Write about the accrual basis of accounting.
Write about the accrual basis of accounting.
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Solution
The accrual basis of accounting recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash is actually received or paid. It is the only basis that conforms to GAAP, and it follows the revenue recognition and matching principles.
- Example: a painter does Rs. 800,000 of work in 2019 and spends Rs. 500,000, but receives the cash only in 2020. Under the accrual basis, he reports Rs. 800,000 of revenue in 2019, giving a net income of Rs. 300,000 for that year.
- Feature: adjusting entries are always required at the end of the period, for items such as prepaid and outstanding expenses and accrued and unearned income. This gives a more accurate measure of profit and a truer picture of assets and liabilities.
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1.
Practice
Describe the users of accounting information. Why do they need such information? Explain.
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2.
Long question Practice
The following are the financial statements of a company:
Liabilities Last Year Current year Assets Last Year Current year Share capital 150,000 300,000 Fixed assets 250,000 360,000 Pref. share capital 60,000 90,000 Investment 60,000 75,000 10% bank loan 75,000 30,000 Sundry debtors 45,000 60,000 Accounts payable 40,000 30,000 Inventories 30,000 75,000 Retained earnings 30,000 75,000 Cash at bank 15,000 30,000 Prov. for dividend 15,000 30,000 Prov. for tax 30,000 45,000 Total 400,000 600,000 Total 400,000 600,000 Income Statement for the current year
Particulars Rs. Rs. Sales 300,000 Less: Cost of goods sold 120,000 Gross profit 180,000 Less: Operating expenses (including depreciation Rs. 30,000 and interest Rs. 12,000) 87,000 Provision for tax 45,000 Provision for dividend 30,000 162,000 18,000 Add: Gain on sale of plant (cost Rs. 30,000, accumulated depreciation Rs. 15,000) 12,000 Interest on investment 15,000 Net income 45,000 Required: Cash flow statement by using direct method.
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Long question Practice
Following are the transaction of a company.
a. Started business with cash Rs. 100,000 and bank balance Rs. 40,000.
b. Purchased office equipment for Rs. 100,000 and paid 25% cash and balance through cheque.
c. Purchased merchandise goods for Rs. 50,000 on account.
d. Sold merchandise goods on account for Rs. 170,000.
e. Received a cheque from customer Rs. 145,000 in full settlement of Rs. 150,000.
f. Paid Rs. 45,000 to supplier by issuing a cheque after deducting 10% discount.
g. Rs. 12,000 was paid for insurance premium.
h. Paid electricity bill Rs. 15,000.
i. Paid office salary Rs. 20,000.
j. Rent paid in advance Rs. 15,000 through cheque.
Additional Information
a) Ending inventory Rs. 20,000.
b) Office salary due Rs. 4,000
c) Depreciation on office equipment @25%
Required:
a. Journal entries.
b. Triple column cash book.
c. Accounts receivable and payable account.
d. Adjusted trial balance.
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Practice
Define source of documents. Write down the objectives of the source of documents.
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Practice
Write down the meaning and types of lease. Also, point out the criteria for identifying capital lease.
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Long question Practice
(a) On Chaitra 2081, Bank Statement disclosed a balance of Rs.10,000 and Cash Book showed the balance of Rs.8,900.
i) Undeposited cheque Rs. 3,000
ii) Outstanding cheque Rs. 4,000.
iii) Notes receivable and interest collected by the bank Rs. 1,000 and Rs. 200 respectively.
iv) A customer's cheque for Rs. 1,000 was returned by the bank due to insufficient fund.
v) Bank charge Rs. 100 for the service provided by the bank.
Required:
a. Bank Reconciliation Statement as on 31st Chaitra
b. Bank balance to be reported on company's balance sheet as on 31st Chaitra.
(b) Differentiate between accounting and accountancy.
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