finance interwive question & answers

What are the various streams of accounting?

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. Theses financial statements are basically of two types: First is Profitability Statement or Profit and Loss Account and second is Balance Sheet.

2)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.

3)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 character-istic features?

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:1) 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.2) 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.3) 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.4) 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.5) Disclosure of Financial Status: It discloses the financial status and financial performance of the business as a whole.6) Interim Reports: Financial statements which are based on financial accounting are interim reports and cannot be the final ones.7) 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.

xplain Cost Accounting. What are the objectives of doing it?

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:

1) Ascertainment of Cost and Profitability2) Cost Control3) Presentation of information for managerial decision making.

What are the characteristic features of cost account-ing?

Following are the characteristic features of Cost Accounting:

1) Cost accounting views the whole organization from the individual component of the organization like a job, a process etc.2) Cost accounting aims at ascertaining the profitability of individual components of the organization.3) It is meant for those people who are part of the decision making process of the organization. Thus, it is only for internal use.4) It is not a legal requirement. It is not compulsory to maintain cost accounting records.5) In Cost Accounting, data is immediately available which facilitates in decision making process.6) 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 objec-tives?

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:

1) 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.

2) Assess Risk: The aim of management accounting is to assess risk in order to maximize risk.

3) Allocation of Resources: is an important objective of Management Accounting.

4) Presentation of various financial statements to the Management.

What are the limitations of Management Accounting?

Limitations of Management Accounting:

1) Management Accounting isbased 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.

2) Management Accounting is useful only to those people who are in the decision making process.

3) Tools and techniques used in management ac-counting only provide information and not ready made decision. Thus, it is only a supplementary ser-vice.

4) In Management Accounting, decision is based on

the manager’s institution as management try to avoid lengthy courses of scientific decision making.

5) Personal prejudices and bias affect the decisions as the interpretation of financial information is based on personal judgment of tWhat is the scope of Man-agement accounting?

Following is the scope of Management Accounting:

1) Financial Accounting2) Cost Accounting3) Revaluation accounting4) Control Accounting 5) Marginal Costing 6) Budgetary Control7) Financial Planning and 8) Break Even Analysis 9) Decision accounting: 10) Reporting11) Taxation12) Audit

What are the various techniques used to discharge the function of management accounting?

Following are the technique used to discharge the function of management accounting:1) Marginal Costing 2) Budgetary Control3) Standard Costing4) Uniform Costing

Compare Financial Accounting and Cost Accounting.

1) Financial Accounting protects the interests of the outsiders dealing with the organization e.g shareholders, creditors etc. Whereas reports of Cost Accounting is used for the internal purpose by the management to enable the same in discharging various functions in a proper manner.

2) Maintenance of Financial Accounting records and preparation of financial statements is a legal requirement whereas Cost Accounting is not a legal requirement.

3) Financial Accounting is concerned about the calculation of profits and state of affairs of the organization as whole whereas Cost accounting deals in cost ascertainment and calculation of

profitability of the individual products, departments etc.

4) Financial Accounting considers only transactions of historical financial nature whereas Cost Accounting considers not only historical data but also future events.

5) Financial Accounting reports are prepared in the standard formats in accordance with GAAP whereas Cost accounting information is reported in whatever form management wants

Compare Financial Accounting and Management Ac-counting

1) Financial Accounting reports are used by outside parties such as creditors, shareholders, tax authorities etc. whereas Management Accounting reports are used by managers inside the organization for planning, directing, controlling and taking decisions.

2) In Financial Accounting, only historical financial transactions are considered and do not consider non financial transactions whereas in Managerial Accounting emphasis is on decisions affecting the future, thus it may consider future data as well s non financial factors.

3) Maintenance of financial accounting records and preparation of financial statements is a legal requirement whereas Management Accounting is not at all legal requirement. Moreover, these systems have their own reporting formats.

4) In Financial Accounting, precision of information is required whereas in Management Accounting timeliness of information is required.

5) In Financial Accounting, only summarized data is prepared for the entire organization whereas in Management Accounting detailed reports are prepared about products, departments, employees and customer.

6) Preparation of Financial Accounting is based of Generally Accepted Accounting Principles whereas Management Accounting does not follow such principles to prepare reports.

7) Financial reports generated by the Financial Accounting are required to be accurate whereas accuracy is notthe prerequisite of management accounting.

Compare Cost Accounting and Management Account-ing

1) The scope of management accounting is broader than that of cost accounting.

2) Both the accounting streams are not a legal requirement.

3) Cost accounting provides only cost information for managerial use whereas management accounting provides all types of accounting information i.e., cost accounting as well as financial accounting information.

4) In Cost accounting, the main emphasis is on cost ascertainment and cost control whereas in management accounting the main emphasis is on decision-making.

5) The various techniques used by cost accounting are standard costing, budgetary control, marginal costing and cost-volume-profit analysis, uniform costing and inter-firm comparison, etc. whereas management accounting also uses these techniques but also uses techniques like ratio analysis, funds flow statement, statistical analysis etc.

6) Cost Accounting is a part of Management Accounting whereas Management accounting is an extension of managerial aspects of cost accounting with the ultimate intention to protect the interests of the business.

What do you mean by accounting concepts? List them.

Accounting concepts are those basis assumptions upon which basic process of accounting is based. Following are the basic accounting concepts:

1) Business Entity Concept

2) Dual Aspect Concept

3) Going Concern Concept

4) Accounting Period

5) Concept Cost Concept

6) Money Measurement Concept

7) Matching Concept

Explain the following:

a) Business Entity Concept:According to this concept, the business has a separate legal identity than the person who owns the business. The accounting process is carried out for the business and not for the person who is carrying out the business. This concept is applicable to both, corporate and non corporate organizations.

b) Dual Aspect Concept:According to this concept, every transaction has two affects. This basic relationship between assets and liabilities which means that the assets are equal to the liabilities remains the same.

c) Going Concern Concept:According to this concept, the organization is going to be in existence for an indefinite period of time and is not likely to close down the business in the shorter period of time. This affects the valuation of assets and liabilities.

d) Accounting Period Concept:According to this concept, the indefinite period of time is divided into shorter time periods, each one being in the form of Accounting period, in order to facilitate the preparation of financial statements on periodical basis. Selection of accounting period depends on characteristics like business organization, statutory requirements etc.

e) Cost Concept:According to this concept, an asset is recorded at the cost at which it is acquired instead of taking current market prices of various assets.

f) Money Measurement Concept:According to this concept, only those transactions find place in the accounting records, which can be expressed in terms of money. This is the major drawback of financial accounting and financial statements.

g) Matching Concept:According to this concept, while calculating the profits during the accounting period in a correct manner, all the expenses and costs incurred during the period, whether paid or not, should be matched with the income generated during the period.


a)Convention of Conservation

This accounting convention is generally expressed as to “anticipate all the future losses and expenses, without considering the future incomes and profits unless they are actually realized.” This concept emphasizes that profits should never be overstated or anticipated. This convention generally applies to the valuation of current assets as they are valued at cost or market price whichever is lower.

b)Convention of Materiality

This accounting convention proposed that while accounting only those transactions will be considered which have material impact on financial status of the organization and other transactions which have insignificant effect will be ignored.. It gives relative importance to an item or event.

c) Convention of Consistency

This accounting convention proposes that the same accounting principles, procedures and policies should be used consistently on a period to period basis for preparing financial statements to facilitate comparison of financial statements on period to period basis. If any changes are made in the accounting procedures or policies, then it should be disclosed explicitly while preparing the financial statements.

What are the various systems of Accounting? Explain them.

There are two systems of Accounting:

1) Cash System of Accounting: This system records only cash receipts and payments. This system assumes that there are no credit transactions. In this system of accounting, expenses are considered only when they are paid and incomes are considered when they are actually received. This system is used by the organizations which are established for non profit purpose. But this system is considered to be defective in nature as it does not show the actual profits earned and the current state of affairs of the organization.

2) Mercantile or Accrual System of Accounting: In this system, expenses and incomes are considered during that period to which they pertain. This system of accounting is considered to be ideal but it may result into unrealized profits which might reflect in the books of the accounts on which the organization have to pay taxes too. All the company forms of organization are legally required to follow Mercantile or Accrual System of Accounting.

What are the different types of expenditures consid-ered for the purpose of accounting?

For the accounting purpose expenditures are classified in three types:

* Capital Expenditureis 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 Expenditureis 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 Expenditureis 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?

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 prof-itability statement in a period? Explain.

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 ex-penses dealt with in profitability statement?

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 do you mean by accounting concepts? List them.

Accounting concepts are those basis assumptions upon which basic process of accounting is based. Following are the basic accounting concepts:

1) Business Entity Concept

2) Dual Aspect Concept

3) Going Concern Concept

4) Accounting Period

5) Concept Cost Concept

6) Money Measurement Concept

7) Matching Concept


a) Business Entity Concept:According to this concept, the business has a separate legal identity than the person who owns the business. The accounting process is carried out for the business and not for the person who is carrying out the business. This concept is applicable to both, corporate and non corporate organizations.

b) Dual Aspect Concept:According to this concept, every transaction has two affects. This basic relationship between assets and liabilities which means that the assets are equal to the liabilities remains the same.

c) Going Concern Concept:According to this concept, the organization is going to be in existence for an indefinite period of time and is not likely to close down the business in the shorter period of time. This affects the valuation of assets and liabilities.

d) Accounting Period Concept:According to this concept, the indefinite period of time is divided into shorter time periods, each one being in the form of Accounting period, in order to facilitate the preparation of financial statements on periodical basis. Selection of accounting period depends on characteristics like business organization, statutory requirements etc.

e) Cost Concept:According to this concept, an asset is recorded at the cost at which it is acquired instead of taking current market prices of various assets.

f) Money Measurement Concept:According to this concept, only those transactions find place in the accounting records, which can be expressed in terms of money. This is the major drawback of financial accounting and financial statements.

g) Matching Concept:According to this concept, while calculating the profits during the accounting period in a correct manner, all the expenses and costs incurred during the period, whether paid or not, should be matched with the income generated during the period.


a)Convention of Conservation

This accounting convention is generally expressed as to “anticipate all the future losses and expenses, without considering the future incomes and profits unless they are actually realized.” This concept emphasizes that profits should never be overstated or anticipated. This convention generally applies to the valuation of current assets as they are valued at cost or market price whichever is lower.

b)Convention of Materiality

This accounting convention proposed that while accounting only those transactions will be considered which have material impact on financial status of the organization and other transactions which have insignificant effect will be ignored.. It gives relative importance to an item or event.

c) Convention of Consistency

This accounting convention proposes that the same accounting principles, procedures and policies should be used consistently on a period to period basis for preparing financial statements to facilitate comparison of financial statements on period to period basis. If any changes are made in the accounting procedures or policies, then it should be disclosed explicitly while preparing the financial statements.

What are Nominal Accounts? List accounts consisting the Nominal Account.

Nominal Accounts are the accounts of Incomes, Expenses, Losses and Gains. Nominal Accounts consist of the following types of accounts:

-Insurance Account-Wages Account-Interest Paid or Received Account-Commission Paid or Received Account-Telephone Expenses Account-Salary Account

What is the principal of Double Entry system of ac-counting? What are the advantages of Double Entry system of accounting?

The principal of Double Entry system of Accounting is “Every debit has a corresponding credit” hence the total of all debits has to be equal to the total of all credits. In simple words, every business transaction affects two accounts. If one account is debited then the other account will be credited with the similar amount. For example: if the business purchases a machinery worth Rs. 500000, then machinery account gets debited with amount Rs. 500000 as the business is receiving an asset for its operation, on the other side cash account automatically gets credited with the same amount of Rs. 500000 as cash is going out of the business.

Advantages of Double Entry system of Accounting:

-It considers both the aspects of business transaction-Arithmetic accuracy of the accounting records can be checked and verified by preparing trial balance-Correct results of the operations can be ascertained by preparing Final Accounts-Correct valuation of assets and liabilities at any point of time by preparing Balance sheet

What are the rules of double entry book keeping for various types of accounts?

Following are the basic rules of double entry book keeping for various types of accounts:

-Personal Account : Debit the Receiver, Credit the Giver-Real Account : Debit what comes in, Credit what goes out-Nominal Account : Debit all the Expenses, Credit all the Incomes

What is depreciation? What are the causes of depreci-ation? Is it a cost? Why?

Depreciation is a permanent, gradual and continuous reduction in the book value of the fixed asset. Except Land all the fixed assets e.g. Car, Machinery, Furniture etc depreciates in value making the asset useless after the end of a certain period.

Following are the causes of Depreciation:

-Wear and Tear due to regular use of the asset-Deterioration occurs with the passage of time, whether the asset is in use or not-Damages done to the assets due to an accident like fire,

mishandling etc.-Depletion of Asset-Obsolescence i.e. due to new technology in use, new inventions, innovations etc.

Yes, depreciation is a cost. It is a historical cost, which is charged against profits of the organisation reducing the profitability. It is a non-cash cost as it is never paid or incurred in cash.

What is the need of depreciation account?

According to the matching principle of accounting, the costs incurred in the accounting year should be matched with the revenue or income earned during the same accounting year. Thus, it is necessary to spread the cost of fixed asset less scrap or realizable value after the useful life of the fixed asset is over and this process of ascertain the same is called depreciation accounting. Thus, depreciation account is needed for mainly two purposes:

To ascertain due profits and to represent the value of the fixed asset at its unexpired cost i.e book value of the asset less depreciation.

What is the effect of depreciation of assets on profits received by owners?

Depreciation forms a part of cost which is used for arriving at correct estimation of profits, which then is distributed to the owners of the business in the form of dividend. Addition of depreciation to the cost reduces the amount of distributable profits. By maintaining a de-preciation account a part of the distributable profit is retained in the business as a reserve which is used to purchase new machinery or for other purposes in the future which reduces the profits or dividends received by the owners.List various methods for calculating depre-ciation.

Methods for calculating depreciation are:

-Straight Line Method-Written Down Value(Reducing Balance)Method-Production Unit Method-Production Hour Method-Joint Factor Rate Method-Revaluation Method-Renewal Method

Explain straight line method to calculate deprecia-tion. What are it advantages and limitations?

It is the simplest and most often used technique. The components used to calculate Straight Line Method are:

-Cost of Asset

-Estimated Scrap vale-is the value of the asset at the end of life of the asset-Estimated life of Asset

Formula to calculate:

Depreciation = (Cost of Asset-Estimated Scrap Vale)/Estimated life of Asset in years

The main advantage of this method is that an equal amount of depreciation is charged every year throughout the life of the Asset which makes the calculation of depreciation easy.

But the limitation of this method is that the amount of depreciation charged on the asset in the later years is high due to the reduced value of the asset.

Explain Written Down Value (Reducing Balance) method to calculate depreciation. What are the bene-fits of this method?

In Written Down Value Method, the rate of depreciation is predetermined. This is done by deducting the amount of depreciation charged before from the balance of cost of asset (Cost of Asset-Estimated Scrap Value). In simple words, in the first year the amount of depreciation charged is high and it gradually starts decreasing during the subsequent years.


Depreciation = 1- N= number of yearsR= Residual/Scrap ValueC=Cost of the asset

The main benefit of this method is that it recognises this fact that in the initial phase of an asset, costs of maintenance, repairs etc. are less which goes on increasing with the progressing life of the asset. Thus, by charging higher amount of depreciation in the initial years and gradually decreasing the amount of depreciation counterbalance both the lower amount of repairs and maintenance cost in the initial years and the gradual increase later on. It can be noted here that the written down value can never be zero.

Explain production unit method to calculate deprecia-tion.

Production Unit Method is also a method of calculat-ing depreciation. According to this method, rate of depreciation is predetermined at per unit, which is calculated on the basis of total number of units pro-duced during the life of the asset. This method gives more importance to the usage factor. Higher the number of units produced, higher will be the amount of depreciation and vice versa.


Rate of Depreciation per unit = (Cost of machine – Es-timated Scrap Value) / EstimatedExplain annuity method of calculating depreciation.

In this method, the purchase of an asset is considered an investment of capital on which a certain rate of interest is earned. The cost of the asset and the interest are written down annually by equal instalments until the book value of the asset is reduced to nil. The annual charge by way of depreciation is found out from the annuity tables. The annual charge for depreciation will be credited to asset account and debited to depreciation account while the interest will be debited to asset account and credited to interest account. The disadvantage of this method is that it is a complicated method to charge depreciation. Secondly, the burden on Profit and Loss account goes on increasing with the passage of time and the amount of interest goes on diminishing as years pass by. Thus this method is best suited to those assets which require considerable investment and don’t require frequent additions.

Explain joint factor rate method of calculating depre-ciation.

This method is also used to calculate amount of depreciation. In this method the depreciation is provided partly at a fixed rate on time basis and partly at a variable rate on usage basis. number of units produced

What is sinking fund method of calculating deprecia-tion?

It is also known as Depreciation fund method. Under this method a sinking fund or depreciation fund is created. Every year the profit and loss account is debited and fund account is credited with a sum, which is calculated such that the annual sum credited to the fund account which is accumulating throughout the life of the asset will be equal to the sum required to replace the old asset. The main

advantage of this method is that it accumulates interest or dividends by regular investment of cash outside the business e.g.in securities to finance the replacement of the assets, which has become useless. But on the other hand this method has disadvantage also as the burden of profit and loss account goes on increasing as years pass by since the amount spent on repairs and maintenance goes on increasing due to the wear and tear of the asset and the amount of depreciation remains same.

Explain endowment policy method of calculating de-preciation.

This method is similar to Sinking Fund method except in this method instead of investing in securities the amount set aside is used to pay premium on an Endowment Policy. And the policy should mature on the date on which the ceases its useful life. This collected money is then used to replace the expired asset.

Explain revaluation method to calculate depreciation

Under this method the fixed assets are valued at the end of each accounting period. The difference between the value at the beginning of the period and the value at the end of the period represents the depreciation value which is charged against the profit and loss account. This method is used in case of assets like loose tools, packages, Farmers’ livestock etc.

Formula for Calculating:

Depreciation = Value of asset at the end – Value of asset at the beginning + Any new purchases

Explain renewal method to calculate depreciation.

In this method the full cost of the asset is charged as depreciation during the period in which the asset is renewed. No depreciation is charged in between the period. This method can be used if the asset is of small value and is renewed frequently.

What method of depreciation calculation is used to calculate the tax liability according to Income Tax Act, 1961?

According to Income Tax Act, 1961 Written Down Method of depreciation is used to calculate the tax liability. In this method, depreciation is charged at predetermined rate, which is calculated on the balance of cost of asset less amount of depreciation previously charged. The rate at which the depreciation will be calculated is also specified in the Income Tax Act 1961.

How is depreciation calculated as per schedule XIV of Companies Act, 1956?

As per Schedule XIV of Companies Act, 1956 the company can calculate the depreciation by using either Straight Line Method or Written Down Value Method. The rate to calculate depreciation is also specified in Schedule XIV. If any addition has been made to any asset during the financial year, depreciation on such an asset will be calculated on pro-rata basis from the date of such addition or upto the date on which such asset has been sold.

How are the fixed assets categorized to calculate the depreciation as per schedule XIV of Companies Act, 1956?

To calculate depreciation as per Schedule XIV of Companies Act, 1956 the fixed assets are categorized as below:

-Buildings-Factory Buildings as well as Administration buildings-Plant and Machinery-Furniture-Vehicles-Computer Installations

Does depreciation generate funds for replacement of assets?

Yes, depreciation generate funds for replacement of assets. When depreciation is charged against the as-set, a significant portion is taken out of the profits every year during the lifetime of the existing assets, and is retained and accumulated without being dis-tributed to the owners as dividend. Thus at the end of the life of the existing asset, the business will have some funds to replace old asset with the new one.-Compare: Depreciation as per Companies Act and In-come Tax Act

Under the Companies Act: Depreciation is computed either using the straight line method or written down value method. In straight line method the amount of depreciation is uniform for all the years where in written down method the amount of depreciation is highest in the first year and gradually decreases in the subsequent years.

Under Income Tax Act: Depreciation is computed using written down value method. Also it is charged on the block of assets and not on individual assets. The block of assets means a group of assets for

which the same rate of depreciation is applicable.

What is Journalizing? What are the columns of a jour-nal?

Journalizing is the process of recoding business transactions in the Journal in chronological order, as and when the transactions take place. Journal is also known as Book of Original Entry or the Book of Prime Entry.

Journal has following five columns:

-Date-Particulars-Ledger Folio-Amount Debited-Amount Credited

Explain Compound Journal Entry.

In day to day business, various similar transactions take place on the same day and every account is either debited or credited. Thus instead of passing different entries, a compound entry can be passed, which involves more than one debit or more than one credit or both. This makes the journal less bulky and avoids duplication.

What are subsidiary books? Why are they main-tained?

Subsidiary book is the sub division of Journal. These are known as books of prime entry or books of original entry as all the transactions are recorded in their original form. In these books the details of the transactions are recorded as they take place from day to day in a classified manner.

The important subsidiary books used are as following:-

-Cash Book: Used to record all the cash receipts and payments.-Purchase Book: Used to record all the credit purchases.-Sales Book: Used to record all the credit sales-Purchase Return Book: Used to record all goods returned by business to the supplier-Sales Return Book: Used to record all good returned by the customer to the business.-Bills Receivable Book: Used to record all accepted bills received by business.-Bills Payable Book: Used to record all bill accepted by us to our creditors.-Journal Proper: Used to record those transactions for which there

is no separate book.

These subsidiary books are maintained because it may be impossible to record each transaction into the ledger as it occurs. And these books record the details of the transactions and therefore help the ledger to become brief. Future reference and any desired analysis becomes easy as transactions of similar nature are recorded together.

List the type of transactions entered in Journal proper.

The Journal proper is used to record following transactions:-

-Opening Entries: are the entries which are made at the starting of the financial year.

-Closing Entries: At the close of the accounting period balances from the various accounts are transferred in order to balance the books of accounts. Thus, this process of transferring balances of the trading and profit and loss account at the end of year is called closing the books and entries passed at that time are called closing entries.

-Transfer Entries: are the entries which are passed in order to transfer one account to another account.

-Adjustment Entries: are passed at the end of an accounting period in order to modify the accounts.

-Rectification Entries: are passed to rectify the error detected the books through an entry in journal proper.

-Entries for rare transactions: Journal proper is used for rare transactions.

-Entries for which there is no special journal: When the transactions cannot be recorded in the above sub journals then the same are entered in the journal proper.

Examples of such transactions are: Distribution of goods as free sample, Goods destroyed by fire, etc

Explain Cash book.

Cash book is a book of original entry in which all the transactions relating to cash receipts and payments are recorded in chronological

order. Cash receipt is entered on the debit side and cash payment is recorded on credit side of the cash book. There are three types of cash book:

-Single Column Cash Book: This record only cash receipts and payments. It has only one money column on debit and credit side. Cash received is entered on the debit side and cash payments are entered on the credit side.

-Double/ Two Column Cash Book: This type of Cash book has two columns of cash and discount on both the debit and credit side.

-Three Column Cash Book: This cash book has three columns of cash, bank and discount on both the debit and credit side.

At the end of specified period the cash book is balanced. Excess of debit balance is posted on credit side as “By balance c/d” to balance both the sides. From the start of the next period the balance on the credit side is brought down on the debit side by “To balance b/d” n records total amount to the supplier.

Explain Purchase day book.

Purchase Day book (Purchase Register)is the book of original entry in which all the transactions relating to only credit purchase are recorded. Cash purchases do not find place in purchase day book as they are recorded in Cash book. At the end of every month purchase day book is totalled. The total amount show the total goods purchased on credit. The total of pur-chase book is debited to the purchase account and the accounts of the suppliers of goods are credited with the amount standing against their names. Ruling of purchase day book is different from a journal. There are five columns in a purchase day book: first column records Date, second column records name of the supplier, quantity supplied, Rate at which quan-tity supplied, description, etc. , third column records Invoice number, fourth column records Ledger Folio, fifth columExplain Sales Day book

Sales Day book (Sales Register): is the book of original entry in which all the transactions relating to only credit sales made by the businessman are recorded. Sales day book is totaled every month. The total of sales book is credited to the sales account and the

accounts of the customers to whom goods are sold are debited with the amount standing against their names. Just like purchase day book sales day book also has five columns: Date, Particulars, Invoice Number, Ledger Folio and Amount to enter all the details.

Explain Purchase return register

Purchase Return Register is the register or book in which the transactions relating to goods returned to the suppliers are recorded. It is also known as Purchase outward book or Purchase return day book. When goods are returned to the supplier a debit note is issued by the businessman, which is an intimation to the supplier that the amount is being debited to his account. The ruling of this book and the entries made are absolutely same as Purchase day book. The total of purchase returns is credited to purchase return account, goods being sent out and the account of suppliers to whom goods are returned are debited, as they receive goods.

Explain Sales Returns Register.

Sales Returns Register is the register or book in which transactions relating to goods returned to the businessman from its customers are recorded. It is also know as Sales inward book or Sales return day book. A credit note is sent by the businessman to the customer who has returned the goods. It is a statement which states that the account of the customer has been credited with the amount of goods returned to the businessman. The ruling of Sales returns register is absolutely same as Sales day book. The total of sales returns book is debited to sales return account and the account of customers are credited with the same amount rare transactions

Explain Journal proper

Journal proper is the book of original entry in which those miscellaneous transactions are recorded which do not find place in any other books. It is also called miscellaneous journal. The Journal proper is used to record following transactions:-

-Opening Entries-Closing Entries- Transfer Entries- Adjustment Entries- Rectification Entries- Entries fohat is a Ledger? What do you mean by Ledger Posting?

Ledger is the book where the transactions of similar nature pertaining to a person, asset, liability, income or expenditure are drawn from the journal or subsidiary books where the transactions are recorded in a chronological order and posted account wise in the Ledger account. Ledger maintains all types of accounts i.e. Personal, Real and Nominal Account.

All the business transactions are first recorded in Journal or Subsidiary books in a chronological order when they actually take place and from there the transactions of similar nature are transferred to Ledger and this process of transferring is called as Ledger Posting.

What are control ledgers? What are the purposes of maintaining it?

In a business, sometimes it is not feasible to carry accounts of all the suppliers and customers in the main ledger. In such cases apart from General or main ledger, the control ledgers are maintained. Control ledgers records the individual accounts. In the end of the period, balance shown in the main ledger has to tally with the balance in the individual ledger accounts maintained in the control ledger. Purposes of maintaining control ledgers are:

- Sundry Debtors- Sundry Creditors- Advances to Staff

What do you mean by Balancing of Ledger Account?

To know the net effect of all the business transactions recorded in the ledger account, the accounts need to be balanced. Thus, Balancing of Ledger Account means the balances of Debit and Credit side should be equal and this involves following steps:

-First total of both the sides are taken.

-Secondly difference between the totals of both the sides is calculated.

-If the debit side is in excess to the credit side then place the difference on the credit side by writing By Balance c/fd.

- If the total of credit side is in excess to the debit side, place the difference on the debit side by writing To Balance c/fd.

-After placing the difference on the appropriate side, make sure the totals of both the sides are equal.

What is Trial Balance? What does an accurate Trial Balance suggest?

Trial Balance is a summary of all the balances of various ledger accounts and Cash/Book accounts of an organisation at any given date. For the preparation of Trial Balance the entire Ledger accounts and Cash book/Bank book are required to be balanced to get the closing balance. Assets and Expenses accounts having debit balance are posted on debit side whereas Income and Liability accounts having credit balance are posted on credit side of the Trial Balance.

An accurate Trial Balance is an evidence that all the transactions are recorded and posted in the General Ledger account as per the accounting principles. It also ensures arithmetical accuracy of the process of ledger posting.

Why are Profit and Loss Accounts prepared?

Profit and Loss Account is a period statement which is prepared to show the profit or loss incurred by the Organization in the year for which it is prepared. It is prepared to disclose the result of operations of all the business transactions during a given period of time. It is also known as profitability statement .It is the final result of all business transactions of the organization. Profit and Loss account has four components namely Manufacturing Account, Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account. Gross profit or Gross loss so calculated in trading account is taken to the profit and loss account.

What are the components of Profit and Loss Account? Explain them

All expenses, losses, incomes and gains are the components of Profit and Loss Account:

Expenses and losses are shown on the debit side of Profit & Loss Account. Following is the list:

Administrative Expenses:

* Office Salaries* Postage & Telephone* Traveling & Conveyance* Legal Charges* Office Rent* Depreciation* Audit Fees* Insurance* Repairs & Renewals

Selling and Distribution Expenses:

* Advertisement* Carriage Outward* Free Samples* Bad Debts* Sales Commission

Incomes and Gains are shown on the credit side of the Profit & Loss Account. Following is the list:

Gross Profit (balance forwarded from the Trading account)

Other Income:

* Discount received* Commission received* Non-Trading Income* Interest received* Bad Debts recovered* Rent received* Profit on the sale of assets

What is a Balance Sheet? Why is it prepared?

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.

List the type of items which appear under the liability side of a balance sheet.

Items which appear under the liability side of Balance Sheet are:

* Capital* Long Term Liabilities* Loan from bank* Mortgage* Current Liabilities* Sundry Creditors* Advance from Customers* Outstanding Expenses* Income Received in Advance

What types of items appear under the assets side?

Items which appear under the assets side of Balance Sheet are:

Fixed Assets:

* Land,* Building,* Machinery,* Furniture,* Vehicles,* Computers

Investments

Current Assets:

* Stock,* Sundry Debtors,* Cash Balance,* Bank Balance,* Prepaid Expenses

hat are adjustment entries? Why are they passed?

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.

Preparing final accounts

a.) Closing Stock

Following entry will be passed:

Closing stock account – Debit

Trading account - Credit

b.) Depreciation


Depreciation account – Debit

Fixed asset account – Credit

c.) Outstanding Expenses


Expenses account – Debit

Outstanding account - Credit

d.) Prepaid Expenses


Prepaid expenses account – Debit

Expenses account – Credit

e.) Accrued Income


Accrued Income account – Debit

Income account - Credit

f.) Income received in advance


Income account – Debit

Income received in advance account - Credit

g.) Bad debts


Bad Debts account – Debit

Sundry Debtors account - Credit

h.) Provision for doubtful debts


Provision for Doubtful Debts account – Debit


i.) Provision for discount on Debtors


Provision for Discount for Debtors account – Debit


j.) Interest on Capital


Interest on capital account – Debit

Capital account - Credit

k.) Drawings


Drawing account – Debit

Sales account - Credit

l.) Deferred revenue expenditure written off


Deferred revenue expenditure written off account – Debit

Deferred revenue expenditure account - Credit

m.) Abnormal Loss


Abnormal Loss account – Debit

Stock destroyed account – Credit

If the organization has insured the stock with the insurance company then the insurance company settles the claim, either in full or part. In that case the following entry will be passed:

Insurance company account – Debit

Abnormal loss account – Debit

Stock destroyed - Credit

n.) Goods distributed as free samples


Advertisement account – Debit

Sales account - Credit

o.) Goods sent on approval basis:

Goods sent on approval basis should not be treated as sales till the goods are finally approved by the customer because property in goods is not transferred until the said period is over. If the goods sent on approval basis are treated as sales then closing stock will be increased by the cost of such goods sent on approval basis.

p.) Commission payable to the manager:


Commission account – Debit

Commission payable account – Credit

Explain Bank Reconciliation Statement. Why is it pre-pared?

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?

* 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 important things to be remembered while preparing a bank reconciliation statement?

While preparing a bank reconciliation statement following important points need to be remembered:

* Bank Reconciliation Statement is prepared either by starting with the Bank pass book balance or Cash book balance.* If the balance of the Cash book is taken as a starting point then Cash book balance is to be adjusted in accordance with the entries passed in the Bank pass book and vice versa. For example: If the balance is taken as per the Cash book then the following items will be added:* Cheques issued but not presented for payment;* Amount credited in Passbook but not in Cash book;* Deposits made in the bank directly;* Wrong credits given by bank;* Interest credited in the Passbook.

The following items will be subtracted:

* Cheques deposited but not cleared;* Interest/Bank Charges debited by bank* Direct payments made by bank not entered in Cash book* Cheques dishonoured not recorded in cash book* Wrong debits given by bank* If it is prepared with the Bank balance as per the bank passbook, then the above procedure will be reversed i.e the items will be added to the pass book which were deducted from the cash book balance and those items will be deducted from the bank pass book balance which were added to the cash book balance.

What are the groups under which errors in accounting are placed?

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?

Following are the types of errors which affect agreement of Trial Balance:

- Wrong totalling 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?

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 steps would you take to locate the errors in case Trial Balance disagrees?

In case Trial Balance disagrees, following steps should be taken to locate the errors:

-Totalling of all the subsidiary books and trial balance should be checked carefully.

-Opening balances of all the accounts are properly brought down in the current year’s books of account.

-Ledger accounts have been properly balanced and the balances of ledger accounts have been correctly shown in the trial balance.

-To locate some errors the difference in the trial balance in halved.

-Another way is dividing the difference in the trial balance by 9.

-If the difference gets divisible without leaving any reminder that indicates the transposition of the amounts.

-To locate certain other errors, current year trial balance can be

compared with the trial balance of the previous year.

What measures would you take to rectify the errors?

If the trial balance does not agree, in such case to close the books of accounts the difference in the trial balance is posted in a suspense account and then the trial balance is tallied. As the balance in the Suspense account needs to be nil. Thus, attempts are made to locate the errors and the rectification is made through suspense account. It should be remembered that Suspense account exists till the time all the errors are located and rectified making the balance of Suspense account nil.

The other way of rectifying the errors is by passing rectification entries. These entries are passed when the errors which affect two account and do not affect the agreement in the Trial balance. In this method of rectification the following steps are taken:

- First find out the wrong entry passed- Second, write the correct entry which should have passed.- Third, to nullify the wrong effect, reverse the same and reinstate the correct by passing rectification entry.

For e.g.: Rs. 200 received from Ravi have been credited to Ram.

Wrong Entry: Cash A/c----------Dr. 200 To, Ram A/c 200

Correct Entry: Cash A/c----------Dr. 200 To, Ravi A/c 200

Rectification Entry: Ram A/c--------Dr. 200 To, Ravi A/c 200 To, Ravi A/c 200

What is cost accountancy? What are the objects of Cost Accountancy?

Cost accountancy is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability as well as the presentation of information for the purpose of managerial decision making.

Following are the objects of Cost Accountancy:

-Ascertainment of Cost and Profitability-Determining Selling Price-Facilitating Cost Control-Presentation of information for effective managerial decision

-Provide basis for operating policy-Facilitating preparation of financial or other statements

What is the difference between costing and cost ac-counting?

Costing is the process of ascertaining costs whereas cost accounting is the process of recording various costs in a systematic manner, in order to prepare statistical date to ascertain cost.

What is cost centre?

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 organisation 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.

Compare the following:

a.) Impersonal and personal cost centres:

Impersonal Cost Centre: consist items of impersonal nature like an equipment or location. Example of Impersonal Cost Centre: a department, a branch, a region of sale, etc.

Personal Cost Centre: consist items of personal nature like a person or a group of persons. Example of Personal Cost Centre: Regional Manager, Sales Manager, Marketing Manger, etc.

b.) Production and service cost centres:

Production Cost Centre: is the place where the production activity is carried on. Example of Production Cost Centre: a assembly shop, a paint shop etc.

Service Cost Centre: is the place where all types of assistance are given to the production activities. Example of Service Cost Centre: the store department, the labour office, the account/costing department etc.

Explain Direct cost and Indirect cost.

Direct Costare 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, labours are hired and wages are paid to them. All these take active and direct part in the manufacturing process.

Indirect Costare 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.

Fixed Costis 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 Costis 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 Costis 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.

Controllable Costare the costs which can be influenced by the action of a specified member of the undertaking. They are incurred in a particular responsibility centres can be influenced by the action of the executive heading that responsibility centre. For example: Direct labour cost, direct material cost, direct expenses controllable by the shop level management.

Uncontrollable Costare the costs which cannot be influenced by the action of a specified member of the undertaking. For example: a foreman incharge 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.

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 labour 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 situation s of the operations or productions. Example: destruction due to fire, shut down of machinery, lock outs, etc.

Explain Opportunity Cost and Differential Cost.

Opportunity Cost is the cost incurred by the organisation 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.

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.

hat things would you take into consideration while in-stalling a costing system?

Following things should be taken into consideration while installing a costing system:

-Nature of the Product is a very important deciding factor in installing an effective costing system.

-Nature of the Organisation should be considered before installing costing system.

-Objectives of the Organisation should be met with the installed

costing system.

-Manufacturing Process: Before installing the costing system the technicalities of the manufacturing process should be studied carefully.

-Technical Details of the business must be studied before introducing new costing system.

-The system should be informative and simple. The system should be simple and easy to use in order to maintain various cost records.

-Reporting Systems: The costing system should be designed in such a way that reports are generated in a proper way to facilitate the cost control decisions.

-The costing system should be elastic and capable of adapting according to the changing environment.

What problems you may face while installing a cost-ing system?

While installing a Costing System an Organisation may face the following problems:

-Lack of Support from Top Management Resistance and non cooperation from the Staff

-Shortage of trained staff

-Non suitability for the nature of product and nature of business

-The cost involved in installing this system may be too high.

What are the various elements of costs?

There are three elements of cost:

-Material Cost:This is the cost of material or the commodity used by the organisation for its production purpose. Material is the substance, from which a product is made. Thus, it may be in a raw or a manufactured state. It can be direct or indirect.

-Direct Material Cost forms an integral part of the finished product and is identified with the individual cost centre. It is also described as process material, stores material, production material, etc. Example: Raw materials purchased or purchased primary packing material, etc.

-Indirect Material Cost is used for ancillary purposes of the business and cannot be conveniently identified with the individual cost centre. Example: Consumable stores, oil and waste, printing and stationery material etc.

-Labour Cost:This is the cost, incurred in the form of remuneration paid to the employees or labours of the organisation. The workforce required to convert material into finished product is called labour. It can be direct or indirect.

-Direct Labour Cost is the cost incurred on those employees who directly take part in the manufacturing process and easily identified with the individual cost centre.

-Indirect Labour Cost is the cost incurred on those employees who do not directly take part in the manufacturing process and cannot identified with the individual cost centre. Example: salary of foreman, salesmen, director’s salary, etc.

-Expenses:are the costs of services provided to the organisation. It can be direct or indirect.

-Direct Expenses are the expenses which can be directly identified with the individual cost centres. Example: hire charges of machinery, cost of defective work for a particular job or contract etc.

-Indirect Expenses are the expenses which cannot be directly identified with the individual cost centres. Example: rent, lighting, telephone expenses, etc.

What are overheads? How are they classified?

Overheads are the aggregate of Indirect Material cost, Indirect Labour and Indirect Expenses. Thus, sum of all indirect costs are overheads. They are of three types:

-Factory Overheads-Office and Administration Overheads-Selling and Distribution Overheads


a.) Factory Overheads: are the overheads which are incurred from the stage of procurement of materials till the stage of finished goods. They include:

- Indirect Materials such as lubricants, cotton waste, consumable stores etc.- Indirect Labour such as storekeeper, time keeper, works manager’s

salary etc.- Indirect Expenses such as cost of factory lighting, carriage inward cost, depreciation on factory building, rent/insurance of building/machinery etc.

b.) Office and Admin overheads: are the overheads incurred for the overall administrative work of the organisation. They include:

- Indirect Materials such as office supplies, stationery and printing items, brooms etc.- Indirect Labour such as salaries payable to manager, clerk etc.- Indirect Expenses such as lighting, bank charges, legal/audit charges, rent/insurance of office.

c.) Selling and Distribution Overheads: are the overheads incurred from the stage of final manufacturing of finished goods till the stage of goods sold in the market and collection of dues from the customers. They include:

- Indirect Materials such as samples, packing materials, etc.- Indirect Labour such as salaries and commission payable to sales manager, salesmen etc.- Indirect Expenses such as rent, carriage outwards, warehouse charges, discount offered to customers, advertising expenses, bad debts etc

Explain Gross Profit.

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.

Gross Profit = Net Sales – Cost of Goods Sold

Explain Net Profit.

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 purposes.

Net Profit = Gross Profit – Total

Operating Expenses – Taxes – Interest

What are the steps in procurement of material?

Following are the steps in procurement of material:

Purchase Requisition is an indication to the purchase department to purchase certain material required for the production. Following particulars appear in the purchase requisition

-Material to be purchased-When it is required-How much to be purchased-Selection of Source of Supply-Single Tender-Limited Tender-Open Tender-Global Tender-Purchase Order-Description of Materials to be supplied-Quantity to be supplied-Cash and trade discount Rates at which materials are supplied-Additional charges e.g. Excise duty, Sales tax, packing charges, insurance Instructions in respect of delivery-Guarantee clause-Inspection clause-Method of settlement of disputes-Terms of payment Receipt and Inspection-After the receipt of materials, inspection of the material is done. Inspection of materials means that the quantity actually received is compared with the quantity ordered; also the quality of the material is inspected.

Invoice received from the supplier is compared along with the purchase order, goods received note and inspection note.

Why should over stocking be avoided?

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

-HWhat can be the consequences of under stocking?

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 organisation to meet the unexpected demands of customers.

What can be the discrepancies in material receipt?

There are two categories of material discrepancies:

First category includes-

-Quantity received in excess-Quantity received in short-Quantity damaged-Receipt of incorrect quantity of material.These discrepancies are normally caused by the transportation system.

Second category includes – Discrepancies in quality of material supplied.These discrepancies are caused by the manufacturer.

Differentiate between Bin Card and Stores Ledger.

-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 can be the reasons for bin card and stores ledger not getting reconciled?

The following can be the reasons for bin card and stores ledger for not getting reconciled:

-Arithmetical error in calculating balances of the sheets.

-If posting of the transaction has been made on wrong bin card or stores ledger sheet.

-If issues transactions are treated as receipt transaction or vice versa, then this may create the difference in both the balances.

-Non posting of certain amount in any of the sheets.

Explain valuation of receipts.

Valuation of receipts is the price billed in the invoices by the supplier. Following points should be kept in mind for this purpose:

-The trade discount is deducted from the basic price and all other amounts as billed by the supplier are added, like excise duty, sales tax, octroi duty, etc.

-Joint costs may be distributed on the basis of the basic price of the material.

-In case of imported material, the cost of the material consists of a basic price, customs duty, clearing charges, transport chares, etc.

Explain valuation of issues and valuation of returns.

a.) Valuation of issuesis a complex process because the material may be issued out of various lots which might have been purchased at various prices. Following methods are used for this purpose:

- First in First out(FIFO)- Last in First out (LIFO)- Average Price Method- Simple Average Method- Weighted Average Method- Highest in First out

- Market Price- Specific Price- Standard Price

b.) Valuation of returnsindicates the material returned by the production department to stores department. This valuation is done on two basis:

- At the same price at which issued- At the current price of issues


a.) Average Price Method- is the method by which the value of total assets or expenses is assumed to be equal to the average cost of the total assets or expenses. Under this method, it is assumed that the cost of inventory is based on the average cost of the goods available for sale during the period. It is computed by dividing the total cost of goods by the total units which gives a weighted average unit cost for the units of the closing inventory.

b.) Weighted Average Method- is the method of calculation in which the weighted average of both the lot sizes as well as the prices of the lot. This method is best for valuing material issues. This method is very useful where the prices and quantities of items vary. Practically, this method is very simple to calculate.

What are the techniques of inventory control?

The techniques of inventory control are:

-Economic Order Quantity-Fixation of Inventory Levels-Maximum Level-Minimum Level-Average Level-Re-order Level-Danger Level

Explain EOQ.

Economic Order Quantity (EOQ)is the quantity which is fixed in such a way that the variable costs for managing the inventory can be minimized. This consists of two parts: Ordering Cost and Carrying Cost. Ordering cost consists of all the costs associated with the administrative efforts connected with preparation of purchase requisitions, enquiries, filing tenders, and comparative statements etc. which are incurred in ordering materials. Carrying cost consists of all the costs which are incurred in carrying or holding the

inventory like godown rent, insurance handling expenses etc. There is a inverse relationship between ordering cost and ordering cost. An effort should be made to balance both the costs, which is possible at Economic Order Quantity where the total variable cost of managing the inventory is minimum.

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