Basics of Accounting

BY: DR. BHUPENDRA SINGH

HADA
Definition Of 'generally Accepted Accounting Principles - Gaap'?
Answer :
 The common set of accounting principles, standards and procedures that
companies use to compile their financial statements. GAAP are a combination of
authoritative standards (set by policy boards) and simply the commonly accepted
ways of recording and reporting accounting information
Who Governs The Financial Reporting Standard?
Answer :
 Since financial accounting is the process that provides financial reports to the
general public, professionals in the accounting, trade and commerce, have
developed and formed an accounting standard which will serve as the foundation
of all accounting process and procedures performed. Such accounting standard is
referred to as the Generally Accepted Accounting Principles (GAAP).
GAAP represents the rules, procedures, practice and standards followed in the
preparation and presentation of the financial statements. Its purpose is to ensure
consistency and comparability of reported financial information of business
entities, in order to protect the users or general public, since they use financial
reports in their economic decisions.
Difference Between IFRS and GAAP

  International Financial Reporting Standards (IFRS) – as the name implies – is an

international standard developed by the International Accounting Standards Board
(IASB). U.S. Generally Accepted Accounting Principles (GAAP) is only used in
the United States. GAAP is established by the Financial Accounting Standards
Board (FASB).
Local vs. Global
 IFRS is used in more than 110 countries around the world, including the EU and
many Asian and South American countries. GAAP, on the other hand, is only used
in the United States. Companies that operate in the U.S. and overseas may have
more complexities in their accounting.
Rules vs. Principles
 GAAP tends to be more rules-based, while IFRS tends to be more principles-
based. Under GAAP, companies may have industry-specific rules and guidelines
to follow, while IFRS has principles that require judgment and interpretation to
determine how they are to be applied in a given situation.
Inventory Methods
 Both GAAP and IFRS allow First In, First Out (FIFO), weighted-average cost,
and specific identification methods for valuing inventories. However, GAAP also
allows the Last In, First Out (LIFO) method, which is not allowed under IFRS.
Using the LIFO method may result in artificially low net income and may not
reflect the actual flow of inventory items through a company.
Fair Value Revaluations
 IFRS allows revaluation of the following assets to fair value if fair value can be
measured reliably: inventories, property, plant & equipment, intangible assets, and
investments in marketable securities. This revaluation may be either an increase or
a decrease to the asset’s value. Under GAAP, revaluation is prohibited except for
marketable securities.
Impairment Losses
 Both standards allow for the recognition of impairment losses on long-lived assets
when the market value of an asset declines. When conditions change, IFRS allows
impairment losses to be reversed for all types of assets except goodwill. GAAP
takes a more conservative approach and prohibits reversals of impairment losses
for all types of assets.
Intangible Assets
 Internal costs to create intangible assets, such as development costs, are
capitalized under IFRS when certain criteria are met. These criteria include
consideration of the future economic benefits.
 Under GAAP, development costs are expensed as incurred, with the exception of
internally developed software. For software that will be used externally, costs are
capitalized once technological feasibility has been demonstrated. If the software
will only be used internally, GAAP requires capitalization only during the
development stage. IFRS has no specific guidance for software.
Fixed Assets
 GAAP requires that long-lived assets, such as buildings, furniture and equipment,
be valued at historic cost and depreciated appropriately. Under IFRS, these same
assets are initially valued at cost, but can later be revalued up or down to market
value. Any separate components of an asset with different useful lives are required
to be depreciated separately under IFRS. GAAP allows for component
depreciation, but it is not required.
Investment Property
 IFRS includes the distinct category of investment property, which is defined as
property held for rental income or capital appreciation. Investment property is
initially measured at cost, and can be subsequently revalued to market value.
GAAP has no such separate category.
 Which Income Is Considered As Accrued Income?
Answer :
 Income which has been earned but not yet received is known as accrued income.
Income is recorded in the same accounting period in which it is earned rather than
in the subsequent period in which it will be received.
What Is Working Capital?
Answer :
 Working capital is the difference between a company's current assets and its current
liabilities. Working Capital is used into day to day operations of any business.
 WC= CA-CL
 Define Amortization & Impairment?
Answer :
 When the assets of the company are written off over a number of years for the
purpose of their replacement or renewal and not depending on the life of asset is
termed as amortization. It is different from depreciation, which is periodic writing
off of the asset based on its normal life expectancy.
 Impairment can be termed as the fall in the value of the asset due to any physical
damage to the asset, obsolescence, or due to technological innovation.
Impairments can be written off. Simply you can say that impairment is the
difference between the fair value and the carrying value of an asset.
What Is Inter Company Reconciliation?
 Answer :
 Every year commonly controlled company prepares a combined or consolidated
financial statement for tax and reporting purposes. Inter Company Reconciliation
(ICR) is the process that helps parent company to split from its subsidiaries
companies by location. Each year, commonly controlled business must prepare a
combined or consolidated financial statement for tax and reporting purposes. The
inter company accounting process is an important process for parent companies
with subsidiaries or companies split by location. ICR helps in avoiding double
counting of transactions as it also helps in maintaining accurate reports. Even it
helps the companies to avoid misrepresentation of a firm's financial position.
w

What Is The Difference Between Profit And Gain?

 Answer :
 Profit is the amount that is left after deducting expenses from revenue that makes the
receipt of revenue possible. There are two streams of earnings that is direct earnings and
indirect earnings. Direct earnings are incurred from main activities and indirect earnings
are incurred from other activities so the profits is calculated as gross profit and net profit.
 Gross profit is the amount of revenue from which trading expenses has been deducted
(expenses related to main activities of the business). Net profit is the amount of revenue
that includes incomes from other activities.
 Gain is the amount that is earned on selling assets which is not included in the inventory
of the business. This sales activity is not the actual trading and these sales does not
includes goods that are sold on regular basis.
When Deferred Tax Asset & Deferred Tax Liability Arises?
Answer :
 Deferred tax asset arises when the expenses are recorded in the income statement
before they are required to be recognized by the taxing authority. Also when
revenue is being taxed before it is taxable in the income statement.
 Deferred tax liability arises from different depreciation methods being used for
tax as depreciable assets are reported as non current.
What Is The Difference Between Fund Flow Vs. Cash Flow?
Answer :
Fund Flow
 Fund flow is based on working capital.
 Fund flows tells about the various sources from where the funds are generated.
 Fund flow is useful for understanding long term financial strategy.
 Changes in current assets and current liabilities are shown through the schedule of changes in working
capital.
Cash Flow
 Cash flow is based on only one element of working capital that is cash.
 Cash flow starts with the opening balance of cash and closes with the closing balance of cash.
 Cash flow is useful for understanding short term strategies that affects liquidity of the business.
 Changes in current assets and current liabilities are shown in the cash flow.
What Do You Understand By Dissolution Of Firm?
Answer :
 Dissolution of firm means assets of firm are realized and liabilities are paid off
and the surplus, if any is distributed among the partners according to their right. It
is to be noted that ‘dissolution of Firm’ involves dissolution of partnership but
dissolution of partnership may not lead to dissolution of firm.
What Are The Various Streams Of Accounting?
Answer :
There are three streams of accounting:
1. Financial Accounting: is the process in which business transactions are recorded systematically in the
various books of accounts maintained by the organization in order to prepare financial statements.
These financial statements are basically of two types: First is Profitability Statement or Profit and Loss
Account and second is Balance Sheet.
Cost Accounting: is the process of classifying and recording of expenditure incurred during the operations
of the organization in a systematic way, in order to as certain the cost of a cost center with the intention
to control the cost.
Management Accounting: is the process of analysis, interpretation and presentation of accounting
information collected with the help of financial accounting and cost accounting, in order to assist
management in the process of decision making, creation of policy and day to day operation of an
organization. Thus, it is clear from the above that the management accounting is based on financial
accounting and cost accounting.
Explain Financial Accounting. What Are Its Characteristic Features?
Answer :
 Financial Accounting is the process in which business transactions are recorded systematically
in the various books of accounts maintained by the organization in order to prepare financial
statements. These financial statements are basically of two types: First is Profitability Statement
or Profit and Loss Account and second is Balance Sheet.
Following are the characteristics features of Financial Accounting:
 Monetary Transactions: In financial accounting only transactions in monetary terms are
considered. Transactions not expressed in monetary terms do not find any place in financial
accounting, howsoever important they may be from business point of view.
 Historical Nature: Financial accounting considers only those transactions which are of historical
nature i.e the transaction which have already taken place. No futuristic transactions find any place
in financial accounting, howsoever important they may be from business point of view.
 Legal Requirement: Financial accounting is a legal requirement. It is necessary to maintain the
financial accounting and prepare financial statements there from. It is also obligatory to get
these financial statements audited.
 External Use: Financial accounting is for those people who are not part of decision making
process regarding the organization like investors, customers, suppliers, financial institutions etc.
Thus, it is for external use.
 Disclosure of Financial Status: It discloses the financial status and financial performance of
the business as a whole.
 Interim Reports: Financial statements which are based on financial accounting are interim
reports and cannot be the final ones.
 Financial Accounting Process: The process of financial accounting gets affected due to the
different accounting policies followed by the accountants. These accounting policies differ
mainly in two areas: Valuation of inventory and Calculation of depreciation.
Explain Cost Accounting. What Are The Objectives Of Doing It?
Answer :
 Cost Accounting is the process of classifying and recording of expenditure
incurred during the operations of the organization in a systematic way, in order to
ascertain the cost of a cost center with the intention to control the cost.
Following are the basic three objectives of Cost Accounting:
 Ascertainment of Cost and Profitability
 Cost Control
 Presentation of information for managerial decision making.
What Are The Characteristic Features Of Cost Accounting?
Answer :
 Following are the characteristic features of Cost Accounting:
 Cost accounting views the whole organization from the individual component of the organization
like a job, a process etc.
 Cost accounting aims at ascertaining the profitability of individual components of the organization.
 It is meant for those people who are part of the decision making process of the organization. Thus,
it is only for internal use.
 It is not a legal requirement. It is not compulsory to maintain cost accounting records.
 In Cost Accounting, data is immediately available which facilitates in decision making process.
 Cost Accounting considers each and every transaction, whether related to past or future which will
have an impact on the business.
Define Management Accounting. What Are Its Objectives?
Answer :
 Management Accounting is the process of analysis, interpretation and presentation of
accounting information collected with the help of financial accounting and cost accounting,
in order to assist management in the process of decision making, creation of policy and day
to day operation of an organization. Thus, it is clear from the above that the management
accounting is based on financial accounting and cost accounting.
 Following are the objectives of Management Accounting:
 Measuring performance: Management accounting measures two types of performance. First is
employee performance and the second is efficiency measurement. The actual performance is
measured with the standardized performance and a report of deviation from the standard
performance is reported to the management for the effective decision making and also to indicate
the effectiveness of the methods in use. Both types of performance management are used to make
corrective actions in order to improve performance.
  Assess Risk: The aim of management accounting is to assess risk in order to maximize
risk.
 Allocation of Resources: is an important objective of Management Accounting.
 Presentation of various financial statements to the Management
What Are The Limitations Of Management Accounting?
Answer :
 Limitations of Management Accounting:
 Management Accounting is based on financial and cost accounting, in which historical data is used
to make future decisions. Thus, strength and weakness of the managerial decisions are based on the
strength and weakness of the accounting records.
 Management Accounting is useful only to those people who are in the decision making process.
 Tools and techniques used in management accounting only provide information and not ready
made decision. Thus, it is only a supplementary service.
 In Management Accounting, decision is based on the manager’s institution as management try to
avoid lengthy courses of scientific decision making.
 Personal prejudices and bias affect the decisions as the interpretation of financial information is
based on personal judgment of the interpreter
What Are The Various Techniques Used To Discharge The Function Of
Management Accounting?
Answer :
Following are the technique used to discharge the function of management
accounting:
 Marginal Costing
 Budgetary Control
 Standard Costing
 Uniform Costing
What Are The Different Types Of Expenditures Considered For The Purpose Of
Accounting?
Answer :
 For the accounting purpose expenditures are classified in three types:

Capital Expenditure is an amount incurred for acquiring the long term assets
such as land, building, equipments which are continually used for the purpose of
earning revenue. These are not meant for sale. These costs are recorded in
accounts namely Plant, Property, Equipment. Benefits from such expenditure are
spread over several accounting years.
E.g. Interest on capital paid, Expenditure on purchase or installation of an asset,
brokerage and commission paid.
 Revenue Expenditure is the expenditure incurred in one accounting year and the
benefits from which is also enjoyed in the same period only. This expenditure does
not increase the earning capacity of the business but maintains the existing earning
capacity of the business. It included all the expenses which are incurred during day
to day running of business. The benefits of this expenditure are for short period and
are not forwarded to the next year. This expenditure is on recurring nature.
Eg: Purchase of raw material, selling and distribution expenses, Salaries, wages etc.

Deferred Revenue Expenditure is a revenue expenditure which has been incurred

during an accounting year but the benefit of which may be extended to a number of
years. And these are charged to profit and loss account.
E.g. Development expenditure, Advertisement etc
What Are Capital Expenditures? Is It Ok To Consider These Expenditures While
Calculating The Profitability Of During A Certain Period?
Answer :
 Capital Expenditure is an amount incurred for acquiring the long term assets such as land,
building, equipments which are continually used for the purpose of earning revenue. These
are not meant for sale. These costs are recorded in accounts namely Plant, Property,
Equipment. Benefits from such expenditure are spread over several accounting years.
E.g. Interest on capital paid, Expenditure on purchase or installation of an asset, brokerage
and commission paid.

No, Capital expenditure should not be considered while calculating profitability as benefits
incurred from the capital expenditure are long term benefits and cannot be shown in the
same financial years in which they were paid for. They need to be spread over a number of
years to show the true position in balance sheet as well as profit and loss account.
Explain Revenue Expenditure. Does It Affect The Profitability Statement In A
Period? Explain.
Answer :
 Revenue Expenditure is the expenditure incurred in one accounting year and the
benefits from which is also enjoyed in the same period only. This expenditure does
not increase the earning capacity of the business but maintains the existing earning
capacity of the business. It included all the expenses which are incurred during day
to day running of business. The benefits of this expenditure are for short period and
are not forwarded to the next year. This expenditure is on recurring nature.
As the return on revenue expenditure is received in the same period thus the entries
relating to the revenue expenditure will affect the profitability statements as all the
entries are passed in the same accounting year, the year in which they were incurred.
Explain Deferred Expenditures. How Are These Expenses Dealt With In
Profitability Statement?
Answer :
 Deferred Revenue Expenditure is revenue expenditure, incurred to receive
benefits over a number of years say 3 or 5 years. These expenses are neither
incurred to acquire capital assets nor the benefits of such expenditure is received
in the same accounting period during which they were paid. Thus they don’t affect
profitability statement as they are not transferred to the profitability statement in
the period during which they are paid for. They are charged to profit and loss
account over a number of years depending upon the benefit accrued.
What Is A Balance Sheet? Why Is It Prepared?
Answer :
 Balance Sheet is a Statement showing financial position of the business on a
particular date. It has two side one source of funds i.e Liabilities, the left side of
the balance sheet and application of funds i.e assets, the right side of the balance
sheet. It is prepared after preparing trading and profit and loss account and has
balances of real and personal accounts grouped and arranged in a proper way as
assets and liabilities. It is prepared to know the exact financial position of the
business on the last date of the financial year.
What Are Adjustment Entries? Why Are They Passed?
Answer :
 Adjustment entries are the entries which are passed at the end of each
accounting period to adjust the nominal and other accounts so that correct net
profit or net loss is indicated in profit and loss account and balance sheet may also
represent the true and fair view of the financial condition of the business.

It is essential to pass these adjustment entries before preparing final statements.

Otherwise in the absence of these entries the profit and loss statement will be
misleading and balance sheet will not show the true financial condition of the
business.
Explain Bank Reconciliation Statement. Why Is It Prepared?
Answer :
 Bank Reconciliation Statement is a statement prepared to reconcile the balances
of cash book maintained by the concern and pass book maintained by the bank at
periodical intervals. At the end of every month entries in the cash book are
compared with the entries in the pass book. The causes of differences in balances
of both the books are scrutinized and then reconciliation statement is prepared.
This statement is prepared for a special purpose and once in a month. It is
prepared with a view to indicate items which cause difference between the
balances as per the bank columns of the cash book and the bank pass book at a
particular date.
What Are The Reasons Which Cause Pass Book Of The Bank And Your Bank Book Not Tally?
Answer :
 Cheques deposited into the bank but not yet collected
 Cheques issued but not yet presented for payment
 Bank charges
 Amount collected by bank on standing instructions of the concern.
 Amount paid by the bank on standing instructions of the concern.
 Interest debited by the bank
 Interest credited by the bank
 Direct payment by customers into the bank account
 Dishonour of cheques
 Clerical errors.
What Are The Groups Under Which Errors In Accounting Are Placed?
Answer :
 Errors in accounting are placed in the following main groups:
 Error of Omission
 Error of Commission
 Error of Principle
 Compensating Error
 What Are The Types Of Errors Which Have An Effect On Trial Balance?
 Answer :
 Following are the types of errors which affect agreement of Trial Balance:
 Wrong totaling of subsidiary books
 Posting on the wrong side of the account
 Posting of the wrong amount
 Omission of posting an amount in the ledger
 Error of balancing.
What Type Of Errors Do Not Affect The Trial Balance?
Answer :
 Following are the types of errors which do not affect the Trial Balance:
 Compensating Error
 Errors of Principle
 Errors of Omission
 Errors of Commission
 Wrong amount recorded in the subsidiary books.
What Is Cost Centre?
Answer :
 Cost centre is defined as a location, machine, person, department, division, or
any equipment or group of these, in relation to which direct and indirect costs
may be ascertained and used for the purpose of cost control. Thus, an organization
for the costing purposes is divided in convenient units and one of the convenient
units is known as cost centre. Example: collecting, sorting, washing of clothes are
the various activities which are separate cost centre in a laundry. The cost centre
facilitates this function of cost control. Thus, correct identification of cost centre
is a prerequisite for the successful implementation of cost accounting process.
This also facilitates the fixation of responsibility in the correct manner
Explain Direct Cost And Indirect Cost?
Answer :
 Direct Cost are all the expenses which can be identified with the individual
product, service or job cost centre. In the manufacturing process of products,
materials are purchased, labors are hired and wages are paid to them. All these
take active and direct part in the manufacturing process.
 Indirect Cost are all the expenses which cannot be identified with the individual
product, service or job cost centre. The totals of indirect costs are termed as
overheads. Example: salaries of storekeepers, foremen, work manager’s salary
etc.
Explain Fixed, Variable And Semi-variable Costs?
Answer :
 Fixed Cost is the cost which remains constant or unaffected by variations in the
volume of output within a given period of time. Example: Rent or rates, Insurance
charges, etc.

Variable Cost is the cost which varies directly in proportion with every increase or
decrease in the volume of output with a given a period of time. Example: Wages paid
to labours, cost of direct material, consumable stores, etc.

Semi-variable Cost is the cost which is neither fixed nor variable in nature. These
remain fixed at certain level of operations while may vary proportionately at other
levels of operations. Example: maintenance cost, repairs, power, etc
Explain Controllable And Uncontrollable Costs?
Answer :
 Controllable Cost are the costs which can be influenced by the action of a specified
member of the undertaking. They are incurred in a particular responsibility centers can be
influenced by the action of the executive heading that responsibility centre. For example:
Direct labor cost, direct material cost, direct expenses controllable by the shop level
management.

Uncontrollable Cost are the costs which cannot be influenced by the action of a

specified member of the undertaking. For example: a foreman in charge of a tool room
can only control costs pertaining to the same department and the matters which come
directly under his control, not the costs apportioned to other department. The expenditure
which is controllable by an individual may be uncontrollable by another individual
Explain Normal And Abnormal Costs?
Answer :
 Normal Cost are the normal or regular costs which are incurred in the normal
conditions during the normal operations of the organization. They are the sum of
actual direct materials cost, actual labor cost and other direct expense. Example:
repairs, maintenance, salaries paid to employees.

Abnormal Cost are the costs which are unusual or irregular which are not
incurred due to abnormal situations of the operations or productions. Example:
destruction due to fire, shut down of machinery, lock outs, etc.
Explain Opportunity Cost And Differential Cost?
Answer :
 Opportunity Cost is the cost incurred by the organization when one alternative is
selected over another. For example: A person has Rs. 100000 and he has two options
to invest his money, either invests in fixed deposit scheme or buy a land with the
money. If he decides to put is money to buy the land then the loss of interest which
he could have received on fixed deposit would be an opportunity cost.

Differential Cost is the difference between the costs of two alternatives. It includes
both cost increase and cost decrease. It can be either variable or fixed. Example:
Cost of first alternative = 10000; Cost of second alternative = 5000; Differential
Cost = 10000 – 5000 = 5000.
Explain Sunk Cost?
Answer :
 Sunk Cost is the sum that has already been incurred and cannot be recovered by
any decision made now or in future. This cost is also called stranded cost.
Example: A special purpose machine was bought by a company for Rs. 100000.
The machine was used to make the product for which it was bought and now it is
obsolete and cannot be sold. And it will be unwise to continue using that obsolete
product to recover the original cost of the machine. In order words, Rs. 100000
already spent on that machine cannot be recovered in future. Such costs are said to
be sunk costs and should be ignored in decision making process
Explain Gross Profit?
Answer :
 Gross Profit is a company’s revenue minus its cost of goods sold. It is also
known as gross margin and gross income. It is calculated by subtracting all costs
related to sales i.e. manufacturing expenses, raw materials, labour, selling and
advertisement expenses from sales. It is an indication of the managements’
efficiency to use labour and material in the production process.
Explain Net Profit?
Answer :
 Net Profit/ Operating Profit Net profit, also known as operating profit is actual
earnings of the company in a given period of time. It is a measure of the
profitability after accounting for all costs. In simple terms, net profit is the money
left over after paying all the expenses including taxes and interest. It is the
calculated by subtracting total expenses from total revenues. Net income can be
either distributed among shareholders of the company or held by the firm as
retained earnings for the future purpose
Why Should Over Stocking Be Avoided?
Answer :
 Due to the following consequences over stocking should be avoided:
 Funds get blocked which could be used elsewhere
 More storage facilities are required
 High costs of storage and maintenance
 Deterioration of quality and obsolescence of stock
 High Insurance cost More security and safety measures.
What Can Be The Consequences Of Under Stocking?
Answer :
 The following can be the consequences of under stocking:
 Production process cannot be operated efficiently, resulting delivery schedules.
 Firm may end up paying an idle labour force due to the production hold ups.
 Organisation may loose its important customers, due to the delay in meeting
customers’ orders.
 Unfavourable prices and quality Increased administration costs.
 Due to under stocking it will not be easy for the organization to meet the unexpected
demands of customers.
Differentiate Between Bin Card And Stores Ledger?
Answer :
 Bin Card is a quantitative record of the individual item of its receipts, issues and closing
balance whereas Stores Ledger records both the quantity and cost of receipts, issues and
balances of item of material received.
 Bin Card is prepared by stores department whereas Stores Ledger is prepared by costing
department.
 In Bin Card system, entries are made immediately after each transaction. In Store Ledger,
entries are made periodically.
 In Bin Card, postings are made before a transaction. In Store Ledger, posting is made after a
transaction.
 Bin Card is kept attached to the bins inside the store as to enable to identify the stock. Store
Ledger is kept outside the store.
What Are The Techniques Of Inventory Control?
Answer :
 The techniques of inventory control are:
 Economic Order Quantity
 Fixation of Inventory Levels
 Maximum Level
 Minimum Level
 Average Level
 Re-order Level
 Danger Level.
What Is The Difference Between Journal Voucher And Contra?
Answer :
 journal voucher is the voucher in which all the adjustment related entries and non cash non
bank transactions are entered in journal eg-dep, some of them book the bills in journal and
while they make a payment they record in payment eg-contractor bill.

contra appears two times in two sides of a account an account will be treated as contra when:
 cash deposited in bank
 cash with drawn from bank for office use
 cheques deposited in bank
 cheques withdrawn for office use
 transfers from one account to another account.
 What Is Goodwill?
Answer :
 Goodwill is an intangible asset of a company which includes company reputation,
fame etc., through goodwill company share value may increases.
Difference Between Financial Accounting And Bookkeeping?
Answer :
 Financial accounting is different from bookkeeping. Bookkeeping is a branch of
financial accounting which pertains to the procedural process of recording and
maintaining the business transactions. The only function of bookkeeping is to
keep the financial record of the business accurate and complete. On the other
hand, financial accounting includes a broader role compared to bookkeeping. It is
not merely procedural in nature but also conceptual. Financial accounting is also
concern with the why, reason or justification of any action adopted. It is
responsible not only in the complete and accurate recording of business
transactions but also it ensures that the reported financial statement abides by the
accounting standards, and all other reporting standards, such as the government.
What Is The Difference Between Balance Sheet And Profit & Loss Account?
Answer :
o The balance sheet is one of the most important financial statements of a company. It is reported to
investors at least once per year. It may also be presented quarterly, semiannually or monthly. The balance
sheet provides information on what the company owns (its assets), what it owes (its liabilities), and the
value of the business to its stockholders (the shareholders' equity). The name, balance sheet, is derived
from the fact that these accounts must always be in balance. Assets must always equal the sum of
liabilities and shareholders' equity.
A company's income statement/profit and loss account statement is a record of its earnings or losses for
a given period. It shows all of the money a company earned (revenues) and all of the money a company
spent (expenses) during this period. It also accounts for the effects of some basic accounting principles
such as depreciation. The income statement is important for investors because it's the basic measuring
stick of profitability. A company with little or no income has little or no money to pass on to its investors
in the form of dividends. If a company continues to record losses for a sustained period, it could go
bankrupt. In such a case, both bond and stock investors could lose some or all of their investment. On the
other hand, a company that realizes large profits will have more money to pass on to its investors.
What Are The Principal Qualitative Characteristics Of Financial Statements?
Answer :
 The principle characteristics of financial statements are the attributes that make the information
provided in the financial statements useful to the users. The principle qualitative characteristics
are
 Understandability: They should be readily understandable to the users. For this purpose users
are deemed to have reasonable knowledge of business and economic activities.
 Relevance: To be useful information must be relevant to the decision-making needs of the
users.
 Reliability: Information is said to be reliable when it is free from errors, bias and can be
depended upon by the users to represent faithfully, which it purports to represent.
 Comparability: Users must be able to compare the financial statements of an enterprise
through time in order to identify trends in its financial position and performance.
What Is Meant By The Quality Of Financial Reporting? What Is Conservatism,
And How Does It Affect The Quality Of Earnings?
Answer :
 The quality of financial reporting refers to how close the financial statements are
to economic reality. The closer the financial statements are to economic reality,
the higher is the quality of financial reporting. The less that management uses
discretionary means to manipulate earnings, the higher the quality of financial
reporting. Conservatism means that management should take great care not to
overstate assets and revenues and not to understate liabilities and expenses. The
more conservative management is in making accounting judgments, the higher
will be the quality of financial reporting.
 What Are The Major Constraints On Relevant And Reliable Financial Statements?
Answer :
 The major constraints on relevant and reliable financial statements are:
 Timeliness: If there is undue delay information becomes irrelevant.
 Balance between cost and benefit: The benefits derived from information should exceed
the cost of providing it.
 Balance between the various qualitative characteristics: In practice it has become
necessary to achieve an appropriate balance between the qualitative characteristics.
 True and fair view presentation: There is no clarity in the term true and fair view as
required by the Companies Act. The conceptual framework does not discuss this.
 What Is Debenture Redemption Reserve?
Answer :
 The companies (Amendment) Act 2000 require every company to create
debenture redemption reserve for redemption of debentures out of appropriation
of profits every year until redemption. This reserve cannot be utilized by the
company except for the purpose of redemption.
What Is Deferred Revenue Expenditure?
Answer :
 Deferred revenue expenditures represent types of assets whose usefulness do not
expire in the year of their occurrence but generally expires in the near future. These
types of expenditures are carried forward and are written off in future accounting
periods.
Sometimes, we make some revenues expenditure but it eventually becomes a capital
asset (generally of an intangible nature). Example, if we undertake substantial repairs
to the existing building, the deterioration of the premises may be avoided. If we
charge the whole expenditure during the current, the current year expenses are affect.
However, since the benefit of this expenditure is enjoyed over a number of years. So,
to overcome this only a part of the expenditure is charged current year and the balance
carried forward and written off gradually during the future periods.
What Are Contingent Liabilities?
 Answer :
 These are liabilities, which materialize on the happening or non-happening of an
event.
Contingent liabilities are not real liabilities and as such do not appear in the
liability side of balance sheet. But are disclosed by way of a note in the balance
sheet
Define Fifo And Lifo. Explain What Effects That Fifo And Lifo Have On The
Balance Sheet During A Period Of Rising Prices And During A Period Of Falling
Prices?
Answer :
 FIFO is the inventory cost flow assumption that treats the first goods in as the first
goods sold. LIFO is the inventory cost flow assumption that treats the last goods
in as the first goods sold. In a period of rising prices, FIFO values inventory at
current costs. However, LIFO would value inventory at costs that the company
could have incurred years ago. The analyst should take the LIFO cost flow
assumption into account and consider adjusting the inventory of a company using
LIFO upward to account for inflation.
What Are Marketable Securities?
Answer :
 Marketable securities are cash substitutes. Marketable securities are investments with short-
term maturities with little risk due to interest rate fluctuations. Examples of marketable
securities include Treasury Bills, Negotiable Certificates of Deposit, and Commercial Paper.
What Is The Entry For Deferred Tax Liability According To As22?
Answer :
 Deferred tax assets and liabilities should be distinguished from assets and liabilities
representing current tax for the period. Deferred tax assets and liabilities should be disclosed
under a separate heading in the balance sheet of the enterprise, separately from current assets
and current liabilities.
The break-up of deferred tax assets and deferred tax liabilities into major components of the
respective balances should be disclosed in the notes to accounts
What are Secret Reserves

 The term secret reserve refers to a reserve the existence of which is

not disclosed in the Balance Sheet. Secret reserves are also
called Hidden Reserve or Internal Reserve. Such a reserve is not
disclosed on the Balance Sheet. It can be said that there is a surplus
of assets over liabilities and that surplus is not disclosed or shown
by the Balance Sheet.
Method of Creation of Secret Reserves
 Providing excess depreciation on fixed assets such as plant, machinery, land
& building, furniture and fixtures, etc.
 Writing down an asset completely.
 Understating goodwill.
 Undervaluing assets such as stock, investments, etc. and showing them much
below their cost or market value.
 Non-recording of permanent rise or appreciation in value of a fixed asset, e.g.,
buildings.
 Providing excessively for bad and doubtful debts.
 Provide more reserve than necessary for bad and doubtful debts.
 Charging capital expenditure to revenue.
 Showing contingent liabilities as real liabilities.
Objects of Creating Secret Reserve
 Maintaining a strong financial position.
 Improving the solvency position of the entity.
 Meeting sudden future financial losses.
 Facing competition.
 Confusing the rivals regarding profitability.
 Providing additional working capital.
 Maintaining a stable dividend payment.
 Hiding a portion of profit.
 Enabling the directors to tide over unfavorable time.
 Helping the management not to distribute the hide portion of profit, which is
retained in the business in the form of secret reserve to the shareholders in the
interest of the business.
What is the difference between bookkeeping and
accounting?

Bookkeeping focuses on recording and organising financial data. Accounting is the

interpretation and presentation of that data to business owners and investors.
Bookkeeping typically consists of:
 payroll
 invoicing
 receipts and bills
 recording business transactions.
Accounting typically consists of:
 financial statements and reports
 budgets
 tax returns
 Analyzing business performance.
The tasks that bookkeepers and accountants do vary between businesses.
Bookkeepers working for smaller businesses might do some basic accounting duties.
There’s often overlap, and the duties may change a lot from one business to another.
What is the objective of financial reporting?

 The objective of financial reporting is to track, analyze and report your

business’ income.
The purpose of these reports is to examine
 resource usage
 cash flow
 Business performance and
 The financial health of the business.
 This helps you and your investors make informed decisions about how to
manage the business.
Three main goals of financial reporting

 Provide information to investors

Investors will want to know how cash is being reinvested in the business, and how
efficiently capital is being used. Financial reporting helps investors decide whether
your business is a good place for their cash.
 Track cash flow
Where is your business’ money coming from? Where is it going? Is the business
making a profit or a loss? These answers are important to know – they show how
well your business is performing, and whether it can cover its debts and continue to
grow.
 Analyse assets, liabilities and owner's equity
By monitoring these, and any changes to them, you can work out what to expect in
the future, and what you can change now to prepare. This also shows the availability
of resources for future growth.
Type of companies
Type of companies
On the basis of members

One person Company:

 OPC or one person company is a new category of company introduced to
encourage startups and young entrepreneurs wherein a single person can
incorporate the entity.
 It also promotes the concept of corporatization of the business. It should be
noted that it is not the same as a sole proprietorship firm, in a way that OPC has
separate legal existence with limited liability.
Private Company:
 A private company is one in which two or more persons get the company
registered under the Companies Act.
 The securities of such a company are not listed on a recognised stock
exchange, and they cannot invite the public to subscribe for the
shares/debentures.
 The members of a private company are restricted from transferring the
shares.
 The maximum number of members in a private company is 200.
Public Company:
 A company which is formed by a minimum number of seven
members with a lawful object is termed as a public company.
 Its securities are listed on a recognized stock exchange, and its
shares are freely transferable.
 Further, there is no limit on the maximum number of members
in such a company.
 The subsidiary of the public company is also considered as a
public company.
Company limited by guarantee:
 A company in which the liability of members is limited to a definite sum
stated in the memorandum of association of the company. Meaning that the
liability of the members is confined by the MoA to a stipulated sum, as
they have guaranteed to contribute to the company’s assets, in the event of
winding up of the company.
Unlimited Company:
An unlimited company is a company whose liability does not have
any limit. In this type of company, the liability of the member ends
when he/she ceases to be a member of that company.
Special companies

Government Company:
 The company whose at least 51% paid up share capital is owned by
Central Government/State Government, or partly by central and partly
by the state government. Further, it also covers a company whose
holding company is a government company.
Foreign Company:
 Any company registered outside the country that has a business place
in India or by way of an agent traditionally or electronically and
undertakes business operations in the country in any manner.
Section 8 Company:
 A company formed for a charitable object, i.e. to encourage commerce,
science, sports, art, research, education, social welfare, environment
protection religion, etc. comes under the category of Section 8 company.
These companies are given special license by the Central Government.
Further, they use the money earned as profit for the promotion of the
object and thus, dividend to members is not paid.
Public Financial Institution:
 The companies, which are engaged in financial and investment business
and whose 51% or more paid up share capital is held by Central
Government and are established under any act are termed as public
financial institutions. It includes LIC, IDFC, IDBI, UTI etc.
On the basis of the control

Holding Company:
 A parent company that owns and controls the management and
composition of the Board of Directors of another company (i.e. subsidiary
company) is termed as a holding company.
Subsidiary Company:
A company whose more than 51% of its total share capital is owned by
another company, i.e. a holding company either itself or together with its
subsidiaries, as well as the holding company also governs the composition of
Board of Directors is called the subsidiary company.
 Associate Company:
 A company in which another company possess a considerable
influence over the company, then the latter is called as an associate
company. The term considerable influence implies controls a minimum
20% of total share capital, or business decisions, as per an agreement.
 Apart from the list given above, there are many other companies such
as listed company, unlisted company, dormant company and Nidhi
company
Suppose an MNC wants to raise money or capital globally ,
which are the various options which they can use ?

 Commercial Banks
Global commercial banks all over provide loans in foreign currency to companies.
They are crucial in financing non-trade international operations. The different types
of loans and services provided by banks vary from country to country.
One example of this is Standard Chartered emerged as a major source of foreign
currency loans to the Indian industry. It is the most used source of international
financing.
International Agencies and Development Banks
 Many development banks and international agencies have come forth over the
years for the purpose of international financing.
 These bodies are set up by the Governments of developed countries of the world
at national, regional and international levels for funding various projects.
 The more industrious among them include International Finance Corporation
(IFC), EXIM Bank and Asian Development Bank.
International Capital Markets
(a) American Depository Receipts (ADR’s)
 This a tool often used for international financing. As the name suggests,
depository receipts issued by a company in the USA are known as American
Depository Receipts.
 ADRs can be bought and sold in American markets like regular stocks.
 It is similar to a GDR except that it can be issued only to American citizens and
can be listed and traded on a stock exchange of the United States of America.
(b) Global Depository Receipts (GDR’s)
 In the Indian context, a GDR is an instrument issued abroad by an Indian
company to raise funds in some foreign currency and is listed and traded on a
foreign stock exchange.
 A holder of GDR can at any time convert it into the number of shares it
represents.
 The holders of GDRs do not carry any voting rights but only dividends and capital
appreciation.
 Many renowned Indian companies such as Infosys, Reliance, Wipro, and ICICI
have raised money through issue of GDRs.
(c) Foreign Currency Convertible Bonds (FCCB’s)
 Foreign currency convertible bonds are equity-linked debt securities that are to be
converted into equity or depository receipts after a specific period.
 A holder of FCCB has the option of either converting them into equity shares at a
predetermined price or exchange rate or retaining the bonds.
 The FCCB’s are issued in a foreign currency and carry a fixed interest rate which
is lower than the rate of any other similar nonconvertible debt instrument.
 FCCB’s resemble convertible debentures issued in India. It is true that businesses
need funds but the funds required in business are of different types — long term,
short term, fixed and fluctuating. That is the reason why business firms resort to
different types of sources for raising funds.