Financial Accounting - Commerce

Explanation: The profits of a business is transferred to the owner/partner's capital account. According to the business entity concept, the owner is different from the business he owns for purposes of accounting. So the profits the business earns, the business firm is liable to pay to the owner. Hence, profits is a liability. However, the profits/part of the profits may be retained in the business for developmental activities or for reserves subject to the rules from time to time.

Explanation: In businesses, we need to purchase raw materials, stock in trade, pay rent for the building, meet other expenditure. A business firm spends on office and administration, selling and distribution, legal and taxation expenses, repairs and maintenance and certain non-cash expenses. Almost all the expenditure is certain and are bound to pay. However, cash crunch organizations may delay the payment and more the delay they are treated as defaulters. Successful organizations do not want to be dishonest. But the recovery of money on credit sales or other dues from others is always subject  to risks. We may have to deal with defaulters and dishonest persons. So recovery is not certain. l Hence this statement

Explanation: Trial balance is a test to see the arithmetical accuracy in the various books of accounts. However, errors are likely to happen. There are different types of errors. The errors are to be located and rectification entries are to be passed. When the trial balance does not tally, the error is evident. Sometimes, if there are compensating errors in the primary or subsidiary books of accounts, then trial balance may tally. The accountant should be intelligent to locate such an error.

Explanation:—The correct answer is “Matching concept”. An Accountant needs to be thinking how rupee comes and goes and how each input is spent. The revenue is matched with the expenses or expenses is limited to the revenue.

Explanation: The raw-material “wood” for a furniture shop manufacturer is the stock in trade which is a current asset which is short term in nature. It is not a long term investment. Hence it is not a capital expenditure. Car is a capital expenditure for a doctor or engineer but a revenue expenditure for a car dealer or a car manufacturer.

Explanation: When a Balance sheet does not tally, the accountant makes all out efforts to locate the errors and correct the same. If the difference could not be located after all the efforts are made, then the accountant takes permission of the decision making authority and transfers the difference to the suspense account which has to be wiped by locating the difference or as a business loss.

Explanation: These are different names, Income and expenditure is used in non-profit organizations ( or non-trading organisations). The net income or profit is shown in this account. Hence the name is Income statement. The account reflects the company's operations and hence the phrase “statement of operations”

Explanation: All direct expenses are debited to the Trading or manufacturing account. All indirect expenses are debited to the P & L Account. (here direct expenses means the expenditure directly connected with the purchase or manufacture of the goods like carriage inwards, Fuel, etc)

Explanation: Balance Sheet show the true and fair view of the statement of liabilities and assets as on a given date. Any liability which may arise on the happening of an event or contingent upon something is not a liability on that date. Hence the contingent liability is not to be shown inside the balance sheet.

Explanation: Debts are seen by the promptness with which the debtors meet their obligations. When the debts are not recovered for a long time by the seller of goods and services the chances of recovery seems to be bleak. That is why, we treat the debtors which are older than 6 months and above are not recognized as current assets. However, it does not mean that they are not recoverable. .

Explanation: When cash sales are effected, cash comes into the business immediately. There is no case of non-recovery. However, in case of credit sales, the seller gives time to the debtor to pay the money for the goods purchased by the buyer. There are chances of money going bad (non-recovery).

Explanation: Depreciation is charged to the P & L Account to enable the business to replace an asset when the asset completes its life time. The business does not spend anything and cash outgo is not there. It is carved out of the income of the business or charged as an expense. Hence it is a non-cash expense.

Explanation: The organizations who are lending money to the clients have given a commitment for a certain period. When a customer or a client prepays the loan amount, the business loses probable income assuming that the funds may not get the same level of income as that of the existing deployment. Hence penalty is levied which acts as a deterrent and a firm commitment on the part of the customer. This also cultivates a financial discipline.

Explanation: Answer is the other way round. Cash discounts are accounted in the books of account. Trade discounts are not accounted in the books of account.

Explanation: Risk is the possibility of a loss or a failure. When success is achieved, there is no risk because we get back what we have spent may be with some surplus. Risks are trade risks, country risks, political risks, financial risks, currency risks etc.

Explanation: Ans; Once a bad is written off from the profit and loss account, any subsequent recovery is treated as a windfall income and credited to the P & L account as an additional income or “income from other sources”

Explanation: Financial accounting measures only quantitative (monetary) terms. Qualitative terms like quality of employees, honesty of the employees cannot be depicted by the financial accounting. However, HR accounting has been the practice among leading companies where HR are considered as Assets.

Explanation: Assets = Liabilities + Owners equity. This is the fundamental equation in financial accounting. The owner of a business brings capital which is a liability of the business to the owner. The cash brought in as capital will be used for purchase of land, building, furniture besides further investment in current assets. Again, the business may resort to outside borrowing the funds derived there from are used in purchase of assets. So, at any point of time the total assets equal Liabilities (outside) and owners' equity (liability of the business to the owner). Sources of funds and Use of funds are always equal. This is again the principles of Double entry book keeping.

Explanation: In fact, this is the general and/or statutory requirement of banking and insurance companies.

Explanation: Reserves are created out of profits for various purposes right for the contingency needs to a specified purpose of development or investment. When then there are losses, there is no meaning in creating reserves because the word “reserves” means “retained earnings”. However, accumulated reserves could be used for equalizing the dividends, or for wiping the losses etc

Explanation: Balance sheet is a statement of account as on a particular date (it is a position as on a given date). A Ledger account shows transactions over a period of time.

Explanation: Heavy or large amount of expenses incurred at the time of commencement of business may be spread over a period of time as we cannot expect a matching income immediately. The business has to earn name, fame, brand and reputation for which a large amount may be spent.  If they are accounted in the first year, the business may have to be closed down.

Explanation: Receivables which arise on account of sales are generally realizable within a period of one year. (may even for shorter periods) Hence they are treated as current assets.

Explanation: Need not be the same always. Allowing the credit period is always the discretionary decision of the seller. However, it depends on the type and length of relationship between the seller and the buyer and the promptness of the parties.

Explanation: In a sale and purchase transactions, the money passes through the buyer to the seller. In a cash sale, the seller receives the money immediately. In credit sales, the seller may allow a certain credit period to the buyer when it becomes “account receivable” or “on account”. The seller may exercise another option in that he draws a bill of exchange on the buyer which the buyer accepts. The accepted bill of exchange can be discounted with a banker for immediate funds. In case the seller is the receiver and the buyer is the payer. So bills payable arises on account of credit purchases.