Theory Base of Accounting Test - 12

Cost of machinery is the amount paid for the purchase of machinery and all the expenses incurred on machinery till it is ready for commercial production . Therefore Cost of the machine = Purchase price + Installation charges + Carraige = Rs ( 150000+5000+15000) = Rs 170000/-.

Income as per cash basis of accounting = Amt of revenue received during the year- Expenses paid during the year = Rs (80000-30000) = Rs 50000/-.

Atul's Income for the year = Revenue for the year - Expenses for the year = Rs (80000+50000) - Rs 40000 = Rs (130000-40000) = Rs 90000/-.

Income for the year on accrual basis of accounting = Income of the year - expenses of the year = Rs (400000-150000) = Rs 250000. Expenses paid for previous and outsatnding expenses will not be considered and income of previous received in current year is also not considered as per accrual basis revenue and expenses of the current year are only considered.

Amount of Income received = Amt recevived for Current year+ Amt received for previous year= Rs (250000+45000)= Rs 295000.                                                                          Amount of expenses paid    = Amt paid for current year+ amt paid for last year = Rs (140000+20000) = Rs 160000

Income for the year on cash basis = Rs ( 295000-160000) = Rs 135000.

According to cash basis of accounting system cash received is considered as income and cash paid is considered as payment for that year whether paid as outstanding or advance or whether received in advance or accrued.

Liquid assets are the assets which can be easily converted into liquid form i.e. cash. And stock cannot be converted easily into cash otherwise we will have sell it at loss and prepaid expeses are the expenses which are once paid cannot be recovered as it will provide us the service for the expenses incured not the liquid money.

Return outward means goods which return outside i.e goods which are purchased from outside are only given outside so it is also called as purchase return.

Accounting assumes that the business will continue to exist and carry on its operations for a very long period in the future unless there is good evidence to its contrary. Thus business is assumed to have indefinite life.

All material information should be disclosed in the financial statements of the firm. It should show infalted profits or laibilities i.e window dressing of the accounts is prohibited as it provides false information to the users of the information.

Revenue is earned only when the goods are transferred i.e. when sales have effected and thus profit has been accrued, This is according to realisation concept. Any order of sale of good is not a sale and any profit on such order is not recorded in the books of accounts.