Accounting Goyal

8/13/2019 Accounting Goyal

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1Ans:- Introduction to financial managementFinancial Management can be defined as:

The management of the finances of a business / organisation in order to achieve financialobjectivesTaking a commercial business as the most common organisational structure, the key

objectives of financial management would be to:

Create wealth for the business

Generate cash, and

Provide an adequate return on investment bearing in mind the risks that the business is

taking and the resources invested

There are three key elements to the process of financial management:

(1) Financial PlanningManagement need to ensure that enough funding is available at the right time to meet the

needs of the business. In the short term, funding may be needed to invest in equipment

and stocks, pay employees and fund sales made on credit.

In the medium and long term, funding may be required for significant additions to the

productive capacity of the business or to make acquisitions.

(2) Financial ControlFinancial control is a critically important activity to help the business ensure that the

business is meeting its objectives. Financial control addresses questions such as:

Are assets being used efficiently?

Are the businesses assets secure?

Do management act in the best interest of shareholders and in accordance with business

rules?


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(3) Financial Decision-makingThe key aspects of financial decision-making relate to investment, financing and dividends:

Investments must be financed in some way however there are always financing

alternatives that can be considered. For example it is possible to raise finance from selling

new shares, borrowing from banks or taking credit from suppliers

A key financing decision is whether profits earned by the business should be retained

rather than distributed to shareholders via dividends. If dividends are too high, the

business may be starved of funding to reinvest in growing revenues and profits further.

Accounting concepts and conventions

In drawing up accounting statements, whether they are external "financial accounts" or

internally-focused "management accounts", a clear objective has to be that the accounts

fairly reflect the true "substance" of the business and the results of its operation.

The theory of accounting has, therefore, developed the concept of a true and fair view .The true and fair view is applied in ensuring and assessing whether accounts do indeed

portray accurately the business' activities.

To support the application of the "true and fair view", accounting has adopted certain

concepts and conventions which help to ensure that accounting information is presented

accurately and consistently.

Accounting ConventionsThe most commonly encountered convention is the historical cost convention . Thisrequires transactions to be recorded at the price ruling at the time, and for assets to be

valued at their original cost.

Under the "historical cost convention", therefore, no account is taken of changing prices in

the economy.

The other conventions you will encounter in a set of accounts can be summarised as

follows:


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Monetarymeasurement

Accountants do not account for items unless they can be quantified in

monetary terms. Items that are not accounted for (unless someone is

prepared to pay something for them) include things like workforce

skill, morale, market leadership, brand recognition, quality of

management etc.

Separate Entity This convention seeks to ensure that private transactions and mattersrelating to the owners of a business are segregated from transactions

that relate to the business.

Realisation With this convention, accounts recognise transactions (and any profitsarising from them) at the point of sale or transfer of legal ownership -

rather than just when cash actually changes hands. For example, a

company that makes a sale to a customer can recognise that sale

when the transaction is legal - at the point of contract. The actualpayment due from the customer may not arise until several weeks (or

months) later - if the customer has been granted some credit terms.

Materiality An important convention. As we can see from the application ofaccounting standards and accounting policies, the preparation of

accounts involves a high degree of judgement. Where decisions are

required about the appropriateness of a particular accounting

judgement, the "materiality" convention suggests that this should only

be an issue if the judgement is "significant" or "material" to a user of

the accounts. The concept of "materiality" is an important issue for

auditors of financial accounts.

Accounting ConceptsFour important accounting concepts underpin the preparation of any set of accounts:

GoingConcern

Accountants assume, unless there is evidence to the contrary, that a

company is not going broke. This has important implications for the

valuation of assets and liabilities.

Consistency Transactions and valuation methods are treated the same way fromyear to year, or period to period. Users of accounts can, therefore,

make more meaningful comparisons of financial performance from

year to year. Where accounting policies are changed, companies are

required to disclose this fact and explain the impact of any change.


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Prudence Profits are not recognised until a sale has been completed. In addition,a cautious view is taken for future problems and costs of the business

(the are "provided for" in the accounts" as soon as their is a reasonable

chance that such costs will be incurred in the future.

Matching (orAccruals )

Income should be properly "matched" with the expenses of a given

accounting period.

Key Characteristics of Accounting InformationThere is general agreement that, before it can be regarded as useful in satisfying the needs

of various user groups, accounting information should satisfy the following criteria:

Criteria What it means for the preparation of accounting informationUnderstandability This implies the expression, with clarity, of accounting information

in such a way that it will be understandable to users - who are

generally assumed to have a reasonable knowledge of business and

economic activities

Relevance This implies that, to be useful, accounting information must assist auser to form, confirm or maybe revise a view - usually in the context

of making a decision (e.g. should I invest, should I lend money to

this business? Should I work for this business?)

Consistency This implies consistent treatment of similar items and application ofaccounting policies

Comparability This implies the ability for users to be able to compare similarcompanies in the same industry group and to make comparisons of

performance over time. Much of the work that goes into setting

accounting standards is based around the need for comparability.

Reliability This implies that the accounting information that is presented istruthful, accurate, complete (nothing significant missed out) and

capable of being verified (e.g. by a potential investor).

Objectivity This implies that accounting information is prepared and reported ina "neutral" way. In other words, it is not biased towards a particular

user group or vested interest


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2Ans:- We can divideaccounting errors with followingways:

1. Errors of Principle

In accounting, if accountant records any transactionagainst the rules of double entry system, then this

mistake is called error of principle. For example,accountant takes all capital expenditures as revenueexpenditures and passes the entry of machinery

purchased in purchase account.
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2. Clerical Errors

We can separate clerical mistakes with following ways:

a) Errors of Omission

If accountant forgets to pass the journal entry of any transaction or ifhe records only one part of transaction, then these mistakes are called

errors of omission. Accountant can also forget to post any journalentry in ledger accounts.

b) Errors of Commission

If accountant passes the wrong entry or posts wrong side of ledgeraccounts or writes wrong amount or calculates wrong total of any

account, then these types of mistakes are called errors of commission.Some of errors of commission can easy find out by making trial

balance but some errors of commission can not find out through trialbalance.

c) Compensating Errors

Sometime we compensate one error with any other errors. For

example we write Rs. 500 less in the credit side of sales account butsame time we write less Rs. 500 in the debit side of purchase account.This is the error which can not be revealed through trial balance.

3Ans :- Thefinancial statementsof anorganizationmade up at the

end of an accounting period,usually thefiscal year.For a manufacturer, the finalaccountsconsist of (1)manufacturing

account,(2)trading account, (3)profit and loss account,and

(4)profitandlossappropriation account.Acommercialcompany'sfinal accounts will include all of the above

except themanufacturingaccount. Together, these accounts show

thegross profit,net income,anddistributionof net incomefiguresofthe company.
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PERFORMA OF FINAL ACCOUNT

TRADING ACCOUNT OF M/S.........for the year ending on.............

PARTICULARS AMOUNTRs. P.


To Opening Stock

To PurchasesLess : Purchases

Returnsor Returns

Outward

(or Returns Cr.Bal)To Expensesincurred in bringing

thegoods to their

present conditionand location

Wages, or

Wages and

Salaries orProductive Wages

or

ManufacturingWages

To Carriage, orCarriage Inward,

or

Carriage on

Purchases or

Freight InwardTo Octroi

To Dock Charges(Inward)

To Customs Duty onimported goods

..................

..................

..................

..................

..................

..................

..................

..................

..................

..................

..................

By Sales

Goods SoldLess : Sales

Returns(or Returns

Inward)

(or Returns Dr.bal)By Closing StockBy Gross

LossTransferred toProfit and Loss

A/c

..................

..................

..................


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To Motive Power,

Coal, Gas,Water and Oil,

Grease, etc.

Fuel, Heating andLighting

To Royalties basedon ProductionTo Gross

Profittransferred to

Profit and LossAccount

.................. ..................


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PROFIT AND LOSS ACCOUNTfor the year ending on.............



To Gross Losstransferred

(from Trading

Account)To Salaries

To Rent, Rates and

TaxesTo Printing & StationeryTo Postage & Telegrams

To Legal Charges

To Telephone Exp.To Insurance PremiumTo Entertainment Exp.To Repairs an Renewals

To Interest on Loan

To Interest on CapitalTo Sundry Trade

Expenses

To Loss on Sale of

AssetsTo ConveyanceTo CharityTo Bank Charges

To Office Expenses

To Establishment Exp.To General Expenses

To Loss in Exchange

To Licence FeeTo Brokerage

To Electricity Exp.To Loss by Fire, TheftTo Commission

To Advertisement

To Cartage outwardTo Export DutyTo Discount

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By Gross Profittransferred

from Trading

AccountBy Rent from Tenants

By Discount (Cr.)

By CommissionBy Interest (Cr.)By Bad Debts

Recovered

By Apprentice PremiumBy Income fromInvestmentsBy Dividends on Shares

By Difference in

exchange (Cr.)By Miscellaneous

Income

By Profit on Sale of

AssetsBy Net Losstransferred to

Capital Account

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To Packing Expenses

To Traveling Exp.To Bad DebtsTo Audit Fees

To DepreciationTo Net Profit transferred

to Capital Account

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BALANCE SHEET OF..........as at..............

LIABILITIES AMOUNTRS. P.

ASSETS AMOUNTRs. P.

CapitalAdd: NetProfit

..........Add: Intt. On

Capital ..........

Less: NetLoss..........

Less: Drawings

..........Less: Int. onDrawings ...........Bank Overdraft

Loans

Sundry CreditorsBills Payable

Tax Payable

..........

..........

..........

..........

..........

..........

GoodwillLand and BuildingsPlant and Machinery

Motor VanComputer

Books

FurnitureClosing StockDebtors

Investment

Bills ReceivableCash at BankCash in Hand

..........

..........

..........

..........

..........

..........

..........

..........

..........

..........

..........

..........

..........

.......... ..........

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Accounting Goyal