Important Questions & Answers

1. Author: Prof. Basavaraj S G
KLE CBA Hubli.
Section - A
(Each Question carries 2 marks)
1. What is an invoice?
An invoice is a record of a sale or shipment made by a vendor to a customer that typically lists the
customer’s name, items sold or shipped, sales price, and terms of the sale. In other words, it’s an
itemized statement the reports the details of a sale for the buyer and seller’s records.
2. What is Credit Note?*
A credit note is a document sent by a seller to its buyer or, in other words, a vendor to the customer,
notifying that a credit has been provided to their account against the goods returned by the buyer.
3. Why is Petty Cash Book maintained?
The petty cash book is a formal summarization of petty (small) cash expenditures, sorted by date.
These are routine and small expenditure maintained separately.
4. Who is an insolvent person?*
Insolvent is a person whose assets are not sufficient to make payment of his liabilities in full. State of
being unable to pay his own liabilities is known as Insolvency, the individual is insolvent.
5. What do you mean by accounting cycle?
The accounting cycle is a series of steps taken each accounting period culminating with the
preparation of financial statements. In other words, the cycle is a set of
reoccurring bookkeeping procedures designed to record accounting information and create financial
statements for end users.
6. What is Money measurement concept?
The money measurement concept states that a business should only record an accounting
transaction if it can be expressed in terms of money. This means that the focus of accounting
transactions is on quantitative information, rather than on qualitative information.
7. Give the meaning of Capital & Liabilities.*
Capital refers to the financial resources that businesses can use to fund their operations like cash,
machinery, equipment and other resources. These are the assets that allow the business to produce a
product or service to sell to customers.

2. A liability is a debt owed from one company to a person or company that is not an owner of
business. In other words, liabilities are debts owed to non-owners or creditors.
8. What is Trial Balance?
Trial Balance is the list of all debit and credit balance of accounts taken out from the ledger at any
given date. The total of the amounts in the debit column should equal the total of the amounts in the
credit column.
9. What is Cash Discount*
A cash discount is a deduction allowed by the seller of goods or by the provider of services in order to
motivate the customer to pay within a specified time. The seller or provider often refers to the cash
discount as a sales discount.
10. What are subsidiary books
Subsidiary Books are those books of original entry in which transactions of similar nature are
recorded at one place and in chronological order. This is also known as special purpose books, special
purpose subsidiary books.
11. What do you mean by fixed capital?*
Fixed capital is capital or money that we invest in fixed assets. In other words, money that we
invest in assets of a durable nature. These are assets that we repeatedly use over a long period.
Fixed assets are tangible assets that we cannot convert into cash easily. Property is an example of
a fixed asset. So are plant and equipment.
12. State any 2 difference between depreciation and Fluctuation.
Depreciation is a permanent value reduction in the asset, whereas the fluctuation is a temporary
variation in the price of an asset. Depreciation is charged against the Profit and loss account. Whereas
fluctuation does not affect the profit of the business
13. Define Accounting.**
Accounting is the process of identifying, measuring and communicating economic information to
permit informed judgements and decisions by the users of such information.
It is the art of recording classifying summarizing & presenting the financial aspect of business
dealings and interpreting the results thereof.
14. What is Cash Transaction
These are the activities which involve the immediate payment of cash. Eg. Goods sold for cash,
commission paid etc.
15. What is accrual concept? How it is applied for accounting
Accrual concept is the most fundamental principle of accounting which requires recording revenues
when they are earned and not when they are received in cash, and recording expenses when they are
incurred and not when they are paid.
16. What is double entry system of Book keeping
In the double-entry system, transactions are recorded in terms of debits and credits. Since a debit in
one account offsets a credit in another, the sum of all debits must equal the sum of all credits. The
double-entry system of bookkeeping or accounting makes it easier to prepare accurate financial
statements and detect errors.
17. What is narration?*
Narration is a short description of the nature of transactions explaining reason for debiting a particular
account and crediting another account.

3. 18. State the rules for debit and credit in case of Real Accounts.
Real Account: Debit what comes in, Credit what goes out.
19. What do you mean by Journalizing?*
It is the process of entering the business transactions affecting both the aspects of double entry in a
book called Journal. In other words, it means the passing of entries for transactions through journal.
20. What is the purpose of preparing Trial Balance
Trial Balance is prepared to know the arithmetical accuracy of the books of account.
21. What is Debit note?*
A debit note is a document sent by a buyer to its seller, or in other words, a purchaser to its vendor
while returning goods received on credit. The intent is to notify the seller that they’ve been debited by
the buyer against the goods returned.
22. What do you mean by inward invoice?
Invoice is a documentary evidence of some transaction e.g. sales/purchase. It enlists the summary of
the transaction i.e. quantity, unit price, total price, date, vendor details, item descriptions, settlement
terms, dates etc. An "inward" is one you receive that you need to pay. An "outward" is one you
prepare and send to someone to pay you.
23. What are current assets give 2 examples.
Current asset is a balance sheet item that represents the value of all assets that can reasonably expect
to be converted into cash within one year. Current assets include cash and cash equivalents, accounts
receivable, inventory, marketable securities, prepaid expenses.
24. Who is a Creditor? *
Creditor may be a bank, supplier or person that has provided credit to a company. In other words, a
company owes money to its creditors. The amounts owed to creditors are reported on the
company's balance sheet as liabilities.
25. What is Compound Journal Entry?
A compound or combined journal entry may be passed whenever two or more transactions of the
same nature take place on same date.
26. What is Trade Discount? *
A trade discount is the reduction in price a manufacturer or wholesaler gives a wholesaler or retail
when they buy a product or group of products. In other words, a trade discount is a certain percentage
a manufacturer is willing to reduce its list price for wholesalers or retailers.
27. What is balancing of an Account?
The difference between the sum of the two sides of an account is called the balance. This is the most
important part of an account as it shows value or position of asset, liability, capital, income or
expenses of which the account is a record. If the total of the debit side exceeds the total of credit side
then this would be represented by a debit balance and opposite is true for a credit balance.
28. What is a Petty Cash book?
Petty Cash book is a subsidiary cash Book in which all the petty payments are recorded. Petty
payments are made to pay small & sundry expenses such as postage, telegrams, carriage, stationery,
coolie, charity, tea charges, conveyance etc.
29. What is Imprest system?

4. The base characteristic of an imprest system is that a fixed amount is reserved, which after a certain
period of time or when circumstances require, because money was spent, it will be replenished.
30. Define Balance sheet.
Balance sheet is a statement of assets and liabilities prepared with a view to ascertain the exact
financial position of a business on a certain fixed date. It is a statement but not an account.
31. What is Bank Reconciliation statement? **
It is a statement prepared at the end of every month or so to explain the causes for difference between
the balance of pass book and bank column of the cash book, as on a particular date and to reconcile
between both the balances for the purpose of cross verification.
32. What is fluctuating capital?*
Under this method as is apparent from the name, capital of each partner goes on changing from time
to time. Each partner will have his separate capital account, which will be credited by his initial
investment and any additional capital introduced during the year will also be credited to his capital
account.
33. Give the formula to calculate Depreciation**
Cost of Asset + installation –Salvage value
Expected life of Asset
34. What is the system of book-keeping?**
Bookkeeping is the activities concerned with the systematic recording and classification of financial
data of an organization in an orderly manner. It is essentially a record-keeping function done to assist
in the process of accounting.
35. What is an Asset?
Assets are properties or resources which are owned by the business entity, Eg: Land, Building
Machinery etc.
36. What is a partnership deed?
A partnership deed, also known as a partnership agreement, is a document that outlines in detail the
rights and responsibilities of all parties to a business operation. It has the force of law and is designed
to guide the partners in the conduct of the business
37. What are bad debts? *
The term bad debts usually refer to accounts receivable (or trade accounts receivable) that will not be
collected.
38. Define depreciation.
It refers to reduction in the value of a fixed assets used in the business due to wear and tear &
effluxion of time.
39. Give two reasons for preparing the bank reconciliation statement.
a. Cheques issued but not presented
b. Interest on deposits credited by the banker
40. What is Dual-Aspect concept?
The dual aspect concept states that every business transaction requires recordation in two
different accounts. This concept is the basis of double entry accounting, which is required by
all accounting frameworks in order to produce reliable financial statements.
The concept is derived from the accounting equation, which states that:
Assets = Liabilities + Equity

5. 41. What is Gross Profit?
Gross profit is the profit a company makes after deducting the costs associated with making and
selling its products, or the costs associated with providing its services. Gross profit will appear on a
company's income statement, and can be calculated with this formula:
Gross profit = Revenue - Cost of Goods Sold
42. Explain in brief the terms “Entity” and “Equity”.
An entity is an organization established through laws or accounting principles that separates it
from its owners, other organizations, and individuals
Equity is used in accounting in several ways. Often the word equity is used when referring to an
ownership interest in a business. Examples include stockholders' equity or owner's equity.
43. What do you mean by accounting cycle?
An accounting cycle is the collective process of identifying, analyzing, and recording
the accounting events of a company. The series of steps begins when a transaction occurs and end
with its inclusion in the financial statements.
44. What do you mean by outstanding income/ Accrued income?
Outstanding or Accrued income is an amount that has been 1) earned, 2) there is a right to receive the
amount, and 3) it has not yet been recorded in the general ledger accounts.
example of accrued income is the interest earned on a bond investment.
45. What are the types of Cash Book
(1) Simple Cash Book, (2) Two Column Cash Book, and
(3) Three Column Cash Book (4) Petty Cash Book.
46. State any 2 users of accounting information
 managers and owners
 Owners and prospective owners.
 Creditors and lenders.
 Employees and their unions
 Customers
 Governmental units.
 General public.
 Stockholders or Investors
 Federal and State Governments
 Banks or lending institutions.
47. What is Partnership?*
According to J. L. Hanson, “a partnership is a form of business organisation in which two or more
persons up to a maximum of twenty join together to undertake some form of business activity”. Now,
we can define partnership as an association of two or more persons who have agreed to share the
profits of a business which they run together. This business may be carried on by all or anyone of
them acting for all.
48. What is Nominal Account? Give an example.
Nominal accounts in accounting are the temporary accounts, such as the income statement accounts.
In other words, nominal accounts are the accounts that report revenues, expenses, gains, and losses.

6. (The owner's drawing account is also a temporary account, even though it is not an income statement
account.)
49. What is P&L Account?
The account, through which annual net profit or loss of a business is ascertained, is called profit and
loss account.
50. State any 2 subsidiary Books
a. Purchase book b. Sales book c. purchase return d. sales return e. journal proper f. cash book
f. petty cash book.
51. Write the accounting equation
Assets = Liabilities + Equity
52. What is Liability
A liability is an obligation and it is reported on a company's balance sheet. A common example of a
liability is accounts payable. Accounts payable arise when a company purchases goods or services
on credit from a supplier. When the company pays the supplier, the company's accounts payable is
reduced.
53. What do you mean by Outstanding Liability
Outstanding liabilities (public debt) the amount of liability which is yet to be paid as on the balance
sheet is known as outstanding liability.
54. Who is preparing Debit note
A debit note or debit memorandum (memo) is a commercial document prepared & issued by a
buyer to a seller as a means of formally requesting a credit note
55. What do you mean by Contra entry?
Contra Entry is an entry, which will have to be made on both sides of the cash book. I.e. One entry on
the receipts side in one column and other entry of the same amount on the payments side in another
column.
56. What is Partnership Deed? Mention any 2 contents
A Partnership Deed is a written agreement among the partners specifying rules and regulations and is
signed by all the partners and stamped as per the Stamp Act with an aim to prevent possible disputes
& disagreements among the partners at a future date. The registration of Deed of Partnership is made
under the Indian Registration Act, 1908.
Contents of a Partnership deed:
 The name of the firm
 Names and addresses of the partners
 Nature of business
 Date of commencement
 Duration/Period
 The amount of capital to be brought in by each partner
57. Write the journal entry to charge depreciation on an asset
Depreciation A/c Dr 10,000
To Asset A/c 10,000
58. What is Net worth?
Net worth is the amount by which assets exceed liabilities. Another way to say this is, it's the value of
everything you own, minus all your debts. Net worth is a concept that can be applied to both
individuals and businesses, as a measure of how much they are really worth.

7. 59. Give the specimen of invoice
60. What do you mean by Accounting Concept
Accounting Concepts includes those basic assumptions and conditions on which the accounting is
based.
61. Pass journal Entry for the following. Rs. 5,000 worth Goods withdrawn for personal use
Drawings A/c Dr 10,000
To Inventory/ Goods A/c 10,000
62. Write any 2 reasons for depreciation
The causes of depreciation are:
 Wear and tear. Any asset will gradually break down over a certain usage period, as parts wear out and
need to be replaced.
 Perishability. Some assets have an extremely short life span.
 Usage rights.
 Natural resource usage.
 Inefficiency/obsolescence.
Financial Accounting
Section - B
(Each Question carries 5 marks)
1. Briefly Explain the important accounting Conventions*
Accounting convention is a common practice used as a guideline when recording a business
transaction. It is used when there is not a definitive guideline in the accounting standards that govern
a specific situation. Thus, accounting conventions serve to fill in the gaps not yet addressed
by accounting standards.
1. Convention of Disclosure:
This convention requires that accounting statements should be honestly prepared and all significant
information should be disclosed therein. That is, while making accountancy records, care should be
taken to disclose all material information. Here the emphasis is only on material information and not
on immaterial information.
2. Convention of Consistency:
Rules and practices of accounting should be continuously observed and applied. In order to enable the
management to draw conclusions about the operation of a company over a number of years, it is

8. essential that the practices and methods of accounting remain unchanged from one period to another.
Comparisons are possible only if a consistent policy of accounting is followed.
3. Convention of Conservatism:
“Anticipate no profit and provide for all possible losses” is the essence of this convention. Future is
uncertain. Fluctuations and uncertainties are not uncommon. Conservatism refers to the policy of
choosing the procedure that leads to understatement as against overstatement of resources and
income.
4. Convention of Materiality:
American Accounting Association defines the term materiality as “An item should be regarded as
material if there is reason to believe that knowledge of it would influence the decision of informed
investor.” It refers to the relative importance of an item or event. Materiality of an item depends on its
amount and its nature.
2. Define Partnership? Explain the essential Features of Partnership.
Partnership as such is an agreement between two or more persons to carry on business with profit
motive, carried on by all or any one of them acting for all.
Features of Partnership
The essential features and characteristics of a partnership are:
 Agreement: The partnership arises out of an agreement between two or more persons.
 Profit sharing: There should be an agreement among the partners to share the profits of the business.
 Lawful business: The business to be carried on by a partnership must always be lawful.
 Membership: There must be at least two persons to form a partnership. The maximum number is 20.
But in case of banking business the maximum is 10 members.
 Unlimited liability: The liability of every partner is unlimited, joint and several.
 Principal-agent relationship: Every partner is an agent of the firm. He can act on behalf of the firm.
He is responsible for his own acts and also for the acts done on behalf of the other partners.
 Collective management: The firm and the partners are one. When a contract is made in the name of
the firm all the partners are responsible for it individually and collectively.
 Non-transferability of shares: A partner cannot transfer his share of interest to others without the
consent of the other partners.
3. What are the objectives and functions of Accounting? *
Objectives of Accounting
 To maintain the records of the financial transactions of a business neatly and accurately.
 To ascertain the profit or loss made by the business during an accounting period.
 To present the true & fair view of financial position of business.
 To know the amount due to each of the creditors.
 To know the amount receivable from each of the debtors
 To compute the tax liability to the government.
 To supply the required financial information to the management for decision making.
 To offer expert advice on the financial aspects of the business
 To facilitate inter period comparison of the financial trends of the business.
 To enable the comparison of performances of different firms.
Functions of accounting include:
 Recording the financial transactions and maintain a journal to keep them all.
 It is important to classify and separate the records and the ledger.
 Preparation of brief summary takes place for the quick reviews.
 This type of accounting gives the net result other than just keeping the records.

9.  Preparation of balance sheet takes place to determine the financial position of the business.
 The analyzed data and records are then used for the other purposes.
 The last step is to communicate the obtained financial information to the interested sectors,
for instance, owners, suppliers, government, researchers etc.
4. Distinguish between Journal and Ledger.
5. What are sub-journals? Explain the purposes of each of them.
Subsidiary book is the sub division of Journal. These are known as books of major entry or
books of unique entry as all the dealings are recorded in their unique form. In these books, the details
of the transactions are recorded as they take place from day to day in a confidential method.
Purpose of Subsidiary Books
 Purchases Book records only credit purchases of goods by the trader.
 Cash Book Used to record all the cash receipts and payments.
 Sales Book is meant for entering only credit sales of goods by the trader.
 Purchases Return Book records the goods returned by the trader to suppliers.
 Sales Return Book deals with goods returned (out of previous sales) by the customers.
 Bills Receivable Book records the receipts of bills (Bills Receivable).
 Bills Payable Book records the issue of bills (Bills Payable).
 Cash Book is used for recording only cash transactions i.e., receipts and payments of cash.
 Journal Proper is the journal which records the entries which cannot be entered in any of the above
listed subsidiary books.
 These books record the details of the transactions and therefore facilitate the ledger to become brief.
Future reference and any preferred analysis becomes simple as transactions of comparable nature are
recorded jointly.
6. Explain the various users of accounting information. *
Internal Users:
Accounting supplies managers and owners with significant financial data that is useful for decision
making. This type of accounting in generally referred to as managerial accounting.
Some of the ways internal users employ accounting information include the following:

10.  Assessing how management has discharged its responsibility for protecting and managing the
company’s resources
 Shaping decisions about when to borrow or invest company resources
 Shaping decisions about expansion or downsizing
External Users
Typically called financial accounting, the record of a business’ financial history for use by external
entities is used for many purposes. The external users of accounting information fall into six groups;
each has different interests in the company and wants answers to unique questions. The groups and
some of their possible questions are:
 Owners and prospective owners: Has the company earned satisfactory income on its total
investment? Should an investment be made in this company? Should the present investment
be increased, decreased, or retained at the same level? Can the company install costly
pollution control equipment and still be profitable?
 Creditors and lenders: Should a loan be granted to the company? Will the company be able
to pay its debts as they become due?
 Employees and their unions: Does the company have the ability to pay increased wages? Is
the company financially able to provide long-term employment for its workforce?
 Customers: Does the company offer useful products at fair prices? Will the company survive
long enough to honor its product warranties?
 Governmental units: Is the company, such as a local public utility, charging a fair rate for its
services?
 General public: Is the company providing useful products and gainful employment for
citizens without causing serious environmental problems?
Some of the ways external users employ accounting information include the following:
 Stockholders have the right to know how a company is managing its investments
 Federal and State Governments require tax returns and other documents often prepared by
accountants
 Banks or lending institutions may use accounting information to guide decisions such as
whether to lend or how much to lend a business
 Investors will also use accounting information to guide investment decisions
7. What are the rules to be followed in the absence of partnership deed?
In the absence of partnership deed the following rules regarding rights and duties are followed.
Regarding rights:
 Every partner has a right to take part in the management of the business.
 Every partner has a right to express his opinion freely and has a right to be heard in all the
matters.
 Every partner has a right to see, inspect and take a copy of books of accounts.
 A partner is not entitled to get salary, interest on capital out of profit.
 A partner has a right to share the profits of the business equally.
Regarding duties:
 Every partner is bound to carry on the business.
 Every partner is bound to keep and render proper books of accounts.
 Every partner has the duty to contribute equally for the losses.
 Every partner has the duty to hold and use partnership property exclusively for the use of the
firm.

11. 8. What are the differences between fixed capital method and fluctuating capital method?
9. What are the objectives of subsidiary book?
(a) To Facilitates division of work: The accounting work can be divided among many persons.
(b) To Save Time and labour in journalizing and posting: For instance, when a Sales Book is kept,
the name of the Sales Account will not be required to be written down in the Journal as many times as
the sales transactions occur and at the same time, Sales Account will not be required to be posted
again and again since, only a periodic total of Sales Book is posted to the Sales Account.
(c) It permits the use of specialised skill: The accounting work requiring specialised skill may be
assigned to a person possessing the required skill. With the use of a specialised skill, prompt,
economical and more accurate supply of accounting information may be obtained.
(d) It Permits the installation of internal check system: The accounting work can be divided in
such a manner that the work of one person is automatically checked by another person. With the use
of internal check, the possibility of occurrence of error/fraud may be avoided.
10. Write the Rules of Debit and Credit under English System
Personal Accounts
Debit the Receiver
Credit the Giver
Real Accounts
Debit what comes in
Credit what goes out
Nominal Accounts
Debit all the Expenses or losses
Credit all the Incomes or Gains

12. 11. Explain in brief different subsidiary Books.
The different subsidiary books and their purpose are shown below:
1. Purchases Day Book: for recording credit purchase of goods only. Cash purchase or assets
purchased on credit are not entered in this book.
2. Sales Day Book: for recording credit sales of goods only. Assets sold or cash sales are not
recorded in this book.
3. Purchases Returns Book for recording the goods returned to the suppliers when purchased on
credit.
4. Sales Returns Books: for recording goods returned by the customers when sold on credit.
5. Bills Receivable Book: for recording the bills received [Bills Receivables] from customers for
credit sales.
6. Bills Payables Book: for recording the acceptances [Bills Payables] given to the suppliers for
credit purchases.
7. Cash Book: for all receipts and payments of cash.
8. Journal proper: for recording any transaction which could not be recorded in the above-
mentioned subsidiary books. For example, assets purchased or sold on credit and opening entry etc.,
are entered in this book.
Financial Accounting
Section - C
(Each Question carries 10 marks)
1. What are the differences between Fixed capital Method & Fluctuating capital method
Fixed Capital Account: Under this system, the capital which is introduced by partners will remain
fixed throughout the life of the partnership. Hence under this method two type of accounts are made
one is capital account and other is current account. Therefore all entries relating to drawings, interest
on capital, profit and loss share of partner are made in a separate account for each partner, it is called
current account of partners. However when partner brings additional capital or withdraws capital
permanently, then capital account is credited or debited respectively.
Fluctuating Capital Account: Under this method capital account of partners will not remain fixed
rather they will keep fluctuating from time to time. In this method all the entries related to drawings,
interest on capital and share of profit and loss of partner are recorded in capital account, hence in this
method there is no need for current account.
Fluctuating capital account method is usually preferred by partners; however they can also use fixed
capital account according to their business and preference.

13. 2. What are the features and Causes of Depreciation
“Depreciation is the permanent and continuing diminution in the quality, quantity or value of an
asset.”
“Depreciation may be defined as a measure of the exhaustion of the effective life of an asset from
any cause during a given period.” -Spicer and Pegler.
Characteristics of Depreciation:
(i) Depreciation is decline in the value of fixed asset (except land). Decline in the value of asset is
permanent in nature. Once reduced, it cannot be restored to its original value.
(ii) Depreciation is a gradual and continuous process because value of asset is reduced, either with use
of asset or due to expiry of time.
(iii) It is not a process of valuation of asset. It is the process of allocating cost of an asset to its
effective life.
(iv) Depreciation reduces the book value and not the market value of the asset.
(v) Depreciation is used in respect of tangible fixed assets only. It is not used for wasting and
intangible assets such as amortization of goodwill, depletion of natural resources etc.
Causes of Depreciation:
1. Normal Physical Wear and Tear: Due to normal use of the assets, the assets deteriorate
physically, which results in reduction in their value.
2. Efflux of Time: Certain intangible assets have fixed life span such as Trade Marks, Patents or
Copyrights etc. The value of such assets decreases anyway with the passage of time irrespective of
the fact business enterprise is using them or not.
3. Obsolescence: Research & Development leads to innovations, in the form of better and technically
advanced machines that scrap old machines even though they may be capable of being run physically.
In that case there may be a permanent decrease in the market prices of certain assets like Computers,
Motor Cars etc.
This results in decline in the value of old machines. Obsolescence is a loss arising from outdating
and replacing the existing asset with the new and improved model of that asset.
4. Accidents: Destruction or damage caused by an accident may result in reducing the value of
assets.

14. 5. What do you mean by Accounting concepts and conventions? Explain any two of each of them.
**
Accounting Concepts:
Accounting is the language of business; affairs of a business unit are communicated to others as
well as to those who own or manage it through accounting information which has to be suitably
recorded, classified, summarized and presented. To make the language convey the same meaning to
all people, as far as practicable, and to make it full of meaning, accountants have agreed on a number
of concepts which they try to follow.
Business entity concept: A business and its owner should be treated separately as far as their
financial transactions are concerned.
Money measurement concept: Only business transactions that can be expressed in terms of
money are recorded in accounting, though records of other types of transactions may be kept
separately.
Dual aspect concept: For every credit, a corresponding debit is made. The recording of a
transaction is complete only with this dual aspect.
Going concern concept: In accounting, a business is expected to continue for a fairly long time
and carry out its commitments and obligations. This assumes that the business will not be forced to
stop functioning and liquidate its assets at “fire-sale” prices.
Cost concept: The fixed assets of a business are recorded on the basis of their original cost in the
first year of accounting. Subsequently, these assets are recorded minus depreciation. No rise or fall in
market price is taken into account. The concept applies only to fixed assets.
Accounting year concept: Each business chooses a specific time period to complete a cycle of
the accounting process—for example, monthly, quarterly, or annually—as per a fiscal or a calendar
year.
Matching concept: This principle dictates that for every entry of revenue recorded in a given
accounting period, an equal expense entry has to be recorded for correctly calculating profit or loss in
a given period.
Realization concept: According to this concept, profit is recognised only when it is earned. An
advance or fee paid is not considered a profit until the goods or services have been delivered to the
buyer.
Accounting Conventions
There are four main conventions in practice in accounting: conservatism; consistency; full
disclosure; and materiality.
Conservatism is the convention by which, when two values of a transaction are available, the
lower-value transaction is recorded. By this convention, profit should never be overestimated, and
there should always be a provision for losses.
Consistency prescribes the use of the same accounting principles from one period of an
accounting cycle to the next, so that the same standards are applied to calculate profit and loss.
Materiality means that all material facts should be recorded in accounting. Accountants should
record important data and leave out insignificant information.
Full disclosure entails the revelation of all information, both favourable and detrimental to a
business enterprise, and which are of material value to creditors and debtors.
6. Define Partnership. State any eight contents of the partnership deed.
Meaning of Partnership Deed
A partnership comes into existence by agreement between the persons who want to share the profit of
the business. Such an agreement may be implied by the conduct of the partners or may be express
(Oral or written). In order to avoid future dispute, it is advisable to have a written agreement. The
document containing the agreement between partners is called ‘Partnership deed’.
The document containing the agreement between the partners is called ‘Partnership Deed’.

15. The deed must be properly stamped and signed by all the partners except a minor who has be
admitted in the benefits of partnership.
It is better if the deed is very elaborate and clear about all possible questions which may rise in
the course of partnership. In the absence of any agreement in relation to any point not incorporated
therein, the provisions of the Partnership Act will apply and will determine their rights and duties.
The Partnership deed is not a public document like the Memorandum of Association of a
Company.
Contents of a Partnership Deed
The partnership deed must contain the following particular:
1. The name of the firm.
2. The names and addresses of the partners.
3. The nature of the business.
4. The term or duration of partnership.
5. The amount of capital to be contributed by each partner.
6. The drawings that can be made by each partner.
7. The interest to be allowed on capital and charged on drawings.
8. Rights of partners.
9. Duties of partners.
10. Remuneration to partners.
11. The ratio in which the profits or losses are to be shared among the partners.
12. The basis for the calculation of goodwill at the time of admission, retirement, and death of a
partner.
13. The keeping of proper books of accounts and the preparation of Balance Sheet.
14. Settlement of amount on the dissolution of the firm.
15. The procedures to be adopted in the case of disputes among the partners.
16. Arbitration clause.
7. What are the objectives and functions of accounting?
Objectives of Accounting
1. To maintain the records of the financial transactions of a business neatly and accurately.
2. To ascertain the profit or loss made by the business during an accounting period.
3. To present the true & fair view of financial position of business.
4. To know the amount due to each of the creditors.
5. To know the amount receivable from each of the debtors
6. To compute the tax liability to the government.
7. To supply the required financial information to the management for decision making.
8. To offer expert advice on the financial aspects of the business
9. To facilitate inter period comparison of the financial trends of the business.
10. To enable the comparison of performances of different firms.
Functions of accounting include:
 Recording the financial transactions and maintain a journal to keep them all.
 It is important to classify and separate the records and the ledger.
 Preparation of brief summary takes place for the quick reviews.
 This type of accounting gives the net result other than just keeping the records.
 Preparation of balance sheet takes place to determine the financial position of the business.
 The analyzed data and records are then used for the other purposes.
 The last step is to communicate the obtained financial information to the interested sectors, for
instance, owners, suppliers, government, researchers etc.

16. 8. What is Trial Balance and Balance Sheet? Explain the difference between these two.
Trial Balance is a statement which lists all the balances of the Real, Personal and Nominal
Account irrespective of Capital or Revenue account. It contains two columns debit and credit.
Balance Sheet is a statement which represents the assets, liabilities and shareholder’s equity of
the company is known as Balance Sheet. This statement contains two major heads in which it is
classified: One is assets, which is divided into Current and Non – Current Assets
BASIS FOR
COMPARISON
TRIAL BALANCE BALANCE SHEET
Meaning Trial Balance is the list of all
balances of General Ledger
Account.
The Balance sheet is the statement
which shows the assets, equity and
liabilities of the company.
Division Debit and Credit columns Assets and equity & liabilities heads
Stock Opening stock is considered. Closing stock is considered.
Part of Financial
Statement
No Yes
Objective To check the arithmetical
accuracy in recording and
posting.
To ascertain the financial position of
the company on a particular date.
Balances Personal, real and nominal
account are shown.
Personal and real account are shown.
Preparation At the end of each month,
quarter, half year or
financial year.
At the end of the financial year.
Use Internal Use External Use
9. What are final accounts of a trader? Explain the need for preparing the final accounts
Final Accounts refers to financial statements and accounts prepared at the end of an accounting year
for working the results of the business operations and to present the financial position of the business
as on date.
Needs to prepare Final Accounts:
1. Ascertainment of trading results: The trading Account is prepared to find out the profit or loss
made by the business activities which include buying, manufacturing, and selling of goods &
services. This profit is called Trading Profit or Gross Profit
2. Determination of Net Profit: The profit & Loss account is prepared to find out the final profit or
loss made by running the business, that is, the ultimate working results of the business. This is called

17. Net Profit/ Net Income. Such profit or income is the excess of sales revenues over all the related
expenses.
3. Presenting Financial Position: The balance sheet is prepared to show the financial status of the
business as on a particular date. It gives an idea of the financial strength of the business in terms of
the value of its assets and properties and also the share of outsider’s equity and the owner’s
investments. This will present the solvency position of the business.
4. Facilitates financial analysis and interpretation: Final accounts serve as window to understand and
explain the changes in the profitability and financial health of a business. The financial statements are
useful for investors, creditors and public, in taking decision in their areas.
5. Legal Requirements: The corporate entities like joint stock companies, statutory corporations,
cooperative societies, etc are required to submit the copies of their financial statements to members,
Stock exchanges, and to the respective government departments. The income tax liability also
computed on the basis of the audited statements of accounts.
10. What are the Objectives of Charging Depreciation? List out Merits and Demerits of Straight
line Method.
Meaning of Depreciation:
In common usage the term ‘depreciation’ refers to a decline in the value of any kind of property. But
in Accounting its use is restricted to the expiration of the cost of tangible fixed assets. Except land, all
other physical assets have a limited period of useful life.
Characteristics of Depreciation:
 Depreciation refers to fall or shrinkage rather than an increase in the value of an asset.
 It refers to a fall in book value of the asset. This value may or may not be equal to the market
value or the cost price of the asset.
 The fall in book value is a slow and gradual process rather than a sudden event. It is always
continuing and a permanent shrinkage.
 Depreciation is restricted to the fall in the value of fixed assets. Once a fixed asset is put to
use, depreciation begins to occur and it stays there forever.
Objectives or Need for Providing Depreciation:
(a) To ascertain true profits: Depreciation is a charge for capital assets used in earning profits and
therefore, it should be viewed as business expenditure. Unless proper charge for this expense is made
in accounts, the correct profit cannot be ascertained.
(b) To show the assets at their proper values: Depreciation must be accounted for in order to show
the assets at their proper values and thereby present a true and fair view of the financial position of
the business. Unless depreciation is provided, the value of the assets will be overstated in the Balance
Sheet and it will not reflect the true and fair view of the business.
(c) To create funds for replacement of assets: Depreciation is non-cash expenditure. Hence, the
amount of depreciation charged to Profit and Loss account remains in the business and the amount
thus accumulated during the working life of the asset provides funds for its replacement at the end of
the working life of the asset.
(d) To keep the capital in tact: If depreciation is not charged, the amount of profit will be inflated. If
such profits are distributed among the owners, then it will amount to the distribution of fixed capital
from the business. In the long run it will affect the financial health of the business.
(e) Statutory Need: Provision of depreciation is a statutory need: Section 205 of the Indian
companies Act has made compulsory for a joint stock company to provide for depreciation before
distributing the profits as dividends.
Advantages of straight line method
Straight line method of providing depreciation has got the following advantages :
1. Simplicity: This is the simplest method of providing depreciation. This can be easily understood
even by ordinary person. Calculation of depreciation according to this method is also very simple.

18. 2. Assets can be completely written off: According to this method, assets can be written off to zero.
The depreciation is calculated on the original cost of the asset at the specified rate, so the value of
asset is fully split over the useful life of asset.
3. Knowledge of total depreciation charged: The amount of total depreciation charged can be easily
known by multiplying the yearly amount of depreciation with number of years, the asset has been
used.
4. Suitable for small firms: Straight line method is the most suitable method for small firms. These
firms use this method, because it is easy, simple and suitable to the size of the firms.
5. Suitable for firms having large number of old and new machines: The weaknesses of this
method are removed, if the firm has both old and new machines. More maintenance charges on old
machines and lesser on the new machines balance each other.
6. Useful for assets having lesser value: This method is the most suitable for charging depreciation
on assets of lesser value such as furniture, fixture and patents etc.
Disadvantages or limitations of straight line method
1. Undue pressure on final years: The final years of the life of the asset have to bear more repairs
and maintenance charges and also the same amount of depreciation. whereas initial years have to
suffer lesser repair charges.
2. No provision for replacement: The amount charged as depreciation is retained in the business and
used in the routine affairs. The firm has to bother for making arrangement of funds for the
replacement of assets although depreciation has been charged every year.
3. Loss of interest: The amount of depreciation charged every year is not invested outside the firm,
so no interest is received. In certain methods of depreciation the amount of depreciation is invested
outside the business in securities and interest is received.
4. Illogical method: It seems illogical to charge depreciation on the original cost of the asset every
year when the balance of the asset is declining year after year.
5. Unsuitable for assets having long life and more value: This method is not suitable for those
assets which are subject to additions and extension from time to time, such as land and building and
plant and machinery. It is not suitable for assets having more value also.
11. Define Partnership? Explain the Essential Features of Partnership
Partnership: A partnership is a formal arrangement in which two or more parties cooperate to
manage and operate a business. Various partnership arrangements are possible in which all partners
might share liabilities and profits equally or some partners may have limited liability.
The essential characteristics of partnership are as follows:
1. Two or more persons: There must be at least two persons to form a partnership. A person cannot
enter into partnership with himself. The maximum number of persons in a partnership should not
exceed 10 in case of banking business and 20 in other types of business.
If the number of partners exceeds the prescribed maximum, it would become an illegal association of
persons. A firm cannot become a partner of another firm though its partners can join any other firm as
partners.
2. Agreement: Partnership is the outcome of an agreement between persons. The relation of
partnership arises from the formation of a contract and not from status or birth.
If a proprietor gives a share in profits to his employee it will not be called a partnership unless there is
an agreement of partnership between the two. The agreement may be oral or in writing but it must
satisfy all the essentials of a valid contract.
3. Lawful business: A partnership can be formed only for the purpose of carrying on a business. An
association of persons who jointly own a house without carrying on a business is not partnership.
Moreover, the business carried on by the partners must be lawful. Illegal acts such as theft, dacoity,
smuggling, etc., cannot be called partnership.
4. Sharing of profits: The agreement between the partners must be to share the profits of business.
There can be no partnership without the intention of mutual gain. The profits must be distributed
among the partners in an agreed ratio.

19. Similarly, losses should be shared among the partners. However, sharing of profits is not a conclusive
proof of partnership. For example, a manager may be given a share in profits of the firm.
5. Mutual agency: Partnership business can be carried on by all the partners or by any of them acting
on behalf of the others. In other words, every partner is an implied agent of the other partners and of
the firm. Each partner is liable for acts performed by other partners on behalf of the firm.
The above mentioned features are the real tests of partnership. In addition, partnership has the
following characteristics:
6. Utmost good faith: The relations between partners are based upon mutual trust and confidence.
Every partner is expected to act in the best interests of other partners and of the firm as a whole.
He must observe utmost good faith in all the dealings with his co-partners. He must render true
accounts and make no secret profits from the business.
7. Unlimited liability: Every partner is jointly and severally liable to an unlimited extent for the debts
of the partnership firm. In case the assets of the firm are insufficient to pay the debts in full, the
personal property of each partner can be attached to pay the creditors of the firm.
8. Restriction on transfer of interest: No partner can transfer his share in the partnership without the
prior consent of all other partners.
12. List out Merits and Demerits of Written down Value Method.
Written down Value Method: It is also known as Reducing Balance or Reducing Installment
Method or Diminishing Balance Method. Under this method, the depreciation is calculated at a
certain fixed percentage each year on the decreasing book value commonly known as WDV of the
asset (book value less depreciation).
Merits:
The following are the advantages of this method:
 As this method equalizes the total charges of using the asset (i.e., the amount of depreciation
plus repair charges) from year to year, it is considered more equitable than straight-line
method. This is because depreciation charges decline each year whereas repair charges
increase year by year.
 It matches the service of the asset with the depreciation charge. When asset is more efficient
in the initial years, higher depreciation is charged compared to later years. It is true about
fixed assets such as motor vehicles.
 It recognizes the risk of obsolescence by charging the major part of depreciation in the early
years of the life of the asset.
 It results in a better cash flow through tax deferral as under this method, the net income to be
taxed is lower in the initial years and higher in subsequent years.
 As and when additions are made to the asset, fresh calculations of depreciation are not
necessary.
 Income-tax authorities recognize this method.
Demerits:
The main drawbacks of this method are as follows:
 In subsequent years the original cost of the asset is completely lost sight of.
 The asset can never be reduced to zero.
 This method does not take into consideration the interest on capital invested in the asset.
 This method requires elaborate book-keeping. The determination of correct rate of
depreciation is a complex task.

20. 13. What are the Accounting rules under English system? Classify the following into Personal, Real
& Nominal Accounts
a. Capital Account
b. Drawings Account
c. Canara Bank Account
d. Machinery Account
e. Salary Account
f. Goodwill Account
g. Interest Account
Personal Accounts
Debit the Receiver
Credit the Giver
Real Accounts
Debit what comes in
Credit what goes out
Nominal Accounts
Debit all the Expenses or losses
Credit all the Incomes or Gains
Transaction type Type of account
Capital Account Personal Account
Drawings Personal Account
Canara Bank Account Personal Account
Machinery Account Real Account
Salary Account Nominal Account
Goodwill account Real Account
Interest account Nominal Account