Explain each real account and nominal account with examples.Real Account
is an account of assets and Liabilities. Types of Real account
- Furniture Account
- Land Account
- Machinery Account
- Building Account
- Goodwill Account
- Patents & Trade Marks Account.
is an account of incomes or expenses. Types of Nominal account
- Salary Account,
- Commission Paid/Received Account,
- Telephone Expenses Account,
- Wages Account,
- Printing & Stationery Account,
- Interest Paid/Received Account.
What is the difference between mercantile system and cash system of accounting?In mercantile system, expenses are considered as expenses during the period to which they pertain. Similarly, incomes are considered to be incomes during the period to which they pertain. This system of accounting is considered to be more ideal. On the hand, in cash system, expenses are considered to be expenses only when they are paid for and the incomes are considered to be income when they are actually received. This system of accounting is mainly used by the organizations established not for earning the profits.
What are the accounting concepts?
Accounting concepts are the basic assumptions on which the process of accounting is based. Following are the accounting concepts
- Business Entity Concept
- Dual Aspect Concept
- Going Concern Concept
- Accounting Period Concept
- Cost Concept
- Money Measurement Concept
- Matching Concept
What is owner’s equity? How will you calculate it?Owner’s equity, also known as capital of the business is the claim of the owner of the business against the assets of the business. Owner’s equity is calculated by subtracting equity of creditors from the total equity.
What is double entry Bookkeeping? What are its rules?Double entry bookkeeping follows the principle according to which every debit has a corresponding credit; hence total of all debits is always equal to the total of all credits. In this system, one account is debited and at the same time another account is credited by the similar amount.
Following are the rules for different account
For Personal Accounts : Debit the receiver, Credit the giver.
For Real Account : Debit what comes in, Credit what goes out.
For Nominal Account : Debit all the expenses, Credit all the incomes.
What is bank reconciliation statement? What are the steps to prepare it?
Bank reconciliation statement is a statement prepared at periodical intervals, with a view to indicated the items which cause disagreement between the balances as per the bank columns of the cash book and the bank pass book on any given date. Follow the below steps to prepare a bank reconciliation statement
- Take the balance either as per cash book or as per pass book as a starting point.
- Compare the items appearing in the bank column of the cash book with the item appearing in the bank pass book.
- Tick off the items in the pass book with the entries in the cash book. A list of unticked items either in cash book or pass book will be found.
- Add or deduct items from the balance which has been taken as a starting point.
- The resultant figure will be the balance as shown by the pass book or vice versa.
What are the reasons for the difference in the balances as shown by the cash book and the pass book?
- Cheques deposited into the bank but not yet collected and credited.
- Cheques issued but not yet presented for payment.
- Bank Charges.
- Amount collected or credited by bank on standing instructions.
- Amount paid or debited by the bank on standing instructions.
- Interest credited by bank.
- Interest debited by bank on overdraft.
- Direct payment by customers into the bank account.
- Dishonour of cheques or bills.
- Errors in recording of transactions by either the firm or the bank.
What is the adjustment entries made while preparing the final accounts from the Trial Balance?
- Closing Stock
- Outstanding Expenses
- Prepaid Expenses
- Accrued Income
- Income received in advance
- Bad Debits
- Provision for Doubtful Debts
- Provision for Discount on Debtors
- Interest on Capital
- Deferred Revenue Expenditure Written off
- Abnormal Loss due to fire etc.
- Goods distributed as free samples
- Goods sent on approval basis
- Commission payable to the manager
What is debit note and credit note? What is the difference between them?Debit note is an intimation sent to a person dealing with the business that his account is being debited for the purpose indicated therein. It is a note made out with a carbon duplicate. The original one is sent to the party to whom the goods are returned and the duplicate copy is kept for office record.
Credit note is an intimation sent to a person dealing with the business that his account is being credited for the purpose indicated therein.
What is the difference between Cash discount and Trade discount?
- Cash discount is an allowance made by retailers to the customers for prompt payment. On the other hand, trade discount is an allowance made by the wholesaler dealer to retailers off the catalogue or invoice price. This allowance is made between purchasers and sellers engaged in the same class of trade.
- Cash discount is always allowed or received when payment is made. Trade discount enables the retailers to sell the products to customers at catalogue or price list issued by the wholesaler.
- Cash discount is an allowance in addition to the trade discount made by the seller to the buyer.
- Cash discount is recorded in account books while trade discount is not shown separately.
- The main purpose of allowing trade discount is to enable the retailers to sell the goods at list price while the purpose of providing cash discount is prompt payment by the debtor to the creditor.
What items are included in Profit and Loss account?
- Rates and Taxes
- Trade Expenses
- Printing and Stationery
- Carriage out, freight out, carriage out
- Travelling expenses
- Apprentice premium
- Life insurance premium
- Insurance premium
- Income tax
- Interest on capital and drawings
- Loss or gain on asset sold
- Discount received and allowed
- Trade discount
What is the difference between a trial balance and a balance sheet?
- Trial balance is a list of balances from the ledger account while balance sheet is a statement of assets and liabilities.
- Trial balance contains balances of all personal, real and nominal accounts, while balance sheet contains balances of only those personal and real accounts which represent assets and liabilities.
- Trial balance is prepared before preparation of trading and profit and loss account, while balance sheet is prepared after the preparation of trading and profit and loss account.
- Trial balance is prepared to check the arithmetical accuracy of posting into ledger while balance sheet is prepared to indicate the financial position of the business on a particular date.
- Debt and credit balances are shown side by side while balance sheet is prepared on a T form basis, the left hand side showing liabilities while right hand side representing assets.
- Closing stock does not appear in the trial balance while it is shown on the assets side of balance sheet.
What is Contingent Liabilities?Contingent liability is an obligation, relating to a past transaction or other event or condition, that may arise in consequence, as a future event now deemed possible but not probable. Thus such liabilities as may arise in future are called contingent liabilities. For example: guarantee to a bank for loan advanced to a third party, possible penalties, fines and penalties payable to the government or income tax authorities etc. Future losses from natural calamities are not contingent liabilities. They are not recorded in books of account. They do not appear on the liabilities side of the balance sheet. They are shown by way of a footnote at the bottom of the balance sheet.
Explain convention of materiality?This convention proposes that while accounting for the various transactions, only those transactions will be considered which have material impact on profitability or financial status of the organization and other insignificant transactions will be ignore. In keeping with the principle of materiality, unimportant items are either let out or merged with other items. Sometimes, such items are shown as footnotes or in parentheses according to their relative importance.
What are the important terms used in balance sheet?Assets
- Current assets and fixed assets
- Tangible assets and Intangible assets
is a claim which can be enforced against the assets of the firm in the court. Thus equity refers to a claim held by
- An owner only,
- A creditor only,
- An owner and the creditor both.
- Current Liability
- Long term Liability or fixed Liabilities
- Contingent Liabilities
What is Deferred Revenue Expenditure? Give some examples.Deferred Revenue Expenditure is a type of expenditure which does not result into the acquisition of any fixed asset and the benefits from such expenditure is not received during the period which they are paid for.
For example - Initial Advertisement Expenditure, Research and development Expenditure, Preliminary Expenses.
Define Trial Balance. What are the main characteristics and uses of a trial balance?
Trial balance is a list of all balances standing on the ledger accounts of a firm at any given time. Following are the main characteristics of a trial balance.
- It is a statement prepared in a tabular form.
- It has two columns: one for debit balances and another for credit balances.
- Closing balances as shown by ledger accounts are shown in the statement.
- It is not an account but only a statement of balances.
- It is prepared on the basis of balanced accounts.
- It is a method of verifying the arithmetical accuracy of entries made in the ledger.
- It helps in preparation of Trading account, Profit & Loss account and Balance Sheet at the end of the period which exhibit the financial position of the firm.
What are the common errors in accounting? What steps will you follow to locate errors?Following are the common errors in accounting:
To locate the errors in the trial balance follow the below steps:
- Errors of Omission
- Errors of Commission
- Errors of Principle
- Compensating Error
- Check the total of all the subsidiary books, cash book and trial balance.
- Ensure that all the opening balances have been correctly brought forward in the current year’s books of account.
- Ensure that all the ledger accounts have been properly balanced and the balances of all the ledger accounts have been reflected in the Trial Balance.
- The difference in trial balance should be halved to locate such errors.
- If the difference in the trial balance is divisible by 9 without any reminder, it may indicate the transposition or transplacement of the amounts.
- The trial balance of the current year can be compared with the trial balance of the previous year to locate certain highlighting error.
What is the relation between journal and ledger?
- The journal is the book of first entry whereas the ledger is the book of second entry.
- The journal as a book of source entry ordinarily has greater weight as legal evidence than the ledger.
- The journal is the book for chronological record whereas the ledger is the book for analytical record.
- The unit of classification of data within the journal is the transaction; in the ledger the unit of classification of data within the ledger is the account.
- The process of recording in the journal is called journalizing, the process of recording in the ledger is called posting.
List down the errors which affect Trial Balance and errors which do not affect Trial Balance.Errors which affect the agreement of trial balance:
Errors which do not affect the agreement of trial balance:
- Wrong totaling of subsidiary books.
- Posting on the wrong side of an account
- Omission of posting an amount in the ledger
- Posting of wrong amount
- Error in balancing
- Error of Principle
- Errors of Omission
- Errors of Commission
- Recording of wrong amount in the books of prime entry or subsidiary books.
- Compensating Errors.
1. What are the different branches of accounting?
2. What is the difference between cost accounting, financial accounting and managerial accounting?
3. What is the difference between book keeping and accounting?
4. What are the important terms which are used in accounting?
5. What is personal account, real account and nominal account?
6. Explain dual aspect concept in accounting?
7. What is the difference between mercantile system and accrual system of accounting?
8. What are bills receivable and bills payable?
9. What are the accounting concepts? Explain each of them.
10. What are the accounting principles?
11. What is owner’s equity? How will you calculate it?
12. What are the rules of Debit and Credit?
13. What do you understand by the term assets and liabilities?
14. What is double entry book keeping?
15. What is bank reconciliation statement? What are the steps to calculate it?
16. What is overhead in accounting terms?
17. What is the difference between cash flow and fund flow statements?
18. What is debit note and credit note? What is the difference between them?
19. What are the golden rules of accounting?
20. What is an adjusting journal entry?
21. What is deferred account?
22. Explain Accounting 101?
23. What are accounting entities?
24. What is the Provision? What is the Entry for Provision?
25. What is the Importance of accounting standards?
26. What are the functions of accounting?
27. What is Contingent Liabilities?
28. Why Accounting is important in business?
29. What are the four classifications of Bad and Doubtful Debts as per the context of the Bank?
30. What is an operative accounts?
31. What is the difference between Accounts and Finance?
32. What is FBT (Fringe Benefit Tax)?
33. What is the relationship between bookkeeping and accounting?
34. Why does the accounting equation have to balance?
35. What is the difference between accounting and bookkeeping?
36. What is accounting period?
37. What is an accounting loss?
38. What is an EA in accounting?
39. What is the software applications used for accounts receivable?
40. What is inventory management?
41. What do you mean by Working Capital?
42. Define "book value" as applied to accounting?
43. What are the basic assumptions in accounting?
44. What is accounting normalization?
45. What are the various items fall under balance sheet?
46. What is the difference between cash basis and accrual basis balance sheet?
47. How do you pass a journal entry for purchase order in books of account?
48. What do you understand by Contingent liability?
49. How to prepare funds flow statement?
50. What is gross profit margin?
51. What is accounting report?
52. What are the different kinds of MIS reports?
53. What is meant by appropriation?
54. What do you understand by inter company settlement?
55. What is the meaning of TDS? How it is charged?