STUDENTS DOING CAFC MUST DO THESE QUESTIONS.

1) JOURNAL

1) The accounting process starts with the recording of transactions in the form of journal entries.
2) The recording is based on double entry system. This book or register called journal is the book of first or original entry.
3) Next step is to post the entries in the ledger which is covered in the next unit.

Theory Questions
1) Write short note on classification of accounts.

Accounts are broadly classified into assets, liabilities and capital. The basic accounting equation specifies broad categories, which are as follows:

(i) Assets: These are resources controlled by the enterprise as a result of past events and from which future economic benefits are expected toflow to the enterprise, namely cash, stock of goods, land, buildings, machinery etc.

(ii) Liabilities: These are financial obligations of an enterprise other than owner’s equity namely longtermloans, creditors, outstanding expenses etc.

(iii) Capital: It generally refer to the amounts invested in an enterprise by its owner(s), the accretion to it or a reduction in it. Since capital is affected by expenses and incomes of revenue nature, there are two more categories of accounts, namely expenses and incomes. The difference between incomes and expenses are taken in to capital account.

 Expenses: These represents those accounts which show the amount spent or even lost in carrying on operations.
 Incomes: These represent those accounts which show therevenue amounts earned by the enterprise.
However, traditionally accounts are classified as follows:
(i) Personal Accounts: These accounts relate to persons, institutions, debtors or creditors.
(ii) Impersonal Accounts: These represent accounts which are not personal. These can be further sub-divided as follows:
 Real Accounts: These accounts relate to assets of the firm but not debt e.g. accounts relating to land, buildings, cash in hand etc.
 Nominal accounts: These accounts relate to expenses, losses, gains, revenues etc.

2) Distinguish between Real account and nominal account.

A real account is an account relating to properties and assets, other than personal accounts of the firm. Examples are land, buildings, machinery, cash, investments etc. Nominal accounts relate to expenses or losses, incomes and gains. Examples are: wages, salaries, rent, depreciation etc. The net result of all the nominal accounts is reflected as profit or loss which is transferred to the capital account. Nominal accounts are therefore, temporary.The real accounts are shown in the balancesheet along with personal accounts.

2) LEDGER

1) Process of transferring journal entries in the accounts opened in Ledger is called posting.
2) Ledger is known as principal books of accounts and it provides full information regarding all the financial transactions pertaining to any individual account.
2) The difference between the totals of debit and credit sides is found out as the balance. Some of these balances (i.e nominal accounts) are transferred to the profit and loss account and some are carried forward to the next period/year i.e. shown in the balance sheet, depending upon the nature of the account.

Theory questions

1) What do you mean by principal books of accounts?

Ledger is known as principal books of accounts and it provides full information regarding all the transactions pertaining to any individual account. Ledger contains all set of accounts (viz. personal, real and nominal accounts).

2) What are the rules of posting of journal entries into the Ledger?

Rules regarding posting of entries in the ledger:

a) Separate account is opened in ledger book for each account and entries from the Journal are posted to respectiveaccounts accordingly.

b) It is a practice to use words ‘To’ and ‘By’ while posting transactions in the ledger. The word ‘To’ is used in the particular column with the accounts written on the debit side while ‘By’ is used with the accounts written in the particular column of the credit side. These ‘To’ and ‘By’ do not have any meanings but are used to the account debited and credited.

c) The concerned account debited in the journal should also be debited in the ledger but reference should be of the respective credit account.

3) SUBSIDIARY BOOKS 

1) Instead of recording all journal entries in one register, it is better to categorize the entries on the basis of type of transactions.

2) Various subsidiary books are maintained so as to record transactions of one type in each register. These are also called books of original entry or prime entry.

Example of subsidiary books are purchases book, sales book, purchase returns books, sales returns book, bills receivable book, bills payable book etc. 

On the basis of these subsidiary books, the ledger accounts are prepared.

Theoretical questions

1) Which subsidiary books are normally used in a business?

In a business, most of the transactions generally relate to receipts and payments of cash, sale of goods and their purchase. It is convenient to keep a separate register for each such class of transactions one for receipts and payments of cash, one for purchase of goods and one for sale of goods. A register of this type is called a book of original entry or of prime entry. The transactions recorded in such books will not require journal entries. The system by which transactions of a class are first recorded in the specified book, specially meant for it and on the basis of which ledger accounts are then prepared is known as the Practical System of Book keeping or even the English System. It should be noted that in this system, there is no departure from the rules of the double entry system.

These books of original or prime entry are also called subsidiary books since ledger accounts are prepared on their basis without further processing of ledger posting. Normally, the following subsidiary books are used in a business:

(i) Cash Book to record receipts and payments of cash, including receipts in to and payments out of the bank.
(ii) Purchases Book to record credit purchases of goods dealt in or of the materials and stores required in the factory.
(iii) Purchase Returns Book to record the returns of goods and materials previously   purchased.
(iv) Sales Book to record the sales of the goods dealt in by the firm.
(v) Sale Returns Book to record the returns of goods made by the customers sold to them earlier.
(vi) Bills Receivable Book to record the receipts of promissory notes or hundies from various parties.
(vii) Bills Payable Book to record the issue of the promissory notes or hundies to other parties.
(viii) Journal (proper) to record the transactions which cannot be recorded in any of the seven books mentioned above.
It may be noted that in all the above cases the word “Journal” may be used for the word “book”.

2) What are the advantages of subsidiary books?
The use of subsidiary books affords the under mentioned advantages:
(i) Division of work: Since in the place of one journal there will be so many subsidiary books, the accounting work may be divided amongst a number of clerks.
(ii) Specialization and efficiency: When the same work is allotted to a particular person over a period of time, he acquires full knowledge of it and becomes efficient in handling it. Thus the accounting work will be done efficiently.
(iii) Saving of the time: Various accounting processes can be undertaken simultaneously because of the use of a number of books. This will lead to the work being completed quickly.
(iv) Availability of information: Since a separate register or book is kept for each class of transactions, the information relating to each class of transaction be available at one place.
(v) Facility in checking: When the trial balance does not agree, the location of the error or errors is facilitated by the existence of separate books. Even the commission of errors and frauds will be checked by the use of various subsidiary books.

3) Distinction between subsidiary books &  Principal books:

The books in which transactions are first recorded to enable further processing are called subsidiary books. The ledger and the cash book are the principle books since they furnish information for preparation of the trial balance and financial statements. 

4) Where to record transactions, if not recorded in special journals.

In fact, if there is no special book meant to record a transaction, it is recorded in the journal (proper). The role of the journal is thus restricted to the following types of entries:
(i) Opening entries: When books are started for the new year, the opening balance of assets and liabilities are journalised.
(ii) Closing entries: At the end of the year, the profit and loss account is prepared. For this purpose, the nominal accounts are transferred to profit and loss account. This is done through journal entries called closing entries.
(iii) Rectification entries: If an error has been committed, it is rectified through a journal entry.
(iv) Transfer entries: If some amount is to be transferred from one account to another, the transfer will be made through a journal entry.
(v) Adjusting entries: At the end of the year the amount of expenses or income may have to be adjusted for amounts received in advance or for amounts not yet settled in cash. Such an adjustment is also made through journal entries. Usually, the entries pertain to the following:
 (a) Outstanding expenses, i.e., expenses incurred but not yet paid;
 (b) Prepared expenses, i.e., expenses paid in advance for future period;
 (c) Interest on capital, i.e., the interest on proprietor’s investment in the business; and
 (d) Depreciation, i.e., fall in the value of the  

       assets used on account of wear and tear.

For above type of transactions/events, journal entries are necessary.

(vi) Entries on dishonour of Bills: If someone who accepted a promissory note (or bill) is not able to pay in on the due date, a journal entry will be necessary to record the non-payment or dishonour of bills.

(vii) Miscellaneous entries: The following entries will also require journalizing :
(a) Credit purchase of items other than goods dealt in or materials required for production of goods e.g. credit purchase of furniture or machinery will be journalised.
(b) An allowance to be given to the customers or a charge to be made to them after the issue of the invoice.
(c) Receipt or issue of promissory notes, if separate bill books have not been maintained.
(d) If an amount becomes irrecoverable, say, because, of the customer becoming insolvent.
(e) Effects of accidents such as loss of property by fire.
(f) Transfer of net profit to capital account.

4) CASH BOOK 

Cashbook contains cash transactions and also bank transactions, if it has a separate book column. It is both a subsidiary book and a principal book.
Cashbook can be prepared with discount column also.

Theoretical questions

1) Is cashbook a subsidiary book or a principal book? Explain.

Cash transactions are straight away recorded in the CashBook and on the basis of such a record, ledger accounts are prepared. Therefore, the Cash Book is a subsidiary book. But the Cash Book itself serves as the cash account and the bank account, if bank column is also included; the balances are entered in the trial balance directly. The Cash Book, therefore, is part of the ledger also. Hence, it is also treated as the principal book. The CashBook is thus both a subsidiary book and a principal book.

2) What are the various kinds of cashbook?

The main Cash Book may be of the three types:
(i) Simple CashBook;
(ii) Two-column CashBook;
(iii) Three-column CashBook.
In addition to the main Cash Book, firms also generally maintain a petty cash book but that is purely a subsidiary book.

3) What are the advantages of a three column cashbook?

The advantages of three column CashBook are that-
(a) The Cash Account and the Bank Account are prepared simultaneously, therefore the double entry is completed in the Cash Book itself. Thus the contra entries can be easily cross-checked in Cash column in one side and the Bank column in the other side of the CashBook. The chances of error are also reduced.
(b) The information regarding Cash in Hand and the Bank Balance can be obtained very easily and quickly as there is no need to prepare Ledger of the Cash and Bank Account.

5) PETTY CASH BOOK 

For small payments, petty cash book is maintained separately for recording the particulars of payment and its amount. The fixed amount is given to the petty cashier for making small payments in the beginning of the period. The amount spent is replenished so that he will have again the fixed sum in the beginning of the next period. This system is known as imprest system of petty cashbook.

6) RECTIFICATION OF ERRORS

Unintentional omission or commission of amounts and accounts in the process of
recording the transactions are commonly known as errors.
♦ Accounting errors are generally of four types-   
(a)  Errors of Principle;  
(b)  Errors of Omission;  
(c)  Errors of Commission;  
(d)  Compensating Errors.  
♦ Some errors may affect the Trial Balance and some of these do not.  
♦ The method of rectification of errors depends on the stage at which the errors are
detected.  If the error is detected before the preparation of trial balance, rectification
is carried out by making the statement in the appropriate side of the concerned
account.
♦ In case of the errors detected after the preparation of the trial balance, we open a
suspense account with the amount of difference in the trial balance. Then complete
journal entries can be passed for rectifying the errors.  
♦ For rectifying the errors detected in the next accounting period, a special account
‘Profit and Loss Adjustment Account’ is opened for correction of amounts relating to
expenses and incomes. 

Theoretical questions

1) How does errors of omission differ from errors of commission?
Errors of Omission: If a transaction is completely or partially omitted from the
books of account, it will be a case of omission. Examples would be: not
recording a credit purchase of furniture or not posting an entry into the ledger.
Errors of Commission: If an amount is posted in the wrong account or it is
written on the wrong side or the totals are wrong or a wrong balance is struck,
it will be a case of “errors of commission.”

2) What is error of principle and how does it affect Trial Balance?  

Errors of principle: When a transaction is recorded in contravention of accounting
principles, like treating the purchase of an asset as an expense, it is an error of principle.
In this case there is no effect on the trial balance since the amounts are placed on the
correct side, though in a wrong account. Suppose on the purchase of a typewriter, the
office expenses account is debited; the trial balance will still agree.
The method of correction of error indicated so far is appropriate when the errors have
been located before the end of the accounting period. After the corrections, the trial
balance will agree. Sometimes the trial balance is artificially made to agree inspite of
errors by opening a suspense account and putting the difference in the trial balance
to the account - the suspense account will be debited if the total of the credit column
in the trial balance exceeds the total of the debit column; it will be credited in the other
case. Each and every error detected after preparation of trial balance can only be
corrected by a complete journal entry. Those errors for which journal entries were not
possible at the earlier stage will now be rectified by a journal entry(s), the difference
or the unknown side is being taken care of by suspense account. Those errors for which
entries were possible even at the first stage will now be rectified in the same way. 

7) TRIAL BALANCE

1) Trial balance contains various ledger balances on a particular date.
2) It forms the basis for preparing financial statement i.e. profit and loss account and balance sheet.
3) If it tallies, it means that the accounts are arithmetically accurate but certain errors may still remain undetected.
It is very important to carefully journalize and post the entries, following the rules of  accounting

Theory Questions

1) What is the trial balance? And how it is prepared?

Preparation of trial balance is the third phase in the accounting process. After posting the accounts in the ledger, a statement is prepared to show separately the debit and credit balances. Such a statement is known as the trial balance.
Trial balance contains various ledger balances on a particular date. It forms the basis for preparing the financial statements i.e. profit and loss account and balancesheet. If is tallies, it means that the accounts are arithmetically accurate but certain errors may still remain undetected. Therefore, it is very important to carefully journalise and post the entries, following are rules of accounting.

2) Explain objectives of preparation of trial balance.

The preparation of trial balance has the following objectives:
(i) Trial balance enables one to establish whether the posting and other accounting processes have been carried out without committing arithmetical errors. In other words, the trial balance helps to establish arithmetical accuracy of the books of accounts.
(ii) Financial statements are normally prepared on the basis of agreed trial balance.
(iii) The trial balance serves as a summary of what is contained in the ledgers.

3) Even if the trial balance agrees, some errors may remain. Do you agree? Explain.
Inspite of the agreement of the trial balance some errors may remain. These may be of the following types:
(i) Transaction has not been entered at all in the journal.
(ii) A wrong amount has been written in both columns of the journal.
(iii) A wrong account has been mentioned in the journal.
(iv) An entry has not at all been posted in the ledger.
(v) Entry is posted twice in the ledger.

8) FINAL ACCOUNTS

1) Non-manufacturing entities are the trading entities, which are engaged in the purchase and sale of goods at profit without changing the form of the goods.
For accounting, profit is measured at two levels:

a) Gross Profit
b) Net Profit

2) The principal function of final statements of account (Trading Account, Profit and Loss Account and the Balance Sheet) is to exhibit truly and fairly the profitability and the financial position of the business to which they relate. In order that these may be properly drawn up, it is essential that a proper record of transactions entered in to by the business during a particular accounting period should be maintained.

3) At the end of the year, it is necessary to ascertain the net profit or the net loss. For this purpose, it is first necessary to know the gross profit or gross loss. Gross Profit is the difference between the selling price and the cost of the goods sold. For a trading firm, the cost of goods sold can be ascertained by adjusting the cost of goods still on hand
at the end of the year against the purchases.

Theoretical Questions:

1. Write shorts notes on:
(a) Balance sheet.

The balance sheet may be defined as “a statement which sets out the assets and liabilities of a firm or an institution as at a certain date.” Since even a single transaction will make a difference to some of the assets or liabilities, the balance sheet is true only at a particular point of time. That is the significance of the word “as at.”

(b) Trading account

At the end of the year, it is necessary to ascertain the net profit or the net loss. For this purpose, it is first necessary to know the gross profit or gross loss with the helps to Trading A/c. Gross Profit is the difference between the selling price and the cost of the goods sold.

(c) Closing entries

(Closing entries: The entries that have to be made in the journal for preparing the Trading and the Profit and Loss Account that is for transferring the various accounts to these two accounts are known as closing entries.

2) Distinguish between Provision and reserve fund
Provision means “any amount written off or retained by way of providing for depreciation, renewal or diminution in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy”.

Reserve Fund: It signifies the amount standing to the credit of the reserve that is invested outside the business in securities which are readily realisable e.g., when the amounts set apart for replacement of an asset are invested periodically, in government securities or shares. The account to which these amounts are annually credited is described as the Reserve Fund.

9) BANK RECONCILIATION STATEMENT

1) Bank pass book is merely a copy of the customer’s account in the books of bank.
2) Bank reconciliation statement is a statement which reconciles the balance as per cash book with the balance as per bank pass book by showing all causes of difference between the two.
3) The salient features of bank reconciliation statement:

 The reconciliation will bring out any errors that may have been committed either in the cash book or in the pass book;
 Any undue delay in the clearance of cheques will be shown up by the reconciliation;
 A regular reconciliation discourages the accountant of the bank from embezzlement. There have been many cases when the cashiers merely made entries in the cash book but never deposited the cash in the bank; they were able to get away with it only because of lack of reconciliation.
 It helps in finding out the actual position of the bank balance.
 The difference in the balances of both the books can be because of the following reasons:
1. Timing differences,
2. Transactions;
3. Errors.
 Bank reconciliation can be started from any of the following four balances given in the question:
1. Dr. balance as per cashbook
2. Cr. Balance as per cashbook
3. Dr. balance as per passbook
4. Cr. Balance as per passbook
 There are two methods of reconciling the bank balances:
1. Bank reconciliation statement without preparation of adjusted cash-book.
2. Bank reconciliation statement after the preparation of adjusted cash-book.

Theoretical questions

1) Write short note on Bank reconciliation statement.

Bank reconciliation statement is prepared as on a particular date to reconcile and explain the causes of difference between the bank balance as per cash book and the same as per savings bank pass book or current account statement. At the end of each month, the bank balance as per cash book and that as per pass book /bank statement should be compared and, if there is disagreement, these balances should be reconciled stating exact reasons of disagreement. The reconciliation is made in a statement called the bank reconciliation statement.

2) State the causes of difference between the balance shown by the pass book and the cashbook.
The difference between the balance shown by the passbook and the cashbook may arise on account of the following:
(i) Cheques issued but not yet presented for payment.
(ii) Cheques deposited in to the bank but not yet cleared.
(iii) Interest allowed by the bank.
(iv) Interest and expenses charged by the bank.
(v) Interest and dividends collected by the bank.
(vi) Direct payments by the bank.
(vii) Direct deposits in to the bank by a customer.
(viii) Dishonour of a bill discounted with the bank.

(ix) Bills collected by the bank on behalf of the customer.
(x) An error committed in cashbook or by the bank etc.
(xi) Undercasting or Overcasting in cashbook.

10) DEPRECIATION

1) Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

2) Objectives for providing depreciation are:
a) Correct income measurement by matching the charge for the year
b) True financial position statement by showing PPE at their current value
c) Funds for replacement
d) Ascertainment of true cost of production.

3) Factors in the measurement of depreciation:
a) Cost of asset
b) Estimated useful life of the asset
c) Estimated scrap value (if any) at the end of useful life of the asset.

4) Methods for providing depreciation:
a) Straight line method
b) Reducing balance method
c) Sum of years of digits method
d) Machine hour method
e) Production units’ method
f) Depletion method

4) The resulting profit or loss on sale of the tangible asset is ultimately transferred to profit and loss account.

5) The depreciation method residual value & useful life applied to an asset should be reviewed atleast at each financial year-end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, on account of the above, they should be changed to reflect the changed pattern.

5) Whenever there is a revision in the estimated useful life of the asset, the balance depreciable amount should be charged to the asset over the revised remaining estimated useful life of the asset.

6) Whenever the depreciable asset is revalued, the depreciation should be charged on the revalued amount on the basis of the remaining estimated useful life of the asset.

7) An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.

8) Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life.

Theory Questions

1) Distinguish between Straight line method of depreciation and Written down value method of  depreciation.

Under straight line method an equal amount is written off each year throughout the working life of the depreciable tangible asset so as to reduce the cost of the asset to nil or to its scarp value at the end. Under reducing balance method, a fixed percentage is charged on the diminishing balance of the asset each year so as to reduce the value of the asset to its scarp value at the end of useful life. The basic distinction between these two methods are as follows:
Under straight line method, annual depreciation charge is equal throughout the life of the asset; but under reducing balance method, depreciation charge is reduced over the years as the asset grows old.
Under straight-line method, the asset can be fully depreciated but under reducing balance method asset can never be fully depreciated.
Under straight line method the charge for depreciation is constant while repair charges increase with the life of the asset, so the total charge throughout the life of the asset will not be uniform. To the contrary, under reducing balance method, depreciation charges become high in the initial years but generally repair remains low. As the asset grows old depreciation charge reduces but repair expenses increase. Thus under Reducing balance method depreciation and repairs are more or less evenly distributed throughout the life of the asset.

2) Write short note on Depletion method of depreciation.

Natural resources include physical assets like mineral deposits, oil and gas resources and timber. These natural resources exhaust by exploitation. Depletion per unit is calculated as
Cost-Residual Value 

Est life units to be extracted

3) What factors are considered for calculation of depreciation of a plant?

The factors considered for calculation of depreciation are as: (i) Cost of asset including expenses for installation, commissioning, trial run etc. (ii) Estimated useful life of the asset and (iii) Estimated scrap value (if any) at the end of useful life of the asset.

4) What are intangible assets. Explain with the help of examples.

An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. Examples of intangible assets include:
(a) Streaming rights of movies/TV shows/web series on platforms like Netflix, Disney Hot Star, Amazon Prime / Sony LIV etc.
(b) Broadcasting rights of events such as the Cricket World Cup, the Indian Premier League, Pro Kabaddi  League etc.
(c) Landing rights/timeslots at air ports which permit aircrafts to land or take-off during a particular time frame
(d) Patents
(e) Trademarks
(f) Copyrights
(g) Distribution rights for motion pictures in theatres
(h) Long-term customer contracts
(i) Customer data collected by the entities such as customer contact numbers / email IDs and spending data at stores like Pantaloons, Westside etc. could be a major intangible asset for these entities.
(j) Goodwill (purchased)
(k) Computer Software

11) SINGLE ENTRY

1) Single entry system is generally found in sole trading concerns or even in partnership firms to some extent but never in case of limited liability companies on account of legal requirements.
There are basically 3 types of single entry systems:
(i) Pure Single Entry
(ii) Simple Single Entry
(iii) Quasi Single Entry

2) Single entry system ignores the concept to of duality and therefore, transactions are not recorded in their two-fold aspects.

Theoretical Questions

1) What is meant by Single entry System? What are the types of procedures adopted for this system?

Single entry system is an inaccurate and unsystematic method of recording business transactions. The procedures adopted are: Pure single entry; Simple entry and Queasy single entry.

TOPIC WISE TRUE OR FALSE COVERED.  IT WILL BE VERY USEFUL FOR CAFC EXAMS

1) JOURNAL  (TRUE OR FALSE)

True : As per the modern accounting equation approach- it is the basic formula in the accounting process

2) In the traditional approach, for an entity a debtor will be receiver after sale of goods.

False: In the traditional approach, a debtor will be giver since he will be paying money for the sale of goods by the entity.

3) The rule of nominal account states that all expenses & losses are recorded on credit side.

False:The rule of nominal account states that all expenses & losses are recorded on debit side.

4) Journal proper is also called a subsidiary book.

True: It is one of the book where in the transactions not entered in the other books are entered in this book.

5) Capital account has a debit balance.

False: Capital account has a credit balance.

6) Purchase account is a nominal account.

True: As it is considered as an expense.

7) All the personal & real account are recorded in P&L A/c.

False: All the personal & real account are recorded in balancesheet.

8) Asset side of balancesheet contains all the personal & nominal accounts.

False: Asset side of balancesheet contains all the personal & real accounts.

9) Capital account is a personal account.

True: As it is in the name of the proprietor who is bringing in the capital to the business.

10) Journal is also known as the book of original entry.

True: As the transactions are entered first in this book as a first hand record.

2) LEDGER  (TRUE OR FALSE)

True: Since it classifies all the amounts related to a particular account and then it is used as the base for preparing the Trial balance, a ledger is also known as principal books of accounts.

2) Cash account has a debit balance.

True: Being an asset under the modern equation approach, cash account has a debit balance.

3) Posting is the process of transferring the accounts from ledger to journal.

False: Posting is the process of transferring the balances from journal to ledger.

4) At the end of the accounting year, all thenominal accounts of the ledger book are balanced.

False: At the end of the accounting year, all the nominal accounts of the ledger book are totaled and transferred to P&L A/c.

5) Ledger records the transactions in a chronological order.

False: Ledger records the transactions in analytical order. But journal records the transactions in a chronological order.

6 ) If the total debit side is greater than the total of credit side, we get a credit balance as opening balance.

False: If the totalof debit side is greater than the totalof credit side, we get a debit balance as the opening balance.

7) Ledger accounts of assets will always be debited when they are increased.

True: The increase to an asset shall be debited since the original balance is also debit. 

3) SUBSIDIARY BOOKS  (TRUE OR FALSE)

True: Since cash purchases are taken to the cash book, it is only credit transactions that are recorded in the purchases book.

2) Transactions regarding the purchase of fixed asset are recorded in the purchase book.

False: Transactions regarding the purchase of fixed asset are not recorded in the purchase book, only the credit purchases of goods are recorded in it.

3) Cash sales are recorded in the sales book.

False: Credit sales are recorded in the sales book.

4) Subsidiary books are also known as the books of original entry.

True: Subsidiary books are maintained as an alternate to the journal.

5) Bills receivable book is a subsidiary book.

True: Bills receivable is one of the subsidiary book.

6) Return inward book is also known as purchase return book.

False: Return inward book is also known as sales return book.

7) Purchase of a second hand machinery will be recorded in purchase book.

False: Purchase of a second hand machinery will not be recorded in purchase book.

8) Total of sales return book may be posted to the debit side of sales account.

True: Since sales return is reduction from the total sales value, it is debited in the sales account.

9) If the sales are on a frequent basis, the transactions are recorded in the sales book.
True: When there are numerous transactions then there are subsidiary books like the sales book where there are recorded instead of regular journal entries.

4) CASH BOOK & PETTY CASH BOOK (TRUE OR FALSE)

True: Since the balance is directly taken to the Trial balance from cashbook. Hence, it is a subsidiary book as well as principal book.

2) Two column cashbook consists of two columns cash column & bank column.

False: Two column cashbook consists of two columns either cash column & discount column or cash column & bank column.

3) Discount column of cashbook is never balanced.

True: Discount column is totaled and transferred to the discount allowed or received account.

4) Contra entry is passed in a two column cashbook.

True: Contra entry can be passed in a two column cash book which includes bank and cash columns.

5) If the bank column is showing the opening balance on credit side, it is an overdraft.

True: The debit side of opening balance shows a favourable balance, whereas the credit balance is an unfavourable balance and treated as overdraft.

6) A cashbook records cash transactions as well as credit transactions.

False: A cashbook records only cash transactions.

7) Discount column of cashbook records the trade discount.
False: Discount column of cashbook records the cash discount. Trade discount is not shown in the books of accounts.

5) RECTIFICATION OF ERRORS  (TRUE OR FALSE)

True: There are 3 different stages when the mistakes are identified and then the rectification depends on the stage of identification of errors.

2) In case of error of complete omission, the trial balance does not tally.

False: In case of error of complete omission, the trial balance tallies.

3) When errors are detected after preparation of trial balance, suspense account is opened.

True: In order to balance the difference of balances in the trial balance suspense account is opened.

4) When purchase of an asset is treated as an expense, it is known as error of principle. 

True: Where the accounts being debited is principally incorrect it is termed as error of principle.

5. Trial balance agrees in case of compensating errors.

True: Compensating errors cancel out each other when Trial balance is prepared as the mistake pertains to the same amount being credited and later debited on account of two different mistakes.

6. When amount is written on wrong side, it is known as an error of principle.

False: When amount is written on wrong side, it is known as an error of commission.

7. On purchase of old furniture, the amount spent on repairs should be debited to repairs account.

False: On purchase of furniture, the amount spent on repairs should be debited to furniture account as it is a capital expense.

8. ‘Profit & Loss adjustment account’ is opened to rectify the errors detected in the current accounting period. 

False: ‘Profit & Loss adjustment account’ is opened to rectify the errors detected in the next accounting period.

9. Rent paid to landlord of the proprietors house, must be debited to ‘Rent account’. 

False: Rent paid to land lord of the proprietors house, must be debited to ‘Drawings account’.

10. If the errors are detected after preparing trial balance, then all the errors are rectified through suspense account. 

False: If the errors are detected after preparing trial balance, then all the errors are not rectified through suspense account. There may be principal errors, which can be rectified without opening a suspense account.

6) TRIAL BALANCE (TRUE OR FALSE)

True: Preparing trial balance is the third phase of accounting process which forms the base for the preparation of the final accounts.

2) Trial balance forms a base for the preparation of Financial statement.

True: Based on trial balance only, we can prepare financial statement.

3) Agreement of trial balance is a conclusive proof of accuracy.

False: Agreement of trial balance gives only arithmetical accuracy, there can still be errors in preparing the trail balance.

4) A trial balance will tally in case of compensating errors.

True: Since compensating errors cancel out due to their compensating nature of the amounts, hence the Trial balance tallies.

5) A trial balance can find the missing entry from the journal.

False: A trial balance cannot find the missing entry from the journal.

6) Suspense account opened in a trial balance is a permanent account.

False: Suspense account opened in a trial balance is a temporary account

7) The balance of purchase returns account has a credit balance.

True: As purchases is debited, any returns shall be credited (treated in opposite way).

7) FINAL ACCOUNTS (TRUE OR FALSE)

True: Profit and loss account shows either net profit or net loss for a particular period.

2) Gains from the sale or exchange of assets are not considered as the revenue of the business.

False: Gains from the sale or exchange of assets are considered as the revenue of the business. But this revenue not in the ordinary course of business so it is capital receipts.

3) The salary paid in advance is not an expense because it neither reduces assets or nor increase liabilities.

True: The salary paid in advance is an asset it is not an expense because it neither reduces assets or nor increase liabilities.

4) A loss is an expenditure which does not bring any benefit to the concern.

True: A loss is an expenditure of the business which does not bring any gain to the  business.

5) All liabilities which become due for payment with in the year are classified as long-term liabilities.

False: All liabilities which become due for payment with in one year are classified as current liabilities.

6) The term current asset is used to designate cash and other assets or resources which are reasonably expected to be realized or sold or consumed with in one year.

True: Current assets are all the assets which are expected to be realized or sold or consumed within one year.

7) An asset gives rise to expenditure when it is acquired and to an expense when it is consumed.

True: When an asset is purchase capital expenditure is incurred and when the asset is put to use expenses are incurred in consumption.

8) If the balance of an account on the debit side of the trial balance where the benefit has already expired then it is treated as an expense.

True: Debit balance of accounts are treated as expenses whose benefit is already received or expired.

9) Sales less cost of goods sold = gross profit.

True: Gross profit is obtained by deducting cost of goods sold from sales.

10) If the debit side of the trading account exceeds its credit side then the balance is termed as gross profit.

False: If the debit side of the trading account exceeds its credit side then the balance is termed as gross loss.

11) The provision for bad debts is debited to Sundry Debtors Account.

False: The provision for bad debts is debited to debited to Profit and loss Account, in Balance Sheet it is shown either on liability side or deducted from the head Debtors.

12) The provision for discount on creditors is often not provided in keeping with the principle of conservatism.

True: According to the provision of conservatism provision is maintained for the losses to be incurred in future. Discount on creditors is an income so provision in not maintained.

13) The debts written off as bad, if recovered subsequently are credited to Debtors Account.

False: The debts written off as bad, if recovered subsequently are credited to Bad Debts Recovered Account and become an income.

14) The adjustment entry in respect of income received in advance is debit Income received in advance account and credit income account.

False: Income received in advance is reduces it from the concerned income in profit and loss account. And it is shows it as a liability in the current balance sheet under the head Current Liabilities.

15) Premium paid on the life policy of a proprietor is debited to profit and loss account.

False: Premium paid on the life policy of a proprietor is to be debited to capital account, as it is personal expense.

16) Depreciation account appear in the trial balance is taken only to profit and loss account.

True: Depreciation is charge on each of the asset on a certain percentage. Depreciation is a charge to profit and loss account and should be debited to profit &loss account by crediting the respective assets. If it appears in trial balance then it is taken only to profit and loss account.

17) Personal purchases included in the purchases day book are added to the sales account in the Trading account.

False: Personal purchases included in the purchases day book are deducted from the purchases account in the Trading account.

18) Medicines given to the office staff by a manufacturer of medicines will be debited to salaries account.

True: Any benefit given to the staff is debited to the salary account.

19) Goods worth Rs. 600 taken by the proprietor for personal use should be credited to Capital Account.

False: Goods taken by the proprietor for personal use should be credited to Purchase Account as less goods are left in the business for sale.

20) If Closing Stock appears in the Trial Balance, the Closing inventory is then not entered in Trading Account. It is only shown in the Balance Sheet.
True: The closing Stock appears in the trial balance only when it is adjusted against purchases by passing the entry. In this case, closing stock is not entered in Trading Account and is shown only in Balance Sheet.

8) BANK RECONCILITION STATEMENT (TRUE OR FALSE)

False : Bank Reconciliation Statement reconciles bank column of cash book with the balance in the pass book i.e. customer account in the books of bank.

2) There are 3 types of differences between cash book and pass book namely Timing, Transactions & Errors.

True : These are the three broad categories.

3) Adjusting the cash book for any errors and/or omissions before preparing bank reconciliation is optional when the reconciliation is done at the end of the financial year.

False : Adjusting the cash book is mandatory when bank reconciliation is done at the end of the financial year.

4) Debit balance in cash book is same as overdraft as per pass book.

False : Debit balance as per cash book should be represented by credit or favourable balance in pass book.

5) Bank charges debited by the bank is an example of timing difference for the purposes of bank reconciliation.

False : Bank charges are example of the transactions that bank carries out by itself and the same has not been recorded in the cashbook until statement is obtained from the bank.

6) Overcasting of the debit side of the cash book is an example of a difference that is due to error.

True : Overcasting is an example of an error.

7) When we start bank reconciliation with a debit balance in cash book, then cheques issued but not yet presented should be added back to arrive at the balance as per pass book.

True : Since the cheques issued would have been recorded as payments and bank balance was credited in cash book, we need to add it back as the same is not yet deducted from our bank balance.

8) The bank charges charged by the bank should be deducted when bank reconciliation statement is being prepared starting from a credit balance of pass book.

False : Bank charges should be added when we start with credit or favourable balance in pass book as bank would have debited the charges.

9) When the causes of differences between pass book balance and cash book is not known, then the bank reconciliation statement can be prepared by matching the two books and identifying any unticked items in both sets.

True : Since, we don’t know the causes of difference, matching the two statements is only efficient way to identify the difference.

10) While preparing the bank reconciliation statement starting with debit balance as per pass book or bank statement, the deposited cheques that are not yet cleared need not be adjusted.

False : Cheques deposited but not yet cleared should be subtracted from debit or unfavourable balance in pass book.

11) Cash book shows a debit balance of ₹ 50,000 and the only difference from the balance as shown in pass book relates to cheques issued for ₹ 60,000 but not yet presented for payment. The balance as per pass book should be ₹ 1,10,000.

True : Cheques issued but not yet presented should be added back to a debit balance in cash book to arrive at pass book balance i.e. ₹ 50,000 + ₹ 60,000 = ₹ 1,10,000.

12) Overcasting of credit side of the cash book shall result in a higher bank balance in cash book when compared with pass book balance.

False : Overcasting of credit side means excessive payments are recorded and hence would lower the bank balance.

13) A cheque for ₹ 25,000 that was issued and was also presented for payment in same month but erroneously recorded on debit side of the cash book would cause a difference of ₹ 50,000 from the balance in pass book.

True: ₹ 25,000 payment is recorded as a receipt and hence it will have to be adjusted twice (once to nullify and then once to record actual payment) hence causing the difference of double amount.

14) A direct debit by bank on account of any payment as may be instructed by customer should be recorded on credit side of cash book.

True : It is an example of a payment instructed by customer to be directly debited by bank, and hence credited in the cash book.

15) Bank Reconciliation Statement can be prepared in two formats – “Balance” presentation and “Plus & Minus” presentation.

True : Reconciliation statement can be prepared in either of the two formats.

16) The difference between cash book & pass book that relates to errors are those mostly made by Bank.

False : Bank rarely makes mistakes, and hence differences that relate to errors are generally made in cash book.

17) A cheque for ₹ 80,000 that was discounted from bank was dishonoured and the bank charged ₹ 1,600 as the charges on account of same. While starting with debit balance in cash book for preparing bank reconciliation statement, we need to deduct ₹ 78,400 to reconcile with pass book.

False : We need to deduct ₹ 81,600 (i.e. both cheque returned & charges) from debit balance in cash book to arrive at balance as per pass book.

18. Interest on savings bank that is allowed or credited by bank is generally recorded in cash book prior to it being recorded by bank.

False : Interest allowed by bank is mostly recorded in cash book after the entry has been made in the pass book or bank statement.

19) A regular bank reconciliation discourages the accountants to be involved in any kind of funds embezzlement.

True : In absence of any reconciliation, the accountants can mis-utilize the funds temporarily by recording the entry without actual depositing the cash.

20) Timing difference relates the transactions that are recorded in the same period in both cash book and also the bank pass book.
False : Timing differences relate to the transactions that are recorded in cash book and pass book in two different periods.

9) DEPRECIATION (TRUE OR FALSE)

False :  It is the decrease in market value as one of the reasons for depreciation. Increase in market value may result in Revaluation.

2) Depreciation is a cash expenditure like other normal expenses.

False: Depreciation is not a cash expenditure like other normal expenses as it does not result in any cash outflow.

3) Cost of property, plant and equipment includes purchase price, refundable taxes & import duties after deducting any discount or rebate.

False: Non refundable taxes & duties form part of the cost.

4) Cost of fixed asset should also include cost of opening a new facility such as inauguration costs.

False: Inauguration costs shouldn’t be part of cost.

5) Depreciation is charged with a constant amount under straight line method and charged with a constant percentage under diminishing balance method.

True :  SLM method results in same amount and diminishing method involves same rate of depreciation.

6) In case an item of Property, Plant & Equipment is revalued, whole class of assets to which that asset being revalued belongs should be revalued.

True: Revaluation should be done for the whole class of the asset.

7) In case the carrying amount of an asset is decreased due to revaluation, such decrease should always be recognized in the Profit and Loss account.

False : Any decrease in value of asset on account of revaluation should be first debited to Revaluation Reserve, if any, and then to Profit & Loss account.

8) Akash purchased a machine for Rs.12,00,000. Estimated useful life is 10 years and scrap value is Rs.1,00,000. Depreciation for the first year using sum of the years digit method shall be Rs. 2,00,000.

True: Sum of years digit method depreciation is calculated as 10/55x(12,00,000– 1,00,000) = 2,00,000

9) Depreciation can not be provided in case of loss, in a financial year.

False: Depreciation is a charge against profit and not an appropriation of profit. Therefore, depreciation has to be provided for, even in case of loss in a financial year.

10) Providing for depreciation also helps in providing for accumulation of funds to facilitate the replacement at the end of its useful life.

True : Depreciation being non cash expense reduces the distributable profits and hence facilitates replacement of asset when required.

11) If the equipment account has a balance of Rs.12,50,000 and the accumulated depreciation account has a balance of Rs. 4,00,000, the written down value of same shall be Rs. 16,50,000.

False: WDV=Rs.12,50,000-Rs.4,00,000=Rs.8,50,000

12) Sum of the years digit method is an example of accelerated method of charging depreciation.

True: Higher depreciation is charged in earlier years under sum of the years digit method.

13) Over the life of an asset subject to depreciation, the accelerated method will result in less Depreciation Expense in early years and more depreciation in later years of its life.

False: It is viceversa as under diminishing balance method; higher depreciation is charged in beginning.
14) While depreciating land cost, Straight line method shall give more depreciation than the written down value.

False: Land is not depreciated.

15) Provision for depreciation account is debited at the time of recording the depreciation on an asset.

 False: Provision for Depreciation account is credited while charging the depreciation.

16) If adequate maintenance expenditure is incurred with relation to running repairs of an asset, we need not charge any depreciation.

False : Depreciation is allocation of the cost of an asset over its useful life. Regular repairs may be required during its life are expensed and depreciation has to be charged anyways.

17) When a property, plant or equipment is sold then provision for depreciation account is debited, asset account is credited and any gain or loss is recorded to profit and loss account.

True : At the time of sale of an asset, respective asset account is credited with provision for depreciation account being debited and any resulting gain or loss being charged to profit & loss account.

18) While calculating the depreciation as per diminishing balance method, the salvage value of the asset at the end of its life is reduced from its cost.

False: Under diminishing balance method, salvage value is not considered initially as it assumes that at the end of the asset’s life the remaining value shall be its salvage value.

19) Any change in the estimated useful life of an asset should be accounted for as a change in an accounting estimate in accordance with Accounting Standards.

True: Any change in useful life of an asset is accounted for as a change in estimate.

20) An intangible asset is an identifiable, monetary asset.

False: An intangible asset is an identifiable non-monetary asset, held for use in production and supply of goods and services.

10) SINGLE ENTRY (TRUE OR FALSE)

True: Since incomplete records are maintained, trial balance cannot be prepared

2) Nominal Accounts are kept under Single Entry System.

False: Under the single entry system of bookkeeping, generally cash book and personal accounts of creditors and debtors are maintained, and no other ledger is maintained.

3) Single Entry System can be adopted by small firms.

True: A single entry system is the one where financial transactions are recorded as a single entry in a log and is usually used by new small businesses.

4) Profit under single entry system is always correct and accurate.

False: Profit under single entry system is only an estimate based on available information and correct profits cannot be determined.

5) Profits computed under single entry system by different business entities are not comparable.
True: Since entry system has no fixed set of principles for recording the financial transaction, different organisations maintain records as per their needs. Hence their accounts are not comparable.

INTANGIBLE ASSETS

For instance, a multi-year customer contract guaranteeing more than 75% of the revenue for the company is a major asset, which on occasions could be more valuable than the tangible assets themselves. 

Similarly, when Air India was up for acquisition, the tangible assets comprised of several old planes which needed overhauling and maintenance. However, one of the major reasons that made Air India a desirable target was the prime landing slots (intangible asset) that it had at airports across the world.

Recognition of Intangible Assets in Financial statements

Determination of cost of Intangible Asset.

The cost of an intangible asset is similar to the manner in which the cost of a tangible asset is determined.

Intangible assets acquired as part of Business acquisition, government grants, internally generated goodwill / intangible assets, or on exchange of assets are dealt separately at the CA intermediate level.

De - recognition of Intangible Assets

Gains or losses arising from the retirement or disposal of an intangible asset should be determined as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognized as income or expense in the statement of profit and loss.

Amortisation of Intangible Asset

Depreciable amount is the cost of an asset less its residual value.
Useful life is either:
(a) The period of time over which an asset is expected to be used by the enterprise; or
(b) The number of production or similar units expected to be obtained from the asset by  the enterprise.

Residual value is the amount which an enterprise expects to obtain for an asset at the end of its useful life after deducting the expected costs of disposal.

The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. 

Amortisation should commence when the asset is available for use. It is presumed that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use unless evidence exists to the contrary.

For instance, given the rapid changes in technology, computers of software and many other intangible assets are susceptible to technological obsolescence. Therefore, it is likely that their useful life will be short. 

Similarly, intangible assets with contractual rights for a period exceeding ten years, will be amortised over such extended period rather than the presumed period of ten years.

Similar to depreciation, the amortisation method used should reflect the pattern in which the asset's economic benefits are consumed by the enterprise. If that pattern cannot be determined reliably, the straight-linemethod should be used. The amortization charge for each period should be recognized as an expense unless permitted or required to be included in the carrying amount of another asset.

Given the nature of intangible assets, the residual value of an intangible asset should be assumed to be zero unless:
(a) there is a commitment by a third party to purchase the asset at the end of its useful life; or
(b) there is an active market for the asset and:
(i) residual value can be determined by reference to that market; and
(ii) it is probable that such a market will exist at the end of the asset's useful life.

The amortisation period and the amortisation method should be reviewed at least at each financial year end. If the expected useful life of the asset is significantly different from previous estimates, the amortisation period should be changed accordingly. If there has been a significant change in the expected pattern of economic benefits from the asset, the amortization method should be changed to reflect the changed pattern.

STUDENTS DOING CAFC MUST DO THESE QUESTIONS.

1) BILLS OF EXCHANGE & ACCOMODATION BILLS

A Bill of Exchange is defined as an “instrument in writing containing an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument”.

A promissory note is an instrument in writing, not being a bank note or currency note containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person. Under Section 31(2) of the Reserve Bank of India Act a promissory note cannot be made payable to bearer.

A party which receives a Promissory Note or receives an accepted Bill of Exchange will treat it as a new asset under the name of Bills receivable. A party which issues a Promissory Note or accepts a Bill of Exchange will treat it as new liability under the heading of Bills Payable.

Theory Questions

1. Write short notes on:
(a) Accommodation bill.

Bills of Exchange are usually drawn to facilitate trade transmission, that  is, bills are meant to finance actual purchase and sale of goods. But the mechanism of bill can be utilised to raise finance also. When bills are used for such a purpose, they are known as accommodation bills.

(b) Renewal of bill.

When the acceptor of a bill finds himself in financial straits to honour the bill on the due date, then he may request the drawer to cancel the original bill and draw on him afresh bill for another period. And if the drawer agrees, a new bill in place of the original bill may be accepted by the drawee for another period. This is called the renewal of bill.

(c) Noting charges.

It is necessary that the fact of dishonor and the causes of dishonor should be established. If the acceptor can prove that the bill was not properly presented to him for payment, he may escape liability. Therefore, if there is dishonour, or fear of dishonour, the bill will be given to a public official known as “NotaryPublic”. These officials present the bill for payment and if the money is received, they will hand over the money to the original party. But if the bill is dishonoured they will note the fact of dishonour, with the reasons and give the bill back to their client. For this service they charge a small fee. This fee is known as noting charges. The amount of noting charges is recoverable from the party which is responsible for dishonour.

2) What is bill of exchange? How does it differ from Promissory Note ?
A bill of exchange has been defined as “an instrument in writing containing an unconditional order signed by them maker directing a certain person to pay a certain sum of money only to or to the order of certain person or to the bearer of the instrument”. When such an order is accepted by the drawee, it becomes a valid bill of exchange. A promissory note is an instrument in writing (not being a bank note or a government currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to ,or to the order of, acertain person, or to the bearer of the instrument.

A promissory note needs no acceptance, as the debtor himself writes the document promising to pay the stated amount. Like bills of exchange, promissory notes are also negotiable instruments, and can be transferred by endorsement. In case of bill of exchange, the drawer and the payee may be the same person but in case of a promissory note, the maker and the payee cannot be the same person.

2) NON PORFIT ORGANISATIONS FINAL A/C'S

1) A non profit organization is a legal accounting entity that is operated for the benefit of the society as a whole, rather than for the benefit of a sole proprietor or a group of partners or shareholders. Financial Statements of such organizations consists of:
1. Receipts and Payments Account
2. Income and Expenditure Account
3. Balance Sheet

2) A Receipts and Payments Account is a summary of the cashbook.

3) The income and expenditure account is equivalent to the Profit and Loss Account of a profit making enterprise and is based on the accrual principle of accounting. Only items of revenue nature pertaining to the current accounting period are recorded.

4) Non-profit organizations registered under section 8 of the Companies Act, 2013 are required to prepare their Income and Expenditure account and Balance Sheet as per the Schedule III to the Companies Act, 2013.

5) It may be noted that after various accounts have been adjusted as is considered necessary - all the revenue accounts shall be closed by transfer to the Income and Expenditure Account, and the remaining balances of capital accounts will be closed by transferring the balances to the balance sheet. To ascertain the opening capital fund-the opening balance sheet will also be prepared. A balance sheet is thus a complement to such an account.

6) Donations, Entrance and Admission Fees, Subscription, Life Membership Fee are some of the sources of incomes for the non-profit organizations. These sources of income are either taken to the Income and Expenditure account or the balance sheet, based on the nature, of the receipt.

7) Educational institutions are quite different from other not-for-profit organisations in terms of sources of finance and items of expenditure.

Theoretical Questions

Distinguish between Receipt and Payment and Income and Expenditure Account.

Non-profit making organizations such as public hospitals, public educational institutions, clubs etc., conventionally prepare Receipt and Payment Account and Income and Expenditure Account to show periodic performance for a particular accounting period. 

Receipt and Payment Account is an elementary form of account consisting of a classified summary of cash receipts and payments over a certain period together with cash balances at the beginning and close of the period. The receipts are entered on the left hand side and payments on the right hand side i.e. same sides as those on which they appear in cash book. All the receipts and payments whether of revenue or capital nature are included in this account. The receipts and payments pertaining to the current, previous or future periods are also considered here. The balance of the account at the end of a period represents the difference between the amount of cash received and paid up. It is always in debit since it is made up of cash in hand and at bank.

Income and expenditure account resembles and is drawn in the same form of a Profit and loss account in case of profit-making organisations. Expenditure of revenue nature is shown on the debit side, income and gains of revenue nature are shown on the credit side. Income and Expenditure Account contains all the items of income and expenditure relevant to the current accounting period only, whether received or paid as well as that which have fallen due for recovery or payment. Capital Receipts, prepayments of income and capital expenditures, prepaid expenses are excluded. It does not start with any opening balance. The balancing figure represents the amount by which the income exceeds the expenditure or viceversa.

3) DISSOLUTION OF PARTNERSHIP FIRM

1) Reasons for which a partnership could be dissolved are
a) Expiry of term for which it was formed
b) Death of a partner

b) Insolvency of a partner.

2) Reasons when a firm stands dissolved
a) When partners mutually decide to dissolve
b) Partners except one becomes insolvent
c) Business becomes illegal
d) If partnership is at will any partner can give notice for dissolution
e) Court orders.

3) The winding up of a LLP may be either voluntary or by the Tribunal and LLP, so wound up may be dissolved.

4) On dissolution assets are realized and all liabilities are paid off.
(If any liability remains unpaid then it is to be realized from partners in their profit-sharing ratio).

5) Piece meal distribution involves either of two methods:
a) Maximum loss method
b) Highest relative capital method.

Theoretical Questions

1) State the circumstances when Garner V/S Murray rule not applicable.

Answer:

Non-Applicability of Garner vs. Murray rule:
(i) When the solvent partner has a debit balance in the capital account.
Only solvent partners will bear the loss of capital deficiency of insolvent partner in their capital ratio. If incidentally, a solvent partner has a debit balance in his capital account, he will escape the liability to bear the loss due to insolvency of another partner.
(ii) When the firm has only two partners.
(iii) When there is an agreement between the partners to share the deficiency in capital account of the insolvent partner.
(iv) When all the partners of the firm are insolvent.

2) W paid a premium to other partners of the firm at the time of his admission to the firm, with a condition that they will not be dissolved before the expiry of five years. The firm is dissolved after three years.  W claims refund of premium.
(i) List the criteria for the calculation of the amount of refund.
(ii) Also list any two conditions when no claim in this respect will  arise.

Answer

If the firm is dissolved before the term expires, as is the case, W being a partner who has paid a premium on admission will have to be repaid/refunded
The criteria for calculation of refund amount are:
(i) Terms upon which admission was made,
(ii) The time period for which it was agreed that the firm will not be dissolved,
(iii) The time period for which the firm has already been in existence. No claim for refund will arise if:
(i) The firm is dissolved due to the death of a partner,
(ii) If the dissolution of the firm is basically because of misconduct of W,
(iii) If the dissolution is through an agreement and such an agreement does not have a stipulation for a refund of premium.

4) VALUATION OF GOODWILL

1) Goodwill is the value of reputation of a firm in respect of profits expected in future over and above the normal rate of profits.

2) Necessity for valuation of goodwill in a firm arises in the following cases:
a) When the profit sharing ratio amongst the partners is changed;
b) When a new partner is admitted;
c) When a partner retires or dies, or
d) When the business is dissolved or sold.

3) Methods for valuation of goodwill:-
a) Average profit basis:

Goodwill = Average Profit x No. of Years’ purchased
Average Profit = Total profit/Number of years 

The profits taken in to consideration are adjusted with abnormal losses, abnormal gains, return on non-trade investments and errors. The average can be simple average or weighted average depending upon the circumstances.

b) Super profit basis: 

Goodwill = Super Profit X No of Yrs Purchased

o Find Super Profit = Average Actual Profit – Normal Profit

o Find Average Actual Profit(FMP)

o Find Normal Profit = Capital Employed X Normal rate of Return

o Calculate Capital Employed

Assets …….                      xx
Less: Liability …….              xx

Capital Employed…….      xx
o Find the normal Rate of Return (NRR)

(c) Annuity basis:
Goodwill = Super Profit x Annuity Number

(d) Capitalization basis:
Goodwill = Super Profit/Normal Rate of Return

Theoretical Questions

1) Write short note on methods for valuation of goodwill.

Answer:

There are three methods for valuation of goodwill
(i) Average profit basis –Simple and Weighted
(ii) Super profit basis - Number of Year Purchase, Annuity basis, and Capitalization of Super Profit
(iii) Capitalization basis

2) Explain Accounting treatment of goodwill in case of change in profit sharing ratio. 

Answer

In case of change in profit sharing ratio, the value of goodwill should be determined and preferably adjusted through capital accounts of the partners on the basis of profit sacrificing ratio.

3) Distinguish between Super profit basis and Capitalisation Basis.

Answer

Super Profit Basis: In case of average profit basis, goodwill is calculated on the basis of average profit multiplied by certain number of years.
Super Profit = Actual Profit-Normal Profit
Actual Profit is average profit and Normal Profit = Normal rate of Return (NRR)

Capitalization Basis: Under this basis, value of whole business is determined applying normal rate of return. If such value (arrived at by applying normal rate of return) is higher than the capital employed in the business, then the difference is goodwill.

5) ADMISSION OF PARTNER

1) New partners are admitted for the benefit of the partnership firm. New partner is admitted either for increasing the partnership capital or for strengthening the management of the firm.

2) When a new partner is admitted into the partnership, assets are revalued and liabilities are reassessed. A Revaluation Account (or Profit and Loss Adjustment Account) is opened for the purpose. This account is debited with all reduction in the value of assets and increase in liabilities and credited with increase in the value of assets and decrease in the value of liabilities. The difference in two sides of the account will show profit or loss. This is transferred to the Capital Accounts of old partners in the old profit sharing ratio.

3) Whenever a new partner is admitted, any reserve etc. appearing in the Balance Sheet should be transferred to the Capital Accounts of the old partners in the old profit sharing ratio.

Theoretical Questions

1) Write short note on Revaluation account.

Answer:

When a new partner is admitted into the partnership, assets are revalued & liabilities are reassessed. A Revaluation a/c (or Profit & Loss Adjustment Account) is opened for the purpose. This account is debited with all reduction in the value of assets and increase in liabilities and credited with increase in the value of assets and decrease in the value of liabilities. The difference in two sides of the account will show profit or loss. This is transferred to the Capital Accounts of old partners in the old profit sharing ratio.

2) What is the difference between revaluation account & memorandum revaluation account?

Answer:

(i) Revaluation account is prepared to find out the profit or loss on revaluation of assets and liabilities which appear in the new balance sheet at the new or revalued figures. Memorandum revaluation account is also prepared to record the effect of revaluation of assets and liabilities which of course are recorded at their old figures in the new balance sheet.

(ii) Revaluation account is not divided into two parts. But the memorandum revaluation account has two parts: first part for old partners and second part for all partners including the new partner.

6) RETIREMENT OF PARTNER

Re-adjustment takes place in case of retirement of a partner likewise the case of admission of a partner. Whenever a partner retires, the continuing partners make gain in terms of profit sharing ratio. So they arrange for the amount to be paid to discharge the claims of the retiring partners.

On retirement of a partner, it is required to revalue assets and liabilities just as in the case of admission of a partner. If there is revaluation profit/loss, then such profit/loss should be distributed amongst the existing partners including the retiring partner at the existing profit sharing ratio.
On the retirement of a partner any undistributed profit or reserve standing at the Balance Sheet is to be credited to the Partners ’Capital Accounts in the old profit sharing ratio.

Following adjustments are necessary in the Capital A/c of a retiring partner at the time of final payment:

(i) Transfer of reserve,
(ii) Transfer of goodwill

(iii)    Transfer of profit/loss on        

          revaluation.

There are three methods for treating premium paid on Joint Life Policy: firstly, it can be shown as an expense; alternatively it can be shown as an asset to the extent of surrender value and the balance as an expense; Thirdly, a joint Life Policy reserve can be created; On retirement of a partner, the surrender value of the Joint Life Policy is to be raised in the books of accounts if it is not shown already as an asset. If the surrender value is more than the value of joint Life Policy shown in the Balance Sheet, only the excess amount should be transferred to revaluation account.

Theoretical Questions:

1) Write short notes on:
(i) Calculation of gaining ratio.

On retirement of a partner, the continuing partners will gain in terms of profit sharing ratio. For example, if A, B and C were sharing profits and losses in the ratio of 5:3: 2 and B retires, then A and C have to decide at which ratio they will share profits and losses in future. If it is decided that the continuing partners will share profits and losses in future at the ratio of 3:2, then A gains 1/10th [(3/5)-(5/10)] and Cgains2/10[(2/5)-(2/10)]. So the gaining ratio between A and C is 1:2. If A and C decide to continue at the ratio 5:2, this indicates that they are dividing the gained share in the previous profit sharing ratio.

(ii) Final payment of a retiring partner.

The following adjustments are necessary in the Capital A/c: 

(i) Transfer of reserve, 

(ii) Transfer of goodwill, 

(iii) Transfer of profit/loss on revaluation. After adjustment of these items, the Capital Account balance standing to the credit of the retiring partner represents amount to be paid to him. The continuing partners may discharge the whole claim at the time of retirement.

2) What is joint life policy? What is the objective of taking such a policy?

A partnership firm may decide to take a Joint Life Insurance Policy on the lives of all partners. The firm pays the premium and the amount of policy is payable to the firm on the death of any partner or on the maturity of policy whichever is earlier. The objective of taking such a policy is to minimize the financial hardships to the event of payment of a large sum to the legal representatives of a deceased partner or to the retiring partner.

7) DEATH OF A PARTNER

 1) The problems arising on the death of a partner are similar to those arising on retirement. Assets and liabilities have to be revalued and the resultant profit or loss has to be transferred to the Capital Accounts of all partners including the deceased partner. Goodwill is dealt with exactly in the way already discussed in the case of retirement.

2) Treatment of joint life policy will also be same as in the case of retirement. However, in case of death of a partner, the firm would get the joint policy value. The only additional point is that as death may occur on any day, the representatives of the deceased partner will be entitled to the partner’s share of profit from the beginning of the year to the date of death. After ascertaining the amount due to the deceased partner, it should be credited to his Executor’s Account.

3) If the death takes place during the accounting period, the Executor of the deceased partner is entitled to have a share of profit up to the date of death based on the profit earned in the immediately preceding year or some other agreed basis. For this purpose, the deceased partners' Capital Accounts is credited and Profit & Loss Suspense Account is debited.

Theory Questions
1) Explain distinction between retirement and death of a partner as relating to finalisation of amount payable.

Answer

The basic distinction between retirement and death of a partner relates to finalisation of amount payable to the Executor of the deceased partner. Although, revaluation of goodwill is done in the same way as it has been done in case of retirement, in addition, the executor of the deceased partner is entitled to share of profit up to the date of  death

2) What amount is payable to legal representatives of dead partner?

Answer:

When the partner dies the amount payable to him/her is paid to his/her legal representatives. The representatives are entitled to the followings:
(a)The amount standing to the credit to the capital account of the deceased partner;
(b) Interest on capital, if provided in the partnership deed up to the date of death;
(c) Share of goodwill of the firm;
(d) Share of undistributed profit or reserves;

8) ISSUE OF SHARES 

1) Total capital of the company is divided in to a number of small indivisible units of a fixed amount and each such unit is called a share.
The total capital of the company is divided in to shares, the capital of the company is called ‘Share Capital’.

Share capital of a company is divided in to following categories:
(i) Authorized Share Capital or Nominal Capital; (ii) Issued Share Capital; (iii) Subscribed Share Capital (iv) Called-up Share Capital; (v) Paid-up Share Capital; (vi) Reserve Share Capital.

2) Types of shares are:
(i) Preference Shares. 

Preference shares can be of various types, e.g.:

(a) Cumulative Preference Shares 

(b) Non-cumulative Preference Shares (c) Participating Preference Shares

(d) Non-participating Preference Shares 

(e) Redeemable Preference Shares 

(f) Non-redeemable Preference Shares 

(g) Convertible Preference Shares 

(h) Non-convertible Preference Shares.
(ii) Equity Shares

3) A company can issue shares either
(1) For cash or
(2) For consideration other than cash

4) A public limited company cannot make any allotment of shares unless the amount of minimum subscription stated in the prospectus has been subscribed and the sum payable as application money for such shares has been paid to and received by the company.

5) When a company issues its securities at a price more than the face value, it is said to be an issue at a premium. Premium is the excess of issue price over face value of the security.

6) According to Section 52 of the Companies Act, 2013, Securities Premium Account may be used by the company:
(a) Towards issue of un-issued shares of the company to be issued to members of the company as fully paid bonus securities.
(b) To write off preliminary expenses of the company.
(c) To write off the expenses of, or commission paid, or discount allowed on any of the securities or debentures of the company.
(d) To provide for premium on the redemption of redeemable preference shares or debentures of the company.
(e) For the purchase of own shares or other securities.

7) Sometimes shareholders fail to pay the amount due on allotment or calls. The total unpaid amount on one or more installments is known as Calls-in-Arrears or Unpaid Calls.

8) Some shareholders may sometimes pay a part, or whole, of the amount not yet called up, such amount is known as Calls-in-advance.

9) Interest on calls in arrear is recoverable and that in respect of calls in advance is payable, according to provisions in this regard in the articles of the company, at the rates mentioned therein or those to be fixed by the directors, within the limits prescribed by the Articles. Table F prescribes 10% and 12% p.a. as the maximum rates respectively for calls in arrears and those in advance.

10) The term ‘forfeit’ actually means taking away of property on breach of a condition. It is very common that one or more shareholders fail to pay their allotment and/or calls on the due dates. Failure to pay call money results in forfeiture of shares.

11) A forfeited share is merely a share available to the company for sale and remains vested in the company for that purpose only. Reissue of forfeited shares is not allotment of shares but only a sale.

12) Public limited companies, generally, issue their shares for cash and use such cash to buy the various types of assets needed in the business. Sometimes, however, a company may issue shares in a direct exchange for land, buildings or other assets. These shares should be shown separately under the heading ‘Share Capital’.

Theory Questions
1) Write short notes on:
(i) Utilization of securities premium account.

Answer

According to Section 52 of the Companies Act, 2013, Securities Premium Account may be used by the company:
(a) Towards issue of un-issued shares of the company to be issued to members of the company as fully paid bonus securities.
(b) To write off preliminary expenses of the company.
(c) To write off the expenses of, or commission paid, or discount allowed on any of the securities or debentures of the company.
(d) To provide for premium on the redemption of redeemable preference shares or debentures of the company.
(e) For the purchase of own shares or other securities.

(ii) Re-issue of forfeited shares

Answer:

A forfeited share is merely a share available to the company for sale and remains vested in the company for that purpose only. Reissue of forfeited shares is not allotment of shares but only a sale. The share, after forfeiture, in the hands of the company is subject to an obligation to dispose it off. In practice, forfeited shares are disposed off by auction. These shares can be re-issued at any price so long as the total amount received (from the original allottee and the second purchaser) for those shares is not less than the amount in arrears on those shares.

2) Distinguish between:
(i) Calls-in-Arrears and Calls-in-advance.

Answer

Calls-in-Arrears: Sometimes shareholders fail to pay the amount due on allotment or calls. The total unpaid amount on one or more installments is known as Calls-in-Arrears or Unpaid Calls. Such amount represents the uncollected amount of capital from the shareholders; hence, it is shown by way of deduction from ‘called-up capital’ to arrive at paid-up value of the share capital.
Calls-in-advance: Some shareholders may sometimes pay a part, or whole, of the amount not yet called up, such amount is known as Calls-in-advance.

(ii) Issue of shares for cash and Issue of Shares for Consideration other than Cash.

Answer:

The shares can be issued by a company either for cash or for consideration other than cash. Public limited companies, generally, issue their shares for cash and use such cash to buy the various types of assets needed in the business. Sometimes, however, a company may issue shares in a direct exchange for land, buildings or other assets.

3) Can a company issue shares at discount?

Answer:

According to Section 53 of the Companies Act, 2013, a Company cannot issue shares at a discount except in the case of issue of sweat equity shares (issued to employees and directors). Thus any issue of shares at discount shall be void.

TOPIC WISE TRUE OR FALSE COVERED.  IT WILL BE VERY USEFUL FOR CAFC EXAMS

1) BILLS OF EXCAHNGE & ACCOMODATION BILLS

 False: The bills payable account is a personal account that represents a liability.

2) Promise to pay is included in a bill of exchange.

False: Bill of exchange contains an order to pay the required amount and not a mere promise to pay.

3) Days of rebate are added to the due date to arrive at the maturity date.

False: 3 Days of grace are added to the due date to arrive at the maturity date.

4) Discount at the time of retirement of a bill is a gain for the drawee.

True:  Discount at the time of retirement of a bill is a gain for the drawee and loss for the drawer.

5) Foreign bill is drawn in the country and payable outside the country.

 True: When a bill is drawn in the country and is payable outside the country it is termed as a foreign bill.

6) Promissory note is different from bill of exchange because the amount is paid by the maker in case of former and by the acceptor in the later.

True:  In case of the promissory note, it is generally the maker who makes the payment, but in case of the bill of exchange, the person accepting the bill shall be liable to make the payment to the holder of the bill.

7) A has drawn a bill on B. B accepts the same and endorses the bill to C.

False: B cannot endorse the bill to C as he is a drawee. Only A, the drawer can do so.

8) A bill given to a credit or is called bills payable.

 True:  A bill given to a creditor is called Bills Payable as the debtor commits to pay by giving a bill to creditor.

2) NON PORFIT ORGANISATIONS FINAL A/C'S

False: It depicts the cash system of accounting rather than the accrual system, as  the  cash  receipts  and  payments  pertaining  to  any  year  are  entered  in  the  Receipts and payments account. The principle of accrual is not followed with regard to the receipts and payments account of a non-profit organization.

2) Both the revenue and capital nature transactions are recorded in the Income and expenditure account.

False: The income and expenditure account records only the revenue income and expenditure. The capital transactions are being recorded in the Balance sheet.

 3) Sale of grass by a sports club is to be treated as sale of an asset.

False: The grass for a sports club is not a capital item, hence the sale of such grass shall be treated as a revenue receipt.

4) Subscriptions outstanding for the current year are disclosed under the Fixed assets side of the Balance sheet.

False: They are disclosed under the current assets of the Balance sheet as they will be paid within the next year and not to be treated as non-current assets.

5) Receipts and payments account gives the details about the expenses outstanding for the year.

False: Receipts and payments account gives information about the expenses paid in cash for the current year, previous or the next year. It is only  from  the  additional  information we identify the outstanding expenses.

6)  Adjustments in the form of additional information shall be adjusted in the final accounts  of a Non- profit organisation only in one place

False: Additional information means that information which has been identified just before the preparation of the final accounts. As NPO follows the double entry system of book keeping, there shall be 2 effects for each of the additional information

7) Tournament expenses incurred are more than the Tournament fund, then the excess to be shown as an asset in the closing Balance sheet.

  False: The excess of expenditure over the tournament fund shall be debited to the income and expenditure account and not taken to the closing balance sheet.

8) For Non-profit organisation, Excess of income over expenditure in the Income and   Expenditure account is termed as profit. 

False: The excess of the income over the expenditure is called as Surplus and not profit for an Non-profit organisation.

9) Surplus of non-profit organizations is distributed among its members.

False: The Non-profit organisation credits the surplus earned in a year to the general fund maintained by it.

10) Tournament fund, building fund, library fund is based on the fund based accounting.

 True: It is Fund based accounting that records the fund balances in the balance sheet.

11) Subscription fees refers to the one-time fees paid by the members to get admission for the benefits of the club.

 False: Subscription is a regular fees paid by the members to keep the membership alive.

12) Token payment made to a person, who voluntarily undertakes a service which would normally be paid in case of profitable organization is termed as Honorarium.

True: Honorarium refers to the nominal amount paid for the services with a non- commercial intent.

13) An Insurance company is an example of non-profit organization.

False: Insurance Company has a profit motive, hence it is not a non-profit organization.

14) Part amount of entrance fees which is to be capitalized shall be disclosed in the income and expenditure account.

False: It shall be shown in the Balance sheet- where it is to be capitalized.

15) Both the income & expenditure of the current and the previous year are recorded in the Income & Expenditure account.

False: It is only the current year income and expenditure which is recorded in the Income and Expenditure account as per the accrual concept.

16) Amount received as donation by an Non-profit organisation under the will of a deceased person is termed as legacy.

True: While on the death bed, if there is any will written that the assets of a person shall be donated to any NPO- then such a donation to the NPO, is termed as Legacy.

17)  Where a Non-profit organisation has a separate trading activity, the profit/loss from the trading account shall be transferred to Income and Expenditure Account at the time of consolidation.

True: Where in case of the trading activities, the profit /loss from such activity to be transferred to the Income and expenditure account in case of consolidated accounts.

18) Not for profit concerns concentrate their efforts to maximize the profit earning avenues.

False: The Non-profit organisation has its very existence to serve the members and the society. Profit earning shall never be its motive.

19) All the receipts are of revenue nature in case of Non-profit organisation.

False: Receipts can be both of revenue as well as capital nature. Receipts of both the nature are recorded in the receipts and payments account

20)   There is opening balance of Income and expenditure account.

False: It represents a nominal account and is prepared in accordance with the accrual concept, hence there can be no opening balances.

3) DISSOLUTION OF PARTNERSHIP FIRM

False. Books of accounts are not closed in dissolution of partnership but are closed in case of dissolution of partnership firm

2) On the dissolution of a partnership, firstly, the assets of the firm are realized. Then the amount realized, is applied first towards repayment of liabilities to outsiders.

True. On the dissolution of a partnership, firstly, the assets of the firm, are realized.  Then the amount realized, is applied first towards repayment of liabilities to outsiders and loans taken from partners; afterwards, the capital contributed by partners is repaid.

3) In event of the dissolution of the firm, the business ceases to end. In event of dissolution of the partnership, the partnership is reconstituted and the business discontinues.

True. In event of the dissolution of the firm, the business ceases to end. However, in event of dissolution of the partnership, the business continues as usual, but the partnership is reconstituted.

4) Expenses of dissolution on realization of assets are credited to the Realization Account.

False. Expenses of dissolution on realization of assets are debited to the Realization Account.

 4) VALUATION OF GOODWILL

False: Even though Goodwill is intangible asset it can be valued in terms of money

2) Goodwill is valued whenever there is change in the profit sharing ratio among the partners.

True: Goodwill has to be valued every time whenever there is a reconstitution.

3) Goodwill is the value of reputation of a firm in respect of profits expected in future over and above the normal rate of profits. 

 True: Goodwill is the brand image the firm has in the market due to which it enjoys an advantageous position over the other players in the market.

4) At the time of admission or retirement of a partner, goodwill can be raised in the books of accounts and shown as an asset 

 False: At the time of admission or retirement of a partner, goodwill should not be raised in the  books  of  account  of  partnership  firm  because  no  consideration  in  money  or  money  worth  has  been  paid  for it.

5) Only simple average method can be used for valuation of goodwill

False: Weighted average profit method, capitalisation method, super profits methods also can be used for valuation of Goodwill.

6) Super profit means excess of actual average profit over normal profit.

True: Super profit means excess profit that can be earned by the firm over and above the normal profit usually earned by similar firms under similar circumstances.

7) Normal profit means profit earned by similar companies in the same industry.

True: The rate of return is considered as an average for the industry, which is applied to the capital employed in the concerned firm.

8) Normal profit depends upon Normal Rate of Return and past profits.

 False: Normal profit depends upon Normal rate of return only and not on past profits.

9) At the time of admission/retirement of a partner, since goodwill can not be raised in the books of accounts is recorded through capital accounts of the partners.

True: Generally, the goodwill at the time of admission is adjusted through the capital accounts and not shown in the books of the firm.

10) At the time of admission of a partner, goodwill brought in by the new partner is shared equally by old partners.

False: Goodwill brought in by new partner is shared by old partners in sacrificing ratio and not equally.

5) ADMISSION OF PARTNER

False: All the partners have same rights at all times, unless contrary is provided in the partnership deed/or agreed by the partners.

2) When a new partner is admitted, old partners have to forego certain share in profits of the firm, this is called as sacrifice ratio. 

True: Revaluation is also called as profit and loss adjustment account.

3) Revaluation account is also called as Profit and Loss Adjustment Account.

True: Revaluation is also called as profit and loss adjustment account.

4) Any appreciation in the value of an asset is credited to Revaluation account.

True: Increase in asset is an income hence credited to revaluation account.

5) All the partners may decide not to change the values of assets and liabilities in the books of accounts.

True: This can be done by opening Memorandum Revaluation Account.

6) New partner is entitled to have share in reserves appearing in the balance sheet prior to his admission.

False: New partner is not entitled to have any share in the reserves of the firm prior to his admission. Such reserves are distributed to old partners in their old profit sharing ratio.

 7) If revaluation account shows credit balance then it represents profit and therefore it is credited to all partners equally.

False: If revaluation account shows credit balance then it represents profit and therefore it is credited to all partners in their profit sharing ratio and not equally.

8) New partner brings necessary amount as his capital.

True: Every incoming partner shall bring in some amount of capital for the firm.

 9) New partner is entitled to share in revaluation profit.

False: New partner is not entitled to profit on revaluation, it belongs to old partners in their old profit sharing ratio.

6) RETIREMENT OF PARTNER

False: Business of a partnership is not closed if any one of the partners retires, remaining partners continue to carry on the business.

2) At the time of retirement of a partner no special treatment is required for any reserves appearing in the Balance Sheet.

False: At the time of retirement of a partner all the reserves appearing in the balance sheet are transferred to all the partners in their old profit sharing ratio.

3) After retirement of a partner, profit sharing ratio of continuing partners remains the same.

False: After retirement of a partner, profit sharing ratio of continuing partners does not remain the same.

4) If any partner wants to retire from the business, he must retire on 1st day of the accounting year.

False: A partner can retire on any day as per his own wish.

5) Retiring partner has to forego his share of goodwill in the firm.

False: Retiring partner is entitled to his share of goodwill in the firm.

6) If a partner retires in between the accounting year then he is not entitled to any profit from the date of beginning of the year till his date of retirement.

False: If a partner retires in between the accounting year then he is certainly entitled to the profit from the date of beginning of the year till his date of retirement.

7)  If the firm has taken any joint life policy then it is to be surrendered at the time of retirement of a partner.

True: The firm is eligible for the surrender value on the Joint Life Policy taken on the partners at the time of their retirement.

8) Any joint life policy reserve appearing in the Balance Sheet is credited to all the partners in their old profit sharing ratio.

True: As per the surrender policy method, the JLP reserve is distributed to the partners in their profit sharing ratio through capital account.

9) No revaluation account is necessary on retirement of a partner.

False: Revaluation account is necessary on retirement of a partner

10) Profit on revaluation is credited to continuing partners, retiring partner is not entitled to any profit on revaluation.

False: Profit on revaluation is credited to all the partners in their profit sharing ratio.

7) DEATH OF A PARTNER

False: Surviving partners continue to carry on the business.

2) Legal heir of a deceased partner automatically becomes partner in the firm.

False: Legal heirs of deceased partners are entitled to dues of the deceased partner.

3) A revaluation account is opened in the books of accounts on death of a partner.

True: To find out the actual values of the assets and liabilities, revaluation account is prepared.

4) Any reserve appearing in the balance sheet on the date of death of a partner is transferred to all partners capital account in their profit sharing ratio.

True: reserves belong to the partners in the same manner the capital contributed by them. Hence it is distributed to them through the capital account.

5) Legal heirs of a deceased partner are entitled to his capital account balance only.

False: Legal heirs of a deceased partner are entitled to all the dues of deceased partner

 6) It is not necessary to adjust goodwill on death of a partner.

False: It is very much necessary to adjust goodwill on death of a partner.

7) On death of a partner continuing partners can agree to change their capital contribution and profit sharing ratio.

True: Yes, it can be continued in the earlier share or in new share- in either case it leads to computing a new profit sharing ratio.

8) On death of a partner, the firm gets surrender value of the joint life policy.

False: On death of a partner the firm gets full value of sum assured of the joint life policy.

9) Only legal heirs of deceased partner are entitled to amount received from joint life policy.

False: All the partners are entitled to amount received from joint life policy.

8) ISSUE OF SHARES 

False: Liability of the holder of shares is limited to the issue price of shares acquired by them.

2) Authorised capital appears in the balance sheet at face value. 

True: Authorised capital is the amount of capital mentioned in ‘capital clause’ of the ‘Memorandum of Association’. Authorised capital is considered only as presentation and not considered in total of balance sheet.

3) The rate of dividend on preference shares may vary From year to year.

False: Rate of preference dividend is always fixed.

4) A company may issue shares at a discount to the public in general.

False: According to Section 53 of the Companies Act, 2013, a Company cannot issue shares at a discount except in the case of issue of sweat equity shares (issued to employees and directors). Thus any issue of shares at discount shall be void.

5) Sweat equity shares are those which are issued to employees & directors at a discount.

True: According to Section 53 of the Companies Act, 2013, a Company cannot issue shares at a discount except in the case of issue of sweat equity shares (issued to employees and directors).

6) As per table F, rate of interest on calls in arrears is 12%.

False: As per table F, rate of interest on calls in arrears is 10%.

7) As per Table F, rate of interest on calls in advance is 10%.

False: As per Table F, rate of interest on calls in advance is 12%.

8) Non-participating preference shareholders enjoy voting rights.

False: A share on which only a fixed rate of dividend is paid every year, without any accompanying additional rights in profits and in the surplus on winding-up, is called 'Non-participating Preference Shares. Non-participating preference shareholders do not enjoy voting rights.

9) Forfeited shares are available to the company for the purpose of resale.

 True: Reissue of forfeited shares is not allotment of shares but only a sale.

10) Loss on reissue should exceed the forfeited amount.

False: Loss on re-issue should not exceed the forfeited amount.

STUDENTS DOING CAFC MUST DO THESE QUESTIONS.

1) ISSUE OF BONUS & RIGHT SHARES

2) REDEMPTION OF PREFERENCE SHARES

1) Redemption is the process of repaying an obligation, at pre arranged amount and timing.
2) In India, the issue and redemption of preference shares is governed by Section 55 of the Companies Act, 2013.
3) A company limited by shares if so authorized by its Articles, may issue preference shares which at the option of the company*, are liable to be redeemed. It should be noted that:
(a) no shares can be redeemed except out of profit of the company which would otherwise be available for dividend or out of proceeds of fresh issue of shares made for the purpose of redemption;
(b) no such shares can be redeemed unless they are fully paid;

4) A company cannot issue irredeemable preference shares.
5) Methods of redemption of fully paid-up preference shares: (i) by Fresh issue of shares; (ii) by Capitalisation of undistributed profits; (iii) Combination of (i) and (ii),

 Theoretical Questions
1) What is the purpose of issuing redeemable preference shares?

Answer:

A company may issue redeemable preference shares because of the following:
1) It is a proper way of raising finance in a dull primary market.
2) A company may face difficulty in raising share capital, as its shares are not traded on the stock exchange. Potential investors who may, hesitate in putting money into shares that cannot easily be sold may been courage to invest if the shares are redeemable by the company.
3) The preference shares may be redeemed when there is a surplus of capital and the surplus funds cannot be utilized in the business for profitable use.
4) No dividend is required to be paid, if there is loss or no profit, whereas interest is payable on debentures or loans even in case of loss. In other words, preference dividend declared/paid continues to be regarded as an appropriation of profits (similar treatment is given for equity shares), as against interest on debentures, which is a charge against profits.
In India, the issue and redemption of preference shares is governed by Section 55 of the Companies Act, 2013.

2) What are the provisions of the Companies Act, 2013 related with redemption of preference shares? Explain in brief.

Answer:

A company limited by shares if so authorized by its Articles, may issue preference shares which at the option of the company, are liable to be redeemed within a period, normally not exceeding 20 years from the date of their issue. 

It should be noted that:
(a) No shares can be redeemed except out of divisible or distributable profit, (i.e.  out of the profit of the company which would otherwise be available for dividend) or out of proceeds of fresh issue of shares made for the purpose of redemption;
(b) No such shares can be redeemed unless they are fully paid;
(c) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under Section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed:

Provided also that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed.
      (ii) In case of other companies (not falling under (i) above), the premium, if any payable on redemption shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed.

(d) where any such shares are proposed to be redeemed out of the profits of the company,  There shall, out of the divisible profits, i.e. the profits which would otherwise have been available for dividends, be transferred to a reserve account to be called Capital Redemption Reserve Account, a sum equal to the nominal amount of the shares redeemed; and the provisions of the Act relating to the reduction of the share capital of a company shall, except as provided in the Section, apply as if the Capital Redemption Reserve (CRR) Account were the paid-up share capital of the company. 

The utilisation of CRR Account is further restricted to issuance of fully paid-up bonus shares only.

3) ISSUE OF DEBENTURES 

1) Debenture is one of the most commonly used debt instrument issued by the company to raise funds for the business. A debenture is a bond issued by a company under its seal, acknowledging a debt and containing provisions as regards repayment of the principal and interest. Money payable on debentures may be paid either in full with application or in installments.

2) Debenture holders are the creditors of the company whereas shareholders are the owners of the company. Debenture holders have no voting rights and consequently do not pose any threat to the existing control of the company. Shareholders have voting rights and consequently control the total affairs of the company.

3) Debentures can be classified on the basis of: 

(1) Security; 

(2) Convertibility; 

(3) Permanence; 

(4) Negotiability; and 

(5) Priority.

4) Issue of redeemable debentures can be categorized in to the following:
a) Debenture issued at par and redeemable at par or at a discount;
b) Debenture issued at a discount and redeemable at par or at discount;
c) Debenture issued at premium and redeemable at par or at discount;
d) Debenture issued at par and redeemable at premium;
e) Debenture issued at a discount and redeemable at premium;
f) Debenture issued at premium and redeemable at premium;
Note: In practical life, redemption of debentures at a discount is a rare situation.

5) Collateral security means secondary or supporting security for a loan, which can be realized by the lender in the event of the original loan not being repaid on the due date. Under this arrangement, the borrower agrees that a particular asset or a group of assets will be realized and the proceeds there from will be applied to repay the loan in the event that the amount due, cannot be paid. Sometimes companies issue their own debentures as collateral security for a loan or a fluctuating overdraft.

6) Debentures can also be issued for consideration other than for cash, such as for purchase of land, machinery, etc.

7) The discount on issue of debentures is amortised over a period between the issuance date and redemption date. Loss on issue of debentures is also a capital loss and should be written off in a similar manner as discount on debentures issued. In the balance sheet both the items (Discount and Loss) are shown as Non-current/current assets depending upon the period for which it has to be written off.

8) Interest payable on debentures is treated as a charge against the profits of the company. Interest on debenture is paid periodically and is calculated at coupon rate on the nominal value of debentures.

Theoretical questions
1) Distinguish between debentures and shares.

Answer:

1. Debenture holders are the creditors of the company.

Shareholders  are the owners of the company.

2. Debenture holders have no voting rights and consequently do not pose any threat to the existing control of the company.

Shareholders have voting rights & consequently control the total affairs of the company.

3. Debenture interest is generally paid at a pre-determined fixed rate. It is payable, whether there is any profit or not. Debentures rank ahead of all types of shares for payment of the interest due on them.

Dividend on equity shares is paid at a variable rate which is vastly affected by the profits of the company (however, dividend on preference shares is paid ata fixed rate).

4. Interest on debentures are the charges against profits and they are deductible as an expense in determining taxable profit of the company.

Dividends are appropriation of profit and these are not deductible in determining taxable profit of the company.

5. There are different kinds of debentures, such as Secured/ Unsecured; Redeemable/ Irredeemable; Registered / Bearer; Convertible/ Non-convertible, etc.

There are only two kinds of shares – Equity Shares and Preference Shares.

6. In the Company’s Balance Sheet, Debentures are shown under “Long Term Borrowings”.

In the Company’s Balance Sheet, shares are shown under “Shareholder’s Fund” detailed in ‘Share Capital’ of Notes to Accounts.

7. Debentures can be converted into other debentures or shares as per the terms of issue of debentures.

Shares cannot be converted in to other shares in any circumstances.

8. Debentures cannot be forfeited for non-payment of call moneys.

Shares can be forfeited for non-payment of allotment and call moneys.

9. At maturity, debenture holders get back their money as per the terms and conditions of redemption.

Equity shareholders cannot get back their money before the liquidation of the company (however, preference shareholders can get back their money before liquidation).

10. At the time of liquidation, debenture holders are paid-off before the shareholders.

At the time of liquidation shareholders are paid at last, after paying debenture holders, Trade payable, etc.

2) Explain the purpose for raising of debenture by the company. Also give the main features of debentures.

Answer:

Debenture is one of the most commonly used debt instrument issued by the company to raise funds for the business. The most common method of supplementing the capital available to a company is to issued debentures which may either be simple or
Naked carrying no charge on assets, or mortgage debentures carrying either a fixed or a floating charge on some or all of the assets of the company.

FEATURES OF DEBENTURES
1) It is a document which evidences a loan made to a company.
2) It is a fixed interest-bearing security where interest falls due on specific dates.
3) Interest is payable at a predetermined fixed rate, regardless of the level of profit.
4) The original sum is repaid at a specified future date or it is converted in to shares or other debentures.
5) It may or may not create a charge on the assets of a company as security.
6) It can generally be bought or sold through the stock exchange at a price above or  below  its face value.

4) REDEMPTION OF DEBENTURES 

1) Debentures may create a charge against some or all the assets of the company. 

2) Charge may be fixed or floating, depends upon the condition of issue.
3) Debentures may be redeemed after a fixed number of years or after a certain period has elapsed.

4) For redemption of debentures, certain companies are required to create Debenture Redemption Reserve.
5) Methods of redemption: 

a) lump sum payment and 

b) Payment in installments.

Theoretical Questions
1) What is meant by redemption of debentures? Explain.

Answer:

Debentures are usually redeemable i.e. either redeemed in cash or convertible after a time period.
Redeemable debentures may be redeemed:
 After a fixed number of years; or
 Any time after a certain number of years has elapsed since their issue; or
 On giving a specified notice; or
 By annual drawing.

A company may also purchase its debentures, as and when convenient, in the open market.  When the debentures are quoted at a discount on the Stock Exchange, it may be profitable for the company to purchase and cancel them.

2) Write short note on Debenture Redemption Reserve.

Answer:

A company issuing debentures may be required to create a debenture redemption reserve account out of the profits available for distribution of dividend and amounts credited to such account cannot be utilised by the company except for redemption of debentures. Such an arrangement would ensure that the company will have sufficient liquid funds for the redemption of debentures at the time they fall due for payment.

5) STOCK VALUATION & RECONCILIATION

6) INTRODUCTION TO CO A/C'S

1) Company’ is termed as an entity which is formed and incorporated under the Co's Act, 2013 or an existing company formed & registered under any of the previous company laws.

2) Salient features of a company include: Incorporated Association; Separate Legal Entity; Perpetual Existence; Common Seal; Limited Liability; Distinction between Ownership and Management; Not a citizen; Transferability of Shares; Maintenance of Books; Periodic Audit; Right of Access to Information.

3) Types of companies: Government Company: Foreign Company; Private Company; Public Company; One Person Company; Small Company; Listed Company; Unlimited Company; Company limited by Shares; Company limited by Guarantee; Holding Company; Subsidiary Company.

4) The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the notified accounting standards and shall be in the form or forms as may be provided for different class or classes of companies, as prescribed in Schedule III to the Companies Act, 2013. Financial Statements as per Section 2(40) of the Companies Act, 2013, include balance sheet as at the end of the financial year; profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year; cash flow statement for the financial year; statement of changes in equity, if applicable; and any explanatory note annexed to.

Theory Questions
1) Explain salient features of a company in brief.

Answer

1) Incorporated Association: A company comes in to existence through the operation of law. Therefore, incorporation of company under the Companies Act is must. Without such registration, no company can come into existence. Being created by law, it is regarded as an artificial legal person.
2) Separate Legal Entity: A company has a separate legal entity and is not affected by changes in its membership. Therefore, being a separate business entity, a company can contract, sue and be sued in its incorporated name and capacity.

3) Perpetual Existence: Since company has existence independent of its members, it continues to be in existence despite the death, insolvency or change of members.
4) Common Seal: Company is not a natural person; therefore, it cannot sign the documents in the manner as a natural person would do. In order to enable the company to sign its documents, it is provided with a legal tool called ‘Common Seal’. The common seal is affixed on all documents by the person authorized to do so who in turn puts his signature for and on behalf of the company. Companies Act, 2013 required common seal to be affixed on certain documents (such as bill of exchange, share certificates, etc.) Now, the use of common seal has been made optional. All such documents which required affixing the common seal may now instead be signed by two directors or one director and a company secretary of the company. Further, every company registered in India are required to obtain unique Corporate Identification Number (CIN) that is assigned by Registrar of Companies.

5) Limited Liability: The liability of every shareholder of a company is limited to the amount he has agreed to pay to the company on the shares allotted to him. If such shares are fully paid-up, he is subject to no further liability.
6) Distinction between Ownership and Management: Since the number of shareholders is very large and may be distributed at different geographical locations, it becomes difficult for them to carry on the operational management of the company on a day-to-day basis. This gives rise to the need of separation of the management and ownership.
7) Not a citizen: A company is not a citizen in the same sense as a natural person is, though it is created by the process of law. It has a legal existence but does not enjoy the citizen ship rights and duties as are enjoyed by the natural citizens.
8) Transferability of Shares: The capital is contributed by the shareholders through the subscription of shares. Such shares are transferable by its members except in case of a private limited company, which may have certain restrictions on such transferability.
9) Maintenance of Books: A limited company is required by law to keep a prescribed set of account books and any failure in this regard attracts penalties.
10) Periodic Audit: A company has to get its accounts periodically audited through the chartered accountants appointed for the purpose by the shareholders on the recommendation of board of directors.

11) Right of Access to Information: The right of the shareholders of a company to inspect its books of account, with the exception of books open for inspection under the Statute, is governed by the Articles of Association. The shareholders have a right to seek information from the directors by participating in the meetings of the company and through the periodic reports.

2) Write short note on:
(i) Foreign company.

According to Section 2(42) of the Companies Act, 2103, “Foreign company” means any company or body corporate incorporated outside India which –
(a) Has a place of business in India whether by itself or through an agent physically or through electronic mode; and
(b) Conducts any business activity in India in any other manner.

(ii) Small company

Section 2(85) of the Companies Act, 2013 defines “Small company” means a company, other than a public company.
(i) paid-up share capital of which does not exceed four crores rupees orsuch higher amount as may be prescribed which shall not be more than ten crore rupees; or

(ii) turnover of which as per its last profit and loss account for the immediately preceding financial year does not exceed forty crores rupees or such higher amount as may be prescribed which shall not be more than hundred crore rupees.
Provided that nothing in this clause should apply to:
(A) a holding company or a subsidiary company
(B) a company registered under section 8
(C) a company or body corporate governed by any special Act

(iii) Company limited by guarantee
As per Section 2(21) of the Companies Act, 2013, “company limited by guarantee” means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.

7) INTRODUCTION TO PARTNERSHIP A/C'S

8) MANUFACTURING FINAL ACCOUNTS

TOPIC WISE TRUE OR FALSE COVERED.  IT WILL BE VERY USEFUL FOR CAFC EXAMS

1) ISSUE OF BONUS & RIGHT SHARES

False. Earnings per share gets decreased after bonus issue.

2) Issued share capital including issue of rights shares and bonus shares may be more than the Authorised capital.

False. Issued share capital including issue of rights shares and bonus shares is always  less than or equal to Authorised capital

3) Rights issue of shares results in decrease of market value of per share in comparison to     market price before rights issue. 

True. Rights issue of shares results in decrease of market value of per share in comparison to market price before rights issue.

4) Right shares are normally offered at a price more than the cum-right value of the share, causing dilution in its value post-right issue.

 False. Right shares are normally offered at a price less than the cum-right value of the share, causing dilution in its value post-right issue.

 2) REDEMPTION OF PREFERENCE SHARES

False: When shares are redeemed by utilising distributable profit, an amount equal to the face value of shares redeemed is transferred to Capital Redemption Reserve account by debiting the distributable profit.

2) A company who prepares financial statements in compliance with Accounting Standards under Section 133 of the Companies Act, 2013, it cannot utilize securities premium for the purpose of providing for premium on the redemption of Redeemable Preference shares of the Company.

True: A company who prepares financial statements in compliance with Accounting Standards under Section 133 of the Companies Act, 2013, it cannot utilize securities premium for the purpose of providing the premium on the redemption of redeemable preference shares.

3) The balance in forfeited shares account can be used for transfer to capital redemption reserve account.

False: The balance in Forfeited shares account cannot be used for transfer to capital redemption reserve account.

4) Capital redemption reserve cannot be used for writing off miscellaneous expenses and losses.

True: Capital redemption reserve cannot be used for writing off miscellaneous expenses and losses.

3) ISSUE OF DEBENTURES

False: Debenture holder are the creditors of the company.

2) Perpetual debentures are payable at the time of liquidation of the company.

 True: Perpetual debentures, also known as irredeemable debentures are not repayable during the life time of the company.

3) Registered debentures are transferable by delivery.

False: Registered debentures are not easily transferable by delivery. Bearer debentures are transferrable by delivery.

3) When companies issue their own debentures as collateral security for a loan, the holder of such debenture is entitled to interest only on the amount of loan and not on the debentures

 True: In case the company cannot repay its loan & the interest thereon on the due date, the lender becomes debenture holder & then only he is entitled to interest on debentures.

4) Debentures suspense account appears on liability side of balance sheet

False: Debentures suspense account appears on asset side of balance sheet under non- current asset.

5) If a company incurs loss, then it does not pay interest to the debenture holders.

False: Even if the company incurs loss or earns profit, it has to pay the interest on debentures.

6) At the time of liquidation, debenture holders are paid off after the share holders.

False : At the time of liquidation,debenture holders are paid off before shareholders on priority basis.

7) Convertible debentures can be converted into equity shares.

True : Convertible debentures can be converted into equity share after a certain period of time from the date of its issue.

8) Redeemable debentures are not payable during the lifetime of the company.

False : These debentures are repayable as per the terms of issue, for example, after 8 years from the date of issue.

9) Debentures can be issued for a consideration other than for cash, such as for purchasing land, machinery etc.

True: Debentures can be issued for a consideration other than for cash, such as for purchasing land, machinery etc.

4) REDEMPTION OF DEBENTURES

False: Amounts credited to the debenture redemption reserve should not be utilised by the company for any purpose except for the purpose other than for redemption of debentures.

2) All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking Companies for both public as well as privately placed debentures need not create any Debenture Redemption Reserve (DRR).

True: All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking Companies for both public as well as privately placed debentures need not  create any DRR.

3) Under payment in instalments method, the payment of entire debenture is made in one lot.

False: under payment in instalments method, the payment of specified portion of debentures are made in instalments at specified intervals.

4) At redemption of debentures, DRR should be transferred to general reserve.

True: DRR is transferred to general reserve at the time of redemption of debentures.

5) STOCK VALUATION & RECONCILIATION

True: Inventories refers to stocks of goods and materials that are maintained in business for revenue generation.

2) A building is considered inventory in a construction business.

True: For a construction business, a building under construction will be inventory. The building is being built in the normal course of business and will eventually be sold as inventory.

3) Inventory is valued as carrying costless percentage decreases.

False: Inventory is valued at lower of cost or net realizable value.

4) Management has daily information about the quantity and valuation of closing stock under physical Inventory System.

False : Under Perpetual Inventory System management have daily information of closing stock.

5) Periodic Inventory System is more suitable for small enterprises.

True : A periodic inventory system is suitable to small and micro enterprises, where physical counting of inventory is not a tedious process.

6) When closing inventory is overstated, net income for the accounting period will be understated.

False : When closing inventory is overstated, net income for the accounting period will be overstated.

7) Closing inventory = Opening inventory + Purchases + Direct expenses + Cost of goods sold.

False: Closing stock = Cost of goods sold - (Opening inventory + Purchases + Direct expenses).

8) Cost of inventories should comprise all cost of purchase.

False: Cost of inventories should comprise all cost of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

9) Inventory by-products, should be valued at net realisable value where cost of by products can be separately determined.

False: Inventory by-products, should be valued at net realisable value where cost of  by products can not be separately determined.

10) Abnormal amounts of wasted materials, labour or other production overheads expensesare included in the costs of inventories.

False: Abnormal amounts of wasted materials, labour or other production overheads expenses are generally not included in the costs of inventories.

11) Perpetual system requires closure of business for counting of inventory.

False: Periodic system requires closure of business for counting of inventory.

12) Periodic inventory system is a method of ascertaining  inventory by taking an actual physical count.

True: Under Periodic inventory system actual physical countofinventory is taken of all the inventory on hand at a particular date.

13) The value of closing inventory under simple average price method is realistic as compareto LIFO.

True: Value of Closing stock as per average method is more realistic then LIFO.

14) The value of stock is shown on the assets side of the balance-sheet as fixed assets.

False: The value of stock is shown on the assets side of the balance-sheet as current assets. As it is realizable within 12 months.

15) Under inflationary conditions, FIFO will not show lowest value of cost of goods sold.

False: Under inflationary conditions, LIFO and weighted average will not show lowest value of cost of goods sold.

16) Under LIFO, valuation of inventory is based on the assumption that costs are charged against revenue in the order in which they occur.

False: Under FIFO, valuation of inventory is based on the assumption that costs are charged against revenue in the order in which they occur.

17) Valuation of inventory, at cost or net realisable value, whichever less, is based on the principle of Conservatism.

True: The conservatism concept states that one shall not account for anticipated profits but shall provide all prospective losses. Valuing inventory at cost o rnet realisable value which ever is less, therefore is based on principle of Conservatism.

18) Finished goods are normally valued at cost or market price whichever is higher.

False: Finished goods are normally valued at cost or market price whichever is lower.

6) INTRODUCTION TO CO A/C'S

False: Listed companies are those which are listed on the stock exchange. Shares oflisted companies are open to general public. Every listed company is a public company but every public company is not a listed company.

2) Shares of a private company are not listed on stock exchange.

True: Only the shares of public company are listed on stock exchange. Every listed company is a public company.

3) It is not mandatory to incorporate a company  under the companies act.

False : It is mandatory to incorporate a company under the Companies Act. Without such incorporation, a company cannot come in to existence.

4) Company is an artificial, legal person created by law.

True : Company comes in to existence through the operation of law. It is aseparate entity distinct from it’s members.

5) Death, insolvency or change of members affects the existence of a company.

False: Company is a separate legal entity created by law. Death ,insolvency or change of member does not affect it’s existence.

6) If the shares are fully paid-up by the shareholder, he is subject to no further liability. 

True: Liability of shareholders is limited to the extent of the unpaid sharecapital. So, if shares are fully paid-up,he is subject to no further liability.

7) Public limited company has restrictions on transferability of shares.

False: Shares of public company are freely transferable. Transferability of shares is restricted in a private limited company.

8) Financial statements of company show the financial position of the business. 

True: Financial statements give a true & fair view of the state of affairs of the company. Financial statements include profit & loss account, balancesheet, etc.

9) Schedule I gives proforma of Balance Sheet.

False : Schedule III Part I explains proforma of Balance Sheet.

10) Schedule III prescribes the format of Directors’ Report.

False : Schedule III Part I explains proforma of Balance Sheet and Profit and Loss.

11) Financial statements need to be true and correct as per Companies Act.

False : As per Section 128, every company shall prepare financial statement for every financial year which give a true and fair view of the state of the affairs of the  company.

7) INTRODUCTION TO PARTNERSHIP A/C'S

False: In absence of any agreement partners share profits equally and not in capital contribution ratio.

2) Profit sharing ratio and capital contribution ratio need not be same.

True: Profit sharing can be different from the that of the capital introduced by each of the partner. Not necessary that partner contributing more capital should have a higher profit sharing ratio and vice versa.

3) Every partnership firm must register itself with Registrar of firms.

False: Registration of firms is not compulsory under Indian Partnership Act, 1932

4) A partner can advance loan to the partnership firm in addition to capital contributed by him.

True: Where the partnership deed is absent, then the interest shall be paid at 6% per annum. So the interest on the loan to be paid to the partner.

5) A partner can demand interest on capital even if it is not provided in the partnership deed.

False: Interest on capital can be paid only if it is provided in the partnership deed.

6) If a partner does not take part in day to day business activities of the firm then he is not entitled to any share of profit.

False: Every partner need not take part in the business. Even if a partner does not take part in the business he is entitled for his share of profit.

7) Interest should be paid @ 6% p.a. on partners’ loan even if it is not provided in the partnership deed.

True: In absence of Partnership deed, Interest at the rate of 6%.p.a is to be allowed on a partner’s loan to the firm.

8) Husband and wife cannot be partners in the same firm.

False: Husband and wife can be partners in the same firm.

9) One senior partner is Principal and other partners are his agents.

False: There is no senior or junior partner. Every partner is agent/principal of other partners.

10) Partners are the agents of the firm and each other.

True: Concept of agency applies to every partner and the firm as well. So each partner is a principal to and agent of every other partner and to the firm.

8) MANUFACTURING FINAL ACCOUNTS

False: In absence of any agreement partners share profits equally and not in capital contribution ratio.

2) Profit sharing ratio and capital contribution ratio need not be same.

True: Profit sharing can be different from the that of the capital introduced by each of the partner. Not necessary that partner contributing more capital should have a higher profit sharing ratio and vice versa.

3) Every partnership firm must register itself with Registrar of firms.

False: Registration of firms is not compulsory under Indian Partnership Act, 1932

4) A partner can advance loan to the partnership firm in addition to capital contributed by him.

True: Where the partnership deed is absent, then the interest shall be paid at 6% per annum. So the interest on the loan to be paid to the partner.

5) A partner can demand interest on capital even if it is not provided in the partnership deed.

False: Interest on capital can be paid only if it is provided in the partnership deed.

6) If a partner does not take part in day to day business activities of the firm then he is not entitled to any share of profit.

False: Every partner need not take part in the business. Even if a partner does not take part in the business he is entitled for his share of profit.

7) Interest should be paid @ 6% p.a. on partners’ loan even if it is not provided in the partnership deed.

True: In absence of Partnership deed, Interest at the rate of 6%.p.a is to be allowed on a partner’s loan to the firm.

8) Husband and wife cannot be partners in the same firm.

False: Husband and wife can be partners in the same firm.

9) One senior partner is Principal and other partners are his agents.

False: There is no senior or junior partner. Every partner is agent/principal of other partners.

10) Partners are the agents of the firm and each other.

True: Concept of agency applies to every partner and the firm as well. So each partner is a principal to and agent of every other partner and to the firm.

VERY IMPORTANT FOR CAFC EXAM

TEST PAPER 1 - 20 MARKS

False: Accounting Standards for non-corporate entities in India are issued by the Institute of Chartered Accountants of India (ICAI).

2) Subsidy received from the government for working capital by a manufacturing concern is a revenue receipt.

True: Subsidy received from the government for working capital by a manufacturing concern is a revenue receipt because it has no effect on improvement of future capability of business in revenue generation.

3) Reducing balance method of depreciation is followed to have a uniform charge for depreciation & repairs & maintenance together.

True: In the early periods of useful life of a fixed assets, repairs and maintenance expenses are relatively low because the asset is new. Whereas in later periods, as the asset become old, repairs and maintenance expenses increase continuously. Under written down value method, depreciation charged is high in the initial period and reduces continuously in the later periods. Thus, depreciation and repair and maintenance expenses become more or less uniform throughout the useful life of the asset.

4) Discount at the time of retirement of a bill is a gain for the drawee.

True: Discount at the time of retirement of a bill is a gain for the drawee and loss for the drawer.

5) Business of partnership comes to an end on death of a partner.

False: Surviving partners may continue to carry on the business in case of partnership.

6) Receipts & Payments Account highlights total income &expenditure. 

False: Receipts and payments account is a classified summary of cash receipts and payments over a certain period together with cash and bank balances at the beginning and close of the period.

B) Discuss the limitations which must be kept in mind while evaluating the Financial Statements. 

Answer:

Limitations which must be kept in mind while evaluating the Financial Statements are as follows:
• The factors which may be relevant in assessing the worth of the enterprise don’t find place in the accounts as they cannot be measured in terms of money.
• Balance Sheet shows the position of the business on the day of its preparation and not on the future date while the users of the accounts are interested in knowing the position of the business in the near future and also in long run and not for the past date.
• Accounting ignores changes in some money factors like inflation etc.
• There are occasions when accounting principles conflict with each other.
• Certain accounting estimates depend on the sheer personal judgement of the accountant.
• Different accounting policies for the treatment of same item adds to the probability of manipulations.

C) Discuss the factors taken into consideration for calculation of depreciation.  Answer:

Following factors are taken into consideration for calculation of depreciation.
1. Cost of asset including expenses for installation, commissioning, trial run etc.- Cost of a depreciable asset represents its money outlay or its equivalent in connection with its acquisition, installation and commissioning as well as for additions to or improvement thereof for the purpose of increase in efficiency.
2. Estimated useful life of the asset - Useful Life’ is either (i) the period over which a depreciable asset is expected to be used by the enterprise or (ii) the number of production or similar units expected to be obtained from the use of the asset by the enterprise. Determination of the useful life is a matter of estimation and is normally based on various factors including experience with similar type of assets. Several other factors like estimated working hours, production capacity, repairs and renewals, etc. are also taken into consideration on demanding situation.
3. Estimated scrap value (if any) is calculated at the end of useful life of the asset. If such value is considered as insignificant, it is normally regarded as nil. On the other hand, if the residual value is likely to be significant, it is estimated at the time of acquisition or installation, or at the time of subsequent revaluation of asset.

D) Write short notes on Accommodation bill & Renewal of bill.

Answer: 

Bills of Exchange are usually drawn to facilitate trade transmission, that is, bills are meant to finance actual purchase and sale of goods. But the mechanism of bill can be utilised to raise finance also. When bills are used for such a purpose, they are known as accommodation bills.

When the acceptor of a bill finds himself in financial straits to honour the bill on the due date, then he may request the drawer to cancel the original bill and draw on him a fresh bill for another period. And if the drawer agrees, a new bill in place of the original bill may be accepted by the drawee for another period. This is called the renewal of bill.

TEST PAPER 2 - 20 MARKS

True: Since the temporary huts were necessary for the construction, their cost should be added to the cost of the cinema hall and thus capitalised.

2) Accrual concept implies accounting on cash basis.

False: Accrual concept implies accounting on ‘due’ or ‘accrual’ basis. Accrual basis of accounting involves recognition of revenues and costs as and when they accrue irrespective of actual receipts or payments.

3) Reducing balance method of depreciation is followed to have a uniform charge for depreciation and repairs and maintenance
together.

True: In the early periods of useful life of a fixed assets, repairs and maintenance expenses are relatively low because the asset is new. Whereas in later periods, as the asset become old, repairs and maintenance expenses increase continuously. Under written down value method, depreciation charged is high in the initial period and reduces continuously in the later periods. Thus, depreciation and repair and maintenance expenses become more or less uniform throughout the useful life of the asset.

4) Discount at the time of retirement of a bill is a gain for the drawee.

True: Discount at the time of retirement of a bill is a gain for the drawee and loss for the drawer.

5) If individual life policies are taken in the name of the partners and premium is paid from the firm, then retiring partner is entitled to surrender value of his policy only.

False: If individual life policies are taken in the name of the partners and premium is paid from the firm, then retiring partner is entitled to surrender value of all the partners policies.

6) Net income in case of persons practicing vocation is determined by preparing profit and loss account.

False: Net income is determined by preparing income and expenditure in case of persons practicing vacation.

B) Differentiate between Book-keeping and Accounting.

Answer:

Book keeping:
1) It is a process concerned with recording of transactions.

2) It constitutes as a base for accounting. 

3) Financial statements do not form part of this process.

4) Managerial decisions cannot be taken with the help of these records.

5) There is no sub-field of book-keeping.

6) Financial position of the business cannot be ascertained through book-keeping records.

Accounnting:

1) It is a process concerned with summarising of the recorded transactions.

2) It is considered as a language of the business.

3) Financial statements are prepared in this process on the basis of book-keeping records.

4) Management takes decisions on the basis of these records.

5) It has several sub-fields like financial accounting, management accounting etc.

6) Financial position of the business is ascertained on the basis of the accounting reports.

C) What are the rules of posting of journal entries into the Ledger?

Answer:

Rules regarding posting of entries in the ledger:
1) Separate account is opened in ledger book for each account and entries from journal are posted to respective ledger account accordingly.
2) It is a practice to use words ‘To’ and ‘By’ while posting transactions in the ledger. The word ‘To’ is used in the particular column with the accounts written on the debit side while ‘By’ is used with the accounts written in the particular column of the credit side. These ‘To’ and ‘By’ do not have any meanings but are used to the account debited and credited.
3) The concerned account debited in the journal should also be debited in the ledger but reference should be of the respective credit account.

D) Explain any 2 differences between Bill of Exchange & Promissory Notes. 

Answer:

Bills of exchange:

1) There are three parties involved drawer, drawee and payee.

2) It is drawn by the creditor.

Promissory notes:

1) There are only two parties involved promissory (maker) and Payee.
2) It is drawn by the debtor.

TEST PAPER 3 - 20 MARKS

True: Insurance claim received on account of plant and machinery completely damaged by fire is a capital receipt as it is not obtained in course of normal business activities.

2) In the balance sheet of Angel Limited, preliminary expenses amounting to Rs. 15 lakhs and securities premium account of Rs.105 lakhs are appearing; The accountant can use the balance in securities premium account to write off preliminary expenses.

True: According to Section 52 of the Companies Act, 2013, Securities Premium Account may be used by the company to write off preliminary expenses of the company. Thus, the accountant can use the balance in securities premium account to write off the preliminary expenses amounting ` 15 lakhs.

3) The financial statements must disclose all the relevant and reliable information in accordance with the Full Disclosure Principle.

True: The financial statements must disclose all the relevant and reliable information in accordance with the Full Disclosure Principle.

4) In case of admission of a new partner in a partnership firm, the profit/loss on revaluation account is transferred to all partners in their new profit sharing ratio.

False: In case of admission of new partner in a partnership firm, profit/loss on revaluation account is transferred to old partners in their old profit-sharing ratio.

5) The debit notes issued are used to prepare Sales Return Book.

False: The debit notes issued are used to prepare purchases return book.

6) Debenture holders enjoy the voting rights in the company.

False: Debenture holder does not enjoy voting rights in company. He is only a creditor of the company.

B) Change in accounting policy may have a material effect on the items of financial statements.” Explain the statement with the help of an example.

Answer:

Change in accounting policy may have a material effect on the items of financial statements. For example, cost formula used for inventory valuation is changed from weighted average to FIFO. Unless the effect of such change in accounting policy is quantified, the financial statements may not help the users of accounts.

C) Write short notes on any two of the following:
(i)Bill of exchange & the various parties to it.

Answer:

A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money to or to the order of certain person or to the bearer of the instrument. When such an order is accepted by the drawee on the face of the order itself, it becomes a valid bill of exchange.
There are three parties to a bill of exchange:
(i) The drawer, who draws the bill, that is, the creditor to whom the money is owing;
(ii) The drawee, the person to whom the bill is addressed or on whom it is drawn and who accepts the bill that is, the debtor; and
(iii) The payee, the person who is to receive the payment. The drawer in many cases is also the payee.

(ii) Retirement of bills of exchange.

Answer:
Retirement of bills of exchange: Sometimes, the acceptor of a bill of exchange has spare funds much before the maturity date of the bill of exchange accepted by him. He may, therefore, desire to pay the bill before the due date. In such a circumstance, the acceptor shall ask the payee or the holder of the bill to accept cash before the maturity date. If the payee agrees, the acceptor may be allowed a rebate or discount on such early payment. This rebate is generally the interest at an agreed rate for the period between the date of payment and date of maturity. The interest/rebate/discount becomes the income of the acceptor and expense of the payee. It is a consideration for premature payment. When a bill is paid before due date, it is said to be retired under rebate.

D) Explain, in brief, the basic considerations for distinguishing between capital & revenue expenditures?

Answer:

The basic considerations in distinction between capital and revenue expenditures are:
(i) Nature of business: For a trader dealing in furniture, purchase of furniture is revenue expenditure but for any other trade, the purchase of furniture should be treated as capital expenditure and shown in the balance sheet as asset.
(ii) Recurring nature of expenditure: If the frequency of an expense is quite often in an accounting year then it is said to be an expenditure of revenue nature while non-recurring expenditure is infrequent in nature and do not occur often in an accounting year.
(iii) Purpose of expenses: Expenses for repairs of machine may be incurred in course of normal maintenance of the asset. Such expenses are revenue in nature. On the other hand, expenditure incurred for major repair of the asset so as to increase its productive capacity is capital in nature.
(iv) Materiality of the amount involved: Relative proportion of the amount involved is another important consideration in distinction between revenue and capital.

TEST PAPER 4 - 20 MARKS

True: Subsidy received from the government for working capital by a manufacturing concern is a revenue receipt because it has no effect on improvement of future capability of business in revenue generation.

2) If the effect of errors committed cancel out, the errors will be called compensating errors and the trial balance will disagree.

False: If the effect of errors committed cancel out, the errors will be called compensating errors and the trial balance will agree.

3) The financial statements must disclose all the relevant and reliable information in accordance with the Full Disclosure Principle.

True: The financial statements must disclose all the relevant and reliable information in accordance with the Full Disclosure Principle.

4) Limited Liability Partnership (LLP) is governed by Indian Partnership Act, 1932.

False: The provisions of the Indian Partnership Act, 1932 shall not apply to a limited liability partnership. Limited Liability (LLPs) Act, 2008 is applicable for Limited Liability Partnerships

5) Nominal Accounts are kept under Single Entry System.

False: Under the single entry system of bookkeeping, generally cash book and personal accounts of creditors and debtors are maintained, and no other ledger is maintained.

6) A person holding preference shares of a company cannot hold equity shares of the same company.

False: Preference share holder can hold both Equity shares and Preference shares of the company. Any person can hold both kinds of shares.

B)Differentiate between provision & contingent liability.  

Provision:

1) Provision is a present liability of uncertain amount, which can be measured reliably by using a substantial degree of estimation.

2) A provision meets the recognition criteria.

3) Provision is recognized when 

a) an enterprise has a present obligation arising from past events; an outflow of resources embodying economic benefits is probable, and 

b) a reliable estimate can be made of the  amount of the obligation.

4) If the management estimates that it is probable that the settlement of an obligation will result in outflow of economic benefits, it recognises a provision in the balance sheet.

Contingent liability:

1) A Contingent liability is a possible obligation that may or may not crystallise depending on the occurrence or non-occurrence of one or more uncertain future events.
2) A contingent liability fails to meet the recognition criteria.
3) Contingent liability includes present obligations that do not meet the recognition criteria because either it is not probable that settlement of those obligations will require outflow of economic benefits, or the amount cannot be reliably estimated.

4) If the management estimates, that it is less likely that any economic benefit will outflow from the firm to settle the obligation, it discloses the obligation as a contingent liability.

TEST PAPER 5  - 20 MARKS

True: The balance represents the cash physically in existence and is therefore an asset.
2) Finished goods are normally valued at cost or market price whichever is higher.

False: Finished goods are normally valued at cost or net realizable value whichever is lower.

3) Subscriptions received for the current year shall be shown in the balance sheet as a current asset.

False: Current year subscription shall be shown in the credit side of the income and expenditure account and not in the balance sheet, as it is not a capital item.

4) When shares are forfeited, the share capital account is debited with called up capital of shares forfeited and the share forfeiture account is credited with Calls in arrear of shares forfeited.

False: When shares are forfeited, the share capital account is debited with called up capital of shares forfeited and the share forfeiture account is credited with amount received on shares forfeited.

5) Discount at the time of retirement of a bill is a gain for the drawee.

True: Discount at the time of retirement of a bill is a gain for the drawee and loss for the drawer.

6) Bills receivable and bills payable books are type of subsidiary books. 

True: Yes they are types of subsidiary books which is alternate to the journals.

B) What services can a CharteredAccountant provide to the society?

Answer:

The practice of accountancy has crossed its usual domain of preparation of financial statements, interpretation of such statements and audit thereof. Chartered Accountants are presently taking active role in company laws and other corporate legislation matters, in taxation laws matters (both direct and indirect) and in general management problems.
Some of the services rendered by chartered accountants to the society are briefly mentioned hereunder:
(i) Maintenance of books of accounts;
(ii) Statutory audit;
(iii) Internal Audit;
(iv) Taxation;
(v) Management accounting & consultancy services;
(vi) Financial advice and financial investigations etc.
Other services like secretarial work, share registration work, company formation receiverships, arbitrations etc.

C) State the causes of difference between the balance shown by the pass book and the cash book.

Answer:

The difference between the balance shown by the passbook and the cashbook may arise on account of the following:
(i) Cheques issued but not yet presented for payment.
(ii) Cheques deposited into the bank but not yet cleared.
(iii) Interest allowed by the bank.
(iv) Interest and expenses charged by the bank.
(v) Interest and dividends collected by the bank.
(vi) Direct payments by the bank.
(vii) Direct deposits into the bank by a customer.
(viii) Dishonour of a bill discounted with the bank.
(ix) Bills collected by the bank on behalf of the customer.
(x) An error committed by the bank etc.

D) Which subsidiary books are normally used in a business? 

Answer:

Normally, the following subsidiary books are used in a business:
(i) Cash book to record receipts and payments of cash, including receipts into and payments out of the bank.
(ii) Purchases book to record credit purchases of goods dealt in or of the materials and stores required in the factory.
(iii) Purchase Returns Books to record the returns of goods and materials previously purchased.
(iv) Sales Book to record the sales of the goods dealt in by the firm.
(v) Sale Returns Book to record the returns made by the customers.
(vi) Bills receivable books to record the receipts of promissory notes or hundies from various parties.
(vii) Bills Payable Book to record the issue of the promissory notes or hundies to other parties.
(viii) Journal (proper) to record the transactions which cannot be recorded in any of the seven books mentioned above.

TEST PAPER 6 - 20 MARKS

False: Such wages being related to capital asset should be debited to the machinery account.

2) Amount spent for the construction of temporary huts, which were necessary for construction of the Cinema House and were demolished when the Cinema House was ready, is capital expenditure.

True: Since the temporary huts were necessary for the construction, their cost should be added to the cost of the cinema hall and thus capitalised.

3) If the effect of errors committed cancel out, the errors will be called compensating errors and the trial balance will disagree.

False: If the effect of errors committed cancel out, the errors will be called compensating errors and the trial balance will agree.

4) Promissory note is different from bill of exchange because the amount is paid by the maker in case of former and by the acceptor in the later.

True: In case of the promissory note, it is generally the maker who makes the payment, but in case of the bill of exchange, the person accepting the bill shall be liable to make the payment to the holder of the bill.

5) The business of partnership must be carried on by all the partners.

False: The business of the partnership firm can be carried on by all the partners or by any one of them acting for all.

6) Debenture interest is payable after the payment of preference dividend but before the payment of equity dividend.

False: Debenture interest is payable before the payment of any dividend on shares.

B) Explain Cash & Mercantile system of accounting?

Answer:

Cash system of accounting is a system by which a transaction is recognized only if cash is received or paid. In cash system of accounting, entries are made only when cash is received or paid, no entry being made when a payment or receipt is merely due. Cash system is normally followed by professionals, educational institutions or non-profit making organizations.

On the other hand, mercantile system of accounting is a system of classifying & summarizing transactions into assets, liabilities, equity (owner’s fund), costs, revenues and recording thereof. A transaction is recognized when either a liability is created/ impaired and an asset is created/impaired. 

A record is made on the basis of amounts having become due for payment or receipt irrespective of the fact whether payment is made or received actually.
Mercantile system of accounting is generally accepted accounting system by business entities

C) Write short notes on:
(i) Adjusted Selling Price method of determining cost of stock.

Answer:

Adjusted selling method is also called retail inventory method. It is used widely in retail business or in business where the inventory comprises of items, the individual costs of which are not readily ascertainable. The historical cost of inventory is estimated by calculating it in the first instance at selling price and then deducting an amount equal to the estimated gross margin of profit on such stocks

(ii) Principal methods ofascertainment of cost of inventory.

Answer:

The specific identification method, First-In–First-Out (FIFO) and weighted average cost formulae are the principal methods of ascertaining the cost of inventory. The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs under the specific identification method

D) Classify the following expenditures as capital or revenue expenditure:
(i) Amount spent on making a few more exists in a Cinema Hall to comply with Government orders : Revenue Expenditure.

(ii) Travelling expenses of the directors for trips abroad for purchase of capital assets: Capital Expenditure.

(iii) Amount spent to reduce working expenses: Revenue Expenditure.

(iv) Amount paid for removal of stock to a new site: Revenue Expenditure.

(v) Cost of repairs on second-hand car purchased to bring it into working condition: Capital Expenditure.

TEST PAPER 7  - 20 MARKS

A) True or False:
1) A claim that an enterprise is pursuing through legal process, where the outcome is uncertain, is a contingent liability.

False: A claim that an enterprise is pursuing through legal process, where the outcome is uncertain, is a contingent asset.

2)If the effect of errors committed cancel out, the errors will be called compensating errors and the trial balance will disagree.

False: If the effect of errors committed cancel out, the errors will be called compensating errors and the trial balance will agree.

3) Stock at the end, if appears in the trial balance, is taken only to the Balance Sheet.

True: If closing stock appears in trail balance, it depicts that one aspect of the double entry has been completed, hence it is taken only to Balance Sheet.

4) Re-issue of forfeited shares is allotment of shares but not a sale.

False: A forfeited share is merely a share available to the company for sale and remains vested in the company for that purpose only. Reissue of forfeited shares is not allotment of shares but only a sale as they have already been allotted earlier.

5) Both revenue &  capital naturetransactions are recorded in the Receipts & Payments Account.

True: All the receipts and payments whether of revenue or capital nature are included in Receipt and Payment account.

6) Since company has existence independent of its members, it continues to be in existence despite the death, insolvency or change of members. 

True: As per perpetual existence the company has existence independent of its members, it continues to be in existence despite the death, insolvency or change of members.

B) Distinguish between Money Measurement concept & Matching concept. 

Answer:

As per Money Measurement concept, only those transactions, which can be measured in terms of money are recorded. 

Since money is the medium of exchange and the standard of economic value, this concept requires that those transactions alone that are capable of being measured in terms of money should be recorded in the books of accounts. Transactions and events that cannot be expressed in terms of money are not recorded in the business books.

In Matching concept, all expenses matched with the revenue of that period should only be taken into consideration. In the financial statements of the organization if any revenue is recognized then expenses related to earn that revenue should also be recognized.

C) Explain in brief objective and advantages of setting Accounting Standards.

Answer:

1) An Accounting Standard is a selected set of accounting policies or broad guidelines regarding the principles & methods to be chosen out of several alternatives. 

2) The Accounting Standards Board formulates Accounting Standards to be established by the Council of the Institute of Chartered Accountants of India.

3) The main objective of Accounting Standards is to establish standards which have to be complied with to ensure that financial statements are prepared in accordance with generally accepted accounting standards. Accounting Standards seek to suggest rules and criteria of accounting measurements. 

4) These standards harmonize the diverse accounting policies and practices at present in use in India.

5) The main advantage of setting accounting standards is that the adoption and application of Accounting Standards ensure uniformity, comparability and qualitative improvement in the preparation and presentation of financial statements.

6) The other advantages are as follows:
(i) Reduction in variations.
(ii) Disclosure beyond that required by law.
(iii) Facilities comparison.

TEST PAPER 8

TEST PAPER 9

TEST PAPER 10