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Commerce Question Bank – 26 Short Questions With Answers on “Financial and Management Accounting”

1. What is money measurement postulate?

According to this postulate accounting records only those transactions which can be expressed in terms of money, consequently, those events or transactions which cannot be expressed in terms of money do not find place in the books of accounts though they may be very useful for the business.

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For example, working conditions, sales policy, quality of products, labour management relation, goodwill, quality of employees etc. cannot be expressed in monetary terms and hence, are not recorded in the books.

2. What are the limitations of the money measurement postulate?

The money measurement postulate has two major limitations:

(i) It restricts the scope of accounting because it is not capable of recording transactions which cannot be expressed in terms of money. Thus this postulate puts a serious handicap on the usefulness of accounting records for management decisions.

(ii) It does not take care of the effects of inflation because it assumes a stability of the money measuring unit. It ignores the fluctuations in the value of money over a period of time.

3. What is going concern postulate?

The going concern postulate of accounting views the business entity as a going concern. It does not presuppose its liquidation. This postulate is sometimes referred to as “Continuity postulate.”

It can be defined as “unless and until the entity has entered into a state of liquidation, it is to be viewed as having an indefinite life.” Transactions are recorded in the books keeping in view the going concern aspect of the business unit.

4. Describe any three effects of going concern postulate.

The going concern postulate has the following effects:

(i) It is because of this postulate that suppliers supply goods and services and other business firms enter into business transactions with the business unit. Suppliers will not supply goods and services and other persons will not have business dealings with the business entity if they feel that the concern will be liquidated

(ii) Long term assets are valued at cost less proper depreciation. The value of assets is ignored because of the fact that the concern is a going concern and it shall not be forced to sell its fixed assets. In the absence of such a postulate, the fixed assets would have been valued at an amount which they would have fetched in a second hand market.

(iii) Inventories (stocks) are valued at cost or market price whichever is lower. In the absence of the going concern postulate they would have been valued at a price which they would have fetched in the events of forced sale (Liquidation). Thus it implies that due to this postulate inventories are valued at cost.

5. What is periodicity postulate?

To facilitate the preparation of financial statements on a periodic basis, accountants follow periodic postulate According to this postulate, the life of the business is divided into appropriate segments for studying the results shown by the business after each segment and such a segment or time interval is called “accounting period” which is usually of one year.

The principal of segregating Capital Expenditure from Revenue Expenditure is based on this postulate. The postulate plays a very important role in determining the income of a particular accounting period and ascertains the financial position of a business entity on a particular date.

6. What is matching concept?

Matching concept is based on periodic postulate. The primary objective of a business is to earn profit. It is for this reason that major share of attention of the accountant is absorbed involving technique for measuring profits. In order to measure the profit made by the period, the revenues should be matched with the costs (expenses) of that period.

The term matching means appropriate association of related revenues and expenses, i.e., comparison of the revenues earned with the expenses incurred for earning that revenue. Thus matching concept implies the matching of expenses against related revenues.

7. Describe the application of matching concept.

Determination of the period in which revenue is to be realized is the first step in the application of the concept. The various bases used for determining the period in which the revenue is realized are sales basis, cash basis and the production basis.

The second step is to find out the costs and expenses to be matched with revenues. This requires various adjustments to be made for outstanding expenses, accrued incomes, and prepaid expenses to be matched with revenues. Matching concept also requires the application of personal judgement in making the estimates for doubtful debts, discounts, etc.

8. What do you understand by accrual concept?

Accrual concept is associated with matching concept. According to this concept, revenues and costs are accrued, i.e. revenues and costs are recognized as they are earned or incurred and recorded in the financial statements of the period to which they relate In order to ascertain correct profit or loss for a period, incomes and expenses accrued but not received and not paid must be taken into consideration.

9. What is realization concept?

Realisation concept is associated with recognition of revenues. According to this concept revenue is considered as being earned on the date at which it is realized, i.e., on the date when the property in goods passes to the buyer and he becomes legally liable to pay.

Thus no profit can be earned without the sale of goods and services. However there are certain exceptions to this concept. In case of hire purchase, the ownership of goods sold passes to the buyer only when last installment is paid but sales are presumed to have been made to the extent of installment received and installments due but not received Similarly in case of contract accounts, though the contractor is liable to pay only when the whole contract is completed the profit is calculated on the basis of work certified year after year.

10. What is dual aspect concept?

This is the basic concept of accounting. According to this concept, every business transaction involves two fold aspects and both the aspects have to be recorded in the books of account.

For example, if a business has acquired an asset, it must have given up some other asset such as cash or the obligation to pay for it in future Thus a giver necessarily implies a receiver and a receiver necessarily implies a given. There must be a double entry to have a complete record of each business transaction entry of the same amount in the giving account.

11. What are the constituents of the final account?

The final account consists of—(a) Trading A/c, (b) Profit and Loss A/c, (c) Profit & Loss Appropriation A/c, (d) Balance Sheet.

The aim of the Trading A/c is to ascertain the Gross Profit or Gross Loss for a certain period that of the Profit & Loss A/c is to ascertain in the Net Profit on Net loss for the same period. The aim of the Profit & Loss Appropriation A/c is to show all dispositions, division and appropriation of the Net Profit. The aim of the Balance Sheet is to show the financial position of a concern on a particular date.

12. Write a short note on capital expenditure.

Capital expenditure consists of expenditure the benefit of which is not fully consumed in an accounting period but spreads over several periods It is, therefore, of non-recurring nature. It includes expenditure incurred

(i) for acquiring fixed assets e.g., land, building, etc.

(ii) for making additions to existing fixed assets, e g , cost of a new factory shed.

(iii) for increasing the income earning capacity of the business either by reducing cost or by increasing productivity, e.g., cost of replacing a petrol driven engine by a diesel engine.

(iv) for acquiring a benefit of an enduring nature or a valuable right, e.g., cost of acquiring goodwill, patent rights.

All items of Capital expenditure appear on the assets side of the Balance Sheet.

13. What do you understand by revenue expenditure?

Revenue expenditure consists of expenditure incurred in one accounting period and the full benefit of which is also consumed in the same period Therefore, it is normally of recurring nature. Such expenditure does not increase the earning capacity of the business.

All items of revenue expenditure appear in the Trading & Profit & Loss Account.

14. Which types of expenses are included in the category of revenue expenditure?

The following types of expenses are included in the category of revenue expenditure:

(i) Expenses incurred in normal course of business

(ii) Expenses incurred to maintain fixed assets.

(iii) Expenses incurred for goods purchased for resale.

(iv) Depreciation on fixed assets, interest on loans for business, loss from sale of fixed assets, era

15. What is deferred revenue expenditure? Give some examples of deferred revenue expenditure.

In some cases, the benefit of revenue expenditure may be available for a period of years. Such expenditure is known as “deferred revenue expenditure.” This sort of expenditure is spread over a number of years.

Discount allowed on issue of debentures, development expenditure of mines and minerals, expenditure on an advertisement campaign or on a scientific experiment are examples of deferred revenue expenditure.

16. Describe the distinct types of deferred revenue expenditure.

The following are the distinct types of deferred revenue expenditure:

(i) Expenditure wholly or partly paid in advance, the benefit of which will be derived in future like prepaid expenses, etc.

(ii) Expenditure where a proportion of the benefit has been derived with the period under review, the balance which is not used, as shown in the Balance Sheet as a fictitious asset e.g., Advertising Expenditure incurred in introducing a new product or developing a new product. Preliminary Expenses of a company is also a type example of Deferred Revenue expenditure.

17. With the help of examples, explain the meaning of capital and revenue receipts.

Amount received by sale of capital asset is capital receipt and the amount received by sale of those goods in which business is carried on is revenue receipt.

The example of capital receipts include sale of fixed assets, capital contribution, loan receipts, and the example of revenue receipts include sale of stock-in-trade, revenue from services rendered in the normal course of business, revenue from permitting others to use the assets of the business, such as interest, rent, royalty.

18. What is a financial statement?

Financial statement is the process of ascertaining the financial strength and weakness of the business and reporting on profitability, operational efficiency, solvency, etc., of the firm.

The detailed information about financial position and performance is summarized and split into simple statements for calculating various ratios and making comparison easily. Financial statement is largely a study of relationship among the various financial factors in a business as disclosed by a single set of statements and study of the trend of these factors as shown in a series of statements

19. Write a short note on final account.

Preparation of final accounts is the last step in the accounting cycle. Final accounts include:

(i) Trading and profit and loss account or income statement.

(ii) Balance sheet or position statement.

Final accounts are the means of conveying to management, owners and interested outsiders a concise picture of profitability and financial position of the business.

The preparation of final accounts is the end product of the accounting process which gives a concise accounting information of the accounting period after the accounting period is over The accounts summarise all accounting information recorded in the subsidiary books and ledger running into thousands of pages.

20. What is the procedure of preparing final accounts?

Once the Trial Balance is prepared trader prepares final accounts, i.e. trading accounting, profit and loss account and balance sheet. Trading and profit and loss account are prepared by transferring from the trial balance, all revenues accounts and expenses accounts and accounts concerning goods by passing closing entries. All remaining accounts, i.e., assets account, liabilities accounts and capital account are shown in Balance Sheet.

21. What do you understand by trading account?

Income statements is made up of two accounts, i.e.. Trading account and Profit and loss account. Trading concerns, i.e. those concerns which purchase goods from one market and sell it in another market, prepare Trading account.

This account is prepared to know the trading results of the business i.e., how much profit the business has earned from buying and selling during a particular period. Trading account shows “Gross Profit” or “Gross loss”, i.e. difference between net proceeds of sale and cost of goods sold.

22. What is the meaning of profit and loss account?

Profit and loss account is prepared to calculate the net profit of the business Net profit is the surplus remaining after charging against gross profit all the expenses, including depreciation and other provisions, properly attributable to the normal activities of the particular business.

23. What are the objectives of preparing profit and loss accounts?

The objectives of preparing profit and loss account can be summed up as under:

(i) Provides information about net profit

(ii) Comparison of current year’s income with that of the previous year’s can be made.

(iii) Concrete steps may be taken to increase the net profit in future through analysis of expenses.

(iv) Proper allocation of net profit can be made among partners and provisions for various types of reserves as also for expenditures can be made.

24. What is balance sheet?

Balance sheet is a “sheet” of all those ledger “Balances” pertaining to the assets owned and liabilities owned by the business on a particular day. Balance sheet is prepared with a view to measure the correct financial position of a business enterprise on a certain fixed date. It is a device for describing the financial position of a business in systematic standard form. It is “snapshot” of the financial conditions of the business.

25. In what respect do the balance sheet and trial balance resemble each other?

Balance sheet and trial balance both are statements and are prepared by almost all enterprises. In spite of differences, they resemble in following aspects:

1. Both contain the cash balance.

2 Both are prepared from the ledger

3 Both are not accounts but statements

4 Accounts having no balance do not appear in either of the two

26. What do you mean by closing stock?

Closing stock means unsold or unused stock of goods remaining at the end of the accounting period. Closing stock needs adjustments at the time of preparing final accounts. The adjustments entry for closing stock is as under

Closing stock account Dr.

To Trading Account

The impact of this entry will be that closing stock becomes an asset and appears in the balance sheet and the Trading A/c is credited with closing stock.

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