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. finance interwive question & answers

  1. 1. What are the various streams of accounting?There are three streams of accounting:1)Financial Accounting: is the process in which business transactionsare recorded systematically in the various books of accountsmaintained by the organization in order to prepare financialstatements. Theses financial statements are basically of two types:First is Profitability Statement or Profit and Loss Account and second isBalance Sheet.2)Cost Accounting: is the process of classifying and recording ofexpenditure incurred during the operations of the organization in asystematic way, in order to ascertain the cost of a cost center with theintention to control the cost.3)Management Accounting: is the process of analysis, interpretationand presentation of accounting information collected with the help offinancial accounting and cost accounting, in order to assistmanagement in the process of decision making, creation of policy andday to day operation of an organization. Thus, it is clear from theabove that the management accounting is based on financialaccounting and cost accounting.Explain Financial Accounting. What are its characteristicfeatures?Financial Accounting is the process in which business transactions arerecorded systematically in the various books of accounts maintainedby the organization in order to prepare financial statements. Thesefinancial statements are basically of two types: First is ProfitabilityStatement or Profit and Loss Account and second is Balance Sheet.Following are the characteristics features of Financial Accounting:1) Monetary Transactions: In financial accounting only transactions inmonetary terms are considered. Transactions not expressed inmonetary terms do not find any place in financial accounting,howsoever important they may be from business point of view.2) Historical Nature: Financial accounting considers only thosetransactions which are of historical nature i.e the transaction whichhave already taken place. No futuristic transactions find any place infinancial accounting, howsoever important they may be from businesspoint of view.3) Legal Requirement: Financial accounting is a legal requirement. It isnecessary to maintain the financial accounting and prepare financialstatements there from. It is also obligatory to get these financialstatements audited.4) External Use: Financial accounting is for those people who are notpart of decision making process regarding the organization like
  2. 2. investors, customers, suppliers, financial institutions etc. Thus, it isfor external use.5) Disclosure of Financial Status: It discloses the financial status andfinancial performance of the business as a whole.6) Interim Reports: Financial statements which are based on financialaccounting are interim reports and cannot be the final ones.7) Financial Accounting Process: The process of financial accountinggets affected due to the different accounting policies followed by theaccountants. These accounting policies differ mainly in two areas:Valuation of inventory and Calculation of depreciation.xplain Cost Accounting. What are the objectives of doing it?Cost Accounting is the process of classifying and recording ofexpenditure incurred during the operations of the organization in asystematic way, in order to ascertain the cost of a cost center with theintention to control the cost.Following are the basic three objectives of Cost Accounting:1) Ascertainment of Cost and Profitability2) Cost Control3) Presentation of information for managerial decision making.What are the characteristic features of cost accounting?Following are the characteristic features of Cost Accounting:1) Cost accounting views the whole organization from the individualcomponent of the organization like a job, a process etc.2) Cost accounting aims at ascertaining the profitability of individualcomponents of the organization.3) It is meant for those people who are part of the decision makingprocess of the organization. Thus, it is only for internal use.4) It is not a legal requirement. It is not compulsory to maintain costaccounting records.5) In Cost Accounting, data is immediately available which facilitates indecision making process.6) Cost Accounting considers each and every transaction, whetherrelated to past or future which will have an impact on the business.Define Management Accounting. What are its objectives?Management Accounting is the process of analysis, interpretation andpresentation of accounting information collected with the help offinancial accounting and cost accounting, in order to assistmanagement in the process of decision making, creation of policy andday to day operation of an organization. Thus, it is clear from theabove that the management accounting is based on financial
  3. 3. accounting and cost accounting.Following are the objectives of Management Accounting:1) Measuring performance: Management accounting measures twotypes of performance. First is employee performance and the secondis efficiency measurement. The actual performance is measured withthe standardized performance and a report of deviation from thestandard performance is reported to the management for the effectivedecision making and also to indicate the effectiveness of the methodsin use. Both types of performance management are used to makecorrective actions in order to improve performance.2) Assess Risk: The aim of management accounting is to assess risk inorder to maximize risk.3) Allocation of Resources: is an important objective of ManagementAccounting.4) Presentation of various financial statements to the Management.What are the limitations of Management Accounting?Limitations of Management Accounting:1) Management Accounting isbased on financial and costaccounting, in which historical data is used to make futuredecisions. Thus, strength and weakness of the managerialdecisions are based on the strength and weakness of theaccounting records.2) Management Accounting is useful only to those peoplewho are in the decision making process.3) Tools and techniques used in management accountingonly provide information and not ready made decision.Thus, it is only a supplementary service.4) In Management Accounting, decision is based on themanager’s institution as management try to avoid lengthycourses of scientific decision making.5) Personal prejudices and bias affect the decisions as theinterpretation of financial information is based on personal
  4. 4. judgment of tWhat is the scope of Managementaccounting?Following is the scope of Management Accounting:1) Financial Accounting2) Cost Accounting3) Revaluation accounting4) Control Accounting5) Marginal Costing6) Budgetary Control7) Financial Planning and8) Break Even Analysis9) Decision accounting:10) Reporting11) Taxation12) AuditWhat are the various techniques used to discharge thefunction of management accounting?Following are the technique used to discharge the function ofmanagement accounting:1) Marginal Costing2) Budgetary Control3) Standard Costing4) Uniform CostingCompare Financial Accounting and Cost Accounting.1) Financial Accounting protects the interests of the outsiders dealingwith the organization e.g shareholders, creditors etc. Whereas reportsof Cost Accounting is used for the internal purpose by themanagement to enable the same in discharging various functions in aproper manner.2) Maintenance of Financial Accounting records and preparation offinancial statements is a legal requirement whereas Cost Accounting isnot a legal requirement.3) Financial Accounting is concerned about the calculation of profitsand state of affairs of the organization as whole whereas Costaccounting deals in cost ascertainment and calculation of profitabilityof the individual products, departments etc.4) Financial Accounting considers only transactions of historicalfinancial nature whereas Cost Accounting considers not only historicaldata but also future events.
  5. 5. 5) Financial Accounting reports are prepared in the standard formatsin accordance with GAAP whereas Cost accounting information isreported in whatever form management wantsCompare Financial Accounting and ManagementAccounting1) Financial Accounting reports are used by outside parties such ascreditors, shareholders, tax authorities etc. whereas ManagementAccounting reports are used by managers inside the organization forplanning, directing, controlling and taking decisions.2) In Financial Accounting, only historical financial transactions areconsidered and do not consider non financial transactions whereas inManagerial Accounting emphasis is on decisions affecting the future,thus it may consider future data as well s non financial factors.3) Maintenance of financial accounting records and preparation offinancial statements is a legal requirement whereas ManagementAccounting is not at all legal requirement. Moreover, these systemshave their own reporting formats.4) In Financial Accounting, precision of information is requiredwhereas in Management Accounting timeliness of information isrequired.5) In Financial Accounting, only summarized data is prepared for theentire organization whereas in Management Accounting detailedreports are prepared about products, departments, employees andcustomer.6) Preparation of Financial Accounting is based of Generally AcceptedAccounting Principles whereas Management Accounting does notfollow such principles to prepare reports.7) Financial reports generated by the Financial Accounting are requiredto be accurate whereas accuracy is notthe prerequisite of managementaccounting.Compare Cost Accounting and Management Accounting1) The scope of management accounting is broader than that of costaccounting.2) Both the accounting streams are not a legal requirement.3) Cost accounting provides only cost information for managerial usewhereas management accounting provides all types of accounting
  6. 6. information i.e., cost accounting as well as financial accountinginformation.4) In Cost accounting, the main emphasis is on cost ascertainment andcost control whereas in management accounting the main emphasis ison decision-making.5) The various techniques used by cost accounting are standardcosting, budgetary control, marginal costing and cost-volume-profitanalysis, uniform costing and inter-firm comparison, etc. whereasmanagement accounting also uses these techniques but also usestechniques like ratio analysis, funds flow statement, statistical analysisetc.6) Cost Accounting is a part of Management Accounting whereasManagement accounting is an extension of managerial aspects of costaccounting with the ultimate intention to protect the interests of thebusiness.What do you mean by accounting concepts? List them.Accounting concepts are those basis assumptions upon which basicprocess of accounting is based. Following are the basic accountingconcepts:1) Business Entity Concept2) Dual Aspect Concept3) Going Concern Concept4) Accounting Period5) Concept Cost Concept6) Money Measurement Concept7) Matching ConceptExplain the following: a) Business Entity Concept: According to this concept, the business has a separate legal identity than the person who owns the business. The accounting process is carried out for the business and not for the person who is carrying out the business. This concept is applicable to both, corporate and non corporate organizations. b) Dual Aspect Concept:
  7. 7. According to this concept, every transaction has two affects. This basic relationship between assets and liabilities which means that the assets are equal to the liabilities remains the same. c) Going Concern Concept: According to this concept, the organization is going to be in existence for an indefinite period of time and is not likely to close down the business in the shorter period of time. This affects the valuation of assets and liabilities. d) Accounting Period Concept: According to this concept, the indefinite period of time is divided into shorter time periods, each one being in the form of Accounting period, in order to facilitate the preparation of financial statements on periodical basis. Selection of accounting period depends on characteristics like business organization, statutory requirements etc. e) Cost Concept: According to this concept, an asset is recorded at the cost at which it is acquired instead of taking current market prices of various assets. f) Money Measurement Concept: According to this concept, only those transactions find place in the accounting records, which can be expressed in terms of money. This is the major drawback of financial accounting and financial statements. g) Matching Concept: According to this concept, while calculating the profits during the accounting period in a correct manner, all the expenses and costs incurred during the period, whether paid or not, should be matched with the income generated during the period.Explain the following:a)Convention of ConservationThis accounting convention is generally expressed as to “anticipate allthe future losses and expenses, without considering the futureincomes and profits unless they are actually realized.” This conceptemphasizes that profits should never be overstated or anticipated.This convention generally applies to the valuation of current assets asthey are valued at cost or market price whichever is lower.
  8. 8. b)Convention of MaterialityThis accounting convention proposed that while accounting only thosetransactions will be considered which have material impact onfinancial status of the organization and other transactions which haveinsignificant effect will be ignored.. It gives relative importance to anitem or event.c) Convention of ConsistencyThis accounting convention proposes that the same accountingprinciples, procedures and policies should be used consistently on aperiod to period basis for preparing financial statements to facilitatecomparison of financial statements on period to period basis. If anychanges are made in the accounting procedures or policies, then itshould be disclosed explicitly while preparing the financial statements.What are the various systems of Accounting? Explain them.There are two systems of Accounting:1) Cash System of Accounting: This system records only cash receiptsand payments. This system assumes that there are no credittransactions. In this system of accounting, expenses are consideredonly when they are paid and incomes are considered when they areactually received. This system is used by the organizations which areestablished for non profit purpose. But this system is considered to bedefective in nature as it does not show the actual profits earned andthe current state of affairs of the organization.2) Mercantile or Accrual System of Accounting: In this system,expenses and incomes are considered during that period to which theypertain. This system of accounting is considered to be ideal but it mayresult into unrealized profits which might reflect in the books of theaccounts on which the organization have to pay taxes too. All thecompany forms of organization are legally required to followMercantile or Accrual System of Accounting.What are the different types of expenditures considered forthe purpose of accounting?For the accounting purpose expenditures are classified in three types:* Capital Expenditureis an amount incurred for acquiring the longterm assets such as land, building, equipments which are continuallyused for the purpose of earning revenue. These are not meant for sale.These costs are recorded in accounts namely Plant, Property,Equipment. Benefits from such expenditure are spread over severalaccounting years.
  9. 9. E.g. Interest on capital paid, Expenditure on purchase or installation ofan asset, brokerage and commission paid.* Revenue Expenditureis the expenditure incurred in one accountingyear and the benefits from which is also enjoyed in the same periodonly. This expenditure does not increase the earning capacity of thebusiness but maintains the existing earning capacity of the business.It included all the expenses which are incurred during day to dayrunning of business. The benefits of this expenditure are for shortperiod and are not forwarded to the next year. This expenditure is onrecurring nature.Eg: Purchase of raw material, selling and distribution expenses,Salaries, wages etc.* Deferred Revenue Expenditureis a revenue expenditure which hasbeen incurred during an accounting year but the benefit of which maybe extended to a number of years. And these are charged to profit andloss account. E.g. Development expenditure, Advertisement etc.What are capital expenditures? Is it Ok to consider theseexpenditures while calculating the profitability of during acertain period?Capital Expenditure is an amount incurred for acquiring the long termassets such as land, building, equipments which are continually usedfor the purpose of earning revenue. These are not meant for sale.These costs are recorded in accounts namely Plant, Property,Equipment. Benefits from such expenditure are spread over severalaccounting years.E.g. Interest on capital paid, Expenditure on purchase or installation ofan asset, brokerage and commission paid.No, Capital expenditure should not be considered while calculatingprofitability as benefits incurred from the capital expenditure are longterm benefits and cannot be shown in the same financial years inwhich they were paid for. They need to be spread over a number ofyears to show the true position in balance sheet as well as profit andloss account.Explain Revenue Expenditure. Does it affect the profitabilitystatement in a period? Explain.Revenue Expenditure is the expenditure incurred in one accounting
  10. 10. year and the benefits from which is also enjoyed in the same periodonly. This expenditure does not increase the earning capacity of thebusiness but maintains the existing earning capacity of the business.It included all the expenses which are incurred during day to dayrunning of business. The benefits of this expenditure are for shortperiod and are not forwarded to the next year. This expenditure is onrecurring nature.As the return on revenue expenditure is received in the same periodthus the entries relating to the revenue expenditure will affect theprofitability statements as all the entries are passed in the sameaccounting year, the year in which they were incurred.Explain deferred expenditures. How are these expensesdealt with in profitability statement?Deferred Revenue Expenditure is revenue expenditure, incurred toreceive benefits over a number of years say 3 or 5 years. Theseexpenses are neither incurred to acquire capital assets nor thebenefits of such expenditure is received in the same accounting periodduring which they were paid. Thus they don’t affect profitabilitystatement as they are not transferred to the profitability statement inthe period during which they are paid for. They are charged to profitand loss account over a number of years depending upon the benefitaccrued.What do you mean by accounting concepts? List them.Accounting concepts are those basis assumptions upon which basicprocess of accounting is based. Following are the basic accountingconcepts:1) Business Entity Concept2) Dual Aspect Concept3) Going Concern Concept4) Accounting Period5) Concept Cost Concept6) Money Measurement Concept7) Matching ConceptExplain the following:a) Business Entity Concept:
  11. 11. According to this concept, the business has a separate legal identitythan the person who owns the business. The accounting process iscarried out for the business and not for the person who is carrying outthe business. This concept is applicable to both, corporate and noncorporate organizations.b) Dual Aspect Concept:According to this concept, every transaction has two affects. This basicrelationship between assets and liabilities which means that the assetsare equal to the liabilities remains the same.c) Going Concern Concept:According to this concept, the organization is going to be in existencefor an indefinite period of time and is not likely to close down thebusiness in the shorter period of time. This affects the valuation ofassets and liabilities.d) Accounting Period Concept:According to this concept, the indefinite period of time is divided intoshorter time periods, each one being in the form of Accounting period,in order to facilitate the preparation of financial statements onperiodical basis. Selection of accounting period depends oncharacteristics like business organization, statutory requirements etc.e) Cost Concept:According to this concept, an asset is recorded at the cost at which itis acquired instead of taking current market prices of various assets.f) Money Measurement Concept:According to this concept, only those transactions find place in theaccounting records, which can be expressed in terms of money. This isthe major drawback of financial accounting and financial statements.g) Matching Concept:According to this concept, while calculating the profits during theaccounting period in a correct manner, all the expenses and costsincurred during the period, whether paid or not, should be matchedwith the income generated during the period.Explain the following:a)Convention of ConservationThis accounting convention is generally expressed as to “anticipate allthe future losses and expenses, without considering the futureincomes and profits unless they are actually realized.” This conceptemphasizes that profits should never be overstated or anticipated.This convention generally applies to the valuation of current assets asthey are valued at cost or market price whichever is lower.
  12. 12. b)Convention of MaterialityThis accounting convention proposed that while accounting only thosetransactions will be considered which have material impact onfinancial status of the organization and other transactions which haveinsignificant effect will be ignored.. It gives relative importance to anitem or event.c) Convention of ConsistencyThis accounting convention proposes that the same accountingprinciples, procedures and policies should be used consistently on aperiod to period basis for preparing financial statements to facilitatecomparison of financial statements on period to period basis. If anychanges are made in the accounting procedures or policies, then itshould be disclosed explicitly while preparing the financial statements.What are Nominal Accounts? List accounts consisting theNominal Account.Nominal Accounts are the accounts of Incomes, Expenses, Losses andGains. Nominal Accounts consist of the following types of accounts:-Insurance Account-Wages Account-Interest Paid or Received Account-Commission Paid or Received Account-Telephone Expenses Account-Salary AccountWhat is the principal of Double Entry system of accounting?What are the advantages of Double Entry system ofaccounting?The principal of Double Entry system of Accounting is “Every debit hasa corresponding credit” hence the total of all debits has to be equal tothe total of all credits. In simple words, every business transactionaffects two accounts. If one account is debited then the other accountwill be credited with the similar amount. For example: if the businesspurchases a machinery worth Rs. 500000, then machinery accountgets debited with amount Rs. 500000 as the business is receiving anasset for its operation, on the other side cash account automaticallygets credited with the same amount of Rs. 500000 as cash is goingout of the business.Advantages of Double Entry system of Accounting:
  13. 13. -It considers both the aspects of business transaction-Arithmetic accuracy of the accounting records can be checked andverified by preparing trial balance-Correct results of the operations can be ascertained by preparingFinal Accounts-Correct valuation of assets and liabilities at any point of time bypreparing Balance sheetWhat are the rules of double entry book keeping forvarious types of accounts?Following are the basic rules of double entry book keeping for varioustypes of accounts:-Personal Account : Debit the Receiver, Credit the Giver-Real Account : Debit what comes in, Credit what goes out-Nominal Account : Debit all the Expenses, Credit all the IncomesWhat is depreciation? What are the causes of depreciation?Is it a cost? Why?Depreciation is a permanent, gradual and continuous reduction in thebook value of the fixed asset. Except Land all the fixed assets e.g. Car,Machinery, Furniture etc depreciates in value making the asset uselessafter the end of a certain period.Following are the causes of Depreciation:-Wear and Tear due to regular use of the asset-Deterioration occurs with the passage of time, whether the asset is inuse or not-Damages done to the assets due to an accident like fire, mishandlingetc.-Depletion of Asset-Obsolescence i.e. due to new technology in use, new inventions,innovations etc.Yes, depreciation is a cost. It is a historical cost, which is chargedagainst profits of the organisation reducing the profitability. It is anon-cash cost as it is never paid or incurred in cash.What is the need of depreciation account?According to the matching principle of accounting, the costs incurredin the accounting year should be matched with the revenue or incomeearned during the same accounting year. Thus, it is necessary tospread the cost of fixed asset less scrap or realizable value after theuseful life of the fixed asset is over and this process of ascertain the
  14. 14. same is called depreciation accounting. Thus, depreciation account isneeded for mainly two purposes:To ascertain due profits and to represent the value of the fixed assetat its unexpired cost i.e book value of the asset less depreciation.What is the effect of depreciation of assets on profitsreceived by owners?Depreciation forms a part of cost which is used for arriving at correct estimation of profits,which then is distributed to the owners of the business in the form of dividend. Addition ofdepreciation to the cost reduces the amount of distributable profits. By maintaining adepreciation account a part of the distributable profit is retained in the business as a reservewhich is used to purchase new machinery or for other purposes in the future which reducesthe profits or dividends received by the owners.List various methods for calculatingdepreciation.Methods for calculating depreciation are:-Straight Line Method-Written Down Value(Reducing Balance)Method-Production Unit Method-Production Hour Method-Joint Factor Rate Method-Revaluation Method-Renewal MethodExplain straight line method to calculate depreciation. Whatare it advantages and limitations?It is the simplest and most often used technique. The componentsused to calculate Straight Line Method are:-Cost of Asset-Estimated Scrap vale-is the value of the asset at the end of life of theasset-Estimated life of AssetFormula to calculate:Depreciation = (Cost of Asset-Estimated Scrap Vale)/Estimated life ofAsset in yearsThe main advantage of this method is that an equal amount ofdepreciation is charged every year throughout the life of the Assetwhich makes the calculation of depreciation easy.But the limitation of this method is that the amount of depreciationcharged on the asset in the later years is high due to the reducedvalue of the asset.
  15. 15. Explain Written Down Value (Reducing Balance) method tocalculate depreciation. What are the benefits of thismethod?In Written Down Value Method, the rate of depreciation ispredetermined. This is done by deducting the amount of depreciationcharged before from the balance of cost of asset (Cost of Asset-Estimated Scrap Value). In simple words, in the first year the amountof depreciation charged is high and it gradually starts decreasingduring the subsequent years.Formula to calculate:Depreciation = 1-N= number of yearsR= Residual/Scrap ValueC=Cost of the assetThe main benefit of this method is that it recognises this fact that inthe initial phase of an asset, costs of maintenance, repairs etc. are lesswhich goes on increasing with the progressing life of the asset. Thus,by charging higher amount of depreciation in the initial years andgradually decreasing the amount of depreciation counterbalance boththe lower amount of repairs and maintenance cost in the initial yearsand the gradual increase later on. It can be noted here that the writtendown value can never be zero.Explain production unit method to calculate depreciation.Production Unit Method is also a method of calculatingdepreciation. According to this method, rate of depreciationis predetermined at per unit, which is calculated on thebasis of total number of units produced during the life ofthe asset. This method gives more importance to the usagefactor. Higher the number of units produced, higher will bethe amount of depreciation and vice versa.Formula to calculate:Rate of Depreciation per unit = (Cost of machine –Estimated Scrap Value) / EstimatedExplain annuity methodof calculating depreciation.In this method, the purchase of an asset is considered an investmentof capital on which a certain rate of interest is earned. The cost of the
  16. 16. asset and the interest are written down annually by equal instalmentsuntil the book value of the asset is reduced to nil. The annual chargeby way of depreciation is found out from the annuity tables. Theannual charge for depreciation will be credited to asset account anddebited to depreciation account while the interest will be debited toasset account and credited to interest account. The disadvantage ofthis method is that it is a complicated method to charge depreciation.Secondly, the burden on Profit and Loss account goes on increasingwith the passage of time and the amount of interest goes ondiminishing as years pass by. Thus this method is best suited to thoseassets which require considerable investment and don’t requirefrequent additions.Explain joint factor rate method of calculating depreciation.This method is also used to calculate amount of depreciation. In thismethod the depreciation is provided partly at a fixed rate on timebasis and partly at a variable rate on usage basis. number of unitsproducedWhat is sinking fund method of calculating depreciation?It is also known as Depreciation fund method. Under this method asinking fund or depreciation fund is created. Every year the profit andloss account is debited and fund account is credited with a sum, whichis calculated such that the annual sum credited to the fund accountwhich is accumulating throughout the life of the asset will be equal tothe sum required to replace the old asset. The main advantage of thismethod is that it accumulates interest or dividends by regularinvestment of cash outside the business e.g.in securities to finance thereplacement of the assets, which has become useless. But on the otherhand this method has disadvantage also as the burden of profit andloss account goes on increasing as years pass by since the amountspent on repairs and maintenance goes on increasing due to the wearand tear of the asset and the amount of depreciation remains same.Explain endowment policy method of calculatingdepreciation.This method is similar to Sinking Fund method except in this methodinstead of investing in securities the amount set aside is used to paypremium on an Endowment Policy. And the policy should mature onthe date on which the ceases its useful life. This collected money isthen used to replace the expired asset.Explain revaluation method to calculate depreciationUnder this method the fixed assets are valued at the end of each
  17. 17. accounting period. The difference between the value at the beginningof the period and the value at the end of the period represents thedepreciation value which is charged against the profit and lossaccount. This method is used in case of assets like loose tools,packages, Farmers’ livestock etc.Formula for Calculating:Depreciation = Value of asset at the end – Value of asset at thebeginning + Any new purchasesExplain renewal method to calculate depreciation.In this method the full cost of the asset is charged as depreciationduring the period in which the asset is renewed. No depreciation ischarged in between the period. This method can be used if the asset isof small value and is renewed frequently.What method of depreciation calculation is used tocalculate the tax liability according to Income Tax Act,1961?According to Income Tax Act, 1961 Written Down Method ofdepreciation is used to calculate the tax liability. In this method,depreciation is charged at predetermined rate, which is calculated onthe balance of cost of asset less amount of depreciation previouslycharged. The rate at which the depreciation will be calculated is alsospecified in the Income Tax Act 1961.How is depreciation calculated as per schedule XIV ofCompanies Act, 1956?As per Schedule XIV of Companies Act, 1956 the company cancalculate the depreciation by using either Straight Line Method orWritten Down Value Method. The rate to calculate depreciation is alsospecified in Schedule XIV. If any addition has been made to any assetduring the financial year, depreciation on such an asset will becalculated on pro-rata basis from the date of such addition or upto thedate on which such asset has been sold.How are the fixed assets categorized to calculate thedepreciation as per schedule XIV of Companies Act, 1956?To calculate depreciation as per Schedule XIV of Companies Act, 1956the fixed assets are categorized as below:-Buildings-Factory Buildings as well as Administration buildings-Plant and Machinery
  18. 18. -Furniture-Vehicles-Computer InstallationsDoes depreciation generate funds for replacement ofassets?Yes, depreciation generate funds for replacement of assets.When depreciation is charged against the asset, asignificant portion is taken out of the profits every yearduring the lifetime of the existing assets, and is retainedand accumulated without being distributed to the ownersas dividend. Thus at the end of the life of the existingasset, the business will have some funds to replace oldasset with the new one.Compare: Depreciation as perCompanies Act and Income Tax ActUnder the Companies Act: Depreciation is computed either using thestraight line method or written down value method. In straight linemethod the amount of depreciation is uniform for all the years wherein written down method the amount of depreciation is highest in thefirst year and gradually decreases in the subsequent years.Under Income Tax Act: Depreciation is computed using written downvalue method. Also it is charged on the block of assets and not onindividual assets. The block of assets means a group of assets forwhich the same rate of depreciation is applicable.What is Journalizing? What are the columns of a journal?Journalizing is the process of recoding business transactions in theJournal in chronological order, as and when the transactions takeplace. Journal is also known as Book of Original Entry or the Book ofPrime Entry.Journal has following five columns:-Date-Particulars-Ledger Folio-Amount Debited-Amount CreditedExplain Compound Journal Entry.In day to day business, various similar transactions take place on thesame day and every account is either debited or credited. Thus instead
  19. 19. of passing different entries, a compound entry can be passed, whichinvolves more than one debit or more than one credit or both. Thismakes the journal less bulky and avoids duplication.What are subsidiary books? Why are they maintained?Subsidiary book is the sub division of Journal. These are known asbooks of prime entry or books of original entry as all the transactionsare recorded in their original form. In these books the details of thetransactions are recorded as they take place from day to day in aclassified manner.The important subsidiary books used are as following:--Cash Book: Used to record all the cash receipts and payments.-Purchase Book: Used to record all the credit purchases.-Sales Book: Used to record all the credit sales-Purchase Return Book: Used to record all goods returned bybusiness to the supplier-Sales Return Book: Used to record all good returned by the customerto the business.-Bills Receivable Book: Used to record all accepted bills received bybusiness.-Bills Payable Book: Used to record all bill accepted by us to ourcreditors.-Journal Proper: Used to record those transactions for which there isno separate book.These subsidiary books are maintained because it may be impossibleto record each transaction into the ledger as it occurs. And thesebooks record the details of the transactions and therefore help theledger to become brief. Future reference and any desired analysisbecomes easy as transactions of similar nature are recorded together.List the type of transactions entered in Journal proper.The Journal proper is used to record following transactions:--Opening Entries: are the entries which are made at the starting ofthe financial year.-Closing Entries: At the close of the accounting period balances fromthe various accounts are transferred in order to balance the books ofaccounts. Thus, this process of transferring balances of the tradingand profit and loss account at the end of year is called closing thebooks and entries passed at that time are called closing entries.
  20. 20. -Transfer Entries: are the entries which are passed in order totransfer one account to another account.-Adjustment Entries: are passed at the end of an accounting period inorder to modify the accounts.-Rectification Entries: are passed to rectify the error detected thebooks through an entry in journal proper.-Entries for rare transactions: Journal proper is used for raretransactions.-Entries for which there is no special journal: When the transactionscannot be recorded in the above sub journals then the same areentered in the journal proper.Examples of such transactions are: Distribution of goods as freesample, Goods destroyed by fire, etcExplain Cash book.Cash book is a book of original entry in which all the transactionsrelating to cash receipts and payments are recorded in chronologicalorder. Cash receipt is entered on the debit side and cash payment isrecorded on credit side of the cash book. There are three types of cashbook:-Single Column Cash Book: This record only cash receipts andpayments. It has only one money column on debit and credit side.Cash received is entered on the debit side and cash payments areentered on the credit side.-Double/ Two Column Cash Book: This type of Cash book has twocolumns of cash and discount on both the debit and credit side.-Three Column Cash Book: This cash book has three columns ofcash, bank and discount on both the debit and credit side.At the end of specified period the cash book is balanced. Excess ofdebit balance is posted on credit side as “By balance c/d” to balanceboth the sides. From the start of the next period the balance on thecredit side is brought down on the debit side by “To balance b/d” nrecords total amount to the supplier.Explain Purchase day book.
  21. 21. Purchase Day book (Purchase Register)is the book oforiginal entry in which all the transactions relating to onlycredit purchase are recorded. Cash purchases do not findplace in purchase day book as they are recorded in Cashbook. At the end of every month purchase day book istotalled. The total amount show the total goods purchasedon credit. The total of purchase book is debited to thepurchase account and the accounts of the suppliers ofgoods are credited with the amount standing against theirnames. Ruling of purchase day book is different from ajournal. There are five columns in a purchase day book:first column records Date, second column records name ofthe supplier, quantity supplied, Rate at which quantitysupplied, description, etc. , third column records Invoicenumber, fourth column records Ledger Folio, fifthcolumExplain Sales Day bookSales Day book (Sales Register): is the book of original entry in whichall the transactions relating to only credit sales made by thebusinessman are recorded. Sales day book is totaled every month. Thetotal of sales book is credited to the sales account and the accounts ofthe customers to whom goods are sold are debited with the amountstanding against their names. Just like purchase day book sales daybook also has five columns: Date, Particulars, Invoice Number, LedgerFolio and Amount to enter all the details.Explain Purchase return registerPurchase Return Register is the register or book in which thetransactions relating to goods returned to the suppliers are recorded.It is also known as Purchase outward book or Purchase return daybook. When goods are returned to the supplier a debit note is issuedby the businessman, which is an intimation to the supplier that theamount is being debited to his account. The ruling of this book andthe entries made are absolutely same as Purchase day book. The totalof purchase returns is credited to purchase return account, goodsbeing sent out and the account of suppliers to whom goods arereturned are debited, as they receive goods.Explain Sales Returns Register.Sales Returns Register is the register or book in which transactionsrelating to goods returned to the businessman from its customers arerecorded. It is also know as Sales inward book or Sales return daybook. A credit note is sent by the businessman to the customer whohas returned the goods. It is a statement which states that the accountof the customer has been credited with the amount of goods returned
  22. 22. to the businessman. The ruling of Sales returns register is absolutelysame as Sales day book. The total of sales returns book is debited tosales return account and the account of customers are credited withthe same amount rare transactionsExplain Journal properJournal proper is the book of original entry in which thosemiscellaneous transactions are recorded which do not findplace in any other books. It is also called miscellaneousjournal. The Journal proper is used to record followingtransactions:--Opening Entries-Closing Entries- Transfer Entries- Adjustment Entries- Rectification Entries- Entries fohat is a Ledger? What do you mean by LedgerPosting?Ledger is the book where the transactions of similar nature pertainingto a person, asset, liability, income or expenditure are drawn from thejournal or subsidiary books where the transactions are recorded in achronological order and posted account wise in the Ledger account.Ledger maintains all types of accounts i.e. Personal, Real and NominalAccount.All the business transactions are first recorded in Journal or Subsidiarybooks in a chronological order when they actually take place and fromthere the transactions of similar nature are transferred to Ledger andthis process of transferring is called as Ledger Posting.What are control ledgers? What are the purposes ofmaintaining it?In a business, sometimes it is not feasible to carry accounts of all thesuppliers and customers in the main ledger. In such cases apart fromGeneral or main ledger, the control ledgers are maintained. Controlledgers records the individual accounts. In the end of the period,balance shown in the main ledger has to tally with the balance in theindividual ledger accounts maintained in the control ledger. Purposesof maintaining control ledgers are:- Sundry Debtors- Sundry Creditors- Advances to Staff
  23. 23. What do you mean by Balancing of Ledger Account?To know the net effect of all the business transactions recorded in theledger account, the accounts need to be balanced. Thus, Balancing ofLedger Account means the balances of Debit and Credit side should beequal and this involves following steps:-First total of both the sides are taken.-Secondly difference between the totals of both the sides is calculated.-If the debit side is in excess to the credit side then place thedifference on the credit side by writing By Balance c/fd.- If the total of credit side is in excess to the debit side, place thedifference on the debit side by writing To Balance c/fd.-After placing the difference on the appropriate side, make sure thetotals of both the sides are equal.What is Trial Balance? What does an accurate Trial Balancesuggest?Trial Balance is a summary of all the balances of various ledgeraccounts and Cash/Book accounts of an organisation at any givendate. For the preparation of Trial Balance the entire Ledger accountsand Cash book/Bank book are required to be balanced to get theclosing balance. Assets and Expenses accounts having debit balanceare posted on debit side whereas Income and Liability accounts havingcredit balance are posted on credit side of the Trial Balance.An accurate Trial Balance is an evidence that all the transactions arerecorded and posted in the General Ledger account as per theaccounting principles. It also ensures arithmetical accuracy of theprocess of ledger posting.Why are Profit and Loss Accounts prepared?Profit and Loss Account is a period statement which is prepared toshow the profit or loss incurred by the Organization in the year forwhich it is prepared. It is prepared to disclose the result of operationsof all the business transactions during a given period of time. It is alsoknown as profitability statement .It is the final result of all businesstransactions of the organization. Profit and Loss account has fourcomponents namely Manufacturing Account, Trading Account, Profitand Loss Account and Profit and Loss Appropriation Account. Grossprofit or Gross loss so calculated in trading account is taken to theprofit and loss account.
  24. 24. What are the components of Profit and Loss Account?Explain themAll expenses, losses, incomes and gains are the components of Profitand Loss Account:Expenses and losses are shown on the debit side of Profit & LossAccount. Following is the list:Administrative Expenses:* Office Salaries* Postage & Telephone* Traveling & Conveyance* Legal Charges* Office Rent* Depreciation* Audit Fees* Insurance* Repairs & RenewalsSelling and Distribution Expenses:* Advertisement* Carriage Outward* Free Samples* Bad Debts* Sales CommissionIncomes and Gains are shown on the credit side of the Profit & LossAccount. Following is the list:Gross Profit (balance forwarded from the Trading account)Other Income:* Discount received* Commission received* Non-Trading Income* Interest received* Bad Debts recovered* Rent received* Profit on the sale of assetsWhat is a Balance Sheet? Why is it prepared?Balance Sheet is a Statement showing financial position of thebusiness on a particular date. It has two side one source of funds i.eLiabilities, the left side of the balance sheet and application of funds
  25. 25. i.e assets, the right side of the balance sheet. It is prepared afterpreparing trading and profit and loss account and has balances of realand personal accounts grouped and arranged in a proper way asassets and liabilities. It is prepared to know the exact financialposition of the business on the last date of the financial year.List the type of items which appear under the liability sideof a balance sheet.Items which appear under the liability side of Balance Sheet are:* Capital* Long Term Liabilities* Loan from bank* Mortgage* Current Liabilities* Sundry Creditors* Advance from Customers* Outstanding Expenses* Income Received in AdvanceWhat types of items appear under the assets side?Items which appear under the assets side of Balance Sheet are:Fixed Assets:* Land,* Building,* Machinery,* Furniture,* Vehicles,* ComputersInvestmentsCurrent Assets:* Stock,* Sundry Debtors,* Cash Balance,* Bank Balance,* Prepaid Expenseshat are adjustment entries? Why are they passed?Adjustment entries are the entries which are passed at the end of eachaccounting period to adjust the nominal and other accounts so thatcorrect net profit or net loss is indicated in profit and loss account and
  26. 26. balance sheet may also represent the true and fair view of the financialcondition of the business.It is essential to pass these adjustment entries before preparing finalstatements. Otherwise in the absence of these entries the profit andloss statement will be misleading and balance sheet will not show thetrue financial condition of the business.Preparing final accountsa.) Closing StockFollowing entry will be passed:Closing stock account – DebitTrading account - Creditb.) DepreciationFollowing entry will be passed:Depreciation account – DebitFixed asset account – Creditc.) Outstanding ExpensesFollowing entry will be passed:Expenses account – DebitOutstanding account - Creditd.) Prepaid ExpensesFollowing entry will be passed:Prepaid expenses account – DebitExpenses account – Credite.) Accrued IncomeFollowing entry will be passed:Accrued Income account – Debit
  27. 27. Income account - Creditf.) Income received in advanceFollowing entry will be passed:Income account – DebitIncome received in advance account - Creditg.) Bad debtsFollowing entry will be passed:Bad Debts account – DebitSundry Debtors account - Credith.) Provision for doubtful debtsFollowing entry will be passed:Provision for Doubtful Debts account – DebitSundry Debtors account - Crediti.) Provision for discount on DebtorsFollowing entry will be passed:Provision for Discount for Debtors account – DebitSundry Debtors account - Creditj.) Interest on CapitalFollowing entry will be passed:Interest on capital account – DebitCapital account - Creditk.) DrawingsFollowing entry will be passed:Drawing account – Debit
  28. 28. Sales account - Creditl.) Deferred revenue expenditure written offFollowing entry will be passed:Deferred revenue expenditure written off account – DebitDeferred revenue expenditure account - Creditm.) Abnormal LossFollowing entry will be passed:Abnormal Loss account – DebitStock destroyed account – CreditIf the organization has insured the stock with the insurance companythen the insurance company settles the claim, either in full or part. Inthat case the following entry will be passed:Insurance company account – DebitAbnormal loss account – DebitStock destroyed - Creditn.) Goods distributed as free samplesFollowing entry will be passed:Advertisement account – DebitSales account - Credito.) Goods sent on approval basis:Goods sent on approval basis should not be treated as sales till thegoods are finally approved by the customer because property in goodsis not transferred until the said period is over. If the goods sent onapproval basis are treated as sales then closing stock will be increasedby the cost of such goods sent on approval basis.p.) Commission payable to the manager:Following entry will be passed:Commission account – Debit
  29. 29. Commission payable account – CreditExplain Bank Reconciliation Statement. Why is it prepared?Bank Reconciliation Statement is a statement prepared to reconcile thebalances of cash book maintained by the concern and pass bookmaintained by the bank at periodical intervals. At the end of everymonth entries in the cash book are compared with the entries in thepass book. The causes of differences in balances of both the booksare scrutinized and then reconciliation statement is prepared. Thisstatement is prepared for a special purpose and once in a month. It isprepared with a view to indicate items which cause difference betweenthe balances as per the bank columns of the cash book and the bankpass book at a particular date.What are the reasons which cause pass book of the bankand your bank book not tally?* Cheques deposited into the bank but not yet collected* Cheques issued but not yet presented for payment* Bank charges* Amount collected by bank on standing instructions of the concern.* Amount paid by the bank on standing instructions of the concern.* Interest debited by the bank* Interest credited by the bank* Direct payment by customers into the bank account* Dishonour of cheques* Clerical errorsWhat are the important things to be remembered whilepreparing a bank reconciliation statement?While preparing a bank reconciliation statement following importantpoints need to be remembered:* Bank Reconciliation Statement is prepared either by starting with theBank pass book balance or Cash book balance.* If the balance of the Cash book is taken as a starting point then Cashbook balance is to be adjusted in accordance with the entries passedin the Bank pass book and vice versa. For example: If the balance istaken as per the Cash book then the following items will be added:* Cheques issued but not presented for payment;* Amount credited in Passbook but not in Cash book;* Deposits made in the bank directly;* Wrong credits given by bank;* Interest credited in the Passbook.
  30. 30. The following items will be subtracted:* Cheques deposited but not cleared;* Interest/Bank Charges debited by bank* Direct payments made by bank not entered in Cash book* Cheques dishonoured not recorded in cash book* Wrong debits given by bank* If it is prepared with the Bank balance as per the bank passbook,then the above procedure will be reversed i.e the items will be addedto the pass book which were deducted from the cash book balanceand those items will be deducted from the bank pass book balancewhich were added to the cash book balance.What are the groups under which errors in accounting areplaced?Errors in accounting are placed in the following main groups:- Error of Omission- Error of Commission- Error of Principle- Compensating ErrorWhat are the types of errors which have an effect on TrialBalance?Following are the types of errors which affect agreement of TrialBalance:- Wrong totalling of subsidiary books- Posting on the wrong side of the account- Posting of the wrong amount- Omission of posting an amount in the ledger- Error of balancingWhat type of errors do not affect the Trial Balance?Following are the types of errors which do not affect the Trial Balance:- Compensating Error- Errors of Principle- Errors of Omission- Errors of Commission- Wrong amount recorded in the subsidiary booksWhat steps would you take to locate the errors in case TrialBalance disagrees?
  31. 31. In case Trial Balance disagrees, following steps should be taken tolocate the errors:-Totalling of all the subsidiary books and trial balance should bechecked carefully.-Opening balances of all the accounts are properly brought down inthe current year’s books of account.-Ledger accounts have been properly balanced and the balances ofledger accounts have been correctly shown in the trial balance.-To locate some errors the difference in the trial balance in halved.-Another way is dividing the difference in the trial balance by 9.-If the difference gets divisible without leaving any reminder thatindicates the transposition of the amounts.-To locate certain other errors, current year trial balance can becompared with the trial balance of the previous year.What measures would you take to rectify the errors?If the trial balance does not agree, in such case to close the books ofaccounts the difference in the trial balance is posted in a suspenseaccount and then the trial balance is tallied. As the balance in theSuspense account needs to be nil. Thus, attempts are made to locatethe errors and the rectification is made through suspense account. Itshould be remembered that Suspense account exists till the time allthe errors are located and rectified making the balance of Suspenseaccount nil.The other way of rectifying the errors is by passing rectificationentries. These entries are passed when the errors which affect twoaccount and do not affect the agreement in the Trial balance. In thismethod of rectification the following steps are taken:- First find out the wrong entry passed- Second, write the correct entry which should have passed.- Third, to nullify the wrong effect, reverse the same and reinstate thecorrect by passing rectification entry.For e.g.: Rs. 200 received from Ravi have been credited to Ram.Wrong Entry: Cash A/c----------Dr. 200 To, Ram A/c 200Correct Entry: Cash A/c----------Dr. 200
  32. 32. To, Ravi A/c 200Rectification Entry: Ram A/c--------Dr. 200 To, Ravi A/c 200 To, Ravi A/c 200What is cost accountancy? What are the objects of CostAccountancy?Cost accountancy is the application of costing and cost accountingprinciples, methods and techniques to the science, art and practice ofcost control and the ascertainment of profitability as well as thepresentation of information for the purpose of managerial decisionmaking.Following are the objects of Cost Accountancy:-Ascertainment of Cost and Profitability-Determining Selling Price-Facilitating Cost Control-Presentation of information for effective managerial decision-Provide basis for operating policy-Facilitating preparation of financial or other statementsWhat is the difference between costing and costaccounting?Costing is the process of ascertaining costs whereas cost accounting isthe process of recording various costs in a systematic manner, inorder to prepare statistical date to ascertain cost.What is cost centre?Cost centre is defined as a location, machine, person, department,division, or any equipment or group of these, in relation to whichdirect and indirect costs may be ascertained and used for the purposeof cost control. Thus, an organisation for the costing purposes isdivided in convenient units and one of the convenient units is knownas cost centre. Example: collecting, sorting, washing of clothes are thevarious activities which are separate cost centre in a laundry. The costcentre facilitates this function of cost control. Thus, correctidentification of cost centre is a prerequisite for the successfulimplementation of cost accounting process. This also facilitates thefixation of responsibility in the correct manner.Compare the following:a.) Impersonal and personal cost centres:
  33. 33. Impersonal Cost Centre: consist items of impersonal nature like anequipment or location. Example of Impersonal Cost Centre: adepartment, a branch, a region of sale, etc.Personal Cost Centre: consist items of personal nature like a person ora group of persons. Example of Personal Cost Centre: RegionalManager, Sales Manager, Marketing Manger, etc.b.) Production and service cost centres:Production Cost Centre: is the place where the production activity iscarried on. Example of Production Cost Centre: a assembly shop, apaint shop etc.Service Cost Centre: is the place where all types of assistance aregiven to the production activities. Example of Service Cost Centre: thestore department, the labour office, the account/costing departmentetc.Explain Direct cost and Indirect cost.Direct Costare all the expenses which can be identified with theindividual product, service or job cost centre. In the manufacturingprocess of products, materials are purchased, labours are hired andwages are paid to them. All these take active and direct part in themanufacturing process.Indirect Costare all the expenses which cannot be identified with theindividual product, service or job cost centre. The totals of indirectcosts are termed as overheads. Example: salaries of storekeepers,foremen, work manager’s salary etc.Explain fixed, variable and semi-variable costs.Fixed Costis the cost which remains constant or unaffected byvariations in the volume of output within a given period of time.Example: Rent or rates, Insurance charges, etc.Variable Costis the cost which varies directly in proportion with everyincrease or decrease in the volume of output with a given a period oftime. Example: Wages paid to labours, cost of direct material,consumable stores, etc.Semi-variable Costis the cost which is neither fixed nor variable innature. These remain fixed at certain level of operations while mayvary proportionately at other levels of operations. Example:maintenance cost, repairs, power, etc.Explain controllable and uncontrollable costs.
  34. 34. Controllable Costare the costs which can be influenced by the actionof a specified member of the undertaking. They are incurred in aparticular responsibility centres can be influenced by the action of theexecutive heading that responsibility centre. For example: Directlabour cost, direct material cost, direct expenses controllable by theshop level management.Uncontrollable Costare the costs which cannot be influenced by theaction of a specified member of the undertaking. For example: aforeman incharge of a tool room can only control costs pertaining tothe same department and the matters which come directly under hiscontrol, not the costs apportioned to other department. Theexpenditure which is controllable by an individual may beuncontrollable by another individual.Explain Normal and Abnormal Costs.Normal Cost are the normal or regular costs which are incurred in thenormal conditions during the normal operations of the organization.They are the sum of actual direct materials cost, actual labour cost andother direct expense. Example: repairs, maintenance, salaries paid toemployees.Abnormal Cost are the costs which are unusual or irregular which arenot incurred due to abnormal situation s of the operations orproductions. Example: destruction due to fire, shut down ofmachinery, lock outs, etc.Explain Opportunity Cost and Differential Cost.Opportunity Cost is the cost incurred by the organisation when onealternative is selected over another. For example: A person has Rs.100000 and he has two options to invest his money, either invests infixed deposit scheme or buy a land with the money. If he decides toput is money to buy the land then the loss of interest which he couldhave received on fixed deposit would be an opportunity cost.Differential Cost is the difference between the costs of twoalternatives. It includes both cost increase and cost decrease. It can beeither variable or fixed. Example: Cost of first alternative = 10000;Cost of second alternative = 5000; Differential Cost = 10000 – 5000 =5000Explain Sunk Cost.Sunk Cost is the sum that has already been incurred and cannot berecovered by any decision made now or in future. This cost is alsocalled stranded cost. Example: A special purpose machine was boughtby a company for Rs. 100000. The machine was used to make the
  35. 35. product for which it was bought and now it is obsolete and cannot besold. And it will be unwise to continue using that obsolete product torecover the original cost of the machine. In order words, Rs. 100000already spent on that machine cannot be recovered in future. Suchcosts are said to be sunk costs and should be ignored in decisionmaking process.hat things would you take into consideration whileinstalling a costing system?Following things should be taken into consideration while installing acosting system:-Nature of the Product is a very important deciding factor in installingan effective costing system.-Nature of the Organisation should be considered before installingcosting system.-Objectives of the Organisation should be met with the installedcosting system.-Manufacturing Process: Before installing the costing system thetechnicalities of the manufacturing process should be studiedcarefully.-Technical Details of the business must be studied before introducingnew costing system.-The system should be informative and simple. The system should besimple and easy to use in order to maintain various cost records.-Reporting Systems: The costing system should be designed in such away that reports are generated in a proper way to facilitate the costcontrol decisions.-The costing system should be elastic and capable of adaptingaccording to the changing environment.What problems you may face while installing a costingsystem?While installing a Costing System an Organisation may face thefollowing problems:-Lack of Support from Top Management Resistance and noncooperation from the Staff-Shortage of trained staff
  36. 36. -Non suitability for the nature of product and nature of business-The cost involved in installing this system may be too high.What are the various elements of costs?There are three elements of cost:-Material Cost:This is the cost of material or the commodity used bythe organisation for its production purpose. Material is the substance,from which a product is made. Thus, it may be in a raw or amanufactured state. It can be direct or indirect. -Direct Material Cost forms an integral part of the finished productand is identified with the individual cost centre. It is also described asprocess material, stores material, production material, etc. Example:Raw materials purchased or purchased primary packing material, etc. -Indirect Material Cost is used for ancillary purposes of the businessand cannot be conveniently identified with the individual cost centre.Example: Consumable stores, oil and waste, printing and stationerymaterial etc.-Labour Cost:This is the cost, incurred in the form of remunerationpaid to the employees or labours of the organisation. The workforcerequired to convert material into finished product is called labour. Itcan be direct or indirect. -Direct Labour Cost is the cost incurred on those employees whodirectly take part in the manufacturing process and easily identifiedwith the individual cost centre. -Indirect Labour Cost is the cost incurred on those employees whodo not directly take part in the manufacturing process and cannotidentified with the individual cost centre. Example: salary of foreman,salesmen, director’s salary, etc.-Expenses:are the costs of services provided to the organisation. It canbe direct or indirect. -Direct Expenses are the expenses which can be directly identifiedwith the individual cost centres. Example: hire charges of machinery,cost of defective work for a particular job or contract etc. -Indirect Expenses are the expenses which cannot be directlyidentified with the individual cost centres. Example: rent, lighting,telephone expenses, etc.
  37. 37. What are overheads? How are they classified?Overheads are the aggregate of Indirect Material cost, Indirect Labourand Indirect Expenses. Thus, sum of all indirect costs are overheads.They are of three types:-Factory Overheads-Office and Administration Overheads-Selling and Distribution OverheadsExplain the following:a.) Factory Overheads: are the overheads which are incurred from thestage of procurement of materials till the stage of finished goods.They include:- Indirect Materials such as lubricants, cotton waste, consumablestores etc.- Indirect Labour such as storekeeper, time keeper, works manager’ssalary etc.- Indirect Expenses such as cost of factory lighting, carriage inwardcost, depreciation on factory building, rent/insurance ofbuilding/machinery etc.b.) Office and Admin overheads: are the overheads incurred for theoverall administrative work of the organisation. They include:- Indirect Materials such as office supplies, stationery and printingitems, brooms etc.- Indirect Labour such as salaries payable to manager, clerk etc.- Indirect Expenses such as lighting, bank charges, legal/auditcharges, rent/insurance of office.c.) Selling and Distribution Overheads: are the overheads incurredfrom the stage of final manufacturing of finished goods till the stageof goods sold in the market and collection of dues from thecustomers. They include:- Indirect Materials such as samples, packing materials, etc.- Indirect Labour such as salaries and commission payable to salesmanager, salesmen etc.- Indirect Expenses such as rent, carriage outwards, warehousecharges, discount offered to customers, advertising expenses, baddebts etcExplain Gross Profit.Gross Profit is a company’s revenue minus its cost of goods sold. It isalso known as gross margin and gross income. It is calculated by
  38. 38. subtracting all costs related to sales i.e manufacturing expenses, rawmaterials, labour, selling and advertisement expenses from sales. It isan indication of the managements’ efficiency to use labour andmaterial in the production process. Gross Profit = Net Sales – Cost of Goods SoldExplain Net Profit.Net Profit/ Operating Profit Net profit, also known as operating profitis actual earnings of the company in a given period of time. It is ameasure of the profitability after accounting for all costs. In simpleterms, net profit is the money left over after paying all the expensesincluding taxes and interest. It is the calculated by subtracting totalexpenses from total revenues. Net income can be either distributedamong shareholders of the company or held by the firm as retainedearnings for the future purposes. Net Profit = Gross Profit – Total OperatingExpenses – Taxes – InterestWhat are the steps in procurement of material?Following are the steps in procurement of material:Purchase Requisition is an indication to the purchase department topurchase certain material required for the production. Followingparticulars appear in the purchase requisition-Material to be purchased-When it is required-How much to be purchased-Selection of Source of Supply-Single Tender-Limited Tender-Open Tender-Global Tender-Purchase Order-Description of Materials to be supplied-Quantity to be supplied-Cash and trade discount Rates at which materials are supplied-Additional charges e.g. Excise duty, Sales tax, packing charges,insurance Instructions in respect of delivery-Guarantee clause-Inspection clause-Method of settlement of disputes-Terms of payment Receipt and Inspection-After the receipt of materials, inspection of the material is done.Inspection of materials means that the quantity actually received is
  39. 39. compared with the quantity ordered; also the quality of the material isinspected.Invoice received from the supplier is compared along with thepurchase order, goods received note and inspection note.Why should over stocking be avoided?Due to the following consequences over stocking should beavoided:-Funds get blocked which could be used elsewhere-More storage facilities are required-High costs of storage and maintenance-Deterioration of quality and obsolescence of stock-HWhat can be the consequences of under stocking?The following can be the consequences of under stocking:-Production process cannot be operated efficiently, resulting deliveryschedules.-Firm may end up paying an idle labour force due to the productionhold ups.-Organisation may loose its important customers, due to the delay inmeeting customers’ orders.-Unfavourable prices and quality Increased administration costs.-Due to under stocking it will not be easy for the organisation to meetthe unexpected demands of customers.What can be the discrepancies in material receipt?There are two categories of material discrepancies:First category includes--Quantity received in excess-Quantity received in short-Quantity damaged-Receipt of incorrect quantity of material.
  40. 40. These discrepancies are normally caused by the transportation system.Second category includes – Discrepancies in quality of materialsupplied.These discrepancies are caused by the manufacturer.Differentiate between Bin Card and Stores Ledger.-Bin Card is a quantitative record of the individual item of its receipts,issues and closing balance whereas Stores Ledger records both thequantity and cost of receipts, issues and balances of item of materialreceived.-Bin Card is prepared by stores department whereas Stores Ledger isprepared by costing department.-In Bin Card system, entries are made immediately after eachtransaction. In Store Ledger, entries are made periodically.- In Bin Card, postings are made before a transaction. In Store Ledger,posting is made after a transaction.-Bin Card is kept attached to the bins inside the store as to enable toidentify the stock. Store Ledger is kept outside the store.What can be the reasons for bin card and stores ledger notgetting reconciled?The following can be the reasons for bin card and stores ledger for notgetting reconciled:-Arithmetical error in calculating balances of the sheets.-If posting of the transaction has been made on wrong bin card orstores ledger sheet.-If issues transactions are treated as receipt transaction or vice versa,then this may create the difference in both the balances.-Non posting of certain amount in any of the sheets.Explain valuation of receipts.Valuation of receipts is the price billed in the invoices by the supplier.Following points should be kept in mind for this purpose:-The trade discount is deducted from the basic price and all otheramounts as billed by the supplier are added, like excise duty, sales
  41. 41. tax, octroi duty, etc.-Joint costs may be distributed on the basis of the basic price of thematerial.-In case of imported material, the cost of the material consists of abasic price, customs duty, clearing charges, transport chares, etc.Explain valuation of issues and valuation of returns.a.) Valuation of issuesis a complex process because the material maybe issued out of various lots which might have been purchased atvarious prices. Following methods are used for this purpose:- First in First out(FIFO)- Last in First out (LIFO)- Average Price Method- Simple Average Method- Weighted Average Method- Highest in First out- Market Price- Specific Price- Standard Priceb.) Valuation of returnsindicates the material returned by theproduction department to stores department. This valuation is doneon two basis:- At the same price at which issued- At the current price of issuesExplain the following:a.) Average Price Method- is the method by which the value of totalassets or expenses is assumed to be equal to the average cost of thetotal assets or expenses. Under this method, it is assumed that thecost of inventory is based on the average cost of the goods availablefor sale during the period. It is computed by dividing the total cost ofgoods by the total units which gives a weighted average unit cost forthe units of the closing inventory.b.) Weighted Average Method- is the method of calculation in whichthe weighted average of both the lot sizes as well as the prices of thelot. This method is best for valuing material issues. This method isvery useful where the prices and quantities of items vary. Practically,this method is very simple to calculate.What are the techniques of inventory control?
  42. 42. The techniques of inventory control are:-Economic Order Quantity-Fixation of Inventory Levels-Maximum Level-Minimum Level-Average Level-Re-order Level-Danger LevelExplain EOQ.Economic Order Quantity (EOQ)is the quantity which is fixed in sucha way that the variable costs for managing the inventory can beminimized. This consists of two parts: Ordering Cost and CarryingCost. Ordering cost consists of all the costs associated with theadministrative efforts connected with preparation of purchaserequisitions, enquiries, filing tenders, and comparative statements etc.which are incurred in ordering materials. Carrying cost consists of allthe costs which are incurred in carrying or holding the inventory likegodown rent, insurance handling expenses etc. There is a inverserelationship between ordering cost and ordering cost. An effort shouldbe made to balance both the costs, which is possible at EconomicOrder Quantity where the total variable cost of managing the inventoryis minimum.

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