Q: 1]

Accounting is an art of recording, classifying and summarizing in a significant

manner and in terms of money transactions and events. Explain the accounting
process and write the objectives of accounting.
A: 1]
Explanation of accounting process
A sequence of activities involving the recording of how cash is received and paid out
in a company or organization. The accounting process in business is based on four
accounting methods, which are: the accrual method, the consistency method, the
prudence method and the going concern method.
As implied earlier, today's electronic accounting systems tend to obscure the traditional
forms of the accounting cycle. Nevertheless, the same basic process that bookkeepers and
accountants used to perform by hand are present in today's accounting software. Here are
the steps in the accounting cycle:
(1) Identify the transaction from source documents, like purchase orders, loan agreements,
invoices, etc.
(2) Record the transaction as a journal entry (see the Double-Entry Bookkeeping Section
above).
(3) Post the entry in the individual accounts in ledgers. Traditionally, the accounts have
been represented as Ts, or so-called T-accounts, with debits on the left and credits on the
right.

(4) At the end of the reporting period (usually the end of the month), create a preliminary
trial balance of all the accounts as follows:
(a) Netting all the debits and credits in each account to calculate their balances and
(b) Totaling all the left-side (i.e. debit) balances and right-side (i.e. credit) balances.
The two columns should be equal.
(5) Make additional adjusting entries that are not generated through specific source
documents. For example, depreciation expense is periodically recorded for items like
equipment to account for the use of the asset and the loss of its value over time.
(6) Create an adjusted trial balance of the accounts. Once again, the left-side and rightside entries - i.e. debits and credits - must total to the same amount.

(7) Combine the sums in the various accounts and present them in financial statements
created for both internal and external use.
(8) Close the books for the current month by recording the necessary reversing entries to
start fresh in the new period (usually the next month).
Nearly all companies create end-of-year financial reports, and a new set of books is begun
each year. Depending on the nature of the company and its size, financial reports can be
prepared at much more frequent (even daily) intervals. The SEC requires public companies
to file financial reports on both a quarterly and yearly basis.
Objectives of accounting
The broad objects of Accounting may be briefly stated follows:
1. To maintain the cash accounts through the Cash Book and to find out the Cash
balance on any particular day.
2. To maintain various other Journals for recording day-to day non cash transactions.
3. To maintain various Ledger Accounts to find out the exact amounts of incomes and
expenses or gain and losses or receivables and payables.
4. To furnish information regarding Purchases and Sales, both Cash and Credit.
5. To find out the net profit or net loss or surplus or deficit for any particular period.
6. To find out the total capital on a particular date.
7. To find out the positions of assets on a particular date.
8. To find out the position of liabilities on a particular date.
9. To detect any defalcations and to check the frauds and misappropriations of money.
10.To detect the various errors and to rectify those through entries in the journal
proper.
11.To confirm about the arithmetical accuracy of the books of accounts.
12.To help the management by supplying accounting ratios, reports and relevant data.
13.To calculate the cost of productions.
14.To help the management formulate policies for controlling cost, preparation of
quotation for competitive supply etc.

Q: 2]

Journal is a book of original entry and only one journal is maintained if the
business is very small in size and the transactions are limited.Give the meaning
of a subsidiary book. List and explain all the types of subsidiary books.
A: 2]
Explanation of subsidiary books
Most of the big companies are recording the business transactions in one journal
and the posting of the same to the concerned ledger accounts are very difficult tasks and
which require more clerical labor. For avoiding such kind of difficulties most of the business
organizations are subdividing the journal in to subsidiary journals or subsidiary books.
Subsidiary books are those books of original entry in which similar nature of transactions
are recording in a chronological order.

Explanation of all types of subsidiary books

Kinds of Subsidiary Books
There are different kinds of subsidiary books which includes purchase day book, Sales day
book, purchase returns book, Sales returns book, Bills receivable books, Bills payable
books, Cash book.
1. Purchase day book
Purchase day book is used for recording credit purchase of goods only. This will not
record any cash purchase or credit purchase of any assets. The term goods means all the
commodities and services in which the company deals in day to day activities. The
preparation of purchase day book involves the Date column, Particulars column, Invoice
number column, Ledger folio column, inner amount column and Amount column.
2. Sales day book
Sales day book is mainly used for recording credit sales of goods and services in an
organization. This will not record any cash sales or assets sales. The ruling for the
preparation of this book is same as like Purchase day book. This involves the Date column,
Particulars column, Invoice number column, Ledger folio column, inner amount column
and Amount column.
3. Purchase returns book
This is maintained to record the transactions of goods returned to the supplier when
purchase on credit. The ruling of the preparation of purchase return book or returns
outward book involves Date, Particulars, Debit note number, Ledger folio and amount
column.

4. Sales returns book

This book is used to record the goods returned by the customer the goods sold on
credit. The ruling of the preparation of Sales return book or returns inward book involves
Date, Particulars, credit note number and Ledger folio and amount column.
5. Bills receivable books
It is used to record the transactions when the bills received from the customer for
credit sales. This provides a medium for posting bills receivable transaction. The
preparation of this book involves Date when received, Drawer, Acceptor, Where payable,
date of bill, term, due date ledger folio, Amount, remarks columns.

6. Bills payable books

This is used to record the acceptances given to the suppliers for credit purchase.
The preparation of bills payable book involves Date of acceptance, giver, payee, Where
payable, date of bill, term, due date, ledger folio, Amount, remarks columns.
7. Cash book
The cash book is used to record all the receipts and payments of cash. For the
preparation of cash book there are different rules are available according to the nature of
business. The different forms of cash book are as follows:a. Simple Cash book This is the simple form of cash book.
b. Two column cash book This type of cash book have two columns like cash column and
discount column.
c. Three column cash book This involves three columns such as Bank column, cash
column and discount column.
d. Petty cash book - This is used to record petty expenses like postage, cartage, printing
and stationery etc. in the day to day business activities.
Q: 3]
For the following balances extracted from a trial balance, prepare a trading
account.
Particulars
Amount in Rs.
Stock on 1-1-2004
Returns inwards
Returns outwards

70700
3000
3000

Purchases
Debtors
Creditors
Carriage inwards
Carriage outwards
Import duty on materials received from
abroad
Clearing charges
Rent of business shop
Royalty paid to extract materials
Fire insurance on stock
Wages paid to workers
Office salaries
Cash discount
Gas, electricity, and water
Sales

10200
0
56000
45000
5000
4000
6000
7000
12000
10000
2000
8000
10000
1000
4000
25000
0

A: 2]

Particulars
To Opening Stock
To Purchases
Less Returns Outwards
To Carriage Inwards
To Wages
To Fire Insurance on stock
To Gas, Electricity and Water
To Import duty
To Clearing charges
To Royalty paid to extract
materials
To Gross Profit

Trading Account
Amount (Rs.)
Particulars
CR
DR
By Sales
70700
Less Return
102000
Inwards
By closing
3000
99000
5000
8000
2000
4000
6000
7000

Amount (Rs.)
CR
DR
250000
3000

247000
56000

10000
91300
303000

303000

Q: 4]
Write short notes on:
a) Cost Management System (CMS)
b) Value added
A: 4]
a)

Cost Management System(CMS)

A cost management system (CMS) consists of a set of formal methods developed for
planning and controlling an organizations cost-managing activities relative to its
short-term activities and long-term strategies. It should provide information to meet
two major challenges: profitability in the short term and maintaining a competitive
position in the long term.

Organizational role of a CMS:

Managing core competencies so as to exploit opportunities and fend off threats

Linking plans and strategies to actual organizational performance

Dual focus of a cost management system:

Objective
Focus

Short Run
Organizational efficiency
Specific costs:

manufacturing
service

marketing

administration

Important characteristics Timely

of information
Accurate

Long Run
Survival
Cost categories:
customers
suppliers

products

distribution
channels
Periodic

Reasonably accurate

Highly specific

Broad focus

Short term

Long term

Six primary goals of a cost management system:

1. Develop reasonably accurate product costs
2. Assess product/service life-cycle performance
3. Improve understanding of processes and activities
4. Control costs

5. Measure performance
6. Allow pursuit of organizational strategies
Primarily a CMS should provide means to develop accurate product or service costs.
Traceability has been made easier by bar codes and radio frequency identification (RFID).
Product and service costs are used to plan, prepare financial statements, assess individual
product/service profitability and period profitability, to establish process for cost-plus
contracts and create a basis for performance measurements.
The CMS should provide information about life-cycle performance of a product or service.
This is not provided by the financial statements. This information gives managers a basis
to relate costs incurred in one stage to costs and profitability of other stages.
A CMS should help managers understand processes and activities, so that they can make
cost-beneficial improvements in the production and processing systems.
Control of costs, the original purpose of cost management systems, is still important.
Costs can only be controlled when the related activity is monitored, the cost driver is
known and the information is available.
The CMS should generate information helping managers measure and evaluate
performance, including not only human and equipment performance but also future
investment opportunities.
The Cost management system should generate information needed to define and
implement organizational strategies. In the current global market, firms must be certain
that a link exists between goals, objectives and organizational activities: organizational
strategy
b)

Value added

The enhancement a company gives its product or service before offering the product to
customers. Value added is used to describe instances where a firm takes a product that
may be considered a homogeneous product, with few differences (if any) from that of a
competitor, and provides potential customers with a feature or add-on that gives it a
greater sense of value.
A value add can either increase the product's price or value. For example, offering
one year of free support on a new computer would be a value-added feature. Additionally,
individuals can bring value add to services that they perform, such as bringing advanced
financial modeling skills to a position in which the hiring manager may not have foreseen
the need for such skills.

Q: 5]
Ajay industries manufactures a product X. On 1 st January, 2007, there were 5000 units of
finished product in stock.
Work-in-progress
Rs.57, 400
Raw materials
Rs.1, 16,200
The information available from cost records for the year
9,06,9
00
3,26,4
00
55,700
1,21,6
00
3,17,3
00
96,400
78,200
30,00,
000
2,13,9
00
There are 15000 units of finished stock in hand on 31st December 2007. Prepare
a statement of cost and profit assuming that opening stock of finished goods is
to be valued at the same cost per unit as the finished stock at the end of the
period.
Preparation of statement of cost and profit
Direct material
Direct labour
Freight on R M purchased
Indirect labour
Other factory overhead
Stock of raw materials on 31st
Dec 2007
Work-in-progress
on 31st Dec
2007
Sales (1,50,000 units)
Indirect materials

A: 5]
Direct Material
Opening stock of raw material
Add: Purchases
Add: Freight on raw materials purchased
Less: Closing stock of raw material
Material Consumption
Direct Wages
Prime Cost
Add: Factory Overheads
Indirect Labor

1,16,200
9,06,900
55,700
96,400
9,82,400
3,26,400
13,08,80
0
1,21,600

Indirect Materials
Other factory Overheads
Gross Factory cost
Add: Opening Work in Progress
Less: Closing Work in progress
Net Factory cost
Add: Administrative Overheads
Cost of Production
Add: Opening stock of finished products (5000
x 12.50)
Less: Closing finished stock (15,000 x 12.13)
Cost of goods sold
Add: Selling exp. (1,50,000 x 0.50)
Cost of sales
Profit
Sales

Prime Cost:
Gross Factory
cost:
Net Factory cost:
Cost of
Production:
Cost
of goods
sold:
Cost of sales
Profit:

2,13,900
3,17,300
19,61,60
0
57,400
78,200
19,40,80
0
Nil
19,40,80
0
62,500
1,81,950
18,21,35
0
75,000
18,96,350
11,03,65
0
30,00,000

13,08,80
0
19,61,60
0
19,40,80
0
19,40,80
0
18,21,35
018,96,35
11,03,650
0

Q: 6]
Assume a company is considering dropping product B from its line because accounting statement
shows that product B is being sold at a loss.

Income Statement

Product

Sales revenue

Total

50,000

7,500

12,500

70,000

7,500

1,000

1,500

10,000

15,000

2,000

2,500

19,500

7,500

1,000

1,250

9,750

Total

30,000

4,000

5,250

39,250

Gross margin on sales

20,000

3,500

7,250

30,750

Selling and Admn

12,500

4,500

4,000

21,000

7,500

-1,000

3,250

9,750

Cost of sales:
D. material
D. labour
Indirect manufacturing cost (50% of
Direct labour)

Net income

Additional information:
a) Factory overhead cost is made up of fixed cost of Rs. 5850 and variable cost of Rs. 3900.
b) Variable cost by products are: A - Rs. 3000, B - Rs. 400, and C - Rs. 500.
c) Fixed costs and expense will not be changed if product B is eliminated.
d) Variable selling and administrative expenses to the extent of Rs. 11000 can be traced to the
product: A Rs.7,500,
BRs.1500,
and
C - Rs. 2000.
e) Fixed selling and administration expense are Rs. 10000.

A: 6]
Income
Statement

Product

A
50,000

Sales revenue
Less V.C
D. Material
D. Labour
Factory overhead
Selling and
administration
Total

cost

Contribution
Less: Fixed cost
Factory overhead
Selling and
administration
Total fixed cost
Net income

B
C
Total
7,500 12,500 70,000

7,500
15,000

1,000
2,000

1,500
2,500

10,000
19,500

3,000

400

500

3,000

7,500
33,000

1,500
4,900

2,000 11,000
6,500 44,400

17,000

2,600

6,000 25,600
5,850

overhead

10,000
15,850
9,750

If the sale of product B was discontinued, the marginal contribution would be lost and
the net income would be reduced by Rs.2600.
Assume that after dropping product B, the sales of product A has increased by 10%.
The total profit of the firm will not increase by this sales increase. Product A makes
only a marginal contribution of 34% (17000/50000).
Sales revenue of product A
Variable cost of product A
Marginal contribution of product A

50000
33000
17000

100%
66%
34%

On additional sales of Rs.5000, the marginal contribution would be Rs.1700.

Sales revenue 10% of 50000
Variable cost 66%
Marginal contribution (34%)

5000
3300
1700

This contribution is less than Rs.2600 now being realized on the sales of product B. It
would take additional sales of product A of approximately Rs.7647 to equal the
marginal contribution of Rs.2600 now being made by product B:

It is possible that the dropping of product B may result in reduction in some of the
fixed costs. Product B now contributes Rs.2600 towards recovery of fixed costs and
expenses. Only if the fixed costs and expenses can be reduced by more than this
amount, it is advisable to drop product B.