Theory Base of Accounting Test - 7

According to accrual concept Revenue is recognised as they are earned whether money is received or not in the current financial year. Thus we will recognise the revenue in the month of february though the money is received in the month of march.

As per accounting period concept all the expenses should be classified in capital and revenue expenditure so that proper allocation can be done. ANy expenses whose benefits will be available for more than one year are classifed as capital expenditure i.e. expenditure on fixed assets and any expenses whose benefit will expire within one year are revenue expenses i.e. salaries for the month, etc.

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.

The method of valuing fixed assets at their cost and not at market value is the underlying principle of cost concept . In the above case Manish is wrong in recording the value of land a price lower than its costs as he is not selling the same in near future. He has purchased the land for construction of the building . He should record the land in the books at the cost price i.e Rs 18 lakhs

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.

According to business entity concept a business entity is separate and distinct from its owner and transaction are recorded from the point of view of business. Therefore capital invested by the owner becomes laibility for the business and owner becomes creditor of the business in accounting terms.Because the amount invested by owner if not then would have been taken from outside liability that is why owner is treated as creditor of the business.

As per accrual concept expenses should be accounted for when it is incurred whether paid or not . Therefore salaries amounting to Rs 20000/-. should be recorded in the books for the month of march 2013 though it is paid or not. Therefore, owner is not correct in not recording the expenses.

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.

According to conservatism or prudence all anticipated profits should be ignored and all anticipated losses should be accounted for. Thus accordingly Cloasing stock should be valued at cost price or market price whichever is lower. If market price is higher, then we ignore market price and recor at cost i.e.anticipated profits are ignored and if market price is lower we record at market price i.e anticipated losses are accounted for.

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.

According to consistency principle method or treatment followed in one year for any transaction, the same should be followed in the subsequent years for the same transactions so that there is uniformity in presentation of data.

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.

In order to calculate tax on the income earned by the firm the Financial acocunting period is taken from 1st April to 31st March  every year.

According to Consistency assumption if a particular method is used in one year, same method should be used in the next year in order to maintain consistenncy in the presentation of the accounts. Thus in the above question when firm adopts one method in the previous year and the other method in next year , so they are violating consistency assumption.

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/-.

According to money measurement concept transactions which can be measured in monetary terms with definite accuracy should only be recorded in the books of accounts. Thus any event which may be important for business but cannot be measured in monetary terms will not be recorded in the books of accounts.

According to money measurement concept only events and transactions which can be measured in terms of money can be recorded in the books . For example manager appointed though importatnt event cannot be recorded in the books of accounts , though salary paid to manager will be recoreded as it can be measured in the books of accounts.

All the fixed assets should be recorded at the cost price or the purchase price plus any cost incurred on its insatllation and to make it ready for commercial production should also be added to the cost of the fixed assets.

Insurance Premium Paid for a month = Rs 1200/12= Rs 100 per month and when books are closed on 31st march every year so cureent year expenses will be for 9 months i.e. from july to march = Rs 100*9= Rs 900 and prepaid will be for 3 months i.e. from april to june = 100*3= Rs 300/-.

According to dual concept every debit has its credit to the extent of same amount. Thus it has resultaed that at any point of time the assets of any entity must be equal to total of owner's equity and outsiders' liabilites. Thus, it emphasises that the proprietory claim is the balance afetr providing for outsider's claims against assets of the business.

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/-.

The financial statements must disclose all the material, relevant and relaible information which may be more beneficial to the shareholders, creditors, bankers, etc.

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.