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Principels Of Accounting

Prof.Afzal Raza

Almas Ahmad


Q#1 Difference between reserves and provision
● Reserve is created only the company earn profit.
● It is utilize for future purpose.

● Provision are required even in the absence of profit.
● It is used for that purpose.

Provision Charge against profit

Reserve Appropriation of profit

Q#2 Difference among depreciation, amortization and impairment.

A reduction in the value of an assets over time, due to in particular to wear and
tear.It is use for tangible assets.
EXAMPLES: Plant , machinery , building etc.
It usually refers to spending an intangible assets cost over that assets useful life.
EXAMPLE: a patent right, goodwill etc.
Impairment is an accounting principle that describes a permanent reduction in the
value of a company's asset, normally a fixed asset. When testing for impairment,
the total profit, cash flow, or other benefit that's expected to be generated by a
specific asset is periodically compared with that same asset's book value. If it's
found that the book value of the asset exceeds the cash flow or benefit of the asset,
the difference between the two is written off and the value of the asset declines on
the company's balance sheet.
Q#3 Difference between salary, commission and wages.
a fixed regular payment, typically paid on a monthly basis but often expressed as
an annual sum, made by an employer to an employee, especially a professional or
white-collar worker.
"he received a salary of £24,000"


Commission is based on performance this is used in sales position so your

remuneration is based on how much you sell.


a fixed regular payment earned for work or services, typically paid on a daily or
weekly basis.
"we were struggling to get better wages"
Q#4 Difference between bonds and debenture.

A financial instrument which

shows the obligation of the
borrower towards the lender is
known as Bond. They are
created to raise funds for
the company or government. It
is a certificate, signifying a DEBENTURES:
contract of indebtedness of the
issuing company, for the A debenture is a debt
amount lent by the bondholders instrument used for
supplementing capital for the
company. It is an agreement
between the debenture holder
and issuing company, showing
the amount owed by the
company towards the debenture
holders. The capital raised is
the borrowed capital; that is
why the status of debenture
holders is like creditors of the

Q#5 Difference between shares and stock.


A share is defined as the smallest division of the share capital of the company
which represents the proportion of ownership of the shareholders in the company.
The shares are the bridge between the shareholders and the company. The shares
are offered in the stock market or markets for sale, to raise capital for the company.

The shares are movable property which can be transferred in a manner specified in
the Articles of Association of the company


The stock is a mere collection of the shares of a member of a company in a lump

sum. When the shares of a member are converted into one fund is known as stock.
A public company limited by shares can convert its fully paid-up shares into stock

Q#6 Difference between expense and expenditure


Expense on the other hand is a cost incurred or expired. For example you have
utilized the services of your employees, whether you have paid them or not is an
expense. Cost of goods sold is also an example of expense because it was incurred
to earn revenue during the accounting period. Depreciation of fixed asset is also an
expense because fixed assets were used to generate revenue.


Expenditure means a payment made. Now this payment could be for many
purposes. Payment could be for settlement of a liability, buying an asset or
payment for any expense like salary, rent or electricity bill.
Q#7 Who is the father of cost accounting?

Josiah Wedgwood is the father of cost accounting.

Q#8 Contra account with two examples.

A contra account is a general ledger account which is intended to have its balance
be the opposite of the normal balance for that account classification

1. Accumulated depreciation.
2. Owners drawing account
3. Allowance for doubtful account
4. Credit balance is contra to debit balance.
5. Discount on not receivable and payable.

Q#9 Difference among financial , management and cost accounting?


Financial accounting is the process of recording, summarizing and reporting the

myriad of transactions resulting from business operations over a period of time.
These transactions are summarized in the preparation of financial statements,
including the balance sheet, income statement and cash flow statement, that
encapsulate the company's operating performance over a specified period.


"Management accounting is a profession that involves partnering in management

decision making, devising planning and performance management systems, and
providing expertise in financial reporting and control to assist management in the
formulation and implementation of an organization's strategy"

Cost accounting is a process of recording, classifying, analyzing, summarizing,
allocating, and evaluating various alternative courses of action for the control of
costs. Its goal is to advise the management on the most appropriate course of action
based on the cost efficiency and capability. Cost accounting provides the detailed
cost information that management needs to control current operations and plan for
the future

Q#10 Difference among closing, adjusting and rectifying entry?

Closing entries, also called closing journal entries, are entries made at the end of
an accounting period to zero out all temporary accounts and transfer their balances
to permanent accounts. In other words, the temporary accounts are closed or reset
at the end of the year
Adjusting entries are accounting journal entries that convert a company's
accounting records to the accrual basis of accounting. An adjusting journal entry is
typically made just prior to issuing a company's financial statements.

if the error is identified at a later stage, the correction should be made by passing a
suitable journal entry, such entries used to fix an accounting error are called
rectification entry
Q#11 Clearing account?
A clearing account is usually a temporary account containing costs or amounts that
are to be transferred to another account. An example is the income summary
account containing revenue and expense amounts to be transferred to retained
earnings at the close of a fiscal period
● Sales account
● Income summary account
● Revenue account
● With drawing account

Q#12 Difference between lease and hire purchase agreement?

a contract by which one party conveys land, property, services, etc. to another for a
specified time, usually in return for a periodic payment
Hire purchase agreements are agreements whereby an owner of goods allows a
person, the hirer, to hire goods from him for a period of time by paying
installments. The hirer has an option to buy the goods at the end of the agreement
if all installments are being paid
Q#13 Forfeited shares with example?
A forfeited share is a share in a company that the owner loses (forfeits) by failing
to meet the purchase requirements. Requirements may include paying an allotment
or call money owed, or avoiding selling or transferring shares during a restricted
The directors of dungaree ltd company forfeit 500 shares of Rs 100 each non-
payment of Rs 30 on final call.
Q#14 What is the nature of drawings account?
Yes, an owner's drawing account is a capital account. However, the drawing
account is expected to have a debit balance, whereas the owner's main capital
account is expected to have a credit balance
Q#15 Is drawing account charged in corporation?
Drawing is not charged in corporation. But partner can take loan from company but
in partnership drawing is charged by a partner.
Q#16 Can debenture repaid at discount?
Yes, debenture can be repaid at discount if a company issue debenture at par then it
can be repaid any reason its price decrease.
Q#17 Creation of secret reserve is legal or illegal Explain.
The creation of secret reserve is legal but it must shown balance sheet clearly.
Q#18 cash book is journal or ledger?
All cash transaction are primary recorded in cash book in order of data and posted
to ledger account.
Q#19 How many system of petty cash accounting exist?
There are two system of two petty cash account exist,
● Columnar petty cash book
● Imprest petty cash book

Q#20 YZ limited used the depreciation fund account for divided purpose .it is
It is used for dividend purpose and not legal.
Q#21 All the fixed assets are recorded at cost but not the good will .why?
Goodwill is an intangible asset when a buyer existing business goodwill represents
assets that are not separately identifiable so it is the reason goodwill is not recorded
at historical cost.
Q#22 Why the fixed assets are recorded at cost but not at market value?
The fixed assets are recorded at cost because it is purchased for long term benefit.
Q#23 Can we say capital of business is contigent liability?
Yes, we can say capital of business is contigent liability because we can use it for
unexpected events in future.
Q#24 According to which law banks prepared their financial statement?
According to company ordinance 1982 or banking company ordinance 1962
Q#25 Is general journal and general are different or same?
Both are different to each other.
Q#26 Can a corporation use secret reserve for dividend purpose?
If corporation used secret reserve for dividend than company must tell the share
holders that it is a secret reserve dividend .anyway it is legal.
Q#27 Which accounting type is used for internal / external reporting?
Managerial accounting is used for internal and external accounting.
Q#28 Notes receivable and promissory note are same or not? Explain
Note receivable and promissory notes are the same.
Q#29 Which corporation create capital redemption reserves?
Those companies that are listed in stock exchange they can purchase their own
shares can create capital redemption reserves.
Q#30 According to which principle provision is created?
● Prudence principle
● Conservatism principle.

Q#31 Any two similarities b/w preferred stock and debentures.

1. Both are financial assets.
2. Both can be issue to company.
3. Source of rising money for company.
Q#32 Can a corporation used general reserve for dividend?
Yes, corporation used general reserve for dividend if the company present in
balance sheet.