Course: Principles of Accounting
Code:- 8401
Spring, 2023
Level: BBA (4 Years)
ASSIGNMENT No. 1
Q. 1 (a) What is the importance of study of accounting? (20)
(b) Discuss the main features of any two of the financial statements?
Importance of studying accounting:
The study of accounting is crucial for various reasons. It serves as the
language of business, enabling companies to communicate their
financial information to stakeholders effectively. Accounting provides
valuable insights into a company's financial health, performance, and
sustainability. It plays a significant role in decision-making, both within
organizations and by external parties. Additionally, accounting principles
and practices ensure transparency, accuracy, and consistency in
financial reporting, which are essential for building trust and credibility
with investors, creditors, and regulatory bodies.
Next, let's move on to discussing the main features of two financial
statements: the Income Statement and the Balance Sheet. I'll cover the
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Income Statement first:
The Income Statement:
1. **Revenue and Sales:** This section displays the total revenue
generated by the company through its core operations, usually over a
specific period (e.g., a fiscal quarter or year).
2. **Cost of Goods Sold (COGS):** This includes the direct costs
associated with producing the goods or services sold during the
reporting period.
3. **Gross Profit:** Calculated by subtracting COGS from the total
revenue, gross profit indicates the initial profitability before considering
operating expenses.
4. **Operating Expenses:** These are the costs incurred in the day-to-
day operations of the business, such as salaries, rent, utilities, and
marketing expenses.
5. **Operating Income:** Also known as operating profit, this is derived
by subtracting total operating expenses from the gross profit. It reflects
the profitability of core business operations.
6. **Non-Operating Items:** This section accounts for any income or
expenses not directly related to the core business operations, such as
interest income, interest expenses, and gains or losses from
investments.
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7. **Net Income:** Often referred to as the bottom line, net income is the
final profit figure after accounting for all expenses, taxes, and other
financial activities.
Moving on to the Balance Sheet:
The Balance Sheet:
1. **Assets:** This section lists the company's resources, both tangible
(like cash, inventory, and property) and intangible (such as patents or
trademarks), at a specific point in time.
2. **Liabilities:** Liabilities represent the company's financial obligations,
including debts, loans, and accounts payable, as of a specific date.
3. **Equity:** Also known as shareholder's equity or net assets, equity
represents the residual interest in the company's assets after deducting
liabilities.
4. **Current Assets and Liabilities:** These are assets and liabilities that
are expected to be converted to cash or settled within a year. They
provide insight into the company's short-term financial health.
5. **Long-Term Assets and Liabilities:** These items have a longer life
span and provide information about the company's long-term investment
and financing strategies.
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These financial statements offer valuable insights into a company's
financial performance, position, and cash flow. They are essential tools
for evaluating a company's financial health, making informed investment
decisions, and assessing its ability to meet its obligations.
Q. 2 Write short notes on the following: (20)
Accounting Equation Realization Concept
Cost Concept Petty Cash
1. **Accounting Equation:**
The accounting equation, also known as the fundamental accounting
equation, is the cornerstone of double-entry bookkeeping. It states that
the total assets of a business are equal to the total liabilities plus the
owner's equity. In equation form: Assets = Liabilities + Owner's Equity.
This equation ensures that every financial transaction has a dual effect
on the balance sheet, maintaining a balance between the sources of
funds (liabilities and equity) and the uses of funds (assets).
2. **Realization Concept:**
The realization concept, also referred to as the revenue recognition
principle, is a fundamental accounting principle. It states that revenue
should be recognized and recorded in the books of accounts when it is
earned and becomes realizable, regardless of when the payment is
received. In simpler terms, revenue is recognized when the company has
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fulfilled its obligations to provide goods or services to customers, and
the revenue is expected to be collected. This principle ensures that
financial statements accurately reflect the company's performance
during a specific period.
3. **Cost Concept:**
The cost concept, also known as the historical cost concept, is a
principle that suggests assets should be recorded in the books of
accounts at their original acquisition cost. This means that assets are
initially recorded at the amount paid to acquire them, and subsequent
changes in their market value are generally not reflected in the
accounting records. This concept ensures that financial statements are
reliable and can be objectively verified, as historical cost is a verifiable
and objective value.
4. **Petty Cash:**
Petty cash is a small amount of cash that a business keeps on hand to
cover minor and day-to-day expenses that are not suitable for payment
through checks or electronic means. This fund is usually managed by a
designated person and is used for expenses like office supplies,
refreshments, and small incidental costs. To ensure accountability,
businesses establish procedures for requesting and reconciling petty
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cash expenses. Regular replenishments and documentation help
maintain control and transparency over these small cash transactions.
Q. 3 From the following trial balance, prepare income statement and
Balance Sheet for the year ended on 31st Dec 1989 and balance sheet
as on that date. (20)
Debit Rs. Credit Rs.
Wages 2,000
Cash 6,650
Bank 1,500
Inventory 850
Sundry Debtors 2,700
Insurance 1,800
Patent rights (4 years unexpired) 2,000
Advertisement 1,200
Machinery 7,500
Sundry Creditors 2,500
Commission 2,200
Bad Debts 1,500
Loan 6,500
Common stock 10,000
Sales 15,000
Discount 1,200
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Purchases 8,000
Salaries 1,000
Electric charges 500
Telephone charges 700
Rent 1,000
Return outward 1,500
38,900 38,900
Adjustments:
i. Prepaid insurance amounts to Rs.200
ii. Unpaid advertisement expenses Rs.400
iii. Machinery is to be depreciated @ 10%
iv. Unearned commission Rs.200
v. Accrued salaries Rs.200
vi. Closing inventory is Rs.7,500
Here is Income Statement and Balance Sheet based on the provided trial
balance and adjustments:
*Income Statement for the Year Ended on 31st Dec 1989:**
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*
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Please note that the "Patent Rights (Net)" and "Machinery (Net)"
accounts reflect the adjustments made for depreciation.
Q. 4 Concord Products uses a perpetual inventory system. On January
1 the Inventory account had a balance of Rs.84,500. During the first few
days of January the following transactions occurred: (20)
Jan. 2Purchased merchandise on credit from Smith Company for
Rs.9,200.
Jan. 3Sold merchandise for cash, Rs.22,000 The cost of this
merchandise was Rs.14,300.
(a) Prepare entries in general journal form to record the above
transactions.
(b) What was the balance of the inventory account at the close
of business January 3?
**(a) Journal Entries:**
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**(b) Balance of the Inventory Account on January 3:**
Beginning Balance on January 1: Rs.84,500
Inventory Increase (Purchase on January 2): Rs.9,200
Inventory Decrease (Cost of Goods Sold on January 3): Rs.14,300
Calculating the balance:
Beginning Balance + Purchases - Cost of Goods Sold
= Rs.84,500 + Rs.9,200 - Rs.14,300
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= Rs.79,400
So, the balance of the Inventory account at the close of business on
January 3 is Rs.79,400.
Q. 5 Far Corners Imports sells a variety of merchandise to retail stores
on open account, but it insists that any customer who fails to pay an
invoice when due must replace it with an interest-bearing note. The
company adjusts and closes its accounts at December 31. Among the
transactions relating to notes receivable were the following:(20)
Sept. 1 Received from a customer (Party Plus) a nine-month, 9% note
for Rs.42,000 in settlement of an account receivable due today.
June 1 Collected in full the nine-month, 9% note receivable from
party Plus, including interest.
Pass journal entries
Here are the entries for the transactions involving the notes receivable:
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Explanation:
- On September 1, the company received a note from Party Plus, which is
recorded as an increase in Notes Receivable and a decrease in Accounts
Receivable.
- On June 1, the company collected the note from Party Plus, along with
interest income. The interest income of Rs.1,890 (9% of Rs.42,000 for 9
months) is recognized as revenue, and the Notes Receivable account is
decreased.
These journal entries ensure proper recording of the note-related
transactions in Far Corners Imports' accounts.
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