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Answer Posted / ranjeesh.k.k
Ground rules of accounting that are (or should be) followed
in preparation of all accounts and financial statements. The
four fundamental concepts are (1) Accruals concept: revenue
and expenses are taken account of when they occur and not
when the cash is received or paid out; (2) Consistency
concept: once an entity has chosen an accounting method, it
should continue to use the same method, except for a sound
reason to do otherwise. Any change in the accounting method
must be disclosed; (3) Going concern: it is assumed that the
business entity for which accounts are being prepared is
solvent and viable, and will continue to be in business in
the foreseeable future; (4) Prudence concept: revenue and
profits are included in the balance sheet only when they are
realized (or there is reasonable 'certainty' of realizing
them) but liabilities are included when there is a
reasonable 'possibility' of incurring them. Also called
conservation concept. Other concepts include (5) Accounting
equation: total assets of an entity equal total liabilities
plus owners' equity; (6) Accounting period: financial
records pertaining only to a specific period are to be
considered in preparing accounts for that period; (7) Cost
basis: asset value recorded in the account books should be
the actual cost paid, and not the asset's current market
value; (8) Entity: accounting records reflect the financial
activities of a specific business or organization, and not
of its owners or employees; (9) Full disclosure: financial
statements and their notes (footnotes) should contain all
pertinent data; (10) Lower of cost or market value:
inventory is valued either at cost or the market value
(whichever is lower) to reflect the effects of obsolescence;
(11) Maintenance of capital: profit can be realized only
after capital of the firm has been restored to its original
level, or is maintained at a predetermined level; (12)
Matching: transactions affecting both revenues and expenses
should be recognized in the same accounting period; (13)
Materiality: relatively minor events may be ignored, but the
major ones should be fully disclosed; (14) Money
measurement: accounting process records only those
activities that can be expressed in monetary terms (with
some exceptions, as in cost-accounting); (15) Monetary
measurement: only the activities measurable in terms of
money should be recorded; (16) Objectivity: financial
statements should be based only on verifiable evidence,
comprising an audit trail; (17) Realization: any change in
the market value of an asset or liability is not recognized
as a profit or loss until the asset is sold or the liability
is paid off (discharged); (18) Unit of measurement:
financial data should be recorded with a common unit of
measure (dollar, pound sterling, yen, etc.). Also called
accounting conventions, accounting postulates, or accounting
principles.
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2. You are required to prepare a Profit & Loss Account for the year ending 31st December, 2007 and the Balance Sheet on that date. The Trial Balance of XYZ Ltd. for the year ended 31st December 2007 is as follows:- Trial Balance of XYZ Ltd. as on 31st Dec. 2007 Debit Balances Rs. Credit Balances Rs. Materials used 3,50,000 Sales(including 2% Sales tax) 9,18,000 Cost of Labour 1,50,000 Sale of Scrap 100 Stock, finished and work in process on 31st December, 2006 50,000 Rent received 2,000 Wages : Factory Staff 15,000 Discounts 2,750 Directors Remuneration 50,000 Recovered against fire claim re : Stock 5,000 Salaries : Clerical Staff 75,000 Capital : Equity 25,000 Insurances : Workmen’s Compensation 1,500 Preference- 9% 8,000 General, fire etc. 2,000 Creditors 1,56,000 Directors’ Life Insurance 1,500 Provision for Taxation 1,05,000 Maintenance : Buildings 1,000 Profit & Loss Account 13,750 Plant and Machinery 12,500 Rent and Rates of premises and hire of plant 20,000 Heat, Light and Power 15,000 Experimental and Laboratory Expenses 10,000 Canteen Expenses 5,000 Staff Welfare expenses 2,500 Motor Expenses 12,500 Professional Charges 2,800 Postage and Telephone 3,500 Books, Printing and Stationery 11,000 Sundry expenses 10,000 Carriage and Packing on Sales 3,300 Discounts 5,000 Debtors 1,78,000 Freehold Property 50,000 Plant and Machinery 12,500 Fixtures and Fittings – Offices 3,500 Office machinery and Equipment 3,000 Motor Car and Van 6,500 Stock of materials on 31st Dec. 2007 1,20,000 Bank 38,000 Sales Tax Paid 15,000 12,35,600 12,35,600 Depreciation is to be provided at the following rates: Plant and Machinery 10% Fixture and Fittings 05% Office Machinery, etc. 10% Motor Vans and Cars 25% The stock of finished goods and work in progress as on 31st December, 2007 was Rs. 35,000. Provide for preference dividend and ordinary dividend at 10%. The total taxation liability is estimated at Rs.1,50,000 of which Rs. 75,000 relates to the current year. Debtors include Rs. 10,000 deposited as security against government contracts. The Works Manager is paid partly by salary and partly by a commission; he is entitled to a commission of 5% on the amount by which the surplus in the factory cost exceeds 20% of the sales for the period. Charge the commission if any in the Profit and Loss Account.
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