FINANCIAL ACCOUNTING

𝙎𝙚𝙘𝙩𝙞𝙤𝙣 𝘼: 𝙈𝙪𝙡𝙩𝙞𝙥𝙡𝙚 𝘾𝙝𝙤𝙞𝙘𝙚 𝙌𝙪𝙚𝙨𝙩𝙞𝙤𝙣𝙨 (2 𝙈𝙖𝙧𝙠𝙨 𝙀𝙖𝙘𝙝)

1. Which of the following is classified as a liability?

a) Cash
b) Inventory
c) Bills Payable
d) Prepaid Expenses

✅ Correct Answer: c) Bills Payable

2. What does the Going Concern concept assume?
a) A business will not continue to operate in the foreseeable future.
b) A business will continue to operate indefinitely.
c) A business will liquidate its assets soon.
d) A business's operations will be halted temporarily.

✅ Correct Answer: b) A business will continue to operate indefinitely.

3. Which of the following is classified as an asset account?
a) Accounts Payable
b) Owner’s Equity
c) Cash
d) Revenue

✅ Correct Answer: c) Cash

4. Which secondary book of accounts is typically used for recording small, routine
expenditures?
a) Sales Journal
b) Purchase Journal
c) Petty Cash Book
d) General Journal

✅ Correct Answer: c) Petty Cash Book

5. What is the primary purpose of preparing a trial balance?
a) To determine the net income of a company
b) To list all the ledger accounts and their balances
c) To prepare financial statements
d) To identify errors in the journal entries

✅ Correct Answer: b) To list all the ledger accounts and their balances
6. Which of the following is not classified as a current asset on the balance sheet?
a) Cash
b) Accounts Receivable
c) Inventory
d) Land

✅ Correct Answer: d) Land

7. Which of the following is a key principle of GAAP?
a) Materiality
b) Cost-benefit analysis
c) Objectivity
d) All of the above

✅ Correct Answer: d) All of the above

8. GAAP is primarily developed by:
a) Internal Revenue Service (IRS)
b) Financial Accounting Standards Board (FASB)
c) Securities and Exchange Commission (SEC)
d) Federal Reserve

✅ Correct Answer: b) Financial Accounting Standards Board (FASB)

9. What is window dressing in accounting?
a) Adjusting financial statements to show a more favorable picture
b) The process of auditing financial statements
c) Applying accounting standards
d) Recording all financial transactions in a journal

✅ Correct Answer: a) Adjusting financial statements to show a more favorable picture

10. What category does depreciation expense fall under in cost classification?
a) Direct cost
b) Indirect cost
c) Fixed cost
d) Variable cost

✅ Correct Answer: b) Indirect cost

𝙎𝙚𝙘𝙩𝙞𝙤𝙣 𝘽: 𝙎𝙝𝙤𝙧𝙩 𝘼𝙣𝙨𝙬𝙚𝙧 𝙌𝙪𝙚𝙨𝙩𝙞𝙤𝙣𝙨

1. Explain the term “Non-Financial Reporting”

✅ Answer:
- Non-financial reporting refers to the disclosure of information that is not purely monetary but
still impacts business performance.
- It includes environmental, social, and governance (ESG) factors.
- Common elements:
- Sustainability practices
- Employee welfare
 - Corporate social responsibility (CSR)
- Ethical governance
- Helps stakeholders assess a company’s long-term value and social impact.
- Examples: Integrated Reports, CSR Reports, ESG Disclosures.
- Mandatory in many countries under global frameworks like GRI or SEBI BRSR in India.

2. Prepare a Trading Account for the year ending 31st December 2024

✅ Answer:
Trading Account for the year ending 31st Dec 2024

Particulars Amount (₹) Particulars Amount (₹)

To Opening Stock 20,000 By Sales 1,40,000
To Purchases 80,000 By Closing Stock 30,000
To Wages 10,000
To Carriage Inwards 3,000
To Gross Profit (Bal. fig.) 57,000
Total 1,70,000 Total 1,70,000

3. Write a note on “Depreciation Accounting”

✅ Answer:
- Depreciation is the systematic allocation of the cost of a tangible asset over its useful life.
- It reflects wear and tear, obsolescence, or usage.
- Common methods:
- Straight Line Method (SLM)
- Written Down Value (WDV)
- Helps in:
- Matching cost with revenue
- Accurate asset valuation
- Tax deduction
- Depreciation is a non-cash expense but affects net profit.
- Example: A machine worth ₹1,00,000 depreciated at 10% SLM = ₹10,000/year.

4. Differentiate between GAAP and IFRS

✅ Answer:
Basis GAAP IFRS
Full Form Generally Accepted Accounting Principles International Financial Reporting
Standards
Origin USA International (by IASB)
Rules vs Principles Rule-based Principle-based
Inventory Valuation Allows LIFO LIFO not allowed
Adoption Used mainly in the US Used in 140+ countries

- GAAP is more detailed; IFRS is more flexible.

- India follows Ind AS, which is IFRS-converged.

5. Explain the Concept of “Separate Business Entity”

✅ Answer:
- This concept treats the business as distinct from its owner(s).
- Personal and business transactions are recorded separately.
- Ensures accurate financial reporting and legal clarity.
- Example: Owner’s personal car is not shown in business books.
- Important for:
- Taxation
- Auditing
- Legal liability
- Forms the basis of double-entry accounting.

6. Write an essay on Secondary Books of Accounts

✅ Answer:
- Secondary books are used to record specific types of transactions.
- They support the main ledger and help in classification.
- Types include:
- Sales Journal – credit sales
- Purchase Journal – credit purchases
- Cash Book – all cash transactions
- Petty Cash Book – small daily expenses
- Journal Proper – miscellaneous entries
- Benefits:
- Saves time
- Reduces errors
- Easy tracking of transactions
- Essential for businesses with high transaction volume.

𝙎𝙚𝙘𝙩𝙞𝙤𝙣 𝘾: 𝙇𝙤𝙣𝙜 𝘼𝙣𝙨𝙬𝙚𝙧 𝙌𝙪𝙚𝙨𝙩𝙞𝙤𝙣𝙨 (𝘼𝙣𝙨𝙬𝙚𝙧 𝘼𝙣𝙮 𝙏𝙝𝙧𝙚𝙚)

1. Describe the advantages and limitations of Accounting.

✅ Answer:
🔹 Advantages of Accounting:
1. Systematic Record Keeping:
- Maintains organized records of all financial transactions.

2. Financial Performance Evaluation:

- Helps assess profitability and financial health.

3. Decision-Making Tool:
- Provides data for budgeting, forecasting, and strategic planning.
4. Legal Compliance:
- Ensures adherence to tax laws and regulatory requirements.

5. Facilitates Auditing:
- Well-maintained records simplify internal and external audits.

6. Communication with Stakeholders:

- Financial statements inform investors, creditors, and management.

🔹 Limitations of Accounting:
1. Ignores Non-Financial Aspects:
- Employee morale, brand value, and customer satisfaction are not recorded.

2. Historical in Nature:
- Focuses on past data, not future projections.

3. Subjectivity in Estimates:
- Depreciation, provisions, and valuations involve judgment.

4. Inflation Not Considered:

- Assets are recorded at historical cost, not adjusted for inflation.

5. Window Dressing Risk:

- Manipulation of accounts can mislead stakeholders.

Conclusion:
While accounting is essential for financial management, it must be complemented with
qualitative analysis for holistic decision-making.

2. Elaborate the concept of Trial Balance along with its Types and Limitations.

✅ Answer:
🔹 What is a Trial Balance?
- A trial balance is a statement of all ledger balances on a particular date.
- It ensures that debits equal credits, verifying arithmetical accuracy.

🔹 Types of Trial Balance:

1. Gross Trial Balance:
- Shows all balances without adjustments.

2. Adjusted Trial Balance:

- Includes year-end adjustments (e.g., depreciation, accruals).

3. Post-Closing Trial Balance:

- Prepared after closing entries to check final balances.

🔹 Format:
Account Name Debit (₹) Credit (₹)
Cash 10,000
Sales 25,000
Purchases 15,000
Capital 20,000

🔹 Limitations:
1. Doesn’t Detect All Errors:
- Errors of omission, principle, or compensating errors may go unnoticed.

2. No Guarantee of Accuracy:
- Balancing doesn’t confirm correctness of entries.

3. Not a Financial Statement:

- It’s a tool, not a report for external users.

Conclusion:
Trial balance is a vital checkpoint in the accounting cycle, but it must be followed by adjustments
and final accounts for complete accuracy.

3. Journalise the following transactions for Jeyaseeli (Jan 2024):

✅ Answer:
Date Particulars L.F. Debit (₹) Credit (₹)
Jan 1 Cash A/c Dr.
To Capital A/c
(Being business started with cash) | | 80,000 | 80,000 |
Jan 2 Bank A/c Dr.
To Cash A/c
(Being cash deposited into bank) | | 40,000 | 40,000 |
Jan 3 Purchases A/c Dr.
To Cash A/c
(Being goods purchased for cash) | | 5,000 | 5,000 |
Jan 4 Salaries A/c Dr.
To Cash A/c
(Being salaries paid in cash) | | 5,000 | 5,000 |
Jan 5 Furniture A/c Dr.
To Cash A/c
(Being furniture purchased for cash) | | 4,000 | 4,000 |

4. Explain the “Final Accounts”, their components and significance.

✅ Answer:
🔹 What are Final Accounts?
- Final accounts are the financial statements prepared at the end of an accounting period to
determine profit/loss and financial position.

🔹 Components:
1. Trading Account:
- Calculates Gross Profit = Sales – Cost of Goods Sold

2. Profit & Loss Account:

- Calculates Net Profit = Gross Profit – Operating Expenses

3. Balance Sheet:
- Shows Assets, Liabilities, and Capital on a specific date

🔹 Significance:
- Performance Evaluation:
- Helps assess profitability and efficiency

- Financial Position:
- Reveals solvency and liquidity

- Stakeholder Communication:
- Used by investors, banks, and regulators

- Legal Requirement:
- Mandatory for companies under law

- Basis for Taxation:

- Determines taxable income

Conclusion:
Final accounts are the backbone of financial reporting, guiding internal decisions and external
trust.