SRM Institute of Science and Technology

College of Science & Humanities, Kattankulathur - 603 203

Department of Commerce - AF &CS

Financial Accounting - I (UAF23101J)

Financial Accounting 1 - Degree Examinations

Theory Questions
1st Semester – November 2023

INSURANCE CLAIMS

1) Fire Insurance Claim

Fire in the business premises of any firm can damage several assets like stock, buildings, furniture, fixtures,
machinery etc. In addition, the normal working of Africa is affected for some days or months, resulting in loss of sales
and loss of profits.

2) Gross Profit Ratio

When the ledger account for the stock is not maintained, the gross profit ratio to sales is the vital link to
compute the claim. The following relevant points for this ratio are to be noted:
(i) Gross profit ratio = Gross Profit / Sales × 100
(ii) The previous accounting year's gross profit and sales can be used for the gross profit ratio.

3) Average Clause
Insurance policies for loss of stock may include an average clause. This clause is needed to discourage under-
insurance. If stock on the date of fire is more than the insured stock, the average clause must be applied to the
compute claim.

Actual loss of stock = stock on the date of fire - salvage value.

Claim to be lodged = Insured stock / Stock on the date of fire × Actual loss of stock

4) Consequential loss policy

Insurance policies taken for loss of profits are also called consequential policies. Under a consequential policy, the
insurer indemnifies the policyholder against losses arising from the suspension, wholly or partly, of the activities of the
business caused by fire. A claim can be made for loss of gross profit which is the total net profit and insured standing
charges (fixed costs) and also any increase in the cost of work which is consequential.

5) Short Sales
This is the difference between standard turnover and the affected period turnover.

6) Annual Turn Over

This is the sales during the twelve months exactly before the fire.

7) Standard Turn Over

This is the sales during the same months as the affected period, in the previous year.

8) Memorandum Trading A/c

If the normal gross profit percentage of the firm to its sales is available, a Memorandum Trading Account can be
prepared for the period from the beginning of the accounting year till the date of the fire.
FINAL ACCOUNTS

1) Elements of final accounts

(i) Trading Accounts
(ii) Profit and loss account
(iii) Balance Sheet

2) Trading account
A trading account is prepared for a specific period to know the trading results of the business. It contains a summary
of all the transactions occurring during a trading period which have a direct relation to the goods dealt in by the
business.

3) P&L A/c
A profit and loss statement is a financial report that shows how much your business has spent and earned
over a specified time. It also shows whether you've made a profit or a loss over that time – hence the name. A profit
and loss statement might also be called a P&L or an income statement.

4) Balance Sheet
A balance sheet is a financial statement that reports a company's assets, liabilities, and shareholder equity.
The balance sheet is one of the three core financial statements that are used to evaluate a business. It provides a
snapshot of a company's finances (what it owns and owes) as of the date of publication.

5) Manufacturing A/c
The manufacturing account can give the actual information regarding the cost of the raw materials used in the
manufacture and all other expenses during the progress of the manufacturing work. It can give information about the
following things at a glance.

6) Order of Liquidity
Order of liquidity is how a company presents their assets in the order of how long it would take to convert
them into cash.

7) Order of Permanence
Order of permanency is where the assets and liabilities are shown as per their permanency in the business
8) Trial balance

9) Adjusting entering treatment in Final Accounts Eg- Depreciation, PrepaExpensesnse, Outstanding Expenses,
Accrued Income, Bad Debts, Drawings, Interest on Capital etc.

10) Calculation of COGS, GP and NP

Cost of Goods Sold formula is: Starting inventory + purchases − ending inventory = cost of goods sold.

The gross profit formula is Gross Profit = Revenue – Cost of Goods Sold.

The Net Profit formula is: Net Profit = Total Revenue – Total Expenses

11) Marshalling and grouping

Marshalling refers to the arrangement of assets & liabilities in a balance sheet, whereas, Grouping refers to
the presentation of items of similar characteristics under one head.
ACCOUNTS FOR INCOMPLETE RECORDS

1) Define single entry

According to R. N. Carter, “Single entry system is a method or a variety of methods, employed for the recording of
transactions, which ignore the two-fold aspects and consequently fails to provide the businessman with the
information necessary for him to be able to ascertain the financial position.

2) Net-worth method
Net worth is calculated by subtracting all liabilities from assets. An asset is anything owned that has monetary
value, while liabilities are obligations that deplete resources, such as loans, accounts payable (AP), and mortgages.

3) Conversion Method
The conversion method is the process of converting a business's accounting from single-entry to double-
entry

4) Statement of Affairs
A statement of affairs is a statement which shows assets on one side and liabilities on the other, just as in the
case of a balance sheet. It is prepared in a single-entry system to ascertain the amount of capital.

5) Features of a single-entry
(i) Absence of Uniformity
(ii) Records Maintained
(iii) Mixing of Transactions
(iv) Suitability

6) Limitations of single entry

(i) Insufficient Records
(ii) Absence of Trial Balance
(iii) Difficulty in ascertaining Profit
(iv) Difficulty in ascertaining Financial Position

7) Statement of Affairs Vs Balance Sheet

Statement of Affairs
1. Shows the financial position of a company at a specific point in time
2. Includes both assets and liabilities
3. Emphasizes current assets and current liabilities
4. Provides information on cash flow

Balance Sheet
1. Shows the financial position of a company at a specific point in time.
2. Includes both assets and liabilities
3. Emphasizes long-term assets and liabilities
4. Provides information on the liquidity of the company

8) Single Entry Vs Double Entry

SINGLE ENTRY SYSTEM
Meaning: The system of accounting in which only one-sided entry is required to record financial transactions is the
single-entry system.
Nature: Simple
Type of recording: Incomplete
Errors: Hard to identify
DOUBLE ENTRY SYSTEM
Meaning: The accounting system, in which every transaction affects two accounts simultaneously is known as the
Double Entry System.
Nature: Complex
Type of recording: Complete
Errors: Easy to locate

9) Methods of ascertaining profit in the single-entry system

The following points highlight the two methods for ascertainment of profit or loss under a single entry system. The
methods are:
1. Statement of Affairs/Increase in Net Worth Method
2. Conversion Method.

ACCOUNTING BASICS - JOURNAL & LEDGER

1) Journal
A journal is a concise record of all transactions a business conducts; journal entries detail how transactions
affect accounts and balances. All financial reporting is based on the data contained in journal entries, and there are
various types to meet business needs.

2) Ledger
An accounting ledger is an account or record used to store bookkeeping entries for balance sheet and income
statement transactions. Accounting ledger journal entries can include accounts like cash, accounts receivable,
investments, inventory, accounts payable, accrued expenses, and customer deposits.

3) Compound entry
A compound journal entry is an accounting entry in which there is more than one debit, more than one credit,
or more than one of both debits and credits.

4) Contra entry
Contra entry refers to transactions involving cash and bank accounts. In other words, any entry which affects
both cash and bank accounts is called a contra entry. Contra in Latin means the opposite. It is more popularly known
as a contra voucher.

5) Subsidiary books
Subsidiary Books are books of Original Entry. They are also known as Day Books or special journals. We record
transactions of a similar nature in Subsidiary Books. They help overcome the limitations of journal books or journal
entries.

6) Book Keeping Vs Accounting

Bookkeeping
1. Bookkeeping is a foundation/base of accounting.
2. Bookkeeping is one segment of the whole accounting system.
3. The result of the bookkeeping process is providing input for accounting.

Accounting
1. Accounting starts where bookkeeping ends and has a broader scope than bookkeeping.
2. Accounting uses the information provided by bookkeeping to prepare financial reports and statements.
3. The result of accounting is preparing financial statements for making informed decisions and judgments.

7) Limitations of Accounting
1. It is unable to measure things or any events that do not have a monetary value.
2. It uses historical costs to measure the values without considering factors such as price changes, or inflation.

7) Petty Cash Book

A petty Cash Book is used for recording payment of petty expenses, which are of smaller denominations like
postage, stationery, conveyance, refreshment, etc

8) Journal Vs Ledger
Journal
Meaning: The book in which all the transactions are recorded, as and when they arise is known as the Journal.
What is it?: It is a subsidiary book
Also known as the Book of Original Entry.

Ledger
Meaning: The book which enables to transfer of all the transactions into separate accounts is known as a Ledger.
What is it?: It is a principal book.
Also known as the Book of Second Entry.

BANK RECONCILIATION STATEMENT (BRS)

1) BRS
A bank reconciliation statement is a document prepared by a company that shows its recorded bank account
balance matches the balance the bank lists. This statement includes all transactions, such as deposits and
withdrawals, from a given timeframe.

2) Adjust Cashbook
In the cash book, the business should make the necessary adjustments based on the list of such entries. Make
corrections or rectify any errors that appear in the cash book

3) Reasons for discrepancy in cash and bank account balances.

1. Errors committed by Firm. ...
2. Errors committed by the Bank. ...
3. Cheques issued by the bank but not yet presented for payment.
4. Cheques paid but not collected.

4) Need for the preparation of BRS.

It helps in knowing the actual Bank balance. It helps in discouraging the staff from embezzlement. Helps in
identifying the reason for differences between the Cash Book and the Pass Book. It helps in identifying any undue
delay in the clearance of cheques.

RECTIFICATION OF ERRORS

1) Classification of Errors
Error in accounting are broadly classified into two categories which are as follows:
1. Error of principle
2. Clerical errors

2) Error of omission, Commission, Principle, Compensating errors.

An error of omission occurs when an entry has not been recorded although a transaction has occurred during
that period.
The error of commission is an error that occurs when a bookkeeper or accountant records a debit or credit to
the correct account but to the wrong subsidiary account or ledger

An error of principle is an accounting mistake in which an entry violates a fundamental principle of accounting
or a fundamental accounting principle established by a company.

Compensating error is when one error has been compensated by an offsetting entry that's also in error.

3) Suspense Account
A suspense account is an account of the general ledger that is used for the temporary recording of business
transactions

4) Meaning of error
Accounting errors are unintentional mistakes that can originate in several ways. Commonly, they involve
recording a transaction incorrectly because of a data-entry mishap. Sometimes transactions are missed entirely or
are simply recorded in the wrong subsidiary journal.

5) Errors disclosed by trial balance.

1. Wrong totalling of the debit amounts and the credit amounts.
2. Error in the total of Subsidiary books.
3. Wrong posting of the total of Subsidiary books in the ledger.
4. Omitting an account balance in the Trial Balance.

DEPRECIATION

1) Definition of depreciation.
According to R.N. Carter, “Depreciation is the gradual and permanent decrease in the value of an asset from any
cause.”

2) Causes of depreciation.
1. By constant use.
2. By passing time.
3. By obsolescence.
4. By Accident.

3) Objectives of depreciation
1. To ascertain true profits
2. To show the assets at their proper values.
3. To create funds for the replacement of assets.
4. To keep the capital intact

4) Factors affecting the amount of depreciation

There are three basic things which are required to charge depreciation viz, cost, estimated useful life and
probable salvage value.

5) Methods of depreciation
1. Straight line
2. Double declining balance.

6) SLM vs WDV
The straight-line method (SLM) of depreciation reduces the asset's value by a fixed amount every year till it
reaches zero or scrap value. It is also known as the 'Fixed Installment Method' or 'Original Cost Method'.

In accounting, the written-down value (WDV) is a method used to calculate the depreciation of an asset. It is a
way of allocating the cost of an asset over its useful life. The WDV method involves reducing the value of an asset by
a fixed percentage each year.

7) Meaning of obsolescence, amortization

Obsolescence in the business sense is the loss in value of an asset due to loss of usefulness or technological
factors; obsolescence describes an asset which is "out of date." Obsolescence is not related to the physical
usefulness or workings of the asset.

Amortization is an accounting technique used to periodically lower the book value of a loan or an intangible
asset over a set period.