Paper5(FinancialAccounting)

TestPaperI/5/FAC/2012/T1

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Question 1.
Describe about the Accounting Cycle.
Answer:
The steps or phases of accounting cycle can be developed as under:

a) Recording of Transaction:- As soon as a transaction happens it is at first recorded in
subsidiary book.

b) Journal :- The transactions are recorded in Journal chronologically.

c) Ledger:- All journals are posted into ledger chronologically and in a classified
manner.

d) Trial Balance:- After taking all the ledger accounts closing balances, a Trial Balance
is prepared at the end of the period for the preparations of financial statements.

e) Adjustment Entries :- All the adjustments entries are to be recorded properly and
adjusted accordingly before preparing financial statements.

f) Adjusted Trial Balance:- An adjusted Trail Balance may also be prepared.

g) Closing Entries:- All the nominal accounts are to be closed by the transferring to
Trading Account and Profit and Loss Account.

h) Financial Statements:- Financial statement can now be easily prepared which will
exhibit the true financial position and operating results.

Question 2.

(i) Provisions contained in the Accounting Standard in respect of Revaluation of fixed
assets.
Answer:
As per AS 10-Accounting for Fixed Assets the provisions relating to the revaluation of fixed
assets are:
When a fixed assets is revalued in financial statements an entire class of assets should be
revalued, or the selection of assets for revaluation should be made on a systematic basis
and should be disclosed
The revaluation in financial statements of a class of assets should not result in the net book
value of that class being greater than the recoverable amount of assets of that class
Paper5(FinancialAccounting)
TestPaperI/5/FAC/2012/T1

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When a fixed asset is revalued upwards, any accumulated depreciation existing at the date
of the revaluation should not be credited to the profit and loss statements
An increase in net book value arising on revaluation of fixed assets should be credited
directly to owners interests under the head of revaluation reserve, except that, to the
extent that such increase is related to and not greater than decrease arising on revaluation
previously recorded as charge to the profit and loss statement, it may be credited to the
profit and loss statement. A decrease in net book value arising on evaluation of fixed asset
should be charged directly to the profit and loss statement except that to the extent that
such a decrease is related to an increase which was previously recorded as a credit to
revaluation reserve and which has not been subsequently reserved to utilise, it may be
charged directly to that account
(ii) Extraordinary Items to be disclosed as per the Accounting Standard.
Answer:
Each extraordinary items, both income and expense arises from events/transactions, which
are clearly distinct from ordinary activities and not expected to recur frequently or regularly,
should be disclosed as apart of net profit/loss for the period in a distinct manner to
understand the impact on current profit/ loss.
An event or transaction may be extraordinary for one enterprise but not for the other
because of difference between their respective ordinary activities.
Example of various disclosures under AS-5

1. change in depreciation method: change in accounting policy

2. useful life reduced but no change: change in accounting estimate in depreciation
method

3. arithmetical error in depreciation computation: prior period item

4. due to oversight depreciation incorrectly computed: prior period item

5. fixed asset destroyed in earth quake: extraordinary item

6. major disposal of fixed items: ordinary activity (exceptional item)

7. maintenance provision no longer required since major part of the assets no longer
exist: the write-back. if material should be disclosed as exceptional item and not as
extraordinary or prior period item.
Question 3.

Paper5(FinancialAccounting)
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(i) Describe the reasons for differences between Cash Book and Pass Book.
Answer:
The differences are basically of two types:

(A) Items appear in Cash Book but not appearing in Pass Book
(1) Cheques issued by business entity not debited by the Bank
(2) Cheques deposited but not credited by the Bank
(3) Errors
(4) Standing Instructions
(B) Items not appearing in the Cash Book
(1) Bank interest, Bank charges etc.
(2) Direct deposits in Bank account
(3) Bills for collection
(4) Errors

Q 3
(ii) Ds Cash Book shows an overdrawn position of `3,630 on 31.03.2013, though the bank
Statement shows only `3,378 overdrawn. Detailed examination of two records revealed
the following:

(a) A cheque for `1,560 in favour of Rath Associates has been omitted by the Bank
from its statement, thus, cheque having been debited to another customers account.

(b) The debit side of owned book has been under caste by `300.

(c) A cheque for `182 drawn in payment of electricity amount had been entered in the
cash Book on `128 & was shown correctly in the bank statement.

(d) A cheque for `210 from S. Gupta having been paid into Bank, was dishonoured &
shown as such on Bank statement, although no entry relating to dishonoured had been
made in Cash Book.

(e) The Bank had debited a cheque for `126 to Ds A/c, in error. It should have debited
to Sukhals A/c.
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(f) A dividend of `90 on Ds holding of equity shares has been duly shown by bank, no
entry has been made in cash book.

(g) A lodgement of `1,080 on 31.03.2013 had not been credited by Bank.

(h) Interest on `228 had been directly debited by Bank not recorded in Cash Book.
You are required to prepare a Bank reconciliation statement after necessary
amendment in cash book as on 31.03.2013.
Answer:
OD as per cash book 3630
Less: chequeommited by bank 1560
Less: under caste of debit side in cash book 300
Add: under caste of electricity bill 54
Add: cheque dishonoured 210
Add: wrongly debited by bank 126
Less: dividend 90
Add: lodgement 1080
Add: interest credited by bank 228
OD as per pass book 3378
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