mb0041

MB0041- Financial & Management Accounting – 4 Credits

Assignment Set 1

Q1. Accounting Principles are the rules based on which accounting takes place and these rules are universally accepted. Explain the principles of materiality and principles of full disclosure. Explain why these two principles are contradicting each other. Your answer should be substantiated with relevant examples. (10 Marks)

Ans.

Principles of Materiality: - While important details of financial status must be informed to all relevant parties, insignificant facts, which do not influence any decisions of the investors or any interested group, need not to b e communicated. Such less significant facts are not regarded as material facts. What is material and what is not material depends upon the nature of information and the party to whom the information is provided. While income has to be shown for income tax purposes, the amount can be rounded off to the nearest ten and fraction does not matter. The statement of account sent to a debtor contains all the details regarding invoices raised, amount outstanding during a particular period.

Principles of Full disclosure: - The business enterprise should disclose relevant information to all the parties concerned with the organization. It means that any information of substance or of interest to the average investors will have to be disclosed in the financial statements.

The company Act 1956 requires that income statement and balance sheet of a company must give a fair and true view of the state of affairs of the company. Full discloser of all relevant facts in accounts is the necessity in order to make accounting record useful. It is not a new thing , but is based on convention. Even in older times people used to speak truth and in full was incorporated in accounts too. Thus, full discloser is a very important convention.

For examples: - a hotel should report the building of a new wing, or the future acquisition of another property. A restaurant facing a lawsuit from a customer who was injured by tripping over a frayed carpet edge should disclose the contingency of the lawsuit. Similarly, is accounting practices of the current financial statements were changed and differ from those previously reported, the changes should be disclosed. Changes from one period to the next that affect current and future business operations should be reported if possible. Changes of this nature include changes made to the method used to determine depreciation expenses or to the method of inventory valuation, such changes would increase or decrease the value of ending inventory, cost of sale, gross margin and net income or loss. All changes disclosed should indicate the dollar effects such disclosures have on financial statements.

Q 2. Journalize the below transactions, prepare relevant ledger accounts and finally trial balance. . ( 6+6+3 = 15 Marks)

M/s Ventak Enterprise Pvt Ltd.

01.01.2009Started business with cash Rs. 2,00,000 Goods Rs. 1,00,000 Furniture Rs. 50,000

01.01.2009 Opened Current Account with Rs. 1,00,000

02.01.2009Placed an order with Ritik for the supply of goods of the list price of Rs. 1, 00, 00. In this connection, we paid 9% of the list price as an advance by cheque.

03.01.2009Ritik supplied goods of the list price of Rs. 1, 00,000 less 12% trade discount. Packing and delivery charges Rs. 1,000.

04.01.2009Purchased goods from Murali of the list price of Rs. 1,00,000 less 12% trade discount and paid him by cheque under a cash discount of 5%

05.01.2009Received an order from Shyam for supply of goods of the list price of Rs. 1, 00,000 with an advance of 10% of list price.

06.01.2009Supplied the above goods at 10% trade discount. Packing and delivery charges Rs. 1000.

07.01.2009Goods costing Rs. 80,000 sold to Mr X at a profit of 20% on sales less 10% trade discount and 2% cash discount

08.01.2009Goods (cost Rs. 3,000, Sales Price Rs. 4,000) taken away by the proprietor for his personal use.

09.01.2009Shyam became insolvent and paid 80 paise in a rupee in full and final settlement

10.01.2009 Paid Ritik 80% on account.11.01.2009 Goods (Cost Rs. 3,000 , Sales Price Rs. 4,000) stolen12.01.2009 Paid Life Insurance Premium Rs. 1,000.13.01.2009 Cash embezzled by an employee Rs. 1,000.

Ans. Journal Entry of M/s Ventak Enterprise Pvt Ltd.

Date Particular L. F.

Debit Amount(in Rs.)

Credit Amount(In Rs.)

01.01.2009 Cash A/c - Dr.Goods A/c DrFurniture A/c Dr

To capital A/c (Being cash , goods & furniture brought in as

200000100000 50000

350000

capital)01.01.2009 Bank A/c - Dr.

To cash A/c(Being the current A/c opent with Rs.100000)

100000100000

01.01.2009 Ritik A/c - Dr.To Bank A/c

(Being advance paid to Ritik)

9000 9000

03.01.2009 Purchase A/c - Dr.Frieght A/c Dr.

To Trade DiscountTo Ritik A/c

(Being goods purchase on credit)

List Price Rs.100000Less: Trade Discount @12% Rs. 12000 Rs. 88000Add: Packing & Delivery Charge Rs. 1000 Rs. 89000

100000 1000

1200089000

04.01.2009 Purchase A/c - Dr.To Bank A/cTo Discount A/cTo Trade Discount

(Being goods purchase against cheque)

List Price Rs.100000Less: Trade Discount @12% Rs. 12000 Rs. 88000Lee: Cash Discount 5% Rs. 4400 Rs. 83600

10000083600 440012000

05.01.2009 Cash /A/c Dr.To Shyam A/c

(Being an advance received from Shyam)

10000

10000

06.01.2009 Shyam A/c Dr. Trade Discount Dr.

To Frieght A/cTo Sales A/c

(Being goods sold on credit)

List Price Rs.100000Less: Trade Discount @10% Rs. 10000

9100010000

1000100000

Rs. 90000Add: Packing & Delivery Charge Rs. 1000 Rs. 91000

07.01.2009 Cash A/c - Dr.Discount Allowed A/c Dr. Trade Discoutn A/c Dr.

To Sale A/c (Being goods sold cash )

Cost Rs. 80000Add: Profit 20% Rs. 16000 Rs. 96000Less: Trade Discount @10 % Rs. 9600 Rs. 86400Less: Cash Discount 5% Rs. 1728 Rs. 84672

84672 1728 9600

96000

08.01.2009 Drawing A/c Dr. To Goods A/c

(Being the goods take away by proprietor for personal use)

3000 3000

09.01.2009 Cash A/c - Dr.Bad Debts A/c Dr.

To Shyam A/c(Being 80% received from Shyam in full & final settlement )

6480016400

81000

10.01.2009 Ritik A/c - Dr.To Cash A/c

(Being 80% paid to Ritik )(Rs.89000 -9000= 80000)

6400064000

11.01.2009 Loss by theft A/c - Dr.To Goods A/c

(Being the goods stolen)

30003000

12.01.2009 Drwaing A/c - Dr.To Cash A/c

(Being life insurance premium paid )

10001000

13.01.2009 Loss by embezzlement A/c Dr To Cash A/c

(Being cash embezzled by an employee)

10001000

Ledger

Capital A/cDate Particulars Amount Date Particulars Amount

31-01-09 To, Balance C/d 350000 01-01-09 By, Cash A/c 200000 By, Goods A/c 100000 By, Furniture A/c 50000

Total 350000 Total 350000

01-2-09 By, Balance B/d 350000

Cash A/cDate Particulars Amount Date Particulars Amount

01-01-09 To, Capital A/c 200000 01-01-09 By, Bank A/c 10000005-01-09 To, Shyam A/c 10000 10-01-09 By, Ritik A/c 6400007-01-09 To, Sales A/c 84672 12-01-09 By, Drawing A/c 100009-01-09 To, Shyam A/c 64800 13-01-09 By, Loss by Embzzlement A/c 1000 31-01-09 By, Balance C/d 193472


01-2-09 To, Balance B/d 193472

Stock A/cDate Particulars Amount Date Particulars Amount

01-01-09 To, Capital A/c 100000 08-01-09 By, Drawing A/c 3000 11-01-09 By, Stolen A/c 3000 31-01-09 By, Balance C/d 94000


01-2-09 To, Balance B/d 94000

Furniture A/cDate Particulars Amount Date Particulars Amount

01-01-09 To, Capital A/c 50000 31-01-09 By, Balance C/d 50000Total 50000 Total 50000

01-2-09 To, Balance B/d 50000

Bank A/cDate Particulars Amount Date Particulars Amount

01-01-09 To, Cash A/c 100000 01-01-09 By, Ritik A/c 9000

01-01-09 By, Purchase A/c 83600 31-01-09 By, Balance C/d 7400


01-2-09 To, Balance B/d 7400

Ritik A/cDate Particulars Amount Date Particulars Amount

01-01-09 To, Bank A/c 9000 03-01-09 By, Purchase A/c 10000003-01-09 To, Trade Discount 12000 By, Frieght A/c 100010-01-09 To, Cash A/c 64000 31-01-09 16000


01-2-09 By, Balance B/d 16000

Purchase A/cDate Particulars Amount Date Particulars Amount

03-01-09 To, Purchase A/c 100000 31-01-09 By, Balance C/d 20000004-1-09 To, Bank A/c 100000


01-2-09 By, Balance B/d 200000

Shyam A/cDate Particulars Amount Date Particulars Amount

05-01-09 To, Cash A/c 10000 06-01-09 By, Sales A/c 10000006-01-09 To, Trade Discount 10000 By, Frieght A/c 100009-01-09 To, Cash A/c 64800 09-01-09 To, Bad debts A/c 16200


Sales A/cDate Particulars Amount Date Particulars Amount

31-001-09 To, Balance C/d 196000 06-01-09 By, Shyam A/c 100000 07-01-09 By, Cash A/c 96000


01-2-09 By, Balance B/d 196000

Frieght A/cDate Particulars Amount Date Particulars Amount

06-01-09 To, Shyam A/c 1000 03-01-09 By, Ritik A/c 1000Total 1000 Total 1000

Trade Discount A/cDate Particulars Amount Date Particulars Amount

06-01-09 To, Shyam A/c 10000 03-01-09 By, Ritik A/c 1200007-01-09 To, Sale A/c 10000 04-01-09 By, Purchase A/c 1200031-01-09 To, Balance C/d 4000


01-2-09 By, Balance B/d 4400

Cash Discount A/cDate Particulars Amount Date Particulars Amount

07-01-09 To, Sale A/c 1728 04-01-09 By, Purchase A/c 440031-01-09 To, Balance C/d 2672


01-2-09 By, Balance B/d 2672

Drawing Discount A/cDate Particulars Amount Date Particulars Amount

08-01-09 To, Goods A/c 3000 31-01-09 By, Balance C/d 400012-01-09 To, Cash A/c 1000


01-2-09 To, Balance B/d 4000

Bad Debt A/cDate Particulars Amount Date Particulars Amount

06-01-09 To, Shyam A/c 16200 31-01-09 By, Balance C/d 16200


01-2-09 To, Balance B/d 16200

Stolen A/cDate Particulars Amount Date Particulars Amount

11-01-09 To, Goods A/c 3000 31-01-09 By, Balance C/d 3000Total 3000 Total 3000

01-2-09 To, Balance B/d 3000

Loss by Embezzlement A/cDate Particulars Amount Date Particulars Amount

13-01-09 To, Cash A/c 1000 31-01-09 By, Balance C/d 1000Total 1000 Total 1000

01-2-09 To, Balance B/d 1000

Trial Balance

Accounts Debit CreditDebit Balance Capital 350000Cash 193472 Stock 94000 Furniture 50000 Bank 7400 Purchase 200000 Ritik 16000Sales 196000Trade Discount 4400Cash Discount 2672Drawing Discount 4000 Bad Debts 16200 Stolen 3000 Loss by Embezzlement 1000 569072 569072

Q 3. Explain any two types of errors that are disclosed by trial balance with examples and rectification entry. Note - Avoid giving examples given in the self learning material.

Ans. Types of Errors that are disclosed by trial balance: - Accountants prepare trial balance to checks this correctness of accounts. If total of debits balances does not agree with the total of credit balances, it is a clear cut indication that certain errors have been committed while recording the transactions the books of original entry or subsidiary books.

All errors of accounting procedure can be classified as errors of principle: -

When a transaction is recorded again the fundamental principles of accounting, it is an error of principle. For Example – if revenue expenditure is treated as capital expenditure or vice versa.

Clerical Error: - Errors of Omission – when a transaction is either wholly or partially not recorded in the books, it is an error of omission.

Error of Commission: - When an entry is inco09rrctly recorded either wholly or partially incorrect posting, calculation, casting or balancing.

Compensating errors: - Sometimes an error is counter-balanced by another in such a way that is not disclosed by the trial balance.

Correction of Errors in next accounting period.As stated earlier, that it is advisable to locate and rectify the error before preparing the final accounts for the year. But in certain cases when after considerable search, the accountant fails to locate the error and he is in a hurry to prepare the final accounts of the business for filing the return for sales tax or income tax purposes, he transfers the amount of difference of trial balance to a newly opened “suspense Account”

In the next accounting period as and when the errors are located these are corrected with references to suspense account. When all the error are disclosed and rectified the suspense account shall be closed automatically.

Those errors which do not affect the trial balance can’t be corrected with the help of suspense account. For Example - It is found that debit total of trial balance was less by Rs. 500/- for the reason that wilson’s account was not debited with Rs. 500/- the following rectifying entry is required to be passed.

From the point of view of rectification of the error, these can be divided into 2 groups: Error affecting one account onlyErrors affecting two or more accounts

Errors affecting one account: -

Casting error , error of posting, carry forward, balancing, Omission from Trial balance.

Such errors should first of all be located and rectified. These are rectified either with the help of journal entry of by giving an explanatory note in the account concerned.

Rectification: - All types of errors in accounts can be rectified at two stages: - 1. Before preparation of the final accounts

2. After Preparation of the final accounts

Errors rectified within the accounting period. The Proper method of correction of an error is to pass journal entry in such a way that it corrects the mistake that has been committed also gives effect to the entry that should have been passed, But while errors are being rectified before the preparation of final accounting.

Q4. Let us assume you have been recently appointed as Management Accountant of a small but upcoming firm. Your immediate supervisor has asked you to prepare certain financial ratios from the balance sheet of one of their clients M/s Vinod Enterprise.

Liabilities Amount Assets AmountEquity Share Capital 50000 Fixed assets 875008% Pref Share Capital 10000 Investments 25000Reserve Fund 40000 Stock 300006% Debentures 20000 Sundry Debtors 13500Sundry Creditors 30000 Bank Balance 7000P & L accountYear 2000-1000Year 2001-20000

21000Preliminary expenses 8000

Total 171000 171000

The director intent to transfer a sum of Rs.5000 out of the current year’s profit to provision for tax. The financial ratios needed are: a. Return on capital employed

b. Current ratio c. Fixed assets to networth d. Debt - Equity ratio e. Return on owner’s capital. (10 Marks)

Ans.

(a) Return on Capital Employed= Fixed asset + Investment + Current Asset – Current Liability= 87500 + 25000 + 30000 + 13500 + 7000 – 30000= Rs. 133000/-

(b) Current Ratio =

(c) Fixed Assets to net worth

(d) Debt-Equity ratio

(e) Return on owner’s Capital

Q 5. A friend of you has approached to help him out in setting his books of accounts in order. Unfortunately he is struck with difference in trial balance. Help him in redrafting the trial balance.

Sl.no Particulars Dr Cr

1Stock on 31st Dec,2008

192,100

2 Capital 13,450

3 Cash in hand 1,400

4 Bank Overdraft 9,320

5 Sales 236,400

6 Purchases 106,400

7 Returns inward 13,400

8 Returns outward 2,960

9 Carriage outward 2,360

10 Carriage inward 14,260

11 Salaries 9,600

12 Wages 3,660

13 Sundry debtors 16,300

14 Sundry creditors 37,360

15Stock on 1st Jan 2006

94,120

16 Land and building 15,000

17 Plant and machinery 20,900

18 Trade expenses 2,090

395,540

395,540

Ans:-

Trial Balance

S.N. Particular L.F. Dr. Amount (Rs.)

Cr. Amount (Rs.)

1 Capital 134502 Cash in hand 1400

3 Bank Overdraft 9320

4 Sales 236400

5 Purchases 106400

6 Return Inward 13400

7 Return Outward 2960

8 Carriage Outward 2360

9 Carriage Inward 14260

10 Salaries 960011 Wages 366012 Sundry Debtors 16300

13 Sundry Creditors 37360

14 Opening Stock on 01.01.2006

94120

15 Land & Building 15000

16 Plant & Machinery 20900

17 Trade Expenses 2090

299490 299490

Q 6. Explain the accounting treatment of bad debt and provision for doubtful debts with suitable example.

Ans:- First let’s distinguish between a bad and a doubtful debt. A debt owing to a business that is not expected to be paid is a bad debt. A doubtful debt is a debt, which the business considers may not be paid. The Distinction is important because the accounting treatment differs, as shown below Double Entry.

Bad and Doubtful debts from part of the double entry book keeping system. Note that the general

principles of double entry book keeping are not covered here but form part of the ICM Accounting unit.

Accounting Treatment for Bad Debts: -If we decide that there is no probability of collecting an overdue amount, we need to reduce the balance sitting on that customer’s account to zero. We do not want to show a balance owing that in act will never be recovered because this would be over stating our debtors and therefore overstating our assets.

We need to reflect this expense in our accounts and therefore transfer the balance to the profit and loss account. The Entries are as follows: -

Debit: Bad debt A/cCredit: Customer’s account

Transferring to the final account:Debit: Profit and loss accountCredit: Bed debt account.

Accounting Treatment for doubtful debts:

A doubtful debt may not turn into a bad debt. In fact, it may not be possible to isolate specific customers when computing an amount which may turn bad. But however we arrive at this figure, prudence dictates that we should provide for this in our final accounts.

The accounting entries will be as follows: -Debit: Profit and loss accountCredit: Provision for bad debts

The Provision will be shown on the balance sheet as a deduction from debtors. Increases to the provision in subsequent year will be debited to the profit and less account. The procision will be calculated after all bad debts have been written off. Note that the auditor pay particular attention to bad debt provisions because of the ease with which they can be used to manipulate profit and crate a hidden reserve.

Example: - Alice Beeton runs a food and drink business. Her customer are given 60 days credit. Alice is about to prepare her accounts as at the year ending 30 June 2000. Alice has run a number of promotions this year and has determined that the provision for bad debts will need to be increased from 2% to 3% of her debtors. The net debtors for last year were 28,000. Debtors are currently 32,900.

31st March F 1250031st May A Ward 400

Show all the relevant entries in the accounts. The profit and loss account shows the expenses incurred the bad debts and increase in the provision for bad debts.

mb0041

Documents

delivery charge

delivery charges

ventak enterprise

income tax

sales price

loss account

financial

accounting