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UGC NET (Financial Accounting) www.innovative.org.in For By: Dheeraj Kumar Singh Ph. No: 9717168088 Address: 71, Main Road G.T.B. Nagar (Near Bank of Baroda) Delhi 100009 Financial & Management Accounting By – Dheeraj Kr. Singh 1
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Page 1: For - Innovative Institute · UGC NET (Financial Accounting)  Syllabus . FINANCIAL & MANAGEMENT ACCOUNTING . Financial & Corporate Accounting:

UGC NET (Financial Accounting) www.innovative.org.in

For

By: Dheeraj Kumar Singh

Ph. No: 9717168088 Address: 71, Main Road G.T.B. Nagar

(Near Bank of Baroda) Delhi 100009

Financial & Management Accounting By – Dheeraj Kr. Singh 1

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© All Rights Reserved with Author No part of this book may be Xeroxed or reproduced in any other form without the written permission of the author Every effort has been made to avoid errors or mistakes in this book. Inspite of this some errors might have crept in. It is noted that author will not be responsible for any damage or loss.

Financial & Management Accounting By – Dheeraj Kr. Singh 2

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Syllabus

FINANCIAL & MANAGEMENT ACCOUNTING

Financial & Corporate Accounting:

Basic Accounting concepts, Capital and Revenue, Financial Statements.

Partnership Accounts: Admission, Retirement, Death, Dissolution and Cash Distribution.

Advance Company Accounts: Issue, forfeiture, Purchase of Business, Liquidation, Valuation of shares, Amalgamation, Absorption and Reconstruction, Holding Company Accounts.

Cost & Management Accounting:

Ratio Analysis, Funds Flow Analysis, Cash Flow Analysis , Marginal Costing and Break-

Even analysis, Standard costing, Budgetary control, Costing for decision- making.

Responsibility accounting

Test Schedule

1st Test 1 to 4 Chapter 50 Questions 2nd Test 5 to 8 Chapter 50 Questions 3rd Test 1 to 10 Chapter 100 Questions 4th Test 11 to 14 Chapter 50 Questions 5th Test 15 to 16 Chapter 30 Questions 6th Test 17 to 22 Chapter 40 Question 7th Test 1 to 22 Chapter 100 Questions

Financial & Management Accounting By – Dheeraj Kr. Singh 3

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Index

S. NO. Chapter Page No.

No. of M.C.Q.

General M.C.Q.

Previous Year

M.Com

Previous Year

N.E.T. Total

1 Accounting Terminology 5 - 14 19 7 1 27

2 Rules of Double Entry Book–Keeping 15 - 21 37 4 3 44

3 Classification of Accounts 22 - 27 13 5 1 19

4 Accounting Process Journal 28 - 39 37 4 1 42

5 Ledger 40 - 46 47 – – 47

6 Trial Balance 47 - 56 35 2 – 37

7 Subsidiary Books 57 - 63 17 1 1 19

8 Cash Book 64 - 70 30 1 – 31

9 Rectification of Errors 71 - 83 7 2 – 9

10 Meaning and Scope of Accounting 92 - 96 26 8 – 34

11 Accounting Concepts, Principles and Conventions 97 - 107 33 17 8 58

12 Accounting Standard -Concepts, objectives, Benefits 108 - 113 14 4 1 19

13 Accounting Policies 114 - 116 11 2 – 13

14 Capital and Revenue Expenditure and Receipts 117 - 124 38 2 6 46

15 Depreciation Accounting 125 - 139 21 7 2 30

16 Inventory Valuation 140 - 151 27 9 1 37

17 Final Accounts 152 - 173 56 15 3 74

18 Introduction to Partnership Accounts 174 - 191 43 1 1 45

19 Treatment of Goodwill 192 - 199 10 1 – 11

20 Admission of New Partner 200 - 213 25 2 4 31

21 Retirement and Death of a Partner 214 - 227 23 – 3 26

22 Dissolution of Partnership Firm 228 - 246 18 2 2 22

Total

Financial & Management Accounting By – Dheeraj Kr. Singh 4

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There is certain basic accounting terms which are daily used in the business world. Before starting the study of accounting it is essential to understand these terms as these terms have their specific meaning in Accounting. These basic terms are called “Accounting Terminology”.

1. Business: - regular occupation, profession or trade. Any occupation or activity in which people regularly engage with a view to earn profit is called business. It is very important that only those activities are called businesses which are done on “Regular basis”. Occasional activities are not cover under business.

2. Owner: – The person who makes the investments and bears all the risks (loss) and rewards (profits) connected with the business is called the owner. In Case of Sole Proprietorship Proprietor is the owner; in case of partnership partners are the owner; in case of company shareholder are the owner of the business. If Mr. X invests money in the business Mr. X is the owner of the business.

3. Capital / Additional Capital / Fresh Capital / Further Capital: – The term Capital is used for the “Business point of View”. It means the amount which proprietor has invested in the business is called capital. Proprietor has right to refund his capital from the business at any time. Capital introduced by proprietor may be in cash or in kind (in form of Furniture, Goods, Building, Plant and Machinery etc.)

Capital is the Internal Liability of the business. It is the liabilities towards Proprietor. Capital is also known as Owner’s Equity or Net Worth.

For Example: - If Ram Started Business with Cash Rs.50,000 and Furniture worth Rs.30,000 then Total Capital of Firm becomes Rs.80,000 (50,000 + 30,000)

Example of Separate Business Concept

After the investment Transactions are recorded in Business at “Business Point of view” and not from “proprietor point of view”

Business Firm

Business Firm

Capital (Liability of

Business)

Cash or Other type of Assets

Chapter 1

Accounting Terminology

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4. Internal Liability: -These represent proprietor’s equity, i.e. all those amount which are entitled

to the proprietor, e.g., Capital, Reserves, Undistributed Profits, etc.

5. Drawings: – It is amount of money or the value of goods, which the proprietor takes (withdraw) for his domestic or personal use. If goods are taken by proprietor then it is valued at purchase cost. Drawings reduce the capital of the proprietor.

6. Purchases: - Purchase means purchase of those goods which purpose is to resale either directly in ordinary course of business or used in producing finished goods, which are also to be sold. Purchase does not include purchase of fixed assets or stationery which purpose is not to resale in ordinary course of business.

Purchase can be made in two ways: -

(i) Cash Purchase: - In this type of purchase goods are purchased on cash basis. It means goods

are comes in business and cash is immediately paid or goes out from business (ii) Credit Purchase: – In this type of Purchase goods are comes in business but cash is not paid

immediately. Cash will be paid in future. In case of Credit purchase Creditors will arise.

7. Purchases Return / Return Outward: - Goods purchased may be returned to the supplier or creditor due to any reason such as “not as per specification” or “defectives” it is known as purchase return or return outward. It has been assume that this facility is only provided when goods are purchase on credit basis.

8. Sales: -Sales means sale of those goods in which firm deals or sale of those goods which was

purchase for the purpose of resale. Sales do not include sales of old Fixed Assets and Scrap

Sales can be done in two ways: – (i) Cash Sales: – In this type of sale goods are goes from the business and cash is immediately

comes. (ii) Credit Sales: – In this type of sale goods are goes from the business but cash is not come

immediately. Cash will be received in future. In Case of Credit sale Debtors will arise.

In case of non-corporate entity (like sole proprietorship and partnership) if any expense of proprietor or partner is paid out of business cash it is treated as drawings. Such as: Income Tax paid, Life Insurance Premium Paid, Tuition Fees Paid for children etc. If any Assets is purchases out of business cash and it is not used in business but used by proprietor or partner for his personal or domestic use it is also treated as drawings.

Shop or

Godowns

Cash Sales

Credit sales

Cash Purchase

Credit Purchase

Remaining Purchase

Revenue Cost

Current Assets

Current Liabilities

Debtors Creditors Sales Return

Purchase Return

Bills Receivable Bills Payable

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9. Sales Return / Return Inward: - Goods sold when returned by customer or debtors due to any reason such as “not as per specification” or “defectives” it is known as sales return or return inward. It is made when goods are purchase on credit basis. It has been assume that this facility is only provided when goods are sold on credit basis.

10. Goods Destroyed by Fire: - Certain time fire occurred and destroyed the goods it reduces the stock (purchase of goods) of business. It is the loss for the business.

11. Goods taken for personal use: - Certain time goods are taken by proprietor for personal use it is drawings and it reduce stock (purchase of goods) it is not treated as sales because no profit is earned on such goods. If goods are taken by proprietor then it is valued at purchase cost.

12. Goods given as Charity / Donation: - Certain time goods are given as charity or Donation (without consideration) it reduce stock (purchase of goods) it is not treated as sales because no profit is earned on such goods. If goods are given as charity then it is valued at purchase cost.

13. Goods distributed as free samples: - Certain time goods are distributed as free sample to marketing purpose and to increase sales it is a way of advertisement it reduce stock (purchase of goods) it is not treated as sales because no profit is earned on such goods. If goods are distributed as free sample then it is valued at purchase cost.

14. Goods used to make or construct assets: - Certain time by using own goods some assets are construct. The goods which are used to construct assets are valued at purchase cost.

15. Trade Debtors: – A person who owes money to the firm generally on account of credit sales of goods is called a Debtor. When goods are sold to Shyam on credit Shyam is the “Debtor “of the firm.

16. Bills Receivable: - It means a bill of exchange accepted by a Debtors showing the particular amount will be received on a particular date. When Bills Receivable is made it decreases the value of Debtors.

17. Trade Receivables: - Amount due from Debtors and Bills Receivables (B/R) is jointly termed as “Trade Receivables” or “Accounts Receivable”

18. Solvent:-A person or a firm is said to be solvent when their assets are more than their liabilities. It means when a person is not in position to pay his debt is called insolvent person.

19. Insolvent: - When the liabilities become more than the assets, that person or a firm is said to be insolvent. In such case all assets & liabilities of insolvent persons is provided to the official receiver or assignee (he is authorised person of courts) and official receiver or assignee sold the assets and paid the liability in proportionate basis. No liability is paid in full only some portion is paid to creditors.

20. Bad Debts written off: - It is that amount of debtors which is irrecoverable. Bad debts are that part of debtors which is not received or recovered by the businessman. It is the loss for the business. It is normally arise when the debtors become insolvent

21. Bad Debts written off earlier Recovered: - Sometimes a debtor whose account had been earlier written off as a Bad Debt pays some amount it is called Bad Debts Recovered. The amount so received is an income for the business because the amount was earlier written off as a loss. This recovery is called Bad Debts Recovered.

22. Trade Creditors: – A person to whom a firm owes money is called a Creditor. When goods are purchased from Mohan on Credit Mohan is the “Creditor” of the firm.

• If a transaction relates to purchase or sale of goods and the name of the seller or purchaser is given but it is not stated that it is a cash transaction or Credit transactions it is treated as a Credit Transaction.

• If a transaction relates to purchase or sale of goods and the name of the seller or purchaser is not given it is treated as a Cash Transaction.

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23. Bills Payable: - It means a bills of exchange acceptance given by creditor showing that a particular amount will be paid on the particular date. When Bills Payable is made it decreases the value of the creditors.

24. Trade Payables: - Amount due to Creditors and for Bills Payable (B/P) is jointly termed as “Trade Payables” or “Accounts Payable”.

25. Payment in Full settlement: - It means total dues are settled and no balance is remaining. Generally some discount is received at the time of payment in full settlement. For example credit purchase of goods for Rs. 20,000 payment made to creditors in full settlement Rs. 19,000. In this situation no dues is balance and Rs. 1,000 is discount received.

26. Stock / Inventory: – At the end of year balance of purchase (remaining goods) is transferred to stock. These are the physical items of trade. It is those items which are purchased for the purpose of resale or it is those items in which firm deals. In other words stock means goods held by the firm for the purpose of sale in ordinary course of business or for the purpose of using it in the production of goods meant for sale or services to be rendered.

Stock may be Opening Stock or Closing Stock

(i) Opening Stock: –Stock lying at the godowns at the beginning of the year is called opening stock.

(ii) Closing Stock: – Stock lying at the godowns at the end of the year is called closing stock.

Inventories for Manufacturer

Raw materials Work in progress Finished Goods

Inventories for Trader Stock in Trade

Stock in Trade means goods in which firm deals. These are those goods which firm normally purchase and sold without any modifications.

27. Cost: – It is the amount of expenditure incurred on a specified article, product or activity. When an item is purchased the value that is paid for it is called Cost.

28. Revenue: – It is the Gross inflow of Cash or receivables arising from a transaction. When the goods are sold the total amount in which goods are sold is called Revenue.

29. Profits: – It is surplus of revenue of a business over its cost.

Profit = Revenue – Cost

Profit may be classified in two types: –

Gross Profits: – Gross Profit is the difference between Sales Revenue and cost of goods sold. Net Profits: – Net Profit is the Profit made after allowing for all expenses.

30. Gains: – It is the profit that is arising from transactions that are incidental or occasional or rare to business. It is not arise from normal business transactions and in normal course of business. It is arise from sale of investments or Fixed Assets at more than their book Value.

It is arise from sale of Investments or Fixed Assets When these items are sold at more than their Book Value

Goods / Stock

Purchases Sales Sales Returns Purchases Returns

Merchandise means goods for resale

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It is not arise in Normal course of Business

Gain = Sale Price of Fixed Assets or Investments – Book Value / Cost of Fixed Assets or Investments

31. Incomes: – It a very wide term. It is the earning during a particular period of time. Income is generally measured in terms of period includes both profit and gain. For example: - Daily income, monthly income or Yearly Income.

Income Received: - (Benefit is provided and payment is received):– These are those incomes, which have been earned and received by the business. For example: - Rent Received

Accrued Income / Income Accrued but not due (Benefit is provided but payment is not received): - These are those incomes, which have been earned by the business during the accounting year but has not yet become due and, therefore, has not been received. This is the Assets of the business. For example: - Accrued Rent. Income received in Advance / Unearned Income (Payment is received without providing benefits): - These are those incomes, which have been received by the business during the accounting year before being earned. This is the liability of the business. For example: - Rent received in Advance.

32. Expenses: – Expenses is the amount spent in order to produce and sell the goods and services which produce Revenue. In other words Expenses are incurred to generate and earn revenue. For example payment of Salaries, Wages, Rent etc. are expenses.

Expenses Paid (Benefit is availed and payment is also made):– amount paid in order to produce and sell the goods and services which produce Revenue. For example: - Salary Paid

Outstanding Expenses (Benefit is availed but payment is not made):– These are those expenses which have become due during the accounting period but which have not yet been paid. This is the liability of the business. For example: - Salary Outstanding / Outstanding Salary

Prepaid Expenses / Unexpired Expenses (Payment is made without availing he benefits): These are those expenses, which have been paid in advance. In this case payment is made before the due date. This is the Assets of the business. For example: - Prepaid Salary

33. Loss: – Loss is the excess of expenses of a period over its related revenue. Loss may be arising in

normal business transactions or occasional transactions. Loss may be arise from sale of Investments or Fixed Assets

Loss = Cost – Revenue

34. Discount: – Discount is allowed to customer by businessman. It is the reduction in price of goods. Discounts are Two Types

1. Trade Discount 2. Cash Discount

Difference between Expenses and Loss

• Expenses are incurred to generate revenue whereas Loss does not incur to generate revenue. For example:-

Expenses Loss

Salary paid to worker Cash embezzled by a worker Depreciation on Machine Selling of Machine below than its book value Purchase of Machine Theft of Machine

Sundry Expenses: - Generally petty (small) expenses are incurred in a business such as refreshment, postage & stamp, conveyance etc. These expenses are normally debited in one account for convenience in Sundry Expenses Account.

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35. Assets: – Assets are the resource owned by the business with the purpose of using it for generating future profits. It means the property or legal right owned by the business. An item only becomes assets of the business when businesses have “its ownership rights” and enable the organization to get cash or a benefit in future.

An items becomes an assets when

Businesses have “its ownership rights” Used in its production or service process and Gives the benefits to the organization

According to Finny and Miller, “Assets are future economic benefits, the rights, which are owned and controlled by an organization or an individual”.

Normal Classification of Assets

(i) Fixed Assets: – Fixed assets are those assets which are “purchased for the purpose of operating the business” and not for resale in ordinary course of business. For example: -

• Land, • Buildings, • Machinery, • Furniture, • Goodwill, • Brand value, • Trademarks, • Computer Software, • Mining Rights, • Copyrights etc.

(ii) Current Assets: – Current assets are those assets of a business which are kept for short term / period with a purpose of resale or converted them into cash. For example: -

• Bank Balance, • Unsold Stock, • Debtors, • Bills Receivable, • Prepaid Expenses, • Accrued Income etc.

(iii) Tangible Assets: – Tangible assets are those assets which have physical form/ existence or they can be seen and touched. For example: -

• Land, • Buildings, • Machinery, • Furniture, • Computer etc.

(iv) Intangible Assets: – Intangible assets are those assets which do not have any physical form/ existence or they cannot be seen and touched. For example: -

• Goodwill,, • Brand value, • Trademarks, • Computer Software, • Mining Rights, • Copyrights,

Fixed Assets

Current Assets

Wasting Assets

Fictitious Assets

Liquid Assets

Tangible Assets

Intangible Assets

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• Licences and Franchise, • Patents and other Intellectual Property Rights, • Service and Operating Rights, • Recipes, • Formulae, • Models and Designs etc.

(v) Wasting Assets: – Wasting assets are those assets which are natural resources consumed during the process of use. For example: - • Mines, • Forest, • Oil Wells etc.

(vi) Fictitious Assets: - Assets which cannot be sold or assets which have Zero market value are called Fictitious Assets. They are losses written off not in the year in which they are incurred but in more than one accounting year. These assets are also known as “Deferred Revenue Expenditure”. These are neither tangible assets nor intangible assets. For example: -

• Advertisement Expense, • Shares Issue Expenses, • Underwriting Commission, • Preliminary Expenses, • Loss / Discount on issue on Shares or Debenture etc.

(vii) Liquid Assets: - Those assets which can be converted into cash within a short span of time are known as Liquid Assets. For example: -

• Cash in hand, • Cash at Bank, • Debtors, • Bills Receivable etc.

In other words: Liquid Assets = Currents Assets – (Stock + Prepaid Expenses)

36. Depreciation: - It is the systematic allocation of the depreciable amount of an asset over its

useful life. Depreciation is charged due to fall or decrease in value of a Fixed Asset and “the diminution in the utility of fixed Assets”. It is the Loss for the business. There are following reasons of charging depreciation. Due to use With the passage of time By accident By obsolesce

37. Investment: - Amount invested in Shares or Debentures or in any other organization is called investment. When Shares are purchased it means new Investment is purchased and when shares are sold it means Investment are sold

38. Liabilities: – These are the obligations or debts that the enterprise must pay in money or services at some time in the future. Liabilities are debts, the amount, which the business owes to outsiders except the proprietor. For example: - amount due to creditors, bank overdrafts, bills payable, loans etc.

According to Finny and Miller, “Liabilities are debts, they are amounts owed to creditors.” Non-Current Liabilities or Long Term Liability:-

These are those liabilities which are payable after a long term (generally more than a year). For example: - Long Term Loans, Debentures etc.

Current Liabilities or Short Term Liability: – These are those liabilities which are payable in near future (generally within a year). For example: - Bank overdrafts, Creditors, Bills Payables etc.

All animals are classified under Livestock Account

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Contingent Liability: It represents a potential obligation that could be created depending on the outcome of an event. E.g. if supplier of the business files a legal suit, it will not be treated as a liability because no obligation is created immediately. If the verdict of the case is given in favour of the supplier then only the obligation is created. Till that it is treated as a contingent liability. Please note that contingent liability is not recorded in books of account, but disclosed by way of a note to the financial statements.

39. Securities Deposit Received: - Security is received when a facility is provided to the users. When the user stop to use the facility security money will be refunded. When security is received it is the liability of the receiver.

40. Accounting Year: - The entire life of a business is divided into time intervals consisting of 12 months. Such a time period is known as an accounting year. It may be Calendar Year or Financial Year. It is period for which performance of business is determined in terms of Profit, Capital, Assets and Liability

41. Transaction: It means an event or a business activity which involves exchange of money or money’s worth between parties. The event can be measured in terms of money and changes the financial position of a person e.g. purchase of goods would involve receiving material and making payment or creating an obligation to pay to the supplier at a future date. Transaction could be a cash transaction or credit transaction. When the parties settle the transaction immediately by making payment in cash or by cheque, it is called a cash transaction. In credit transaction, the payment is settled at a future date as per agreement between the parties.

42. Entry: - Recording of a transaction and events in the books of accounts is called entry. Every transaction is recorded in books of accounts from business point of view.

43. Books of Original Entry: - These are those books in which transactions are recorded in “First Time” from a source document. Transactions are first recorded first in Journal or Subsidiary Books.

44. Account: - It is a statement in which all like (or one nature transaction) transactions are recorded in one place. It is prepared from Journal or Subsidiary Books.

45. Revenue Receipt: - It is an amount which is received from the regular transaction of a business. It is the amount received from the sale of goods and services. It is the main source of income. It is a regular type of income. It is shown on the credit side of the trading and profit and loss accounts. Revenue receipt is of recurring nature.

46. Capital Receipt:- is the amount received from the sale of assets, shares and debentures. Capital receipt is of non-recurring nature.

47. Debits and Credits: - The words debit and credit are the words used in the 15th century in Italy by “Luca Pascioli”.

The term Debit and Credit are used as follows: Debit indicates that an amount should be entered on the left side of an account Credit indicates that an amount should be entered on the right side of an account In short, debit means left, credit means right. An increase in an asset account is recorded with a debit amount. In other words, the amount should be entered on the left side of the account.

48.Net worth: It represents excess of total assets over total liabilities of the business. Technically,

this amount is available to be distributed to owners in the event of closure of the business after payment of all liabilities. That is why it is also termed as Owner’s equity. A profit making business will result in increase in the owner’s equity whereas losses will reduce it.

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MCQ 1. Money owed from an outside is a :

(a) Assets (b) Liability

(c) Expenses (d) Capital

2. Money owed to an outside is a : (a) Assets (b) Liability

(c) Expenses (d) Capital

3. The obligation of an enterprise towards owner’s fund are known as: (a) Assets (b) Liability

(c) Capital (d) None of these

4. Which of the following is not an Asset? (a) Stock of stationery (b) Goodwill

(c) Profit and Loss Account (Credit Balance) (d) Accounts Receivable

5. Which of the following is / are fixed asset (s)? (a) Closing inventory (b) Deposits in a bank

(c) Patents (d) Prepaid expenses

6. Bank Overdraft is shown as a : (a) Current Liability (b) Contingent Liability

(c) Unsecured Loan (d) Provision

7. Which of the following assets is a fictitious asset : (a) Goodwill A/c (b) Prepaid Rent A/c

(c) Outstanding Salary A/c (d) Preliminary expenses A/c

8. Computers taken on hire by a business for a period of twelve months should be classified as : (a) Current assets (b) Intangible assets

(c) Deferred revenue expenditure (d) Not an asset

9. Current Liabilities mean — (a) Liabilities which are payable within 12 months (b) Liabilities which are payable immediately (c) Liabilities which are payable after one accounting year (d) Liabilities which are repayable within 3 months

10. Goodwill of business is : (a) Capital (b) Fictitious Assets

(c) Profit (d) Intangible Assets

11. Fixed Assets are : (a) Immovable assets like land, building etc. (b) Long term assets where benefit in the

operations of the firm is likely to extend beyond one accounting period

(c) Assets which a business firm gets in the beginning of the year

(d) Assets which a firm has purchased

12. Which of the following is not included in the category of Intangible Assets : (a) Copy rights (b) Franchises

(c) Competitive benefit and privileges (d) Lease Rights

13. Assets which are expected to be converted in to cash or to be used in the business within one year : (a) Fixed Assets (b) Fictitious Assets

(c) Current Assets (d) Wasting Assets

14. Which of the following statements is true in relation to liabilities : (a) Claims against the resources (b) Currently existing obligations which

firm intends to meet at some time in the future

(c) It must be capable of being expressed in money terms

(d) All of the above

15. Animals are grouped under : (a) Mics. Expenses (b) Livestock

(c) Intangible Assets (d) Wasting Assets

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16. Merchandise means : (a) Goods for resale (b) Owner

(c) Worker (d) Creditor

17. A person who owes money to a firm is called a : (a) Creditor (b) Debtor

(c) Owner (d) Manager

18. Which of the following is not the internal liability : (a) Creditor (b) Capital

(c) Reserve (d) Un-distributed profit

19. Which of the following is not the liquid assets : (a) Debtors (b) Stock

(c) Bank Overdraft (d) Goodwill

1. The obligation of an enterprise other than owner’s fund are known as: M.Com (Entrance 2010) (a) Assets (b) Liability

(c) Capital (d) None of these

2. Income Tax paid by sole proprietor is shown : M.Com (Entrance 2010) (a) On the debit side of profit and loss

account (b) On the debit side of account

(c) By way of deduction from capital in Balance Sheet

(d) On Liability side of Balance sheet 3. Brand Value for a business is : M.Com (Entrance 2012)

(a) Capital (b) Assets

(c) Profit (d) Liabilities

4. Which account causes the main difference between a merchandiser’s adjusting and closing process and that of a service business : M.Com (Entrance 2012) (a) Advertising expenses (b) Interest revenue

(c) Inventory (d) Accounts receivable

5. Which of the following elements represents an economic resource? M.Com (Entrance 2015) (a) Assets (b) Owner’s equity

(c) Liabilities (d) Retained earnings

6. Money receiving from customers for products to be delivered in the future is recorded as : M.Com (Entrance 2015)

(a) Revenue and an assets (b) An assets and a liability

(c) Revenue and a liability (d) Neither revenue nor liability

7. The following is a non-current account : M.Com (Entrance 2016) (a) Inventory (b) Plant and Machinery

(c) Debtors (d) Accounts Receivable

1. Which of the following is a non-current liability? UGC-NET Paper II (December 2008) (a) Bills Payable (b) Sundry Creditors

(c) Bank Overdraft (d) Long Term Loans

M.Com (Entrance) Previous Year Questions

U.G.C. N.E.T. Previous Year Questions

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Transactions: - which affect our financial position. Transactions analyzed in terms of money and supported by proper documents are recorded in the books of accounts under double entry system. To analyze the dual aspect of each transaction, two approaches can be followed: -

(1) Accounting Equation Approach / Modern Approach / American Approach (2) Traditional Approach / British Approach / Double Entry System

Double Entry system:- This system was developed in the 15th century in Italy by “Luca Pascioli”. Double Entry system of Book-Keeping has emerged in the process of evaluation of various accounting techniques. It is the most scientific, complete and perfect system of keeping records. Every transaction has two fold aspects - Debit and Credit and both the aspect are recorded in the books of accounts. According to this system, every business transaction involves two accounts, one receiving the benefit and other giving the benefit. Features of Double Entry system:- (i) It maintains a complete record of each transaction (ii) It recognizes two fold aspect of every transaction (iii) In this system, one aspect is debited and other aspect is credited following the rules of Debit

and Credit

(iv) Since one aspect of a transaction is debited and the other is credited, total of all debits is always equal to total of all credits. It helps in establishing arithmetical accuracy by preparing a Trial Balance.

Accounting Equation Approach:- The relationship of Assets with that of liability and owners’ equity in the equation form is known as “Accounting Equation” Basic Accounting Equation comes into picture when sum total of capital and liabilities equalizes assets Where Assets are what that business owns and Capital and Liabilities are what the business owes An Accounting Equation is a statement which shows that Assets = Liabilities + Capital. It is based on the dual aspect concept. In this concept every business transactions has a two-sided effect either on the assets of the business or on the liabilities of the business. The total Claims will always equal the total Assets of the firm.

Chapter 2

Rules of Double Entry Book–Keeping

Now a day’s Double Entry System is followed in almost all over the world, in our country still some organization follows Single Entry System.

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ASSETS = EQUITIES / Owner’s Equity / Shareholder’s Equity (TOTAL CLAIMS)

or

ASSETS = Internal Equities/Claims + External Equities/Claims

or

ASSETS = CAPITAL (Owners’ Equity / Equity) + LIABILITIES or

Fixed Assets + Current Assets = Capital + (Current Liabilities + Non- Current Liabilities) or

Long Term Assets + Short Term Assets = Capital + (Short Term Liabilities + Long Term Liabilities)

The above relationship is known as the “Accounting Equation” or the “Balance sheet” Equation.

« Capital = Assets – Liability « Liability = Assets – Capital

Procedure for Developing Accounting Equation STEP 1: – Ascertain the Items which are involve

STEP 2: – Find out the effect on the items

STEP3:– Grouping the items as ASSETS or LIABILITIES or CAPITAL

In Accounting Equation effects are taken on

Important Terms and its effect on Accounting Equation: – 1. Outstanding Expense: - These are those expenses which have become due during the

accounting period but which have not yet been paid. This is the liability of the business.

2. Prepaid Expenses: – These are those expenses, which have been paid in advance. In this case payment is made before the due date. This is the Assets of the business.

3. Accrued Income: - These are those incomes, which have been earned by the business during the accounting year but has not yet become due and, therefore, has not been received. This is the Assets of the business

4. Income received in Advance: - These are those incomes, which has been received by the business before being earned. This is the liability of the business

ASSETS

LIABILITIES

CAPITAL

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S. No

Item

Effect on Accounting Equation

1 Outstanding

Expenses Increase in Liabilities (as a separate head such as Outstanding Rent; Outstanding Salary ) and Decrease in Capital

2 Accrued Income

Increase in Assets (as a separate head such as Accrued Interest ; Accrued Commission) and Increase in Capital

3 Income Received in

Advance

Increase in Assets (as a Cash) and Increase in Liabilities (as a Separate head such as Commission Received in Advance; Fees Received in Advance)

4 Pre- Paid Expenses

Decrease in Assets (as Cash) and Increase in Assets (as a Separate head such as Prepaid Insurance ; Prepaid Rent Expenses)

Added to the Capital: - These items are added to the capital: -

Income, Gain, Profit and Introduction of Additional Capital / Fresh Capital.

Deducted from the Capital: - These items are deducted from the capital:-

Losses, Expenses and Drawings

IMPORTANT FORMULA

1. Owner’s Equity = Opening Owner’s Equity + Revenue – Expenses 2. Total Equity = Owner’s Equity + Outside’s Equity / Creditor’s Equity + Revenue –

Expenses 3. Total Assets (opening) = Capital + Outside’s Liabilities 4. Total Assets (closing) = Capital + Outside’s Liabilities + Profit / (– Loss) = Capital + Outside’s Liabilities + Revenue – Expenses 5. Closing Capital = Closing Assets – Closing Liabilities 6. Closing Capital = Opening Capital + Additional Capital + Profit / (– Loss) – Drawings

S. No Examples Effects

1

1. Sale of Fixed Assets / Goods for whether cash or Credit 2. Purchase of Fixed Assets / Goods for Cash 3. Payment received from Accounts Receivable 4. Bills Receivable issued 5. Prepaid Expenses (Expenses paid in advance)

2

1. Bills Payable Accepted

3

1. Sale of Fixed Assets / Goods for cash or Credit 2. Purchase of Fixed Assets / Goods for Cash 3. Payment received from Accounts Receivable 4. Bills Receivable issued 5. Bills Payable Accepted 6. Interest on Capital Provided 7. Interest on Drawings Provided

4

1. Purchase of Fixed Assets / Goods for Credit 2. Loan taken 3. Income Received in Advance

No Change in Total Assets

No Change in Total Liability / Increase in one Liability and Decrease in Other Liability

No Change in Total Capital / Owners Equity

Increase in Assets and Increase in Liabitilies

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5

1. Payment of Accounts Payable 2. Payment of all type of Liability (such as payment of o/s

Expense

6

1. Expenses Paid 2. Loss 3. In case of Depreciation and Provisions 4. Withdraw from Capital / Drawings

7

1. Income Received 2. Accrued Income 3. Introduced Additional Capital / Fresh Capital

8

1. Conversion of Partners Loan to Capital

9

1. Outstanding Expenses provided

MCQ 1. Double accounting system owes its origin to:

(a) Luca Pascioli (b) Adam Smith

(c) Kohler (d) Karl Marx

2. Double Entry system of Book- Keeping was developed by : (a) Japan (b) England

(c) India (d) Italy

3. Double Entry system of Book- Keeping was developed in the (a) 15th century (b) 18th century

(c) 19th century (d) 20th century

4. In Double Entry system of Book- Keeping every business transaction affect: (a) Two accounts (b) The same account on two different dates

(c) Two side of the same account (d) All of the above

5. Which of the following is correct? Owner’s Equity is; (a) (Current Assets + Fixed Assets) + (Current liability + Long term liability) (b) (Current Assets + Fixed Assets – (Current liability + Long term liability) (c) (Current Assets – Fixed assets ) – ( Current liability + Long term liability) (d) None of the above.

6. Capital of Business is Rs. 1,20,000 and Liability is Rs. 45,000 , Total Assets of Business would be (a) Rs. 75,000 (b) Rs. 1,65,000

(c) Rs. 1,20,000 (d) Rs. 45,000

7. If owner’s Capital is Rs. 50,000 Liability is Rs. 30,000 and Fixed Assets is Rs. 70,000, then what is the value of Current Assets?

(a) Rs. 80,000 (b) Rs. 50,000

(c) Rs. 1,50,000 (d) Rs. 10,000

8. Innovative Ltd. Purchase Land & Building for Rs. 10,00,000 gave a cheque of Rs. 2,00,000 and accepts a bill of Rs. 8,00,000 due after 90 days. As a result.

(a) Total Assets increased by Rs. 10,00,000 & Total Liability decreased by Rs. 10,00,000 (b) Total Assets increased by Rs. 8,00,000 & Total Liability decreased by Rs. 8,00,000 (c) Total Assets increased by Rs. 8,00,000 & Total Liability increased by Rs. 8,00,000 (d) Total Assets increased by Rs. 10,00,000 & Total Liability increased by Rs. 10,00,000

9. Equity Rs. 90,000, Liability Rs. 60,000 and Profit of the years - Rs. 20,000. Find out Total Assets of the business (a) Rs. 1,70,000 (b) Rs. 1,50,000

(c) Rs. 1,10,000 (d) Rs. 80,000

10. If Capital of business is Rs. 2,00,000 ; liabilities are 50,000, Loss Rs. 20,000, Find out Total Assets (a) Rs. 1,80,000 (b) Rs. 2,50,000

(c) Rs. 2,30,000 (d) Rs. 80,000

Decrease in Assets and Decrease in Liabitilies

Decrease in Assets and Decrease in Capital

Increase in Assets and Increase in Capital

Decrease in Liability and Increase in Capital

Increase in Liability and Decrease in Capital

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11. Land and Building was purchased for Rs. 6,60,000. Cash was paid Rs. 1,20,000 and for the balance a bill was accepted for 60 days. What will be the effect on Net Assets (a) Rs. 1,20,000 (b) Rs. 5,40,000

(c) Rs. 6,60,000 (d) Nil

12. Land and Building was purchased for Rs. 6,60,000. Cash was paid Rs. 1,20,000 and for the balance a bill was accepted for 60 days. What will be the effect on Fixed Assets

(a) Rs. 1,20,000 (b) Rs. 5,40,000

(c) Rs. 6,60,000 (d) Nil

13. Innovative Ltd. purchase a car for Rs. 10,000 paid Rs. 3,000 as cash and balance amount will be payable in three equal installments. Due to this.

(a) Total assets increase by Rs. 10,000 (b) Total liability increase by Rs. 3,0000

(c) Assets will increase by Rs. 7,000 with corresponding increase in liability by Rs. 7,000

(d) Both (a) and (b) 14.Calculate the Total Assets if, Capital is Rs. 90,000; Creditors are Rs.10,000; Revenue during the

period is Rs. 60,000 ; Expenses during the period are Rs. 40,000 (a) Rs. 1,20,000 (b) Rs. 2,50,000

(c) Rs. 2,70,000 (d) Rs. 80,000

15. Long term assets being Rs.3,00,000, current Assets Rs.80,000, outside liabilities Rs.1,20,000. Find owners equity-

(a) Rs.3,50,000 (b) Rs. 2,60,000

(c) Rs. 2,00,000 (d) None

16. Rent of proprietor’s house paid from business account by cash will : (a) Decrease the profit (b) Increase the profit

(c) Reduce the capital of business (d) Reduce the Cash as well as Capital of business

17. Cash Purchases (a) Increases Assets (b) Decreases Assets

(c) Result in no change in the Total Assets (d) None of these

18. Payment received from debtors / What is the effect of the Net Assets if cash is received from debtors of Rs. 50,000?

(a) Increases the Total Assets (b) Decreases the Total Assets

(c) Results in no change in the Total Assets (d) None of these

19. Which of the following transactions would cause a change in “Owners’ equity (a) Repayment of Bank Loan (b) Payments of Dividends and

Unprofitable Operations

(c) Sale of Land on Credit (d) Purchase of Assets and incurrence of

Liabilities 20. If outside liabilities and owners’ equity are added we get………

(a) Total Liabilities (b) Net worth

(c) Shareholders Fund (d) Gross Block

21. How does depreciation effect basic accounting equation (a) Leads to decreases in assets and shareholders’ equity (b) Leads to decrease in asset only (c) Leads to increase in liability and decrease in assets (d) Leads to decrease in share holders’ equity

22. In which of the following case there is No Change in Total Liability (a) Payment of Creditors (b) New Bills Payable accepted

(c) Payment of Outstanding Liability (d) None of these

23. Withdrawals by proprietor would (a) Reduce both Assets and Owner’s Equity (b) Reduce Assets and increase Liabilities

(c) Reduce Owner’s Equity and increase Liabilities (d) Have no effect on the Balance Sheet

24. Which of the following is true? (a) The payment of a Liability causes an increase in Owner’s Equity (b) The collection of an Account Receivable will cause Total Assets to increase (c) The accounting equation may be stated as: Assets + Liabilities = Owners‘ equity (d) The purchase of an asset such as office equipment, either for cash or on credit, does not change

the Owners‘ Equity 25. Purchase of goods on credit

(a) Increases Liabilities (b) Increases Assets

(c) Increases both Assets and Liabilities (d) Decreases Assets

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26. Purchase of Raw Material for Cash (a) Increases total Assets (b) Leaves total Assets unchanged

(c) Increases total Fixed Assets (d) Increases total Current Assets

27. If Office Equipment is purchased for cash, what effects will this transaction have on the financial position of the company?

(a) There is no change in the Assets, Liabilities and Owners‘ Equity (b) There is a decrease in Assets, increase in Liabilities and no change in Owners‘ Equity (c) There is a decrease in Assets, no change in Liabilities and a decrease in Owners‘ Equity (d) There is an increase in Assets, decrease in Liabilities and no change in Owners‘ Equity

28. The amount of Owners‘ equity in a business is not affected by (a) The percentage of Total Assets held in cash (b) Investments made in the business by the owner (c) The profitability of the business (d) The amount of dividends paid to Stock holders

29. An Investment in one asset A/c may lead to – (a) Increase in liability A/c (b) Decrease in A/c asset

(c) Each (a) or (b) (d) None of these

30. An increase in one liability may lead to (a) Increase in another asset (b) Decrease in liability

(c) Both (a) and (b) (d) Either (a) or (b)

31. Decrease in the amount of Creditors results in (a) Increase in Cash (b) Decrease in Assets

(c) Decrease in Cash (d) No Change in assets

32. If individual assets is increased, there will be a corresponding (a) Increase of another assets or increase of capital (b) Decrease of another assets or increase of liability (c) Decrease of specific liability or decrease of capital (d) Increase of drawings and liability

33. An increase in one liability may lead to (a) Increase in another asset (b) Decrease in liability

(c) Both (a) and (b) (d) Either (a) or (b)

34. Which Financial statement represents the accounting equations (a) Income Statement (b) Statement of Cash Flows

(c) Balance Sheet (d) None of the above

35. In Accounting Equation effects are taken on: (i) Assets (ii) Liability (iii) Capital (iv) Revenue (v) Expenses

(a) (i) only (b) (i) & (ii) & (iii)

(c) (i) & (ii) & (iii) & (iv) & (v) (d) (iv) & (v)

36. Which of the following is true when a debtor pays his dues? (a) The asset side of the Balance Sheet will decrease (b) The asset side of the Balance Sheet will increase (c) The liability side of the Balance Sheet will increase (d) There is no change in total assets or total liabilities

37. When Fixed Assets are sold (a) The Total Assets will increase (b) Total Liability will increase

(c) Total Assets will decrease (d) There is no Change in Total Assets

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1. Which of the following does not follow dual aspect? M.Com (Entrance 2010) (a) Increase in one asset, decrease in other (b) Increase in both assets and liability

(c) Decrease in one assets, decrease in other (d) Increase in one asset and capital

2. The payment of an account payable (or any other liability) will : M.Com (Entrance 2012) (a) Increase one assets and decrease

another assets (b) Decrease an assets and decrease

owner’s equity

(c) Decrease an assets and decrease a liability (d) Increase an assets and increase a liabilities

3. The payment of liability will M.Com (Entrance 2013) (a) Increase both assets and liabilities (b) Increase assets and decrease liabilities

(c) Decrease assets and increase liabilities (d) Decrease assets and decrease liabilities

4. Sale of goods has : M.Com (Entrance 2013) (a) Only revenue effect (b) Only expense effect

(c) Both (a) & (b) (d) None of the above

1. Which of the following accounting equations is not correct? UGC Net Paper II (December) 2011

(a) Assets – Liabilities = Equity (b) Assets – Equity = Liability

(c) Assets + Liability = Equity (d) Liability + Equity = Assets

2. Owner equity stands for (a) Fixed Assets minus Fixed Liabilities (b) Fixed Assets (c) Current Assets minus Fixed Liabilities (d) Total Assets minus total outside

UGC Net Paper III (December) 2012

3. Dual Aspect Concept results in the following accounting equation UGC Net Paper II (December 2015)

(a) Revenue = Expenses (b) Capital + Profit = Assets + Expenses

(c) Capital + Liabilities = Assets (d) Capital + Drawings = Owner’s Equity

M.Com (Entrance) Previous Year Questions

U.G.C. N.E.T. Previous Year Questions

Financial & Management Accounting By – Dheeraj Kr. Singh 21