Assignment Code: BCOC-131/TMA/2023-24

Course Code: BCOC-131

Assignment Name: Financial Accounting

Year: 2023-2024

Verification Status: Verified by Professor

SECTION-A

Note: Attempt all the Sections. Maximum Marks: 100

Attempt all the questions. Each question carries 10 marks. (5x10=50)

Q1) Home appliances Ltd. Sells goods on hire purchase terms at a profit of 25% on hire purchase price. Following are the transactions for the year ended December 31, 2018. (10)

Calculate the profit or loss on hire purchase under Debtors Method.

Solution

To calculate the profit or loss on hire purchase under the Debtors Method, we need to consider the following transactions:

Stock out on hire at cost in January: Rs. 6,000

Stock on hand (at shop) in January: Rs. 1,000

Instalment due in January: Rs. 600

Cash received in January: Rs. 16,000

Stock out on hire (at cost) on December 31: Rs. 6,900

Stock on hand (at shop) on December 31: Rs. 1,400

Instalment due on December 31: Rs. 1,000

Now, let's calculate the profit or loss step by step:

Step 1: Calculate the Total Cash Received during the year:

Total Cash Received = Cash received in January

Total Cash Received = Rs. 16,000

Step 2: Calculate the Total Instalments Due during the year:

Total Instalments Due = Instalment due in January + Instalment due on December 31

Total Instalments Due = Rs. 600 + Rs. 1,000

Total Instalments Due = Rs. 1,600

Step 3: Calculate the Total Stock on Hand (at shop) during the year:

Total Stock on Hand = Stock on hand in January + Stock on hand on December 31

Total Stock on Hand = Rs. 1,000 + Rs. 1,400

Total Stock on Hand = Rs. 2,400

Step 4: Calculate the Total Stock out on Hire (at cost) during the year:

Total Stock out on Hire = Stock out on hire at cost in January + Stock out on hire (at cost) on December 31

Total Stock out on Hire = Rs. 6,000 + Rs. 6,900

Total Stock out on Hire = Rs. 12,900

Step 5: Calculate the Total Cost Price of the goods sold on hire purchase:

Total Cost Price = Total Stock on Hand + Total Stock out on Hire

Total Cost Price = Rs. 2,400 + Rs. 12,900

Total Cost Price = Rs. 15,300

Step 6: Calculate the Profit on Hire Purchase:

Profit on Hire Purchase = (Cash Received - Total Instalments Due) - Total Cost Price

Profit on Hire Purchase = (Rs. 16,000 - Rs. 1,600) - Rs. 15,300

Profit on Hire Purchase = (Rs. 14,400) - Rs. 15,300

Profit on Hire Purchase = -Rs. 900

Since the result is negative, it means there is a loss on the hire purchase transactions under the Debtors Method. The loss is Rs. 900.

Q2) What are the qualitative characteristics of accounting information? Briefly explain.

Ans) The qualitative characteristics of accounting information are essential attributes that make financial statements and other accounting reports useful and reliable for decision-making. These characteristics help ensure that the information provided by accounting is relevant, faithful, and enhances the overall quality of financial reporting. There are several qualitative characteristics, but the two primary categories are fundamental qualitative characteristics and enhancing qualitative characteristics. Here's a brief explanation:

Fundamental Qualitative Characteristics

• Relevance: Information is relevant when it can influence the economic decisions of users. To be relevant, information must be timely, have predictive or confirmatory value, and be material. For example, information about a company's recent acquisition would be relevant to investors considering buying its stock.

• Faithful Representation: Information should faithfully represent the underlying economic events and transactions. This means it should be complete, neutral, and free from material errors. Faithful representation ensures that users can rely on the accuracy and integrity of the information presented in financial statements.

Enhancing Qualitative Characteristics

• Comparability: Information should be presented in a way that allows users to compare it with similar information about other entities or with the same entity's historical data. Consistency in accounting policies over time enhances comparability. For example, if one company uses the FIFO inventory valuation method and another uses LIFO, their financial statements may not be directly comparable.

• Verifiability: Others should be able to verify the information's accuracy through auditing, inspections, or other means. Verifiability increases the trustworthiness of financial reporting. For example, a third-party auditor can verify the accuracy of a company's financial statements.

• Understandability: Information should be presented in a clear and concise manner, making it easily understandable to users who have a reasonable knowledge of business and economic activities. Complex financial jargon should be avoided, and disclosures should be user-friendly.

• Timeliness: Timely information is more relevant, and delayed information may lose its usefulness. Financial reports should be prepared and issued promptly to ensure that users can make informed decisions in a timely manner.

• Materiality: Information is considered material if omitting or misstating it could influence users' decisions. Materiality is a relative concept and depends on the nature and size of the item. Companies should disclose all material information.

These qualitative characteristics collectively ensure that accounting information is informative, trustworthy, and user-friendly. They guide accountants and financial professionals in preparing and presenting financial statements that meet the needs of various stakeholders, such as investors, creditors, regulators, and management, thereby facilitating better decision-making.

Q3) Explain the Concept of IFRS.

Ans) The International Financial Reporting Standards (IFRS) is a globally recognized set of accounting standards and principles that are used for the preparation and presentation of financial statements. IFRS is developed and maintained by the International Accounting Standards Board (IASB), an independent international body headquartered in London, United Kingdom.

The primary objective of IFRS is to enhance the transparency, comparability, and reliability of financial statements across different countries and industries. Here are key points explaining the concept of IFRS:

1. Global Applicability: IFRS is designed to be applicable globally and is used by more than 140 countries, including many major economies. This widespread adoption makes it easier for investors, creditors, and other stakeholders to understand and compare financial statements across borders.

2. Principle-Based: IFRS is a principle-based accounting framework, which means it provides broad guidelines and principles for financial reporting rather than detailed rules. This allows companies flexibility in applying the standards to their specific circumstances while adhering to the overarching principles.

3. Uniformity: IFRS aims to ensure uniformity and consistency in financial reporting practices worldwide. This is particularly important for multinational companies that operate in multiple countries, as it simplifies the process of preparing financial statements in different jurisdictions.

4. Transparency: IFRS places a strong emphasis on transparency and the faithful representation of financial information. The goal is to provide clear and understandable financial statements that assist users in making informed decisions.

5. Relevance and Reliability: IFRS standards emphasize the importance of financial information being both relevant and reliable. Information should be relevant to the decision-making needs of users and should faithfully represent the economic reality of the business.

6. Continual Development: The IASB, which oversees the development of IFRS, continually updates and issues new standards to address emerging accounting issues and changes in the global business environment. This ensures that IFRS remains relevant and responsive to evolving financial reporting needs.

7. Disclosure Requirements: IFRS places significant importance on disclosures in financial statements. Companies are required to provide comprehensive and transparent information about their accounting policies, judgments, and estimates.

Q4) Journalise the following transactions:

Ans) Solution

Here are the journal entries for the given transactions:

On February 1

Debit: Purchases Account (Goods) - Rs. 18,000

Credit: Cash Account - Rs. 18,000

(To record the purchase of goods for cash)

On February 2

Debit: Purchases Account (Goods) - Rs. 37,000

Credit: Mithun's Account (Accounts Payable) - Rs. 37,000

(To record the purchase of goods on credit from Mithun)

On February 5

Debit: Mahesh's Account (Accounts Receivable) - Rs. 10,000

Credit: Sales Account - Rs. 10,000

(To record the sale of goods to Mahesh)

On February 8

Debit: Cash Account - Rs. 8,000

Credit: Sales Account - Rs. 8,000

(To record cash sales)

On February 9

Debit: Cash Account - Rs. 7,000

Credit: Sales Account - Rs. 7,000

(To record cash sales to Jayant)

On February 11

Debit: Mithun's Account (Accounts Payable) - Rs. 4,000

Credit: Purchases Returns Account - Rs. 4,000

(To record the return of goods to Mithun)

On February 12

Debit: Sales Returns Account - Rs. 1,000

Credit: Mahesh's Account (Accounts Receivable) - Rs. 1,000

(To record the return of goods by Mahesh)

Q5) Harinath purchased on January 1, 2016, a plant for Rs. 50,000. On July 1, 2016, an additional plant worth Rs. 20,000 was purchased and on July 1. 2017, the plant purchased on January 1, 2016, having become obsolete is sold off for Rs. 20,000. On July 1, 2018, a new plant was purchased for Rs. 60,000 and the plant purchased on July 1, 2016, was sold for Rs. 15,000. Depreciations to be provided at 10% p.a. on the written down value every year. Show the Plant Account.

Ans) Solution

Let's calculate the depreciation and prepare the Plant Account:

Explanation

1. On January 1, 2016, the plant was purchased for Rs. 50,000, so we debit the Plant Account by Rs. 50,000.

2. On July 1, 2016, an additional plant was purchased for Rs. 20,000, so we debit the Plant Account by Rs. 20,000, bringing the balance to Rs. 70,000.

3. At the end of December 31, 2016, we provide depreciation at 10% on the balance of Rs. 70,000, which is Rs. 7,000. We credit this amount to the Plant Account, reducing the balance to Rs. 63,000.

4. On July 1, 2017, the plant purchased on January 1, 2016, is sold for Rs. 20,000. We credit the Plant Account with this amount, reducing the balance to Rs. 43,000.

5. At the end of December 31, 2017, we provide depreciation at 10% on the balance of Rs. 43,000, which is Rs. 4,300. We credit this amount to the Plant Account, reducing the balance to Rs. 38,700.

6. On July 1, 2018, a new plant was purchased for Rs. 60,000, so we debit the Plant Account by Rs. 60,000, bringing the balance to Rs. 98,700.

7. At the end of December 31, 2018, we provide depreciation at 10% on the balance of Rs. 98,700, which is Rs. 9,870. We credit this amount to the Plant Account, reducing the balance to Rs. 88,830.

8. On July 1, 2019, the plant purchased on July 1, 2016, is sold for Rs. 15,000. We credit the Plant Account with this amount, resulting in a final balance of Rs. 73,830.

SECTION-B

Attempt all the questions. Each question carries 6 marks. (5x6=30)

Q6) Briefly describe the advantages and limitations of accounting. (6)

Ans)

Advantages of Accounting

1. Financial Information: Accounting provides a structured way to record and report financial information, helping businesses and individuals track their financial health and make informed decisions.

2. Historical Record: It creates a historical record of financial transactions, facilitating comparisons and analysis over time.

3. Legal Requirement: In many countries, maintaining proper accounting records is a legal requirement for businesses, ensuring transparency and accountability.

4. Decision-Making: Accounting information aids in decision-making, such as determining profitability, assessing the feasibility of projects, and setting budgets.

5. Performance Evaluation: It helps in evaluating the performance of a business or individual, allowing for adjustments and improvements.

Limitations of Accounting

1. Subjectivity: Accounting involves some degree of subjectivity, especially in areas like depreciation methods and asset valuation, which can lead to different interpretations.

2. Historical Data: Accounting primarily deals with historical data, and it may not always reflect the current or future financial reality of an entity.

3. Complexity: Accounting rules and standards can be complex, making it challenging for small businesses and individuals to maintain accurate records.

4. Estimations: Certain financial aspects, like bad debt provisions or future liabilities, require estimations that may not always be accurate.

Q7) What is an account? Describe the various classes of accounts with examples. (6)

Ans) An account, in the context of accounting, is a systematic arrangement used to record, classify, and summarize financial transactions of a business or individual. It serves as a ledger where financial data is organized for the purpose of analysis, reporting, and decision-making. There are several classes of accounts in accounting, broadly categorized into five main types:

1. Asset Accounts: These represent resources owned or controlled by a business or individual. Examples include Cash, Accounts Receivable, Inventory, and Equipment. For instance, a business's cash account records the amount of money it holds.

2. Liability Accounts: These represent obligations or debts owed by a business or individual to external parties. Examples include Accounts Payable, Loans Payable, and Accrued Liabilities. Accounts Payable, for example, records unpaid bills.

3. Equity Accounts: Equity accounts represent the owner's interest in the business. Common examples include Owner's Capital and Retain Earnings. Owner's Capital reflects the owner's investment in the business.

4. Revenue Accounts: These accounts track income earned by the business through its core operations. Examples include Sales Revenue, Service Revenue, and Interest Income. Sales Revenue, for instance, records income from selling products or services.

5. Expense Accounts: Expense accounts represent costs incurred in running the business. Examples include Rent Expense, Wages Expense, and Utilities Expense. Rent Expense accounts for the cost of renting office space.

Q8) Write about the Business Entity Concept. (6)

Ans) The Business Entity Concept is a fundamental accounting principle that underpins financial reporting and ensures the separation of a company's financial affairs from those of its owners or other entities. According to this concept, a business is treated as a distinct and separate entity from its owners, shareholders, or any other businesses it may be affiliated with. This means that the financial transactions and records of the business must be kept separate from those of its owners, and the business's financial statements should reflect only its own financial activities.

This concept is crucial in providing clarity and transparency in financial reporting, as it enables stakeholders to assess the financial performance and position of the business independently of its owners' personal finances or other external factors. By adhering to the Business Entity Concept, businesses can accurately measure their profitability, assets, liabilities, and equity, facilitating better decision-making and accountability. It also ensures that financial statements accurately represent the economic reality of the business, which is essential for investors, creditors, and regulators in evaluating a company's financial health and sustainability.

Q9) What do you mean by double entry system? (6)

Ans) The Double Entry System is a fundamental accounting method that forms the basis for recording financial transactions in a systematic and accurate manner. It is built on the principle that every financial transaction affects at least two accounts, with equal and opposite entries, hence the term "double entry." This system ensures that the accounting equation, Assets = Liabilities + Equity, remains in balance after each transaction.

In the Double Entry System, for every debit entry made to one account, there must be an equal and corresponding credit entry in another account. Debits represent increases in assets or expenses and decreases in liabilities or equity, while credits signify decreases in assets or expenses and increases in liabilities or equity. This system not only maintains the fundamental accounting equation but also provides a clear trail of how each transaction impacts various accounts.

The Double Entry System enhances accuracy, transparency, and accountability in financial reporting, reducing the likelihood of errors or fraud. It enables businesses to produce reliable financial statements and facilitates effective decision-making by providing a comprehensive view of their financial position and performance.

Q10) What is a Balance Sheet? Describe different methods of arranging assets and liabilities. (6)

Ans) A Balance Sheet is a crucial financial statement that provides a snapshot of a company's financial position at a specific moment in time, usually at the end of an accounting period. It offers a summary of a company's assets, liabilities, and shareholders' equity, following the fundamental accounting equation: Assets = Liabilities + Equity. The balance sheet is divided into two main sections: assets on one side and liabilities and equity on the other. There are various methods for arranging assets and liabilities on a balance sheet:

1. Current Vs. Non-Current (Long-Term): This method segregates assets and liabilities into two categories. Current assets and liabilities are expected to be realized or settled within a year, while non-current (or long-term) assets and liabilities extend beyond a year.

2. Order of Liquidity: Assets are listed based on how quickly they can be converted into cash, with the most liquid items appearing first. Commonly, this order starts with cash and cash equivalents, followed by short-term investments, accounts receivable, inventory, and fixed assets. Liabilities follow a similar order of liquidity.

3. Order of Permanence: This method arranges items on the balance sheet based on their permanence or staying power. It begins with permanent items like equity and long-term liabilities and moves towards more temporary items like current assets and liabilities.

4. Order of Presentation: In some cases, companies may arrange assets and liabilities in the order they appear in their financial statements, often starting with the most significant items.

The choice of arrangement method depends on a company's specific reporting preferences, industry standards, and regulatory requirements. Regardless of the method used, the balance sheet serves as a critical tool for stakeholders to evaluate a company's financial health, solvency, and overall stability.

Section C

Attempt all the questions. Each question carries 5 marks. (4x5=20)

Q11) What is Trial Balance? (5)

Ans) A Trial Balance is a fundamental accounting report that lists all the general ledger account balances of a company at a specific point in time, typically at the end of an accounting period, such as a month or fiscal year. It serves as an internal control tool to ensure that the total debits equal total credits, which helps in identifying errors or discrepancies in the accounting records. If the Trial Balance balances, it suggests that the company's double-entry accounting system is in order. However, if it doesn't balance, it indicates potential mistakes that need to be rectified before creating financial statements, ensuring the accuracy of financial reporting.

Q12) What are the characteristics of a hire purchase agreement? (5)

Ans) A Hire Purchase Agreement is a financing arrangement commonly used for purchasing assets like vehicles and machinery. Its key characteristics include:

1. Ownership Transfer: The buyer gains ownership of the asset once all payments, including the final instalment, are made.

2. Initial Down Payment: The buyer pays an initial deposit, which is a percentage of the asset's purchase price.

3. Instalment Payments: The remaining cost is paid in regular instalments over an agreed-upon period.

4. Interest Charges: Interest is often included in the instalment payments, making it a form of credit.

5. Asset Use: The buyer can use the asset during the agreement but doesn't own it until the final payment.

6. Default Consequences: If the buyer defaults on payments, the seller may repossess the asset.

7. Maintenance and Repairs: The buyer is typically responsible for maintaining and insuring the asset.

8. Termination Options: The buyer can usually terminate the agreement early, but penalties may apply.

Q13) “Consignment is the same thing as sale”. Briefly Discuss. (5)

Ans) Consignment and sale are not the same thing, as they represent distinct arrangements in business. In a sale, ownership of goods is transferred from the seller to the buyer in exchange for payment. The buyer bears the risks and rewards associated with the goods from that point onward.

Conversely, in a consignment, the ownership of the goods remains with the consignor (the party sending the goods) until they are sold by the consignee (the party receiving and selling the goods). The consignor retains control and responsibility for the goods and only receives payment when a sale is made. Any unsold items may be returned to the consignor.

Q14) Briefly explain advantages of Computerized Accounting. (5)

Ans) Computerized accounting offers several advantages over manual accounting:

Accuracy: Computer software reduces the risk of human errors in calculations, data entry, and financial reporting, leading to more precise financial records.

1. Efficiency: Automated processes speed up data entry, report generation, and reconciliation, saving time and reducing labour costs.

2. Data Storage: Digital storage allows for easy and organized access to historical financial data, facilitating trend analysis and decision-making.

3. Security: Password protection and encryption enhance data security, reducing the risk of unauthorized access or data loss.

4. Automation: It automates routine tasks like invoice generation, payroll processing, and bank reconciliations, improving workflow efficiency.

5. Reporting: Computerized systems offer customizable reporting options for better financial analysis and decision support.

6. Scalability: These systems can adapt to the changing needs of a growing business without major disruptions.