1. Explain any two accounting concepts with example?

Concepts are the basic assumptions or conditions up on which the

science of accounting is based. There are five basic concepts of
accounting namely –

• Business entity concept,

• Going concern concept,
• Money measurement concept,
• Periodicity concept and
• Accrual concept.

Business separate entity concept:

The essence of this concept is that business is a separate entity and

different from the owner or the proprietor. This is true in the case all
forms of organization. If X starts business, he should not mix up his
personnel properties with that of the business. When he invests his
funds into the business, it is regarded as capital to the business and
capital is a liability from the business point of view. If X withdraws any
money fro the business, it is detectable form the capital and to that
extent the liability of the business towards the owner is reduced. On
the other hand, if the proprietor withdraws money form the business
for business purposes, then it is treated as expenditure to the
business. This legal separation between business and ownership is
kept in mind while recoding the transactions in the books of business.

Going concern concept

The fundamental assumption is that the business entity will continue

fairly for a long time to come. There is no reason why an enterprise
should be promoted for a short period only to liquidate the business in
the foreseeable future. This assumption is called “Going concern
concept”. For this reason accountants value fixed assets on historical
cost method. Had the business been setup to last for short period,
fixed assets should have been valued at a market price. Besides, going
concern concept provides for amortization of the cost of fixed assets
over the lifetime of the assets. For example, an entrepreneur
purchases a plant for Rs. one crore and it has a life of 10 years. During
this period, he sets aside every year certain funds from the income of
the business so that it would help him for replacement of the asset at
the end of ten years. This process of amortization presupposes that
the enterprise will continue to do business fairly for long time.

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2. Prove that accounting equation is satisfied in all the
following transactions of Mr. X
i. Commenced business with cash – Rs 80,000
ii. Purchased goods for cash –Rs 40,000 and on
credit Rs. 30,000
iii. Sold goods for cash –Rs. 40,000 costing Rs.
25,000
iv. Paid salary – Rs. 2,000 and salary
outstanding Rs. 1,000
v. Brought scooter for personal use for cash at Rs.
20,000

The accounting equation is,

Equity [Working Capital] + Liabilities + Assets

i. Commenced business with cash – Rs 80,000

In the first transaction, the business receives a capital of Rs. 80,000

cash and so capital account and cash accounts are affected.
Capital is a liability and cash is an asset to the business.
This is shown in the transaction number 1, in the table.

ii. Purchased goods for cash –Rs 40,000 and on credit Rs.
30,000

In this transaction, cash account, goods account and liabilities account

gets affected.
Cash account reduces by Rs. 40,000
Goods account increases by Rs. 40,000
Liabilities account increases by Rs. 30,000
This is shown in the transaction number 2, in the table.

iii. Sold goods for cash –Rs. 40,000 costing Rs. 25,000

In this transaction, goods account, cash account and profit account

gets affected.
Cash account increases by Rs. 40,000
Goods account reduces by Rs. 25,000
Profit account being owner’s account, it gets credited with Rs 15,000
This is shown in the transaction number 3, in the table.

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iv. Paid salary – Rs. 2,000 and salary outstanding Rs. 1,000
In this transaction, cash and salary accounts are affected.
Cash account reduces by Rs. 2,000 ans salary account gets credited by
Rs. 2,000
Outstanding salary is Rs. 1,000 which is not paid yet, hence non of the
accounts gets affected.
This is shown in the transaction number 4, in the table.

v. Brought scooter for personal use for cash at Rs. 20,000

The scooter is for personal use, the liability of the business on owner’s
capital decreases.
Cash account and capital account decreases by Rs. 20,000
This is shown in the transaction number 5, in the table.

Liabilities and owner's

Assets equity
Transaction Cash Goods Salary Mr.X's
Number a/c a/c a/c Liabilities Capital
1 80000 80000

2 -40000 70,000 30000

3 40000 -25000 15000

4 -2000 2000

5 -20000 -20000
58000 45000 2000 30000 75000
105000 105000

3. Show the rectification of entries for the following

a. the sales account is undercast by Rs.15,000

b. Goods returned by customer Mr. X of Rs.5650 has
been posted in return inward account as Rs.5560 and
in Mr. X’s account as Rs. 6550
c. Salary paid Rs.6,000 has been posted to rent
account.
d. Cash received from Ram posted to Shyam account
Rs. 7000
e. Cash received from jadu Rs. 8640 has been posted
to the debit of Madhu’s account.

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The below table shows the rectification of entries

Particulars Debit [Rs.] Credit [Rs.]

Suspense account Dr 15,000

To Sales account 15,000

Suspense account Dr 90

To Return account 90

Mr. X’s account Dr 900

To Suspense account 900

Salary account Dr 6000

To rent account 6000

Shyam account Dr 7000

To Ram account 7000

Jadu account Dr 8640

To Madhu account 8640

4. The following balances are extracted from the

books of Kiran Trading Co on 31st March 2000. You
are required to prepare trading and profit and loss
account and a balance sheet as on that date:

Opening Stock 5,000 Commission 2,000

received
B/R 22,500 Return Outward 2,500
Purchases 1,95,000 Trade Expenses 1,000
Wages 14,000 Office furniture 5,000
Insurance 5,500 Cash in hand 2,500
Sundry Debtors 1,50,000 Cash at bank 23,750
Carriage 4,000 Rent and Taxes 5,500

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 Inwards
Commission 4,000 Carriage 7,250
Paid Outward
Interest on 3,500 Sales 2,50,000
Capital
Stationery 2,250
Bills Payable 15,000
Return Inwards 6,500
Creditors 98,250
Capital 89,500
The closing stock was valued at Rs.1,25,000

Trading account of M/s Kiran Trading Co

Trading Account
Dr Cr
Opening stock 5,000 Sales - Return Inward 243,500
Purchases - Return Outward 192,500 Closing Stock 125,000
Carriage Inwards 4,000
Wages 14,000
Gross Profit 153,000
368,500 368,500

Profit and Loss Account of M/s Kiran Trading Co

Profit and Loss Account

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Dr Cr
Rent and Taxes 5,500 by Trading a/c Gross Profit 153,000
Insurance 5,500 Comission Received 2,000
Trade Expenses 1,000
Commission Paid 4,000
Interest on Capital 3,500
Staionary 2,250
Carriage Outward 7,250
Net Profit 126,000
155,000 155,000

Balance Sheet Account of M/s Kiran Trading Co

Balance Sheet
Capital and Liabilities Assets
Bills Payable 15,000 Sundry Debtors 150,000
Capital 89,500 Office Furniture 5,000
Creditors 98,250 Cash in Hand 2,500
Net Profit from P & L Account 126,000 Cash in Bank 23,750
B/R 22,500
Closing Stock 125,000
328,750 328,750

5. Write a note on:

a. outstanding expenses
b. prepaid expenses

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a. Out standing expenses:

Expenses due but not paid are known a outstanding expenses.

Wages, salaries, rent, commission etc payable in the current month
are paid in the following month. If the final accounts are prepared for
the year ending 31st December, then the expenses payable for
December will be paid in January of next year. The extent to which the
amount belongs to the current year but payable in the next year is
called outstanding expenses. To record that aspect, the journal entry
drawn in the journal proper is:

Concerned Expenses account Dr

To outstanding expenses account.

Outstanding expenses account indicates liability for the current year

and it will appear in the balance sheet.

b. Prepaid expenses:

Expenses paid in advance are regarded as prepaid expenses. Prepaid

expenses form an asset and therefore prepaid expenses account is
debited. For example, insurance premium is paid from April, 2004 to
March, 2005; and the amount is Rs. 3600. The financial year ends by
31st December, 2004. Therefore the premium relating to Jan, Feb. and
March of 2005 Rs. 900 is said to have been paid in advance. To record
this internal adjustment, the entry is:

Prepaid Expenses account Dr 900

To insurance account 900

Note that outstanding or prepaid expenses accounts are regarded as
personal accounts.

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