Commerce Question Bank – 26 Important Short Questions With Answers on “Financial and Management Accounting”

26 Important Short Questions with Answers on “Financial and Management Accounting” for Commerce Students:

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1. Which type of expenses is called outstanding expenses?

Those expenses which have been incurred and are due for payment, i.e., not paid as yet, are called outstanding expenses. For example, Rs. 10,000 pm is paid as a salary to an employee but during the year 2009, only Rs. 100,000 are paid as salary.

Two months’ salary, i.e. Rs. 20,000 which is due but not paid is outstanding salary. All such expenses must be accounted for in that accounting year in which they are occurred irrespective of the fact whether they are paid or not. In order to bring this fact into books of account, following adjusting entry will be passed at the end of the year.

Salary A/c Dr.

To outstanding salary A/c

2. What is the effect of the outstanding expenses adjustment entry?

The two fold effect of the outstanding expenses adjustment entry will be:

(i) Outstanding expenses will be shown on the debit side of the trading or profit & loss Account by way of addition to the expenses.

(ii) Outstanding expenses account represents liability and it will be shown on the liabilities side of the balance sheet.

3. Write a short note on unexpired expenses.

There are certain expenses which are paid in advance or paid for the future period which is not set over or not yet expired. Since such expenses are already paid, they are also recorded in books of accounts of that period for which they do not relate.

Therefore, such prepaid expenses must be adjusted in the books of accounts to arrive at the true results Generally insurance taxes, telephone rent, etc. are paid in advance.

For example, if a fire insurance policy is taken for a year paying Rs. 1,000 as insurance premium on 1st April 2010, the policy will expire on 31st March 2011. If accounts are closed on 31st December 2010, premium from 1st January 2011 to 31st March 2011, will be prepaid expenses, i.e. Rs. 250 will be prepaid expenses. The following adjustment entry will be passed:

Prepaid Insurance A/c Dr.

To Insurance A/c

4. What is the effect of prepaid expenses adjustment entry?

The two fold effect of prepaid expenses adjustment entry will be:

(i) Prepaid expenses will be shown in the trading A/c or profit and loss account by way of deduction from the expenses.

(ii) Prepaid expenses represents benefit receivable, i.e. an asset and, therefore, it will be shown on the assets side of the balance sheet.

5. Which type of incomes is known as accrued incomes?

That income which has been earned but not received during the accounting year is called accrued income. Income like interest on investments, rent of property sublet, etc. are many a times earned by the business during a particular accounting period but actually not received during that period.

For example if the business has invested Rs. 10,000 in 5% securities on 1st January 2009 but during the year, Rs. 350 has been received as interest on securities. Then Rs. 150 interest on securities will be accrued interest for the year 2009. The following adjustment entry will be passed.

Accrued Interest A/c Dr.

To interest A/c

6. What is the effect of accrued income adjustment entry?

The two fold effect of the accrued income adjustment entry will be:

(i) Accrued income will be shown on the credit side of profit and loss Account by way of addition to the income.

(ii) It will be a benefit receivable, i.e., an asset to the business and, therefore, it will be shown on the assets side of the balance sheet.

7. What do you understand by unearned incomes?

Income received but not earned during the accounting year is called as income received in advance. It is the income received in advance for which business is responsible, for example building has been given to a tenant on 20,000 p.m. but during the year Rs. 300,000 has been received. Then Rs. 60,000 will be unearned income. For unearned income, following adjustment entry will be passed:

Rent A/c ‘ Dr.

To unearned rent A/c

8. Write down the effects of income received in advance adjustment entry.

The effect of income received in advance entry will be:

(i) It is shown on the credit side of profit and loss Account by way of deduction from the income.

(ii) Unearned income represents liabilities side of the Balance sheet.

9. What is depreciation in a balance sheet?

Depreciation is permanent decrease or reduction in the value of the assets. When an asset is employed for earning purpose, it is necessary that depreciation must be charged to the profit of the year in order to show correct profit or loss and to show the asset at its correct value in the balance sheet.

Generally, depreciation is charged at some percentage on the value of an asset, for example, if a machine is purchased for Rs. 10,000 on 1st January 2009 and it depreciates at 10% p.a. for the year 2009, then Rs. 1000 will be charge as depreciation. Following entry will be passed to adjust depreciation:

Depreciation A/c Dr.

To Machinery A/c

10. What are the effects of depreciation adjustment entry in a balance sheet?

The two fold effect of depreciation adjustment entry will be:

(i) Depreciation is shown on the debit side of the profit and loss account.

(ii) Depreciation is shown on the asset side by way of deduction from the value of asset.

11. What do you understand by bad debts?

When goods are sold on credit the amounts receivable from all debtors may not be recovered fully. Some debts may become irrecoverable due to many reasons like death, insolvency, insanity or dishonesty of the debtor.

Such debts are called as “Bad debts”. It is loss for the business. Therefore it is once shown on the debit side of profit and loss A/c and secondly, shown as a deduction from the amount of sundry debtors in balance sheet.

The bad debts A/c is closed by transferring its balance to profit and loss A/c by a closing entry. The concerned debtor A/c gets reduced to the extent of the bad debts.

12. Which type of debts is known as doubtful debts?

Debts created by selling goods on credit in an accounting year may not become bad in the same year. They may become bad in the subsequent year. In such cases the bad debts arising on A/c of selling goods on credit in one year fall upon the next year or subsequent year.

So it is advised to ascertain the amount of debts which may become bad out of the debts of a year before preparing final accounts of the year. Such debts are called as “Doubtful debts.” These are calculated or estimated by a trader on the basis of past experience.

It is generally calculated at a fixed percentage on the total debtors of a trader at the end of an accounting period. The amount of doubtful debts is once placed on the debit side of profit and loss A/c and secondly it is shown as a deduction from the amount of sundry debtors in Balance sheet.

13. What is reserve for discount on sundry debtors?

Debtors are sometimes allowed a discount to induce them for a prompt payment. The traders maintain a reserve for them which are called reserve for discount on sundry debtors.

It is shown on the debit side of profit and loss A/c and deducted from the sundry debtors in the balance sheet. It would be kept in mind that while calculating the reserve for discount, the reserve for bad debts should be deducted from the sundry debtors.

14. (a) What do you mean by financial statements?

(b) What is the utility of activity ratios? Why are they called turnover ratios?

(a) A financial statement is a collection of data organised according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm.

(b) Activity ratios are calculated to measure the efficiency with which the resources of a firm have been employed. These ratios are also called turnover ratios because, they indicate the speed with which assets are being turned over into sales.

15. While preparing funds flow statement how will you treat provision for tax?

There are two different ways of treating provision for tax in the funds flow statement:

First method:

As per this method, the provision for tax is treated as internal appropriation and thus non-current liability. It is used for calculating the profit made during the year and tax paid during the year is treated as an application of fund.

Second method:

As per this method, tax provision made during the year is treated as current liability. If this is the treatment then provision for tax made during the year is not used for adjusting the profit made during the year for calculating the source from operation and tax paid is not shown as an application of fund.

16. Write a short note on proforma invoice.

When the consignor sends the goods to the consignee, he forwards a statement showing the particulars of goods such as quality, quantity, price, marking, packing, etc. and this statement is called the Proforma Invoice.

The price mentioned in the proforma invoice is called the proforma invoice price. The proforma invoice price may be the cost price of the goods sent, though usually it represents the selling price or the minimum price at which the consignee is expected to sell the goods sent to him.

17. What do you understand by account sales?

At regular intervals, the consignee sends a statement to his consignor about the details of goods received, sales, expenses incurred, commission charged and remittance made, with the resultant balance due by him. This statement is known as “Account Sales”.

18. What are statement of sources and applications of funds?

This financial statement is variously known as the funds flow statement. It describes the sources from which additional funds were derived and uses to which funds were applied. It is a statement of flows to measure the changes that have taken place in the financial position of a firm between two balance sheets. It shows the summary of inflow (sources) and (uses) of funds over a period of time.

19. What are the sources of working capital?

Sources of working capital are as follows:

1. Funds from operation

2. Sale of non current assets like—long term investment, land, plant building and other assets

3. Intangible assets like goodwill and patents

4. Issue of debentures.

20. What are the uses of working capital?

Uses of working capital are as follows:

1. Purchase of non current assets like tangible and intangible assets

2. Redemption of debentures

3. Payment of cash dividend

4. Payment of long-term debt

5. Miscellaneous non trading expenditure.

21. What do you understand by goodwill? What factors give rise to goodwill?

Goodwill is the value of the reputation of firm in respect of the profits expected in future over and above the normal profits earned by other similar firms belonging to the same industry. The factors that give rise to goodwill are as follows: (a) Technical know-how, (b) Favourable Location, (c) Efficiency of Management, (d) Market situation, (e) Special advantage if any, enjoyed by the firm, like import license, patents, trade marks.

22. Under what circumstances is the goodwill valued?

Goodwill is valued under the following circumstances:

(i) When new partner is admitted

(ii) When a partner retires or dies

(iii) When there is a change in profit-sharing ratio

(iv) When business is sold to another company

(v) When two firms are amalgamated.

23. What is meant by the admission of a partner? State the two main rights acquired by a new part

The admission of a partner is one of the modes of reconstituting the firm under which old partnership comes to an end and a new one between all partners (including incoming partner) comes into existence. Two main rights acquired by a new partner are:

(i) Sharing in the assets of the firm and

(ii) Sharing in the future profits of the firm.

24. Enumerate the various matters that need adjustment at the time of admission of a new partner retirement of a partner.

The various matters that need adjustment at the time of admission of a new partner or retirement of partner are as follows:

(i) Adjustment in profit sharing ratio

(ii) Adjustment for goodwill

(iii) Adjustment of profit/loss arising from the revaluation of assets and liabilities

(iv) Adjustment of accumulated profits or losses, reserves

(v) Adjustment of capital (if agreed).

25. What do you mean by a joint life policy?

A joint life policy is taken on the joint lives of all the partners. If any partner dies then amount of policy is paid by the Life Insurance Corporation. This amount can be very well used to settle account of the executor of the deceased partner without disturbing the position of the business.

26. Write short note on amalgamation of firms.

When two or more firms are carrying on business of a similar nature, they may amalgamate their business to avoid competition. It is usual to revalue all assets and liabilities so that true capital brought into the new firm by each of the partner is ascertained. Therefore:

(i) Each firm should prepare a revaluation account. The balance of this account is transferred to partner’s capital account in the profit sharing ratio.

(ii) Entries for raising goodwill should the passed.

(iii) Assets and liabilities not taken over by the new firm should be transferred to the capital account of partners in the ratio of capital.

(iv) The new firm should be debited with the difference between the value of assets and liabilitiestaken over by it, the assets should be credited and liabilities debited.

(v) Partners capital account should be transferred to the new firm account.

The above steps will close the books of the old firm. New firm will pass the following entry

Assets (at an agreed value) Dr.

To Liabilities

To Individual Partners’ Capital A/c.