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Financial and

Manish Kumar Jain

Master of Business Administration-MBA Semester 1

MB0041 – Financial and Management Accounting- 4 Credits

Q.1 What is accounting cycle? List the sequential steps involved in

Accounting cycle.

Ans. Accounting cycle:-

1. Identification: This is the first step of accounting cycle. It identifies the

transaction of financial character that is required to be recorded in the books
of accounts. Transaction is the transfer of money or goods or services from
one person or account to another person or account.

2. Measuring: This denotes expressing the value of business transactions and

events in terms of money.

3. Recording: It deals with recording of identifiable and measurable

transactions and events in systematic manner in the books of original entry
that are in accordance with the principles of accountancy.

4. Classifying: It deals with periodic grouping of transactions of similar nature

that appear in the books of original entry into appropriate heads by posting
or transfer of entries.

5. Summarizing: It deals with summarizing or condensing transactions in a

manner useful to others. This function involves the preparation of financial
statements such as income statement, balance sheet, statement of changes
in financial position and cash flow statement.

6. Analyzing: it deals with the establishment of relationship between the

various items or group of item taken from income statement or balance sheet
or both. Its purpose to identify the financial strengths and weaknesses of the

7. Interpreting: It deals with explaining the significance of those data in a

manner that the end users of the financial statements can make a
meaningful judgment about the profitability and financial position of the
business. The accountants should interpret the stamen in a manner useful to
the users, so as to enable the user to make reasoned decision out of the
alternative course of action.

8. Communicating: It deals with communicating the analyzed and interpreted

data in the form of financial reports/statements to use the users of financial
Q. 2 A. Bring out the differences between Indian GAAP and US GAAP

B. What is the matching principle? Why should a business concern

follow this principle?

Ans. Differences between Indian GAAP and US GAAP:-


It is established under FASB and AICPA It is established under ICAI

Balance sheet, income statement & Balance sheet and income statement are
funds flow statement are mandatory alone mandatory

Any change in foreign exchange Any difference in foreign exchange can

fluctuations cannot be capitalized but be capitalized
the difference can be shown or debited
to income statement.

Financial accounting, Management Only financial accounting and income tax

accounting and income tax accounting accounting are prepared
are prepared separately

The basic tenets is globalization of The basic tenet is localization


Any long term loan repayable is the Long term loans maturing in the current
current financial year is shown financial year need not be disclosed
separately separately

In lease contract, lessee is more In lease contract, lessee is eligible for

beneficiary because he can claim depreciation allowance and not the
depreciation allowance lessee

It is more transparent and accepted It is comparatively less transparent. For

worldwide. More disclosure is required listing the securities in other country’s
stock exchange US GAAP is mandatory
Principle of matching Cost and Revenue

Revenue earned during a period is compared with the expenditure incurred to earn
that income, whether the expenditure is paid during that period or not. This is
matching cost and revenue principle, which is important to find out the profit
earned for that period. Here costs are reported as expenses in the accounting
period in which the revenue associated with those costs is reported. A business
concern should follow this principle to know his actual earnings and growth for the

Q.3 Prove that the accounting equation is satisfied in all the following
transactions of Mr. X

a) Commence business with cash Rs. 50000

b) Paid rent in advance Rs. 1000

c) Purchase goods for cash Rs. 18000 and Credit Rs. 20000

d) Sold goods for cash Rs. 25000 costing Rs. 22000

e) Paid salary Rs. 5000 and salary outstanding is Rs. 3000

f) Bought moped for personal use Rs. 20000

Ans. Accounting equation for the transactions of Mr. X

Asstes Liabilities + Owner's Equity

Transaction Advance Outstanding X's
Cash Goods Rent Salary Moped Salary Creditors Capital
A 50000 50000
B -1000 1000
C 18000 38000 20000
D 25000 -22000 3000
E -5000 5000 3000 -3000
F 20000 20000
End 31000 16000 1000 5000 20000 3000 20000 50000
Equation Total=73000 Total=73000
Q.4 Following are the extracts from the Trial Balance of a firm as on 31st
March 2007.

Dr Cr

Sundry Debtors 205000

Provision for Doubtful Debts 10000

Provision for Discount on Debtors 1800

Bad Debts 3000

Discounts 1000

Additional Information:

1) Additional Bad Debts required Rs. 4000

2) Additional Discount allowed to Debtors Rs. 1000

3) Maintain a provision for bad debts @ 10% on debtors

4) Maintain a provision for discount @ 2% on debtors

Required: Pass the necessary journal entries and show the relevant
accounts including final accounts.

Ans. Journal Entries:-

Journal Entries
Date Particulars Dr. Cr.
31/3/2007 Bad Debts a/c Dr 4000
To Debtors a/c 4000
31/3/2007 Provision for Bad Debts a/c Dr 4000
To Bad Debts a/c 4000

31/3/2007 Discount on Debtors a/c Dr 1000

To Debtors a/c 1000

31/3/2007 Provision for Discount a/c Dr 1000

To Discount on Debtors a/c 1000

Debtors A/c
Particulars Amount Particulars Amount
To Balance b/d 205000 By Dis. On Debtors 1000
By Bad Debts 4000
By Balance c/d 200000

205000 205000

Provision for Bad Debts A/c

Particulars Amount Particulars Amount
To Debtors 4000 By Balance b/d 10000
To Balance c/d 20000 By P & L 14000

24000 24000

Provision for Discount A/c

Particulars Amount Particulars Amount
To Bad Debts 1000 By Balance b/d 1800
To Balance c/d 3600 By P & L 2800

4600 4600
Bad Debts A/c
Particulars Amount Particulars Amount
To Provision for Bad Debts 4000 By Debtors 4000

4000 4000

Discount A/c
Particulars Amount Particulars Amount
To Provision for Discount 1000 By Debtors 1000
1000 1000

P & L A/c

To Provision for Bad
DebtsAmountParticulars 14000
To Provision for Discount 2800

Balance Sheet
Particulars Amount Particulars Amount
Debtors 200000
Less: Provision 20000
Less: Provision 3600 176400

Q. 5 (A) Bring out the differences between trade discount and cash

(B) Explain the term (a) Asset (b) Liability with help of examples.

Ans. Differences between trade discount and cash discount:-

1. Trade discount is a reduction granted by a supplier from the list price on goods
or services on business consideration such as quantity bought, trade practice
etc while cash discount is a reduction granted from the invoice price in
consideration of immediate payment or payment within a stipulated period.
2. Trade discount is allowed to promote the sales while cash discount is allowed to
encourage early or prompt payment.

3. Trade discount is shown by the way of deduction in the invoice itself. Hence no
further entry is required in the books of accounts. Cash discount is shown as an
expense in Profit and Loss account.

4. Trade discount may vary with the quantity purchased while cash discount
varies with the period.


An asset is a resources legally owned by the enterprises as a result of past

events and from which future economic benefits are expected to flow to the
enterprises. Ex. Land and buildings, plant and machinery, furniture and fixtures,
cash in hand and at bank, debtors and stock etc. are regarded as assets, Assets
may be fixed, current, liquid or fictitious.

Fixed Assets are those which are held for use in the production or supply of
goods and services, Ex. Plant and machinery which is used fairly for long

Current Assets are those which are held or receivable within a year or within
the operating cycle of the business. They are intended to be converted into
cash within a short period of time, Ex. Stock in trade, debtors, bills receivable,
cash at bank etc.

Liquid Assets are those which can be easily converted into cash and for
instance cash in hand, cash at bank, marketable investments etc.

Fictitious Assets are in the form of such expenses which could not be written
off during the period of their incidence For example promotional expenses of a
company which could not be treated as expenditure in the year of incidence
are shown as fictitious assets.


It is financial obligation of an enterprise arising from past even the settlement

of which is expected to result in an outflow of resources embodying economic
benefit. Ex. Loans payable, salaries payable, term loans.

Current Liability is that obligation which ahs to be satisfied within a year. For
example payment o be made sundry creditors for the goods supplied by them
on credit; bills payable accepted by the businessman; overdraft raised by the
businessman in a bank etc.

Q. 6 A fresh MBA student joined as trainee was asked to prepare Trail

Balance. He was unable to submit a correct Trial Balance. You, as a senior
accountant find out the errors and rectify them. After redrafting the Trial
Balance, prepare trading and P&L account.


1) Stock on hand on 31st March 2008 was valued at Rs. 1800

2) Depreciate fixtures and fittings by Rs. 25

3) Rs. 35 was due and unpaid in respect of salaries

4) Rates and insurance has been paid in advance to the extent of Rs. 40

Particulars Debit Credit

Capital 7670

Cash in Hand 30

Purchases 8990

Sales 11060

Cash at Bank 885

Fixtures and Fittings 225

Freehold Premises 1500

Lighting and Heating 65

Bills Receivable 825

Returns Inward 30

Salaries 1075

Creditors 1890

Debtors 5700

Stock at 1st April 2007 3000

Printing 225

Bills Payable 1875

Rates, Taxes and Insurance 190

Discount Received 445

Discount Allowed 200

22940 22940

Trading A/c

Particulars Amount Particulars Amount

To Opening Stock 3000 By Sales 11060

To Purchase 8990 Less: S/R 30 11030

To Lighting & Heating 65 By Closing Stock 1800

To Gross Profit 775

12830 12830

Profit & Loss A/c

Particulars Amount Particulars Amount
To Salaries 1075 By Gross Profit 775
Add: O/S 35 1110 By Discount Received 445
To Fixtures & Fittings 225 By Loss 490
T0 Rate, Tax & Ins 190
Less: Advance paid 40 150
To Discount Allowed 200
To Depreciation 25

1710 1710

Balance Sheet as on 31st March, 2008

Particulars Amount Particulars Amount
Capital 7670 Cash in hand 30
Creditors 1890 Stock in hand 1800
Bills Payable 1875 Cash at Bank 885
Outstanding Salary 35 Fixture & Fitting 225
Less: Depreciation 25 200
Freehold Premises 1500
Debtors 5700
Advance Rate & Ins 40
Loss 490
Bills Receivable 825

11470 11470