representation to the

representatives of industry and commerce, company law, central board of direct taxes, comptroller

and auditor general of India, Banks, Public enterprises and practicing auditors. The accounting

standards board prepares a draft of the standard on a subject which is published in the journal of the

institute, viz. The Chartered Accountant for the views and comments of the accounting

professionals, practicing chartered accountants, industry people, academics and other persons, bodies

and associations. Such draft standard exposed to the public is called Exposure Draft . Through such

exposure draft, people are requested to send their comments and suggestions for consideration to the

Accounting Standard Board. A definite timeframe is given for sending comments and suggestions.

Accounting standard board then examines all the issues related to the proposed standard in the light

of the comments and suggestions received from various quarters. Finally the standard on the

concerned subject is formulated and placed before the council of the institute for its consideration.After adoption by the council, the standard is finally established for its implementation. The

accounting standards formulated by the ASB are thus finally established by the council of the ICAI.

While formulating accounting standard, ASB should be given due consideration to

international accounting standard (IAS) issued by International accounting standard committee

(IASC) and try to integrate them, to the extent possible , in the light of conditions and practices

prevailing in India.

**********************

SECTIONAL AND SELF BALANCING LEDGER

Q. What is meant by Sectional Balancing System ?

Ans. Sectional ledger balancing system is a system under which only one section of the ledgers is

self balanced with the help of two control accounts. It means that out of the three ledgers viz. debtors

ledger , creditors ledger and general ledger, only the general ledger is self balanced by opening two

separate accounts called total debtors account and total creditors account. Under this system the

debtors ledger and the creditors ledger are not self balanced because of the fact that the double entry

of a transaction is not completed in either of the ledgers. Sectional balancing system is a technique to

check the accuracy of any ledger with the help of control accounts.

In order to make the general ledger self balanced, two control accounts viz. total debtors

account and total creditors account are opened in the general ledger. The total debtors account is

used to complete the double aspects relating to debtors ledger and total creditors account, to

complete the double aspects relating to creditors ledger. Thus this two control accounts enable thepreparation of trial balance from the general ledger.

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Q. What are the features of sectional balancing system ?

Ans. The following are the special features of sectional ledger balancing system :-

1. Sub-division of ledger :- Under this system, ledger is divided into three sections :(a)Debtors ledger(b)Creditors ledger(c)General ledger or Nominal ledger

2. Self balancing of one ledger :- Under this system only one ledger i.e.General ledger is madeself balancing.

3. Preparation of control accounts :- Under this system two control accounts, viz. totaldebtors account and total creditors account are required to be opened in the general ledger .

4. Preparation of trial balance :- Under this system , trial balance of the business as a wholecan be prepared at periodical intervals from the balances of the accounts in the general ledger

including the control accounts.

****************

Q. What are the advantages of sectional ledger balancing system ?

Ans. Following are the advantages of sectional ledger balance system :-

1. Division of work :- Since the ledgers are sub-divided, under this system more than oneledger keeper can be employed, which facilitates the division of work among the book-

keepers.

2.

Internal check :- The work on each ledger is independently checked and controlled by thework of another ledger by means of control accounts opened in the general ledger. So, it is a

technique of good internal check.

3. Ascertainment of debtors and creditors balances :- The balances of sundry debtors andsundry creditors at the end of a period can be easily determined from the Total debtors

account and the Total creditors account.

4. Location of errors :- Under this system , errors can be located without much effort and time.5. Reduction in auditors work :- As the debtors and creditors ledgers are automatically

checked, it reduces the volume of work of an auditor.

6. Preparation of interim accounts:- Interim accounts can be prepared without waiting forrectification of errors, if any in debtors ledger and in creditors ledger.

****************

Q. Explain the defects / disadvantages of sectional balancing system .Ans. Following are defects / disadvantages of sectional balancing system :-

1. Self balancing of one ledger only :- Under this system only one ledger i.e. general ledger isself balanced. Debtors ledger and creditors ledger are not self balanced. Hence, errors cannot

be located in these two ledgers.

2. Arithmetical accuracy :- As debtors ledger and creditors ledger are not self balanced, thearithmetical errors of these ledgers cannot be tested.

3. Limited application of internal check:- Sectional balancing has a limited application ofinterim check because it is limited to exercising internal check for general ledgers only.

4. Non-adherence to double entry :- Sectional balancing system does not adhere to doubleentry system of accounting as no journal entry is required to be passed.

5. Lack of effective supervision :- Since the control accounts for the general ledger aremaintained by different ledger clerks, effective supervision is not possible.

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Q. What is self balancing ledger system .

Ans. Self balancing ledger system is a system of maintaining ledgers in such a way that an

independent trial balance can be prepared from each ledger without the help of any other ledger.

According to Roger N.Carter, A self balancing ledger is one whose balances , when

extracted , from a complete trial balance

Under this system an account called adjustment account is opened in the back side of each

ledger for the purpose of completing double entry of each of the transactions relating to each ledger

within the ledger itself.

The principle involved in this case in that to each adjustment account the posting of the

summary of all transactions of the relevant accounts are made only in the reverse manner so that the

total of debit balance of all accounts would exactly be equal to the total of the summarized credit

entries and vice versa. It helps the preparation of the trial balance and the ledger is thus made self

balancing.

The following adjustment accounts are required to be opened in the ledgers :-

Name of the ledger Name of the Adjustment Account

(a) General Ledger (i) Debtors ledger adjustment account

(ii) Creditors ledger adjustment account

(b) Debtors Ledger (i) General ledger adjustment account.

Creditors Ledger (i) General ledger adjustment account.

*****************************

Q. Explain the features of self balancing ledger system .

Ans. Following are the special features of self balancing ledger system :-

1. Self balancing of each ledger :- Under this system each ledger is made self balanced whichmeans that an independent trial balance can be prepared for each ledger out of the balances in

the accounts appearing in that ledger.

2. Periodical posting :- Self balancing entries are passed and posted at the time of periodicaltesting of arithmetical accuracy of ledgers.

3. Contra entries :- Journal entries for maintaining the ledgers under self balancing system arerequired to be passed between two adjustment accounts maintained in two different ledgers.

Contra entries for transactions relating to trade debtors will be passed between the generaladjustment account in debtors ledger and debtors ledger adjustment account in general ledger.

4. Specially designed subsidiary books :- Subsidiary books are made in such a manner thatthey readily show the total of transactions to be posted in adjustment accounts.

5. Adjustment accounts :- Each ledger contains an adjustment account in order to complete thedouble entry of the transactions. Adjustment accounts are Debtors ledger adjustment account,

Creditors ledger adjustment account and the General ledger adjustment account.

**************************

Q. State the objectives of self balancing ledger system.

Ans. Following are the objectives of self balancing ledger.

1. Location of errors :- The primary objective of self balancing system is the location of bookkeeping and arithmetical errors if any, to a particular ledger. If a ledger is not made self

balanced, the mistake is likely to be committed in that ledger itself.2. Internal check :- It enforces an internal check on all the ledgers. The work on one ledger is

independently checked by the work on the other ledger.

3. Fixation of responsibility :- Each ledger is usually entrusted with a particular ledger keeperand the location of an error in that particular ledger becomes the responsibility of that

particular ledger keeper.

4. Effective supervision :- The object of effective supervision over the accounts keeping staffcan be exercised by the person in charge of accounts department through control accounts in

the general ledger.


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5. Preparation of interim accounts :- Interim accounts can be prepared for managerial purposebecause the accounts are kept up-to-date under this system.

6. Early preparation of trial balance :- A trial balance can be prepared from the controlaccounts without waiting for rectification of any error in any ledger.

7. Early preparation of final accounts :- Draft annual or periodical accounts can be preparedwithout waiting for the schedules of sundry debtors and sundry creditors.

8. Proof of arithmetical accuracy :- It provides a proof of the total arithmetical accuracy of thebook-keeping entries in any ledger.

********************************

Q. State the advantages of self balancing ledger system .

Ans. The following are the advantages of self balancing ledger system :-

1. Arithmetical accuracy of ledgers : It provides a proof of the total arithmetical accuracy ofthe book-keeping entries in any ledger.

2. Early detection of errors : As the adjustments accounts are prepared at periodical intervals,errors can be quickly localized and detected.

3. Internal check : It provides a good method of internal check. It means that the works of oneledger keeper is automatically checked by other ledger keeper.

4. Division of labour : As multiple ledgers are kept under this system, the whole work can bedivided among many personal of the accounts department.

5.

Early preparation of final accounts : As the accounts are kept always up-to-date , thus itfacilitates early preparation of final accounts.

6. Reduction of audit work : It reduces the work of the auditor because this system acts as anautomatic control over the ledger.

7. Effective supervision : This system exercises effective supervision of the work of the ledgerclerks.

8. Reduction of burden of the main ledger : It reduces the burden of the main ledger by takingout personal ledgers from it.

9. Fixation of responsibility : The responsibility for the commission of errors may be fixed bythe localization of errors.

10.Acts as control accounts : It acts as control accounts on the individual debtors and creditors.***************************

Q. Distinguish between sectional ledger balancing system and self balancing ledger systemAns. Following are the difference between sectional ledger balancing system and self balancing

ledger system :-

Points Sectional ledger balancing system Self balancing system

1.Nature of work

2.Object

3.Trial Balance

4.Scope of work

5. Application

6.Application of double

entry system.

7.Transfer from one

It involves balancing of a section

of a group of ledgers

Its object is location of error for a

section of group of ledger.

Only one trial balance for the

general ledger can be drawn.

It makes a part of the ledgers selfbalanced

Applied mainly in sales and

purchase transactions.

Double entry system can be

completed only in respect of

general ledger.

Transfers are shown through total

It involves balancing of each

ledger.

Its object is location of error for

each ledger.

A trial balance can be prepared

for each ledger i.e. for the

debtors ledger, creditors ledger

and general ledger.

It can make each ledger selfbalanced.

Applied in sales and purchase

transactions along with other

transactions.

Double entry is completed in

general ledger and other ledgers

by preparing Adjustments a/c.

Transfer from one ledger to


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ledger to another ledger

8.Adjustment Account

9.Detection of errors

10.Internal check

Debtors account and total creditors

account only.

Total debtors account and total

creditors account are opened in the

general ledger but no adjustment

account is opened in the sales

ledger or in the purchase ledger.

Errors in debtors ledger and

creditors ledger cannot be self

detected.

Control can be enforced only in

respect of sales ledger and

purchase ledger but not on the

general ledger.

another is shown through

Adjustment Account

Each ledger contains an

adjustment account.

The errors and omissions are

self detected by the clerks

entrusted with a particular

ledger.

It enforces total internal check

on the net work of the accounts

system because all the

transactions are subject to

scrutiny of more than one

person.

**********************************

Q. Distinguish between a total debtors account and a debtors ledger adjustment account opened in

the general ledger.Ans. Following are the difference existing between a total debtors account and a debtors ledger

adjustment account :-

Points Total debtors account Debtors ledger adjustment a/c

1.Application

2.Entries

3.Double entry

4.Object

5.Internal check

6.Sources of

information

It is used in sectional ledger

balancing system

Items are directly recorded in

total in this account from the

relevant subsidiary books. No

journal entries are required to be

passed.

It does not require completion of

double entry.Its object is to make the general

ledger self balanced.

It exercises on internal check on

the debtors ledger only.

Subsidiary books and other

relevant records are the source of

information.

It is used in self balancing

ledger system.

Items are posted to this account

after passing journal entries.

Process of double entry is

completed here.Its objects is to make both the

debtors ledger and the general


It exercises internal check along

with general ledger adjustment

account.

It is related to the general ledger

adjustment account in the

debtors ledger.


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Q. Distinguish between a total creditors account and a creditors ledger adjustment account opened in

the general ledger.

Ans. Following are the difference existing between a total debtors account and a debtors ledger

adjustment account :-

Points Total creditors account Creditors ledger adjustment a/c

1.Application

2.Entries

3.Double entry

4.Object

5.Internal check

6.Sources of

information

It is used in sectional ledger

balancing system

Items are directly recorded in

total in this account from the

relevant subsidiary books. No

journal entries are required to be

passed.

It does not require completion of

double entry.

Its object is to make the general


It exercises on internal check on

the creditors ledger only.

Subsidiary books and other

relevant records are the source of

information.

It is used in self balancing ledger

system.

Items are posted to this account

after passing journal entries.

Process of double entry is

completed here.

Its objects is to make both the

creditors ledger and the general


It exercises internal check along

with general ledger adjustment

account.It is related to the general ledger

adjustment account in the

creditors ledger.

HIRE PURCHASE AND INSTALMENT PURCHASE SYSTEM

Q. What do you mean by Hire Purchase System ?

Ans. Hire purchase system means a transaction where the buyer acquires the immediate possession

of the goods entering into an agreement and agrees to pay the total hire purchase price by an agreed

number of periodical instalments. Each instalment is treated as a hire charge until the last instalment

is paid out when the ownership of the goods passes from the seller to the buyer.

In the words ofJ.Stephenson, The hire purchase is a form of trade in which credit is granted

to the buyer on the security of a lien on the goods.In a hire purchase transaction, there are two parties the seller, known as hire vendor and the

buyer, known as hire purchaser or hirer.

Features :

1. Agreement : It is an agreement to sell goods but not a contract of sale. Sale takes place infuture.

2. Possession of goods : The hire purchase agreement gives the buyer the right to get immediatepossession of the goods.

3. Ownership : The ownership of the goods sold under the hire purchase system remains withthe seller till the payment of last instalment. The buyer can become owner only on the

payment of last instalment.

4. Down payment : On agreement and delivery of the goods, generally some payment is madeby the buyer to the seller , which is called cash down. It does not include any interest.

5. Mode of payment : The payment is made by instalments viz half yearly, yearly etc. and eachinstalment includes interest at a certain rate on the balance due.

6. Hire charge : Instalments paid by the hire purchaser are treated as hire charge till thepayment of the last instalment.

7. Right of repossession : The hire vendor has the right to reposses the goods if the hirepurchaser makes default in the payment of any instalment.

8. Right to return goods : The buyer has an option to return the goods before the payment oflast instalment.


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Q. Discuss the advantages and disadvantages of hire purchase system.

Ans. Advantages :The advantages of hire purchase system are as follows :

1. As the hire buyer gets the immediate possession of the goods he can enjoy the goods beforethe full payment is made.

2. The buyer enjoys the option to return the goods before payment of last instalment.3. The seller is entitled to receive interest on unpaid amount at an agreed rate and so the seller

gets compensation for fund blocked for long time.

4. This system proves helpful to the sellers as it provides opportunity to increase their volume ofturnover and consequently to increase profit.

5. The seller has a right of lien on the goods i.e. he may take back the goods if the buyer fails topay any instalment.

Disadvantages : The disadvantages of hire purchase system are as follows :

1. The goods purchased under hire purchase system are generally charged at a higher pricebecause it includes interest.

2. As the buyer does not enjoy the right of ownership , he cannot sell nor can he take loanagainst the mortgage of the asset until the last instalment is paid.

3. Hire purchase trading is a credit business hence it requires a huge amount of capital. So forsmall traders it is not possible to undertake hire purchase trading.

4.

The hire vendor runs the risk of bad debt if the hire purchaser makes default in payment ofinstalments.

5. It is a difficult task on behalf of the seller to select the right buyers.************************************

Q. What is instalment purchase system ?

Ans. Instalment system or instalment purchase system indicates a system of sale under which the

price for the goods and the interest on the price are paid by the buyer by periodical instalments.

Under this system, the buyer acquires the tittle of the goods and the possession thereof as soon as the

transaction is completed.

Under this system, in the event of default by the buyer in payment of of any instalment , the

seller cannot take back the goods, he can only take steps for the recovery of the unpaid instalments.

This system hardly differs from a contract for sale except that payment of the price of the goods

is spread over a number of instalments and that each instalment includes interest. However, it differsfrom hire purchase in the same way as credit sale differs from hire purchase. Both the systems i.e

hire purchase and instalment, have one point common viz payment of price by instalment.

Features :

1. Ownership : The ownership of the goods passes to the buyer as soon as the transaction iscompleted and delivery is effected.

2. Nature of sale : Instalment payment system is a type of credit sale where price of the goodsis paid in periodical instalments

3. Interest : Every instalment is paid along with interest calculated on outstanding balance.4. Repossession : The seller under instalment system does not have the right of repossession of

goods, if the buyer defaults in payment of instalments.

5. Buyers right : The buyer has the right to deal with the goods as he likes viz: sale mortgageetc of the goods.

6. Return of goods : The buyer has no option to return the goods once they are purchased.*************************


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Q. Discuss the rights of hire purchaser or hirer.

Ans. The following are the rights of hirer or hire purchaser under the Hire Purchase Act

1972 :-

1. Right to get possession of the Goods = Under hire purchase, the hire purchaser has the rightto get possession of the goods on the date of signing the agreement after making down

payment , if any.

2. Right to return the goods = A hire purchaser has the right to return the goods before he paysthe last instalment.

3. Right to get notice of termination = A hirer has the right to receive from the hire vendor awritten notice of termination of the hire purchase agreement when he does not pay an

instalment.

4. Right to receive statement of account =A hirer has the right to receive from the vendor , astatement showing the amount paid by or to be paid together with interest and dates of

payment etc.

5. Right to seek courts sanction from vendor = In certain cases the hire purchaser can seekfrom the vendor the courts sanction.

6. Right to get back excess payment on repossession = A hirer has the right to get back anyexcess payment to vendor on time of repossession.

7. Right of assignment and transmission = The hirer may assign his right, title and interestunder the hire purchase agreement with the consent of the owner. However he can do sowithout the consent of the owner if the owner withholds his consent unreasonably.

8. Right to Appropriate payments :- A hirer has the right to appropriate payments in respectof two or more agreements.

*******************************

Q. Discuss the rights of hire vendor

Ans. The following rights are enjoyed by a hire vendor under the hire purchase act.

1. Right to get payment = A hire vendor has the right to get the full agreed amount from thehire buyer by instalment on due dates.

2. Right to charge interest = A hire vendor has the right to charge interest on the outstandingamount.

3. Right to repossess = A hire vendor has the right to repossess the goods if the buyer fails topay any installment.

4. Right to forfeit the initial deposit = On the termination of the hire purchase agreement, thehire vendor has the right to forfeit initial deposit made by the hire purchaser.

5. Right to charge fee for statement of account = The hire vendor has a right to charge a feeRs.1 from the hire purchaser for expenses for a statement of account.

6. Right to terminate the hire purchase agreement = The hire vendor has a right to terminatethe hire purchase agreement for default in payment of hire or unauthorized act by the hirer.

7. Right to claim damage for non delivery of the goods = The hire vendor has the right toclaim damage for non delivery of the goods from the date on which termination of hire

purchase agreement is effective.

8. Right to seize the goods = On termination of hire purchase agreement, the hire vendor hasthe right to enter the premises of the hire purchaser and seize the goods sold on hire purchase.

*************************Q. Bring out the distinctions existing between Hire Purchase and Installment System.

Ans. The difference between Hire Purchase and Installment System are as follows :

Points Hire Purchase Installment purchase

1.Nature of Contract

2.Ownership

It is an agreement of hiring

The buyer becomes the owner of

the goods only after clearing the

It is an agreement to sell

The buyer becomes the owner

of the goods immediately after


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3.Return of goods

4.Rights of disposal

5.Rights of seller

6.Controlling Act

7.Nature of payment

8.Right of lien on goods

9.Effect of default in

payment

10.After sale services

11.Position of the buyer

final instalment.

The buyer can return the goods at

any time before the payment of

final instalment.

The buyer cannot sell, destroy,

transfer, damage etc. the goods

before paying the final instalment.

The seller can repossess the goods

if the buyer makes default in the

payment of any instalment.

It is controlled by H.P.Act 1972

The payments made by the buyer

are regarded as hire charges for the

goods till the final installment is

paid

The seller has a lien on the goods

until he receives full paymentThe seller gains if there is default

in payment by the hirer.

It is the responsibility of the seller

to provide after sale service till the

last installment is made.

The position of the buyer is like a

bailee.

the agreement to sell is

complete

The buyer cannot return the

goods unless there is any defect

in the goods.

The buyer can do all these

things

The seller can sue in the court

of law for price if the buyer

makes default in payment of

any instalment.

It is controlled by law of

contract

The payments made by the

buyer are regarded as part

payment of the goods

The seller has no lien on the

goods as it is a contract of sale.The seller does not gain in case

of default in payment by the

hirer.

The buyer must arrange for

such services at his own cost.

The position of a buyer is that

of an owner.

Q. Distinguish between installment sale and credit sale.

Ans. The difference between installment purchase system and credit sale are as follows :

Points Instalment Purchase System Credit Sale

1.Nature of contract

2.Controlling act.

3.Mode of payment

4.Interest

5.Period of credit

6.Cash discount

7.Suit for outstanding

amount.

8.Security

Instalment payment system is anagreement to sell.

It is controlled by law of contract

The payment is made by a fixed

number of periodical instalment.

Interest is paid on the unpaid

balance and is included in

instalment.

Instalment purchase system is a

long period credit contract.Cash discount is not allowed in

case of instalment system

In case of default of payment , the

seller can sue the buyer for the

outstanding balance including

interest.

Usually adequate securities or

Credit sale is a contract of sale

It is controlled by the sale of

goods Act 1930.

Payment may not be made in

periodical instalment. Generally

it is paid at a time or at the

convenience of the buyer.

Generally no interest is charged

on the outstanding balances.

Credit sales are generally short

period credit contract.Discount is allowed if the

payment is made within the

stipulated period.

In case of default of payment,

the seller can sue the buyer for

the outstanding balance of the

principal only.

Usually credit sales are made to


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guarantees are necessary in case of

instalment purchase system

known customers on personal

security only

Q. Mention points of differences between Hire purchase and credit sale.

Ans. The difference between Hire purchase and credit sale are as follows :

Points Hire Purchase Credit sale

1.Nature of contract

2.Controlling act.

3.Ownership of goods

4.Interest

5.Discount

6.Return of goods

7.Disposal of goods

8.Position of the buyer

9.After sale services

10.Treatment of

payments

Hire purchase is in the nature of

agreement to sale

It is controlled by the Hire

Purchase Act of 1972

The ownership of the goods passes

from the seller to the buyer after

the last instalment is paid

The outstanding balance after

down payment is subject to

interest charged by the hire vendor

No discount is allowed by the hire

vendor on timely payment of the

instalmentThe buyer can return the goods at

any time before the last instalment

is paid

The buyer has no right to dispose

off until he pays the last instalment

The buyer holds the position of the

bailee in respect of the goods.

The seller provides after sale

services

The payments are treated as hire

charge until the last instalment ispaid

Credit sale is a contract of sale

of goods.

It is controlled by the sale of

goods Act 1930.

The ownership of the goods

passes from the seller to the

buyer when the contract to sell

is completed.

The price agreed upon does not

include any interest charges.

Discount is allowed on bulk

purchase as well as on timely

payment of the price.Generally, the buyer cannot

return the goods unless there is

an agreement to the contrary

The buyer can dispose off the

goods even before the final

payment is made

The buyer holds the position of

the owner

The buyer bears the cost of

after sale services

The payments are treated as a

part of the price of the goods.

Short Note : Interest Suspense Account :

Interest suspense account is usually opened in the book of both the buyer and the seller

when the goods are purchased or sold under instalment purchase system with the total amount of

interest. It is a deferred interest to be paid by the buyer to the seller. It consists of total interest

payable by the buyer along with different instalments during the period of contract. It is a future

liability to the buyer and future income to the seller. It is treated as deferred expenses by the

buyer.

In the books of the buyer Interest suspense account is debited and vendor account is

credited on the day of contract. When the periodical instalment becomes due interest due on the

date of instalment on the unpaid balance is transferred from interest suspense account to interestaccount and thus it is gradually written off to interest account over the contractual period. Any

balance remaining in this account on the closing day is shown in the balance sheet as a deduction

from Vendors A/c on the liabilities side.

In the books of the vendor, interest suspense account is credited and the

purchaser account is debited on the day of contract. It is a future income and is gradually adjusted

when instalments become due. It is shown as a deduction from the buyer account in the balance

sheet on the assets side.


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Q. Explain the meaning of Repossession. Discuss the various forms of repossession.

Ans. The ownership of the goods sold under hire purchase system passes to the hire purchaser only

after the payment of the last instalment . If the hire purchaser makes default in the payment of

any of the instalment as agreed at the time of entering into the hire-purchase agreement, the hire

vendor has the right to take back the goods sold under such system.

In case of default by the hire purchaser to pay the instalment as per the agreement, the hire

vendor has the right to take back the goods sold under hire purchase system. When the hire

vendor takes back the possession of such goods from the hire purchaser, it is termed as

repossession.

When the goods are repossessed by the hire vendor, he is not required to compensate the

hire purchaser. The amount already paid by the hire purchaser as down payment and instalments ,

if any are forfeited.

Forms of Repossession :

When the hire vendor sells different goods or more than one item of the same goods to the same

party under hire purchase agreement, the hire vendor may , at his option, either repossess all the

goods or a part thereof in case of default in payment of instalments by the hire purchase

depending on the terms of agreement. Thus, the repossession may take of the following forms :

(a)Complete repossession(b)Partial repossession

(a)Complete repossession : Complete repossession means taking over the possession of all thegoods sold under hire purchase system from the hire purchaser

(b)Partial repossession : in case of default in making payment of instalments by the hirepurchaser, if the hire vendor repossess a part of the goods sold, it is a case of partial

repossession. In partial repossession, the value of goods so repossessed is determined through

mutual agreement.

**************************************

BRANCH ACCOUNTING

Q. What is Branch Accounting? Discuss its features.

Ans. A branch may be defined as a section of an enterprise geographically separated from the rest ofthe business, controlled by a head office and generally carrying on the same activities as of the

enterprise. In order to increase the volume of profit, is it the primary objective the firms open their

shops in different parts of the locality / country to increase their volume of sales. It is a method to

sell goods direct to customers spread over a large territory without any intermediary. The main

establishment is called the head office and its off shoots are called branches. The method of

accounting which is used by the head office to record the branch activities in order to ascertain profit

or loss made by branch is called branch accounting.

According to William Pickles, Branch as, where a section of a business is segregated

physically from the main section, it is a branch, in other words, if the location of activities is

separated from the main place of operation, there may be said to be a head office and a branch.

Features : The following are the some important features of branch accounting :-

1. Branches are physically and geographically separated from each other as well as from thehead office.

2. A branch is not a separate legal entity.3. A branch acting under the direction and control of the head office.4. A branch depends on its head office for its supply of goods except in case of an independent

branch.

5. A branch acting under the direction and control of the head office.


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Q. What are the objectives of keeping branch accounts ?

Ans. The objectives of keeping separate branch accounting are as follows :

1. Ascertainment of operational results of each branch : A separate branch account is openedfor each branch to determine periodically the profit or loss made by each branch.

2. Ascertainment of financial position : Branch accounting becomes necessary to determinethe financial position of each branch at the closing date of a year.

3. Evaluation of performance : Branch accounting provides the management with adequateinformation to evaluate its performance and progress.

4. Branch policy : Branch accounting provides valuable information to the management toundertake a sound policy towards the branchs expansion, contraction or closure.

5. Causes of success or failure : It provides information about branch functioning in detail theanalysis of which helps the head office to arrive at the reasons for success or failure of a

particular branch.

6. Control over branch functioning : Branch accounting is a technique for exercising controlover branch functioning by the head office, especially regarding branch cash, branch stock

and petty cash.

7. Determination of managers commission : Branch accounting helps the management indetermining the commission payable to the branch manager where such commission is based

on branch profit.

8.

Fulfillment of legal requirements : Branch accounting becomes necessary in case of acompany to fulfill the requirements of the companies act in respect of branch audit as per

Sec.228 and the requirements of AS 17.

Q. What are the needs / importance for branch accounting ?

Ans. The following are the need of branch accounting :

1. To ascertain the profitability of each branch separately .2. To ascertain the financial position of each branch separately on a particular date.3. To assess the progress and performance of each branch.4. To fulfill the audit requirements under Sec.228 of the companies act 1956.5. To ascertain the requirement of stock and cash for each branch.6. To ascertain the rate of return on capital invested in the branch.7. To ascertain the closing stock at branch.8. To assess whether branch should be expended or closed.9. To ascertain the amount of commission to the manager.10.To incorporate branch profit/loss and assets/liabilities in the books of Head Office.

Q. What are the advantages of the head office by invoicing its goods to the branch at selling price or

invoice price ?

Ans. Sometimes the head office may prefer to send goods to the branch at a price higher than the cost

price termed as invoice price which is normally the selling price. This is generally done with the

following objectives or advantages :-

6. Maintenance of secrecy : the head office can keep secret from the branch manager the profithey makes on the sale of the goods. Thus it reduces the possibility of competition in the

business. Moreover , it also prevents demand for increased commission.7. Uniform selling price : All the branches will be directed to sell the goods at invoice price.

Thus uniformity of selling can be maintained.

8. Control over stock : It facilitates the control of the head office over the unsold stock atbranch. Closing stock can be easily calculated , by deducting the sale proceeds from the net

invoice price.

9. Adjustment of price : Any changes in the price of a product can be adjusted by changingtrade discount rate without changing the invoice price.


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10.No price discrimination and bargaining : If the goods are sent at selling price, there is noscope of charging discriminating prices to customers and there is no charge of bargaining on

the part of the customers.

Q. What do you mean by Debtor / Synthetic system of branch accounts.

Ans. In this system, a separate Branch account is maintained for every branch in the books of Head

office. This system is usually applicable for those branch which are fairly small in size and it

depends on head office for goods. Under this system, Branch account is considered as a nominal

account and the purpose is to ascertain the profit or loss made by each branch during an accounting

period. The profit earned or loss incurred by each branch is transferred to the General Profit and Loss

Account. Under this system all the transactions are recorded assuming that the branch is a debtor of

the Head office. Hence this system is called Debtors system.

It should be carefully noted that sales, discount, bad debts, expenses paid by branch and return

from debtors to the branch are not direct transactions between the branch and the head office and

therefore, they are not taken care of while preparing the Branch Accounts in the books of the Head

Office according to this system. Moreover, losses due to pilferage, wastage and other losses of stock

due to normal or abnormal reasons are also completely ignored under this method.

The main defect of this method is that it does not provide full information for analysis of branch

profit and loss. In short the various transactions and their recording under this system are, Branch

Account is debited with the opening balance of branch assets, goods sent to branch less returns,cheque sent for expenses of the branch and branch liabilities at the end and credited by branch

liabilities at the beginning, cheque received for remittance and closing balances of branch assets. The

difference between the two sides will be profit or loss of the branch.

Q. What is stock and debtors / Analytical system of branch accounting ?

Ans. Stock and debtors system of branch accounting is generally followed for large sized dependent

branches where goods are sent to the branches at prices above the cost or at invoice price Under this

system , instead of opening one branch account, separate accounts are opened for various

transactions. Under this system of branch accounting, the following accounts are maintained in the

head office.

1. Branch Stock Account.2. Branch Debtor account3. Goods sent to branch account.4. Branch Cash Account.5. Branch Expenses account.6. Branch Adjustment Account.7. Branch Fixed Assets account.8. Branch Profit and Loss Account.

1. Branch Stock Account : Branch stock account records the transactions regarding the movementof stock at branch. This account is debited with opening stock at branch, goods sent to branch

and goods returned by branch debtors. Cash sales, credit sales, goods returned by the branch to

the head office, any normal and abnormal losses and closing stocks of goods are recorded on the

credit side. The difference between the two sides represents surplus or shortage of stock shouldbe transferred to branch adjustments account.

2. Branch Debtors Account : Branch debtors account is maintained when the branch is allowed tosell goods on credit. This account is prepared by debiting the account with opening balance of

debtors and credit sales and crediting the account with cash received from debtors, goods

returned by the customers, discount allowed, bad debts written off, the balance represents the

closing balance of debtors. It is used to exercise control over branch debtors.


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3. Branch expenses account : This account records all branch expenses in cash and other expenseslike bad debts, discount allowed, depreciation on branch fixed assets etc. and balance of this

account is transferred to the branch profit and loss account.

4. Branch Adjustment Account : Branch adjustment account is prepared with a view to ascertainthe gross profit of the branch. This account summarises the profit on account of Loading on

all transactions connected with goods at branch. This account is credited with the stock reserve

on opening stock and with the loading on the net goods sent to the branch. It is also credited

with loading on surplus in stock. Again , this account is debited with the loading on shortage in

stock, spoilage , pilferage, loss by fire, loss in transit and the stock reserve on the closing stock.

The balance of this account is transferred to the Branch profit and loss account. Apparent gross

profit or gross loss is transferred to this account from branch stock account.

5. Branch Cash Account : This account is maintained for recording all cash transactions relatingto the branch. It is debited with the opening balance, cash received from head office, cash sales

and cash received from debtors and is credited with branch expenses and remittance to head

office. The closing balance represents the cash lying with the branch.

6. Goods sent to Branch : Goods sent to branch account is prepared to ascertain the net value ofgoods sent to the branch during the year. This account is credited with the invoice price of goods

sent to the branch by the head office and

acconts theory

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