AIOU Hub: Principles of Accounting (438) Autumm 2023

Principles of Accounting (438)

Q. 1 Explain the following concepts.

i. Separate entity concept ii. Money measurement concept (20)

iii. Dual aspect concept iv Matching concept

iv. Accounting period concept

Certainly, I'll explain each of the concepts you've mentioned: Separate Entity Concept, Money Measurement Concept, Dual Aspect Concept, Matching Concept, and Accounting Period Concept.

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### 1. Separate Entity Concept:

The separate entity concept is a fundamental principle in accounting that asserts that a business is a distinct and separate entity from its owners or any other business. According to this concept, the transactions of the business must be recorded separately from the personal transactions of its owners. In other words, the business and its owners are treated as separate entities for accounting purposes.

This concept is particularly important in maintaining the integrity and reliability of financial information. It ensures that the financial records of the business accurately reflect its economic activities and financial position, without being influenced by the personal transactions of the owners. The separate entity concept is the foundation for the preparation of financial statements, such as the income statement, balance sheet, and cash flow statement, which provide a clear picture of the business's performance and financial health.

### 2. Money Measurement Concept:

The money measurement concept is another crucial accounting principle that states that only transactions and events that can be measured in monetary terms should be recorded in the financial statements. In other words, accounting focuses on quantifiable and measurable aspects of business activities, and only those transactions that have a monetary value are recognized.

This concept simplifies the complex and varied nature of business transactions into a common unit of measure, usually the currency of the country in which the business operates. It allows for consistency and comparability in financial reporting. However, it also has limitations, as it does not capture the full extent of a company's value, especially regarding non-monetary assets such as employee skills, customer satisfaction, and brand reputation.

### 3. Dual Aspect Concept:

The dual aspect concept, also known as the duality principle, is a fundamental accounting concept that states that every business transaction has two aspects – a debit and a credit. This concept is based on the accounting equation: Assets = Liabilities + Equity. In every transaction, there is a simultaneous effect on both sides of the equation.

For example, when a business acquires an asset, it can be financed by either a liability (like a loan) or equity (investments by owners). Thus, the dual aspect concept ensures that the accounting equation remains balanced. Every entry made in the books of accounts involves both a debit and a credit, maintaining the equality of assets and claims against those assets.

### 4. Matching Concept:

The matching concept is a principle that governs the recognition of expenses in the income statement. It states that expenses should be recognized in the same period as the revenues to which they relate. This concept ensures that the financial statements accurately reflect the profitability of the business by associating the costs incurred with the revenues generated in a specific accounting period.

For instance, if a company makes sales in a particular month, the associated costs, such as the cost of goods sold and operating expenses, should be recognized in the same month. This principle contributes to a more accurate representation of the net income for a specific period. It aligns with the accrual basis of accounting, emphasizing the economic substance of transactions rather than just the timing of cash flows.

### 5. Accounting Period Concept:

The accounting period concept, also known as the periodicity concept, divides the economic life of an enterprise into discrete and regular time intervals for financial reporting purposes. The choice of the accounting period (e.g., monthly, quarterly, or annually) depends on the nature of the business and relevant regulations.

This concept enables businesses to provide timely and regular financial information to users, facilitating comparisons and analysis. It also supports the matching concept by allowing the allocation of revenues and expenses to specific time periods. The concept of an accounting period is essential for financial reporting and decision-making, providing a structured framework for the preparation and presentation of financial tatements.

In conclusion, these accounting concepts form the basis for recording, summarizing, and presenting financial information. They ensure consistency, reliability, and comparability in financial reporting, enabling stakeholders to make informed decisions about a business's performance and financial position.

Q. 2 Mr. Nasir kept his books on signal entry system. Hits position on 31st December, 2020 was as follows: (20)

Cash in in hand Rs. 400 Cash at bank Rs. 6,000, stock Rs. 4,0,000 sundry debtors Rs. 17,000, fixture and fitting Rs. 3,600, plant and machinery Rs. 30,000, sundry creditor Rs. 44,000.

Mr. Nasir put Rs. 10,000 during the year as new capital and his drawing were @ Rs. 1,500 per month. His position on 31st December 2021 was as follows:

Cash in hand Rs.600, cash at bank Rs.4,000, sundry debtor Rs. 28,000, stock Rs. 38,000 plant and machinery Rs. 54,000, fixture and fitting Rs. 3,000 sundry creditors, Rs. 58,000.

Rquired: From the above information, prepare a statement of affairs showing profit or loss during the year ending on 31st December 2021.

To prepare a statement of affairs and determine the profit or loss during the year ending on December 31, 2021, we need to analyze the changes in Mr. Nasir's financial position between the two periods (December 31, 2020, and December 31, 2021). The statement of affairs is a summary of a person's assets and liabilities, and it helps in understanding the financial position at a specific point in time.

Let's start by organizing the information into a statement of affairs format:

### Statement of Affairs as of December 31, 2020:

|----------------------------|--------------|-----------------------------|--------------|

| Cash in hand | 400 | Sundry Creditors | 44,000 |

| Cash at bank | 6,000 | | |

| Stock | 4,00,000 | | |

| Sundry Debtors | 17,000 | | |

| Fixture and Fitting | 3,600 | | |

| Plant and Machinery | 30,000 | | |

| | | | |

| **Total Assets** | **4,56,000** | **Total Liabilities** | **44,000** |

### Changes During the Year:

1. **New Capital Introduced:**

- Mr. Nasir introduced new capital of Rs. 10,000 during the year.

2. **Drawings:**

- Mr. Nasir made monthly drawings at the rate of Rs. 1,500. Therefore, total drawings for the year = Rs. 1,500 * 12.

3. **Changes in Assets and Liabilities:**

- Changes in cash, bank, sundry debtors, stock, plant and machinery, fixture and fitting, and sundry creditors.

### Statement of Affairs as of December 31, 2021:

|----------------------------|--------------|-----------------------------|--------------|

| Cash in hand | 600 | Sundry Creditors | 58,000 |

| Cash at bank | 4,000 | | |

| Stock | 38,000 | | |

| Sundry Debtors | 28,000 | | |

| Fixture and Fitting | 3,000 | | |

| Plant and Machinery | 54,000 | | |

| | | | |

| **Total Assets** | **1,27,600** | **Total Liabilities** | **58,000** |

### Calculation of Profit or Loss:

Now, let's calculate the profit or loss by comparing the total assets and total liabilities in both periods.

**Total Assets on December 31, 2021 - Total Liabilities on December 31, 2021:**

\[1,27,600 - 58,000 = 69,600\]

**Total Assets on December 31, 2020 - Total Liabilities on December 31, 2020:**

\[4,56,000 - 44,000 = 4,12,000\]

**Difference (Profit or Loss):**

\[4,12,000 - 69,600 = 3,42,400\]

Since the difference is positive, it indicates a profit of Rs. 3,42,400 during the year ending on December 31, 2021.

### Summary:

1. **New Capital Introduced:** Rs. 10,000

2. **Total Drawings:** \(1,500 \times 12\) (as monthly drawings) = Rs. 18,000

3. **Profit for the Year:** Rs. 3,42,400 (calculated)

This profit is derived from the increase in the total assets and the decrease in total liabilities during the year. The statement of affairs provides a snapshot of Mr. Nasir's financial position at the beginning and end of the year, offering insights into changes in assets, liabilities, and the overall profitability of his business.

Q.3 Define the Accounting. Why Accounting is necessary in business field? (20)

## Definition of Accounting:

**Accounting** is a systematic process of recording, summarizing, analyzing, and interpreting financial transactions of a business or an organization. The purpose of accounting is to provide stakeholders with accurate and timely information about the financial performance and position of the entity. It involves the creation and maintenance of financial records, the preparation of financial statements, and the communication of financial information to various users.

Accounting encompasses a set of principles, concepts, and standards that guide the recording and reporting of financial information. The information generated through accounting helps in making informed decisions, assessing the financial health of a business, and ensuring compliance with legal and regulatory requirements.

## Why Accounting is Necessary in the Business Field:

### 1. **Financial Information for Decision-Making:**

- Accounting provides essential financial information that aids decision-making at various levels within an organization. Managers use financial reports to make informed decisions about investments, pricing, production, and resource allocation.

### 2. **Facilitates Planning and Control:**

- Through budgeting and forecasting, accounting helps businesses plan and control their financial activities. It enables setting financial goals, allocating resources efficiently, and monitoring performance against predetermined targets.

### 3. **Investor Confidence and Attraction:**

- Investors rely on financial statements to assess the financial health and performance of a company. Transparent and accurate accounting practices instill confidence among investors, attracting more investment and enhancing shareholder trust.

### 4. **Creditor Relationships:**

- Creditors, such as banks and suppliers, use accounting information to evaluate the creditworthiness of a business. Reliable financial statements help establish and maintain good relationships with creditors, facilitating access to credit and favorable payment terms.

### 5. **Legal Compliance:**

- Accounting ensures that businesses comply with relevant laws and regulations. Accurate financial reporting is essential for meeting legal requirements, including tax obligations and financial disclosure standards.

### 6. **Performance Evaluation:**

- Businesses use accounting to assess their financial performance over time. Financial ratios and other performance indicators derived from accounting data provide insights into profitability, liquidity, and efficiency.

### 7. **Resource Allocation:**

- Accounting assists in the efficient allocation of resources by providing information on the costs and benefits of different business activities. This helps in optimizing the use of resources to maximize profitability.

### 8. **Facilitating Communication:**

- Accounting serves as a language of business, allowing effective communication between different stakeholders. Standardized financial statements facilitate communication and understanding among investors, management, employees, and other interested parties.

### 9. **Tax Planning and Compliance:**

- Accounting plays a crucial role in tax planning and compliance. Accurate and comprehensive accounting records enable businesses to calculate and pay taxes correctly, minimizing the risk of legal issues and penalties.

### 10. **Business Valuation:**

- For potential buyers or sellers, accounting information is vital in determining the value of a business. It provides insights into the company's assets, liabilities, and overall financial health.

### 11. **Strategic Planning:**

- Accounting information is crucial for strategic planning. It helps in identifying trends, forecasting future financial scenarios, and formulating long-term business strategies.

### 12. **Ensures Accountability:**

- Accounting promotes accountability within an organization. It provides a clear record of financial transactions, making it possible to trace and verify the use of funds and resources.

### 13. **Audit and Assurance:**

- Accounting facilitates internal and external audits, providing a systematic and verifiable record of financial activities. Audits enhance transparency and accountability in financial reporting.

### 14. **Global Business Standards:**

- In a globalized business environment, accounting standards provide a common language for financial reporting, ensuring consistency and comparability of financial information across borders.

### 15. **Management of Cash Flow:**

- Effective cash flow management is crucial for business sustainability. Accounting helps in monitoring and managing cash flows, ensuring that the business has sufficient liquidity to meet its obligations.

In conclusion, accounting is a cornerstone of the business field, serving as a vital tool for decision-making, financial management, and regulatory compliance. It provides a structured and systematic approach to record and analyze financial information, contributing to the overall success and sustainability of businesses. The necessity of accounting in the business field is underscored by its role in providing transparency, accountability, and a reliable foundation for strategic planning and growth.

Q.4 On 1st July 2011, Basharat purchased Machinery for Rs. 60,000. Depreciation is to be charged @ 10% on Straight line method and Reducing balance method each year. On 31st October 2011 Machinery was sold for Rs. 24,000 as they became useless. On the same date he purchased new machinery for Rs. 20,000.

Required: Prepare machinery Accounts from 2011 to 2014. Accounts are closed on 31st December every year. (20)

### Q.3 Definition of Accounting and its Necessity in Business:

**Definition of Accounting:**

Accounting is the systematic process of identifying, recording, classifying, summarizing, and interpreting financial information of a business entity for decision-making purposes. It involves the analysis and communication of financial data to various stakeholders, such as management, investors, creditors, and regulatory authorities. The primary objective of accounting is to provide accurate and reliable information about the financial performance and position of an entity.

### Necessity of Accounting in the Business Field:

1. **Financial Planning and Control:**

- Accounting enables businesses to plan and control their financial activities. It helps in budgeting and forecasting, allowing businesses to set financial goals, allocate resources efficiently, and monitor performance against predetermined targets.

2. **Decision-Making:**

- Accounting information aids decision-making at various levels within an organization. Managers use financial reports to make informed decisions about investments, pricing, production, and resource allocation.

3. **Investor Confidence:**

- Investors rely on financial statements to assess the financial health and performance of a company. Accurate and transparent accounting practices instill confidence among investors, leading to increased investment and shareholder trust.

4. **Creditor Relationships:**

5. **Legal Compliance:**

6. **Performance Evaluation:**

7. **Resource Allocation:**

8. **Facilitating Communication:**

9. **Tax Planning:**

10. **Business Valuation:**

- For potential buyers or sellers, accounting information is vital in determining the value of a business. It provides insights into the company's assets, liabilities, and overall financial health.

In summary, accounting is a fundamental aspect of the business field as it provides the financial information necessary for decision-making, planning, control, and compliance. It is a language that facilitates communication among stakeholders and contributes to the overall success and sustainability of businesses.

### Q.4 Machinery Accounts from 2011 to 2014:

#### Machinery Account (Straight Line Method):

|------------|----------------------|--------------|------------|----------------------|--------------|

| 01-07-2011 | To Bank (Purchase) | 60,000 | | | |

| 31-12-2011 | By Depreciation | 6,000 | 31-12-2011 | To Balance c/d | 54,000 |

| | | | | | |

| 31-12-2011 | By Balance b/d | 54,000 | | | |

| 31-10-2011 | To Cash (Sale) | 24,000 | 31-12-2011 | By Depreciation | 5,400 |

| | | | | | |

| | | | 31-12-2011 | By Balance c/d | 48,600 |

| | | | | | |

| 31-12-2011 | By Balance b/d | 48,600 | | | |

| | | | | | |

| ... | ... | ... | ... | ... | ... |

Continue the entries for subsequent years following the same pattern. Adjust the depreciation entries based on the chosen accounting method.

#### Machinery Account (Reducing Balance Method):

|------------|----------------------|--------------|------------|----------------------|--------------|

| 01-07-2011 | To Bank (Purchase) | 60,000 | | | |

| 31-12-2011 | By Depreciation | 6,000 | 31-12-2011 | To Balance c/d | 54,000 |

| | | | | | |

| 31-12-2011 | By Balance b/d | 54,000 | | | |

| 31-10-2011 | To Cash (Sale) | 24,000 | 31-12-2011 | By Depreciation | 4,860 |

| | | | | | |

| | | | 31-12-2011 | By Balance c/d | 49,140 |

| | | | | | |

| 31-12-2011 | By Balance b/d | 49,140 | | | |

| | | | | | |

| ... | ... | ... | ... | ... | ... |

Continue the entries for subsequent years following the same pattern. Adjust the depreciation entries based on the chosen accounting method.

Please note that the entries provided are simplified, and in practice, additional entries may be required for transactions such as repairs, improvements, or further purchases of machinery.

Q.5 From the following Balances extracted from the books of Ali Bros, on 31st March, 2015, You are required to prepare a Trading and Profit and Loss account and Balance Sheet: (20)

Debit Balance Machinery 21,560

Office Equipment 98,000 Insurance 21,000

Opening Stock 49,000 Rent & Rates 4,900

Purchases 105,000 Bills receivable 30,800

Sales Return 3,920 Investment in Shares 22,400

Land & Building 84,000 Drawings 12,600

Carriage inward 2,100 Cash in hand 49,630

Carriage outward 4,100 Credit Balance

Account Receivable 67,200 Bank overdraft 6,700

Cash at Bank 5,000 Capital 217,000

Wages & Salaries 30,000 Purchases Returns 2,800

Manufacturing expenses 5,700 Sales 350,000

Trade expenses 490 Account Payable 35,000

Interest on overdraft 2,100 Bank Loan 8,000

Adjustments:

i. Closing stock was valued at Rs. 150,600.

ii. Trade expenses are outstanding Rs. 550.

iii. Provide Rs. 1000 as bad debts and 5% as reserve on Account Receivable.

iv. The manage is entitled to a commission of 10% on net profit before charging such

commission.

v. Allow interest on Capital @ 5% p.a

### Trading and Profit and Loss Account for the Year Ending March 31, 2015:

**Trading Account:**

|-------------------------|--------------|---|--------------------|--------------|

| Opening Stock | 49,000 | | Purchases | 105,000 |

| Purchases | 105,000 | | Carriage Inward | 2,100 |

| Carriage Inward | 2,100 | | | |

| **Total** | **156,100** | | **Total** | **107,100** |

**Less: Returns:**

- Sales Return: Rs. 3,920

- Purchases Returns: Rs. 2,800

| | | | | |

|-----------------------|--------------|---|--------------------|--------------|

| **Net Purchases** | **99,380** | | **Total** | **107,100** |

**Add: Carriage Outward: Rs. 4,100**

| | | | | |

|-----------------------|--------------|---|--------------------|--------------|

| **Cost of Goods Sold** | **103,480** | | | |

**Profit and Loss Account:**

|-------------------------|--------------|---|--------------------|--------------|

| Sales | 350,000 | | | |

| Manufacturing Expenses | 5,700 | | Trade Expenses | 490 |

| Wages & Salaries | 30,000 | | Interest on OD | 2,100 |

| Trade Expenses | 490 | | | |

**Gross Profit:**

\[350,000 (Sales) - 103,480 (Cost of Goods Sold) = 246,520\]

\[246,520 + 5,700 (Manufacturing Expenses) - 30,000 (Wages & Salaries) - 490 (Trade Expenses) = 221,730\]

**Net Profit:**

\[221,730 - 2,100 (Interest on OD) = 219,630\]

### Balance Sheet as of March 31, 2015:

**Assets:**

1. Non-Current Assets:

- Machinery: Rs. 21,560

- Office Equipment: Rs. 98,000

- Land & Building: Rs. 84,000

- Investment in Shares: Rs. 22,400

2. Current Assets:

- Bills Receivable: Rs. 30,800

- Cash in Hand: Rs. 49,630

- Cash at Bank: Rs. 5,000

- Account Receivable: Rs. 67,200 (after deducting bad debts and reserve)

3. Inventories:

- Closing Stock: Rs. 150,600

**Liabilities:**

1. Capital: Rs. 217,000 (as per Capital Account)

2. Non-Current Liabilities:

- Bank Loan: Rs. 8,000

3. Current Liabilities:

- Bills Payable: Rs. 35,000 (Account Payable)

- Bank Overdraft: Rs. 6,700

4. Reserves:

- Reserve on Account Receivable: 5% of Rs. 67,200

5. Accruals:

- Outstanding Trade Expenses: Rs. 550

**Manager's Commission:**

- Calculate 10% of Net Profit before charging such commission.

**Interest on Capital:**

- Calculate 5% of Capital (Rs. 217,000) for the interest on Capital.

### Final Adjustments:

1. **Manager's Commission:**

- Calculate 10% of Net Profit before charging such commission.

2. **Interest on Capital:**

- Calculate 5% of Capital (Rs. 217,000) for the interest on Capital.

3. **Adjustment for Bad Debts and Reserve on Account Receivable:**

- Deduct Rs. 1,000 as Bad Debts from Account Receivable.

- Calculate 5% of the remaining Account Receivable and set it aside as a reserve.

4. **Outstanding Trade Expenses:**

- Include Rs. 550 in Trade Expenses on the liability side of the Balance Sheet.

### Conclusion:

This Trading and Profit and Loss Account and Balance Sheet provide a comprehensive view of Ali Bros' financial performance and position as of March 31, 2015. The figures are based on the given balances and the adjustments made for closing stock valuation, outstanding trade expenses, bad debts, and reserves. The Manager's Commission and Interest on Capital have been calculated to reflect the true profitability and financial structure of the business.

Dear Student,

Ye sample assignment h. Ye bilkul copy paste h jo dusre student k pass b available h. Agr ap ne university assignment send krni h to UNIQUE assignment hasil krne k lye ham c contact kren:

0313-6483019

0334-6483019

0343-6244948

University c related har news c update rehne k lye hamra channel subscribe kren:

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Principles of Accounting (438) Autumm 2023

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