1. Explain the convention of conservatism.
This convention states that the accountant should not recognize any profit and loss till realized,
but should provide for all possible losses. On account of this rule, the accountant follows the rule
anticipate no profit but provide for all possible losses while recording business transaction. In
other words accountant follows the policy of “playing safe”. The example of this convention is
as follows:
(i) Making provision for doubtful debts in anticipation of bad debts.
(ii) Valuing stock at the end accounting period at cost price or market price
whichever is less.
What is Intangible Assets?
The term asset is derived from the French word “assez” which means enough. So assets mean
enough resources for carry on the business. In accounting assets means things, resources,
properties, possessions owned by a businessman. According to Robert N. Anthony,” Assets are
valuables resources owned by a businessman which were acquired at a measurable money cost.”
Intangible assets are those assets, which are not seen able and touchable, such as goodwill,
patent rights, trademarks, copyrights etc.
What is ‘contra entry’? Explain with examples.
Contra entries are used in triple column cashbook. By contra entry we mean transfer of money
from cash to bank or vice versa. When there is a effect in both the accounts with one transaction
that entry is called as contra entry i.e. amount deposited in the bank and amount withdrawn from
bank for office use. Contra entries re indicated by a contra sign “c” in the ledger folio (L.F.)
column.
Define the term “working capital.”
There are two types of capital requirements in the organization. One is fixed capital and the
working capital. Fixed capital is required for fixed assets of the organization. Working capital is
necessary for the day-to-day expenses of the firm. The difference in between current assets and
current liabilities is called as working capital. Working capital flow should be according to the
requirements of the firm if a firm produces on a large scale then requirement of working capital
should also be high.
Working capital = Current Assets - Current Liabilities.
Explain the steps (in sequence form) involved in the accounting cycle.
An accounting cycle is a complete sequence beginning with the recording of the transactions and
ending with the presentation of the final accounts.

2. ACCONTING CYCLE
What is debt equity ratio?
This is the very important ratio, which is helpful to determine the long-term solvency position of
the firm. This ratio shows the relationship between borrowed funds and internal owner’s fund.
Formula of debt-equity ratio:
= Total long-term debt
Shareholder’s fund
Total long-term debt = All long term liabilities including redeemable preference capital.
Shareholder’s fund = equity share capital + non-redeemable preference share capital+ credit
balance of profit &loss a/c and free reserves – fictitious assets.
How is a trading a/c different from profit and loss a/c?
Trading and profit and loss a/c is basically prepared to check the profit or loss of the business.
Every businessman wants to see the position of the business at he end of the year to make plans
for the future. Trading a/c deals with all the direct expenses and direct incomes of the business.
From trading a/c we can calculate gross profit or gross loss of any organization. But gross profit
does not give the true picture of the firm. To have a true and clear picture of the firm profit and
loss a/c help the management in this we record all the indirect expenses and indirect incomes of
the business and in the end it shows net profit or net loss of the business. A company can plan for
the coming time on the basis of past profits or losses of the firm.
What is the purpose of ratio analysis?
Business
Transactions
Journal
LedgerTrial Balance
Final
Accounts

3. Ratio analysis is the power full tool of the financial analysis. A ratio can be defined as, “the
term accounting ratios is used to describe significant relationships which exit between
figures shown on a balance sheet, in a profit and loss account, in a budgetary control
systemor in any other part of the accounting organization.”
In simple words ratio is the numerical relationship between two variables, which are
connected with each other in some way or the other. A ratio can be used as a yardstick for
evaluating the financial position and performance of a concern because the absolute accounting
data cannot provide meaningful understanding and interpretation.
Write a brief note on ‘External users of accounting information.’
(i) Investors: accounting gives detail information to investors because without having full
knowledge about the position of the company no investor will invest the money.
(ii) Customers: customer is the end user of the product. Customers will be interested in
continuous availability of the products if an organization going to close the production then they
will think about another product.
(iii) Suppliers: Suppliers are interested in the organization because to check the creditability of
the company. If firm has a good position then supplier will give material on credit.
(iv) Government & Taxation Authorities: The detail information of accounting is necessary to
calculate the right amount of tax. Taxation authorities collect tax when these are prepared
properly and conveying detailed information.
Define ‘Accrual concept’
Accrual concept recognizes income when it is earned rather than it is collected. Similarly in the
case of expenses also. According to this concept we should record the incomes and expenses
when it is incurred not collected and paid. The business may not receive cash on the time of sale
but sale should be recorded in the same accounting year in which sale is committed. For example
Deepika sold goods amounted Rs. 50,000 to parul on 20th march, 2008. Parul paid Rs. 40,000
and promised to pay the left amount after 20 days but total revenue should be recorded in March
only.
Write three principles of accounting.
Accounting is the process of identifying, measuring and communicating economic information
to permit informed judgments and decisions by user of information. Accounting is based on the
following three principles:
(i) Personal accounts: This represents the accounts related to individuals, firms,
societies etc. these can be further divided into two parts.
(a) Natural personal accounts: these accounts are related with human beings who
can think for the benefit of the organization I.e., Pankaj’s a/c, Amit’s a/c, and
Jagdeep’s a/c.
(b) Artificial personal account: these accounts are related with non-human beings
for example firms, hospitals, colleges, banks, universities etc.
Rule: - DEBIT THE RECEIVER.

4. CREDIT THE GIVER.
(ii) Real accounts: This account deals with the things which we can touch, see such as
cash, building, furniture etc. but with this we also record intangible thing like
goodwill, copy rights etc.
Rule: - DEBIT WHAT COMES IN.
CREDIT WHT GOES OUT.
(iii) Nominal accounts: In this account we record all the expenses, losses, incomes and
profits of the business. For examples wages, advertisement expenses, commission,
interest etc.
Rule: - DEBIT ALL THE EXPENSES AND LOSSES.
CREDIT ALL THE INCOMES AND GAINS.
What is the difference between gross profit and net profit?
Gross profit: Gross profit is the difference of direct income and direct expenditure of the
business. It is very necessary to find out the profit or loss account. For this trading and profit and
loss account is being prepared. If the credit side of trading account is more than the debit side the
difference will be gross profit of the firm.
Net profit: Gross profit do not give the true picture of the firm because there are so many other
indirect expenses also in the business which should be deducted from the gross profit of the
business. Profit and loss a/c gives the true picture of net profit of the firm. Again if credit side of
P&L a/c is more than debit side then the difference will be net profit of the firm.
What are the advantages of ratio analysis?
Ratio analysis is the power full tool of the financial analysis. A ratio can be defined as,” the
term accounting ratios is used to describe significant relationships which exit between
figures shown on a balance sheet, in a profit and loss account, in a budgetary control
systemor in any other part of the accounting organization.”
Advantages of ratio analysis:
1. It helps in simplifying the financial statements.
2. Ratios are very helpful for inter firm comparison.
3. It is also very helpful in intra-firm comparisons.
4. It plays an important role in planning of the business.
Money Measurement Concept.
The basic unit of measurement in accounting is money. In accounting we record only those
transactions, which are related with money only. Money is the common denominator. Money is
only common factor to all the business transactions. Money is a medium to value the assets.
Suppose, a firm has 5 computers, 2 cars, 1 building. This information is not suitable to record in
the books of accounts. If we say that a firm has computers worth Rs.40, 000, cars worth Rs.
2,00,000, building worth Rs. 10,00,000, it is more meaningful to record in the accounting books.
In books of accounts we do not records those transactions which are non monetary in nature i.e.

5. the skill, experience and honesty of a manager or employees. Money does not provide stable
measurement basis due to inflation and deflation in the economy.
Convention of Materiality.
According to this convention the accountant should attach importance to material details and
ignores insignificant details. Because the cost of recording and reporting such events will not be
justified by the usefulness of the information derived. The question what constitutes a material
detail, is left to the discretion of the accountant, Moreover, an item may be material for one
purpose while immaterial for another.
According to American Accounting Association (AAA):- “An item should be regarded as
material, if there is a reason to believe that knowledge of it would influence the decision of
informed investors,” so materiality means the characteristic attaching to a statement, fact or item
where by its disclosure or method of giving it expression would be likely to influence the
judgement of a reasonable person.”
Doubtful Debts.
In this present era of business we have to sell our product on credit basis due to competition in
the market. It is not necessary that every businessman can recover all the debts from the market. .
Sometimes a businessman finds at the end of the year that he may not be able to able to recover
some of the debts or the debts are doubtful of recovery. In that situation he has to maintain some
provisions in advance.
The following adjustment entry is made: -
P&L a/c Dr.
To provision for doubtful debt a/c
Treatment in final a/c.
(i) Provision will be shown on the debit side of profit and loss a/c.
(ii) The amount of provision will be deducted from debtors on asset side of balance sheet
a/c.
Contra Entry
Contra entries are used in triple column cashbook. By contra entry we mean transfer of money
from cash to bank or vice versa. When there is a effect in both the accounts with one transaction
that entry is called as contra entry i.e. amount deposited in the bank and amount withdrawn from
bank for office use. Contra entries re indicated by a contra sign “c” in the ledger folio (L.F.)
column.
Net Worth.
Net worth is the ability of the organization to repay the external debts of the concern or we can
say that on the basis of net worth a company can arrange long-term debts from the market. We
can name net worth as shareholders fund and equity. Shareholders’ fund consist of preference

6. share capital, equity share capital, profit & loss a/c (Cr. Balance), capital reserve, revenue
reserve and marked surplus, like reserves for contingencies, sinking fund etc.
Overheads.
There are two types of expenses in the organization direct and indirect expenses. Overheads may
be defined as the aggregate of cost of indirect materials, indirect labour and other expenses. In
general terms, overheads comprise all expenses except direct expenses. So overheads are those
expenses, which are incurred for the general organization as a whole. These are the following
few groups in which we can divide the overheads (i) Administration Overheads (ii)
Manufacturing Overheads (iii) Selling Overheads (iv) Distribution Overhead (v) Research and
Development Overheads.