01 (a). Accounting Information? Discuss the 01 (b). Distinction between Accounting Theory 01) (c).
eory 01) (c).Why do external users use accounting
importance / need of accounting information
in modern banking.
Accounting is a set of concepts and techniques
that are used to measure and report financial
information about an economic unit. The
economic unit is generally considered to be a
separate enterprise. The information is reported
to a variety of different types of interested parties.
These include business managers, owners,
creditors, governmental units, financial analysts,
and even employees. In one way or another,
these users of accounting information tend to be
concerned about their own interests in the entity.
Business managers need accounting information
to make sound leadership decisions. Owners and
investors hope for profits that may eventually lead
to distributions from the business. Creditors are
always concerned about the entity’s ability to
repay its obligations. Governmental units need
information to tax and regulate. Analysts use
accounting data to form opinions on which they
base investment recommendations. Employees
want to work for successful companies to further
their individual careers, and they often have
bonuses or options tied to enterprise
performance. Accounting information about
specific entities helps satisfy the needs of all of
these interested parties.
Need of accounting information in modern
banking-
The Rochester Institute of Technology's
Saunders College of Business describes
accounting as an information science, which is
used to gather, categorize and manipulate
financial data. Those who use accounting
information can gauge an organization's financial
health by analyzing related documents, such as
balance sheets and income statements. Although
accounting information can be stored in hard
copy, companies generally use computerized
systems.
Accounting is the most important part of any
successful business. It records all profits, losses,
credits, and debts. It tells you the state of the
business in numbers, not words.
Regardless of which category you fall into, the
truth is that anyone can learn the basic principles
of accounting and develop a knack for managing
the financial aspects of a business.
and Accounting Practice.
Accounting Theory: Accounting theory is a set
of assumptions and methodologies used in the
study and application of financial reporting
principles. The study of accounting theory
involves a review of both the historical
foundations of accounting practices, as well as
the way in which accounting practices are
changed and added to the regulatory framework
that governs financial statements and financial
reporting. Further, accounting theory can be
thought of as the logical reasoning that helps
evaluate and guide accounting practices.
Accounting theory, as regulatory standards
evolve, also helps develop new accounting
practices and procedures.
Accounting Practice: Accounting practice is the
system of procedures and controls that an
accounting department uses to create and record
business transactions. Accounting practice
should ideally be extremely consistent, since
there are a large number of business transactions
that must be dealt with in exactly the same
manner in order to produce consistently reliable
financial statements. Auditors rely upon
consistent accounting practice when examining a
company's financial statements. Examples of
good accounting practice are:
==Always using the same calculation to
determine the amount of overtime paid to
employees.
==Always issuing billings to customers on the
same day that goods are shipped to them
==Always paying supplier invoices on the day
when they are due.
==Always using the same depreciation method
for the same class of fixed assets.
Accounting practice also calls for the continual
installation and updating of best practices, so that
both the efficiency and effectiveness of the
accounting processes are improved over time.
Doing so calls for additional skills in identifying
best practices and in the installation and
monitoring of any changes made.
information?
Ans- External users do not make decisions for
the business, however, they are interested in the
company's financial information for some other
purposes. External users include:
1. Investors:
Potential investors are interested in the past
performance of a business and its potential for
future earnings. The financial statements of a
company summarizes historical information on
performance, financial position, and business
activities. These sets of information are vital in
assessing profitable investments. Current
investors also want to track the performance of
their investments to be able to decide whether to
hold on to such investment or look for more
promising ones.
2. Trade Creditors or Suppliers:
Some suppliers of businesses provide goods and
services on credit. Before extending credit, trade
creditors review the ability of a business to pay.
Creditors are particularly interested in a
company's liquidity (i.e., ability to pay short term
obligations). Cash flows and profitability is also
assessed. Information gathered may also be
used in determining the extent of credit to be
allowed, credit period, and other credit policies to
be applied.
3. Banks and Other Lenders:
Lenders would like to know if a business is
capable of paying debts. Lenders often asses the
stability of the business as well as cash flows and
profitability. They are particularly interested in the
ability of a business to pay borrowings and the
corresponding interests when they become due.
4. Tax Authorities and Regulatory Agencies:
Tax authorities use accounting information in
determining taxes due from the business.
Businesses pay different kinds of taxes and are
computed in reference to different tax bases and
different tax rules. Businesses are also required
to submit reports to regulatory agencies such as
the SEC. These agencies watch over compliance
to corporate and trade laws.
5. Employees and Labor Unions:
Non-managerial employees form part of the
operations of the company but do not participate
in decision-making. Employees want to know if
the company has the ability to pay remuneration
and benefits. Labor unions review the financial
performance and condition of the company before
making demands on salary increase, employment
benefits, and other labor matters.
6. Customers:
Customer or clients may become interested in
knowing whether a company is capable of
continuously providing their needs. This happens
when a customer uses the goods from a
particular company as raw materials or supplies
in his own business or when he is heavily
dependent upon the goods or services of the
company.
7. Others:
Anyone outside the company who do not
participate in the day-to-day operations of the
business and makes use of the company's
financial information is considered an external
user. This includes analysts, researchers,
students, media reporters, and publishers. They
are interested in financial information about the
company for educational, scholarly, and other
non-commercial purposes. Internal Users of
Accounting Information Internal users are to
those who use information in making decisions
for the business. Internal users actually refer to
the members of the company's management: top
management, middle management, and lower
management. They need financial information to
guide them in doing their tasks and in making
informed decisions that affect the operations of
the company.
02(a). Distinction between IAS (International
Accounting Standard) and GAAP (Generally
Accepted Accounting Principles).
Ans-
International Accounting Standard (IAS):
In the world of accounting there are lots of
principles and standards to be followed, most
especially if you are trying to prepare those
meticulously crafted financial statements and the
like. Although these standards may vary per state
or country, there are some internationally
recognized policies or protocols respected in
accountancy, and it’s other related professions.
The IAS, for one, is known worldwide as the
International Accounting Standards. Set by the
IAS Committee (IASC) from 1973 to 2001, the
IAS has lots of sub entities like the IAS Board
(IASB), which is the primary body that sets its
actual standards. Many people listen to both the
IASB and IASC, not just for their influence, but
also because of what they stand for on issues
concerning accounting.
Generally Accepted Accounting Principles
(GAAP):
Conversely, GAAP, or the Generally Accepted
Accounting Principles, is the more Americanized
term referring to the accounting standards
present in any country. The GAAP basically
dictates the rules or standards, as well as the
conventions to be followed when one records,
summarizes, transacts and prepares financial
statements within the nation.
Although the IASC is a powerful entity, it still does
not directly control or set the rules for the GAAP.
Whenever the IASC forms a new accounting
standard, some nations just try to incorporate that
standard into their country’s existing set of
standards. The said standards were already set
by the local accounting board of the nation. They
will be the ones that influence what will be the
GAAP for their jurisdiction.
To make it clearer, a concrete example is
America, wherein the accounting board known as
the FASB is in charge of making the actual
accounting rules that will later become the GAAP
for the country. Thus, it is safe to claim that each
nation has their very own set of GAAP. Although
individual GAAPs per country are technically
different from each other, these GAAPs are
almost entirely the same, and may only vary in
terms of how the rules are being interpreted.
Furthermore, it was last in 2001 when IASB took
the role of the IASC in setting the actual IAS. To
date, the IASB has been making and
implementing new accounting standards, but is
named as the IFRS, or International Financial
Reporting Standards. Nevertheless, all the other
standards, including the IAS, are still included in
the IFRS.
In Summary:
1. GAAP are the more generic accounting rules
that every country holds, and are directly
influenced by the different accounting boards of
each jurisdiction, whereas, IAS is the specific set
of internationally recognized accounting
standards, set by the IAS Committee.
2. GAAP, in itself, is locally based, while the IAS
is globally recognized, and some of its rules or
standards are incorporated in the GAAPs of many
countries.
2/ (c). Discuss the basic steps in recording
process?
Accounting is the recording, analysis and
reporting of events that are materially significant
to a company. Accounts contain records of
changes to assets, liabilities, shareholders'
equity, revenues and expenses. The usual
sequence of steps in the recording process
includes analysis, preparation of journal entries
and posting these entries to the general ledger.
Subsequent accounting processes include
preparing a trial balance and compiling financial
statements.
Identify the basic steps in the recording
process: The basic steps in the recording
process are: (a) analyze each transaction in
terms of its effect on the accounts, (b) enter the
transaction information in a journal, (c) transfer
the journal information to the appropriate
accounts in the ledger.
What a journal is and how it helps in the
recording process: The initial accounting record
of a transaction is entered in a journal before the
data are entered in the accounts. A journal (a)
discloses in one place the complete effect of a
transaction, (b) provides a chronological record of
transactions, and (c) prevents or locates errors
because the debit and credit amounts for each
entry can be readily compared.
What a ledger is and how it helps in the
recording process: The entire group of accounts
maintained by a company is referred to
collectively as a ledger. The ledger keeps in one
place all the information about changes in specific
account balances.
What posting is and how it helps in the
recording process: Posting is the procedure of
transferring journal entries to the ledger accounts.
This phase of the recording process accumulates
the effects of journalized transactions in the
individual accounts.
Prepare a trial balance and explain its
purposes: A trial balance is a list of accounts
and their balances at a given time. The primary
purpose of the trial balance is to prove the
mathematical equality of debits and credits after
posting. A trial balance also uncovers errors in
journalizing and posting and is useful in preparing
financial statements
Short Note:
 Ethics in Accounting:
Accounting ethics is primarily a field of applied
ethics and is part of business ethics and human
ethics, the study of moral values and judgments
as they apply to accountancy. It is an example of
professional ethics. Accounting introduced by
Luca Piccioli, and later expanded by government
groups, professional organizations, and
independent companies. Ethics are taught in
accounting courses at higher education
institutions as well as by companies training
accountants and auditors. Due to the diverse
range of accounting services and recent
corporate collapses, attention has been drawn to
ethical standards accepted within the accounting
profession.[2] These collapses have resulted in a
widespread disregard for the reputation of the
accounting profession.[3] To combat the criticism
and prevent fraudulent accounting, various
accounting organizations and governments have
developed regulations and remedies for improved
ethics among the accounting profession. Ethics is
a term that refers to a code or moral system that
provides criteria for evaluating right and wrong.
An ethical dilemma is a situation in which an
individual or group is faced with a decision that
tests this code. Many of these dilemmas are
simple to recognize and resolve. For example,
have you ever been tempted to call your
professor and ask for an extension on the due
date of an assignment by claiming a fictitious
illness? Temptation like this will test your
personal ethics.
 Conceptual framework:
A conceptual framework is an analytical tool with
several variations and contexts. It is used to
make conceptual distinctions and organize ideas.
Strong conceptual frameworks capture something
real and do this in a way that is easy to remember
and apply. Isaiah Berlin used the metaphor of a
"fox" and a "hedgehog" to make conceptual
distinctions in how important philosophers and
authors view the world. Berlin describes
hedgehogs as those who use a single idea or
organizing principle to view the world (such as
Dante Alighieri, Blaise Pascal, Fyodor
Dostoyevsky, Plato, Henrik Ibsen and Georg
Wilhelm Friedrich Hegel). Foxes, on the other
hand, incorporate a type of pluralism and view the
world through multiple, sometimes conflicting,
lenses (examples include Johann Wolfgang von
Goethe, James Joyce, William Shakespeare,
Aristotle, Herodotus, Molière, Honoré de Balzac).
Economists use the conceptual framework of
"supply" and "demand" to distinguish between the
behavior and incentive systems of firms and
consumers. Like many conceptual frameworks,
supply and demand can be presented through
visual or graphical representations (see demand
curve).
02 (b). What is conservatism convention?
How it aid to bank loan recovery system?
Ans- In accounting, the convention of
conservatism, also known as the doctrine of
prudence, is a policy of anticipating possible
future losses but not future gains. This policy
tends to understate rather than overstate net
assets and net income, and therefore lead
companies to "play safe". When given a choice
between several outcomes where the
probabilities of occurrence are equally likely, you
should recognize that transaction resulting in the
lower amount of profit, or at least the deferral of a
profit.
In accounting, it states that when choosing
between two solutions, the one that will be least
likely to overstate assets and income should be
selected. Essentially, "expected losses are losses
but expected gains are not gains".
The conservatism principle is the foundation for
the lower of cost or market rule, which states that
you should record inventory at the lower of either
its acquisition cost or its current market value.
Conservatism plays an important role in a number
of accounting rules, including the allowance for
doubtful debts and the lower of cost or market
rule.
Bank Loan Recovery System-
Introduction:
When a bank or other financial institutions
distribute a loan to other organization or people,
then after regaining from loan it is called loan
recovery, Rajshahi Krishi Unnayan Bank
distributed loan to loan and recovers this money.
Rajshahi Krishi Unnayan Bank recover loan
under two basis-
1. Unclassified loan, and
2. Classified loan.
Unclassified loan: When half or more than half
of the total loan is repaid within the due dates by
the borrowers then that is called unclassified
loan. The duration of time in which the loan will
be treated as unclassified is less than 12 months
from sanctioning loan.
Classified loan: When more than half of the total
loan or total is unpaid / due over the due date
then that loan is called classified loan.
Classified loans can be substandard, Doubtful
and bad. The criteria of these classification of
classified loans are as follows:
1. for short term loan: Short term loan are
classified by Rajshahi Krishi Unnayan Bank in
three categories-
i) Crop loan and micro credit:
--Age of overdue, 12 months Irregular.
--Age of overdue 13-36 months Substandard
--Age of overdue 36-60 months Doubtful.
--Age of overdue: Above 60 months Bad.
ii) Cash credit-and working capital
--From 6 months but less than 9 months-
Substandard.
--From 9 mouths but less than 12 months-
Doubtful.
iii) Demand Loan
--From 6 months but less than 9 months-
Substandard.
-- From 9 months but less than 12 months-
Doubtful.
--From 12 months above- Bad.
2. Medium loan (Up to 5 years):
--From 0 months but less than 6 months-
Substandard.
-- From 6 months but less than 12 months-
Doubtful.
--From 12 months but less than 18 months – Bad.
3. Long term loan (Above 5 years):
--From 0 months but less than 12 months-
Substandard.
--From 12 months but less than 18 mounts –
Doubtful.
-- From 18 months but less than 24 months-Bad.
Procedure of loan recovery:
The main responsibility of bank manager and
loan officer is to recovery the outstanding loan in
Rajshahi Krishi Unnayan Bank.
Two-recovery procedures are- iv)Shortage of credit personnel- The branch
a) Usual procedure. has shortage of manpower to evaluate credit
b) Legal procedure. worthiness of the borrowers, identification of real
a) Usual procedure: borrowers, and supervision and recovery of loan.
The usual loan recovery procedure is divided into v) Lack of legal action by the banks against
several steps. They are as follows: defaulters- Neither the Bank Manager nor the
1. Issue of demand notice: Demand notice is supervisor has any authority and power to take
issue before on month being due of outstanding effective measures or administrative action
loan or installment. It is sent to the borrower. against defaulters. For that reason, the defaulters
2.Legal notice: It the borrower does not repay do not bother for requests of loan repayment by
their respective loans and interest after maturity them. Moreover, legal action against defaulters
being received the demeaned notice under has rarely been taken.
registered with acknowledgement by post to the vi)Corruption of the bank employees- In some
borrowers the bank should send lower notice to cases, the bank officers take bribe from the
him. defaulters and avoid responsibilities of realization
3. Special notice: Beside the above to notice a of loan from the borrowers.
special notice signature by DC, TNO is sent to Vii) Inability of the farmers to repay loan-
the respective borrower to keep mental pressure Farmers need credit not only for agricultural
on him for repaying the loan. production but also for consumption for their
4.Field recovery: Loan officer recover the survival, particularly by marginal farmers. This
recovered loan through I.O. receipt by visiting the sometimes compels them to divert agricultural
spot and source of the borrower. credit to consumption and other unproductive
5. Personal Communication: If the borrower purposes which ultimately lead to their low
fails to repay his loan installment, the loan officer repayment capacity.
communicates with the respected persons of that viii) ‘Benami’ loan received particularly by
area to give mental pressure to the borrower so U.P. chairman/Member- Sometimes the rural
that he repays his respective loan. influential, particularly Union Parishad Chairman
6. Loan Recovery Camp: Rajshahi Krishi and Members receive ‘Benami’ loan. It happens
Unnayan Bank made camp in various areas for particularly due to shortage of credit personnel
the recovery of his loan, in this issue; the who have to disburse credit in a short notice and
manager and other officer were present in the do not have enough time to identify genuine
camp and communicated with borrowers. They borrowers.
gave them moral persuasion and tried to ix) Accessibility to alternative credit
encourage them, so that they could repay their institutions- There are a number of credit
loan. institutions which are working independently. So
7. Loan recovery: with the help of interest non-repayment of loan to one institution does not
exemption the loan amount which becomes more affect in receiving loan from another institution.
than double in principle and interest and which is x) Evaluation of banker’s efficiency-
not possible to recover with the help of legal Performance of bank personnel is judged on the
action then those loan can be recovered by basis of amount deposited by him, not on the
exempting interest. By this way bad loan can be amount of loan recovered. Further, there is
recovered. practically no incentive for him to increase
b) Legal procedure: recovery amount.
When legal action for recovering loan becomes xi) Inadequate training facilities for credit
failed a case in filed against the borrowers. The officers and their qualifications- The persons
case is generally filed in the following ways: involved in agricultural credit operations in rural
I. Unwilling to repay loan although he is financially bank branches have poor educational
solvent. background with inadequate training. Banking
Every effort of loan recovery becomes failure. training programmer has hardly anything
Rules of Recovery: regarding an agricultural credit operation which
Rajshahi Krishi Unnayan Bank loan recoveries affects loan recovery performances of the Banks.
from loan in installment system are as follows:
i) Weekly ii) Fortnightly iii) Monthly.
Causes of defaulter:
The loan cannot loan payment in due time in
various causes:
i)Natural calamity destroy the crops, for this
reason the loan unable to pay loan in due time.
ii)Rajshahi Krishi Unnayan Bank cannot take
proper step against the loan for influential man.
iii) The loan cannot use the loan in proper.
iv) The loan do not pay loan in more time.
v) Lack of loan supervision.
Causes of low recovery:
i) Negative attitudes of the local elites to
repay loan- In most of the cases, the influential
persons due to their political and social power are
not interested to repay the loan. Because to their
political influence, credit officers cannot take any
effective measure for loan recovery from them.
Sometimes, loan received by them for a specific
purpose is also diverted to other purposes.
ii) Damage of crops due to flood- Sometimes,
the farmers have some valid reasons for non-
repayment of loan in spites of their willingness of
repayment of loan. In the case of crop failure due
to natural disaster like flood, drought, etc., it
becomes really difficult for the farmers to repay
loan in time.
iii) Unproductive use of loan- The time involved
in processing loan is such that the farmers
usually receive credit at the end of the specific
crop season even after harvesting of the crop.
For that matter, credit does not help in increasing
production rather it is actually spent for non-farm
expenses.
03 (a). What is Account? In what basis
account is to be classified?
Ans- An account can have several meanings in
the accounting profession. They are as follows:
Record: An account can be the record in a
system of accounting in which a business records
debits and credits as evidence of accounting
transactions. Thus, the accounts receivable
account stores information about billings to
customers, as well as reductions of those billings
due to payments from customers.
Customer: An account can be considered the
same as a customer. Under this meaning, an
account is another entity or person for whom a
business acts as a supplier, and with whom there
may be an outstanding accounts receivable
balance.
Future payment: If a sale is "on account," this
means that the buyer will pay the seller at a later
date.
Basis account is to be classified-
In accounting, the accounts are classified using
one of two approaches – modern approach or
traditional approach. We shall describe modern
approach first because this approach of
classification of accounts is used in almost every
advanced country. The use of traditional
approach is very limited.
Modern approach
According to modern approach, the accounts are
classified as asset accounts, liability accounts,
capital or owner’s equity accounts, withdrawal
accounts, revenue/income accounts and expense
accounts.
1. Asset accounts:
Assets are things or items of value owned by a
business and are usually divided into tangible or
intangible. Tangible assets are physical items
such as building, machinery, inventories,
receivables, cash, prepaid expenses and
advance payments to other parties. Intangible
assets normally include non-physical items and
rights. Examples of intangible assets include
goodwill, trademarks, copyrights, patent rights
and brand recognition etc.
A separate account for each tangible and
intangible asset is maintained by the business to
record any increase or decrease in that account.
2. Liability accounts:
Liabilities are obligations or debts payable to
outsiders or creditors. The title of a liability
account usually ends with the word “payable”.
Examples include accounts payable, bills
payable, wages payable, interest payable, rent
payable and loan payable etc. Besides these, any
revenue received in advance is also a liability of
the business and is known as unearned revenue.
For example, a marketing firm may receive
marketing fee from its client for the forthcoming
quarter in advance. Such unearned revenue
would be recorded as a liability as long as the
related marketing services against it are not
provided to the client who has made the advance
payment.
3. Capital or owner’s equity accounts:
Capital is the owner’s claim against the assets of
the business and is equal to total assets less all
liabilities to external parties. The balance in
capital account increases with the introduction of
new capital and profits earned by the business
and decreases as a result of withdrawals and
losses sustained by the business.
In sole proprietorship, a single capital account
titled as owner’s capital account or simply capital
account is used. In partnership or firm, each
partner has a separate capital account like John’s
capital account, Peter’s capital account etc. In
corporate form of business there are many
owners known as stockholders or shareholders
and the title capital stock account is used to
record any change in the capital.
3++4. Withdrawal accounts:
Withdrawals are cash or assets taken by a
business owner for his personal use. In sole
proprietorship and partnership, an account titled
as drawings account is used to account for all
withdrawals. In corporate form of business
withdrawals are more systematic and usually
termed as distributions to stockholders. The
account used for recording such distributions is
known as dividend account.
5. Revenue or income accounts:
Revenue is the inflow of cash as a result of
primary activities such as provision of services or
sale of goods. The term income usually refers to
the net profit of the business derived by deducting
all expenses from revenue generated during a
particular period of time. However, in accounting
and finance, the term is also used to denote all
inflows of cash resulted by those activities that
are not primary revenue generating activities of
the business. For example, a merchandising
company may have some investment in an oil
company. Any dividend received from Oil
Company would be termed as dividend income
rather than dividend revenue. Other examples of
income include interest income, rent income and
commission income etc. The businesses usually
maintain separate accounts for revenues and all
incomes earned by them.
6. Expense accounts:
Any resource expended or service consumed to
generate revenue is known as expense.
Examples of expenses include salaries expense,
rent expense, wages expense, supplies expense,
electricity expense, telephone expense,
depreciation expense and miscellaneous
expense.
Traditional approach
According to traditional approach, the accounts
are classified into four types – personal accounts,
real accounts, nominal accounts, and valuation
accounts. A brief explanation of each is given
below:
1. Personal accounts:
The accounts related to real persons and
organizations are classified as personal accounts.
Examples of personal accounts include John’s
account, Peter’s account, Procter and Gamble’s
account, Vibrant Marketing Agency’s account and
City bank’s account etc. The business keeps a
separate account for each individual and
organization for the purpose of ascertaining the
balance due from or due to them.
2. Real accounts:
Real accounts are accounts related to assets or
properties (both tangible and intangible) owned
by a business enterprise. A separate account for
each asset is maintained to account for increases
and decreases in that asset. Examples of real
accounts include cash account, inventory
account, investment account, plant account,
building account, goodwill account, patent
account, copyright account etc.
3. Nominal accounts:
The accounts related to incomes, gains,
expenses and losses are classified as nominal
accounts. These accounts normally serve the
purpose of accumulating data needed for
preparing income statement or profit and loss
account of the business for a particular period.
Examples of nominal accounts include sales
account, purchases account, wages account,
salaries account, and interest account, rent
account, gain on sale of fixed assets account and
loss on sale of fixed assets account etc.
4. Valuation account:
Valuation account (also known as contra account)
is an account used to report the carrying value of
an asset or liability in the balance sheet. A
popular example of valuation account is the
accumulated depreciation account. Companies
maintaining fixed assets in the books of accounts
at their original cost also maintain an
accumulated depreciation account for each fixed
asset.
03 / (b). Discuss the necessarily of revenue
recognitions?
Ans- The principle of ‘revenue recognition’ has
long been the domain of the Finance department,
but it has such a major impact on the overall
success of a business that when it is not properly
adhered to or managed it not only hits the
balance sheet, it can also make front page news.
This is of direct importance for professional
service firms who should only recognize their
revenues when services are rendered no matter
when payment is made. This differs from cash
accounting, where revenues are recognized on
payment and not where goods and services are
sold.
What this means is that organizations need to
carefully manage two types of accounts for
revenue recognition:
1. Accrued revenue: Revenue is recognized
before cash is received.
2. Deferred revenue: Revenue is recognized
after cash is received.
An inconsistent approach to revenue recognition
will impact on profits, and reputation. Recent
events with such high profile names as Tesco
have really highlighted the importance of
Revenue Recognition and the consequences of
poor Corporate Governance in Executive
Management ensuring that there is a renewed
focus for:
==Organizations adherence to the rules and
standards expected of them
==Sound Financial Policies endorsed by the
Board
==Financial Policies being implemented
effectively
How Deltek Maconomy can assist with ensuring
implementation of Financial Policies for services
firms
For project-based firms who sell their people’s
time and are rendering services, strict adherence
to Revenue Recognition principles is essential.
Revenue can be recognised at cost or selling
price based on any of:
==The recording of time against a Project
==Invoice creation ==% of Project work done
This means that you can rest assured that your
Company Financial Policies are being effectively
implemented, your balance sheet is in order and
you are not at risk of any potentially damning
headlines.
3/(c). What is monitory Unit Assumption?
What impact does inflation have on the
monitory Unit Assumption?
Monitory Unit Assumption:
The monetary unit concept is an accounting
principle that assumes business transactions or
events can be measured and expressed in terms
of monetary units and the monetary units are
stable and dependable. In other words, the
language of business and finance is money. It
doesn’t matter what currency it is as long as it’s
stable and can be comparable to other
currencies.
Inflation of the monitory Unit
Assumption:Inflation has a lot of impact on
monetary unit assumption. Inflation greatly
reduces the value of a monetary unit and acts as
a hidden tax on consumers."The monetary unit
assumption requires that companies include in
the accounting records only transactions data that
can be expressed in terms of money. This
assumption enables accounting to quantify
(measure) economic events. The monetary unit
assumption is vital to applying the cost principle.
This assumption prevents the inclusion of some
relevant information in the accounting records.
For example, the health of the owner, the quality
of service, and the morale of employees are not
included. The reason: Companies cannot quantify
this information in terms of money. Though this
information is important, only events that can be
measured in money are recorded.
(4)..a) What is Balancing? What is debit 4/ (b). What is adjusting entries? States the Short Note:
balance & credit balance? types of adjusting entries with example.  IFRIC:
Balancing: Adjusting entries are journal entries recorded at The Director of Implementation Activities
- To compute the difference between the debits the end of an accounting period to adjust income informed the Board that he wanted to highlight
and credits of (an account). and expense accounts so that they comply with three items from the Update.
- To reconcile or equalize the sums of the debits the accrual concept of accounting. Their main The first item related to IFRIC. The Interpretations
and credits of (an account). purpose is to match incomes and expenses to Committee had looked into clarifying the
- To settle (an account, for example) by paying appropriate accounting periods. circumstances in which an asset could be
what is owed. recognized in respect of a defined benefit pension
Debit Balance The transactions which are recorded using plan. In particular, an asset should not be
In accounting, a debit balance is the ending adjusting entries are not spontaneous but are recognized if a third party had the unilateral right
amount found on the left side of a general ledger spread over a period of time. Not all journal to use the surplus from the plan for other
account or subsidiary ledger account. entries recorded at the end of an accounting purposes. The Interpretations Committee also
period are adjusting entries. For example, an addressed some presentation issues. One sweep
A debit balance is normal and expected for the
entry to record a purchase on the last day of a issue would be discussed at the Interpretations
following accounts:
period is not an adjusting entry. An adjusting Committee meeting in November so that the
==Asset accounts such as Cash, Accounts
entry always involves either income or expense Board could discuss the issue as early as during
Receivable, Inventory, Prepaid Expenses,
account. the December or January IASB meeting.
Buildings, Equipment, etc. For example, a debit
balance in the Cash account indicates a positive The Director then notified the Board that there
There are following types of adjusting entries: had been five tentative agenda decisions that the
amount of cash. (Therefore, a credit balance in
Interpretations Committee had published. One
Cash indicates a negative amount likely caused  Accruals:
by writing checks for more than the amount of item concerned the assessment of significant
These include revenues not yet received nor influence over a fund by the fund manager. The
money currently on hand.) recorded and expenses not yet paid nor
==Expense accounts and loss accounts Interpretations Committee had concluded that
recorded. For example, interest expense on loan IAS 28 did not provide sufficient guidance on this
Including Cost of Goods Sold, Wages Expense, accrued in the current period but not yet paid. issue. The Committee had therefore
Rent Expense, Interest Expense, Loss on  Prepayments: recommended that the IASB should address this
Disposal of Equipment, Loss from Lawsuit, etc. These are revenues received in advance and issue in its research project on the equity method
(The debit balances in these accounts will be recorded as liabilities, to be recorded as revenue of accounting. He went on to the last issue,
transferred to Retained Earnings or to the and expenses paid in advance and recorded as concerning the cost associated with levies raised
proprietor's capital account at the end of each assets, to be recorded as expense. For example, on production property, plant and equipment. The
accounting year.) adjustments to unearned revenue, prepaid
==Contra-revenue accounts including Sales question was whether these were administrative
insurance, office supplies, prepaid rent, etc. costs or whether those were fixed production
Discounts, Sales Returns, etc. (The debit

balances in these accounts allow for the reporting
Non-cash: overheads to be recognized as part of the cost of
These adjusting entries record non-cash items the entity's inventory. The Interpretations
of both the gross and net amounts of sales.
such as depreciation expense, allowance for Committee had decided during its deliberations
These balances will also be transferred to an
doubtful debts etc. on IFRIC that this could not be generalized and
equity account at the end of each accounting
Example-This example is a continuation of the should therefore not be included in the
year.)
accounting cycle problem we have been working Interpretation. At the last Committee meeting, the
==Contra-liability accounts such as Discount
on. In the previous step we prepared Committee decided to forward the issue to the
on Bonds Payable. (This debit balance allows for
an unadjusted trial balance. Here we will pass Conceptual Framework team.
the presentation of both the maturity value and
adjusting entries
the book or carrying value of the bonds.)
==Contra-equity accounts such as the owner's
Relevant information for the preparation of
drawing account and Treasury Stock. (The debit
adjusting entries of Company A
balance in the drawing account will be closed to
Office supplies having original cost Tk.
the owner's capital account thereby reducing its
4,320 were unused till the end of the
balance at the end of each year. The debit
period. Office supplies having original cost
balance in Treasury Stock serves as a reduction
of $22,800 are shown on unadjusted trial
to the total amount of Stockholders' Equity.)
balance.
credit balance Prepaid rent of Tk.36,000 was paid for the
In accounting, a credit balance is the ending months January, February and March.
amount found on the right side of a general The equipment costing Tk.80,000 has
ledger account or subsidiary ledger account. useful life of 5 years and its estimated
salvage value is Tk.14,000. Depreciation is
A credit balance is normal and expected for the provided using the straight line
following general ledger and subsidiary ledger depreciation method.
accounts: The interest rate on Tk.20,000 note
==Liability accounts. These include Accounts payable is 9%. Accrue the interest for one
Payable, Notes Payable, Wages Payable, month.
Interest Payable, Income Taxes Payable, Tk.3,000 worth of service has been
Customer Deposits, Deferred Income Taxes, and provided to the customer who paid
so on. For instance, a credit balance in Accounts advance amount of Tk.4,000.
Payable indicates the amount owed to vendors.
==Equity accounts. Four examples of equity
accounts are Common Stock, Paid-in Capital in
Excess of Par Value, Retained Earnings, and M.
Smith, Capital. These are also permanent
accounts and their balances are not closed at the
end of the accounting year.
==Revenue accounts and gain accounts.
Examples include Sales Revenues, Service
Revenues, Interest Revenues, Gain on Disposal
of Equipment, Gain from Lawsuit, etc.
==Contra-asset accounts. Two examples
are Allowance for Doubtful Accounts and
Accumulated Depreciation. The credit balances in
these accounts will allow for the reporting of both
the gross and net amounts for accounts
receivable and for property, plant and equipment.
==Contra-expense accounts. These include
Purchases Discounts, Purchases Returns and
Allowances, and Expenses Reimbursed by
Employees, etc. The credit balances in these
accounts allow the company to report both the
gross and net amounts.
5/ (a). What are objective of preparing of Bank
Reconciliation Statement?
Objective of preparing of Bank Reconciliation
Statement:
Bank Reconciliation statement is the basic
document of the accounting. Preparation of it is
not legally compulsory but by making it, following
objects/advantages/importance are derived and is
needed due to following causes:
1. To know the accuracy of entries in the Cash
Book and the Pass Book: The basic object of
preparing Bank Reconciliation Statement is to test
the accuracy of causes of difference in the Cash
Book and the Pass Book. The trader tests the
accuracy on the basis of entries in the Cash Book
and the Bank or the basis of its own transactions.
2. To know the errors in Cash Book and Pass
Book: Cash inflow and outflow must tally asper,
Cash Book with the Bank Pass Book or, Bank
Statement. This brings into focus errors and
irregularities in Cash Book and Pass Book as well
as in the business.
3. Knowledge of cheques deposited for
collection: Bank Reconciliation Statement gives
information about the position of cheques
deposited for collection e.g.
(i) How many cheques were issued and not
presented for payment up to the date of
reconciliation?
(ii) How many cheques were not credited up to
the reconciliation time or were dishonored,
(iii) Cause of delay, in clearance etc.
4. Check on the embezzlement of cash: The
continuous comparison of Cash Book with the
Pass Book keeps check on employees trying to
indulge in embezzlement and misappropriation of
funds. The cases of embezzlement of cash by
employees can be detected easily.
5.Verification of Bank Balance: The balance of
Bank can be known and it becomes convenient for
issuing cheques on its basis in future.
6. Mechanism of Internal control: The
preparation of Bank Reconciliation statement is an
important mechanism of internal control on cash
inflow and outflow. It checks misappropriation of
cheques, bank drafts, malpractices of dishonest
employees dealing with cash and bank etc.
7. Knowledge of interest allowed by bank or
Commission and Interest charged by Bank:
The information regarding transaction of interest
and other expenses (e.g., commission) which are
recorded by Bank, but not recorded by customer
in his Cash Book is received by preparation of
Bank Reconciliation Statement.
8. Knowledge of Other Facts:
• The knowledge of wrong entries by bank;
• The correct position of cash and bank deposit;
• Dividend directly collected by bank;
• Direct deposit of cash or cheque by a debtor;
• Payment made by the bank on behalf of trader
as per standing instructions;
• Position of dishonor of bills receivable.
5/ (b).Possible practice of defalcation of
online banking system:
==Your password and PIN (personal
identification number) are your first line of
defense and your unique identifier. Be sure not
to share them with anyone.
==Do not use public or other unsecured
computers for logging into Online Banking or for
financial transactions (for example, one at a
library or coffee shop).
==Review account balances and detail
transactions regularly (preferably daily) to
confirm payment and other transaction data and
immediately report any suspicious transactions
to your financial institution
==View transfer history available through
viewing account activity information.
==Whenever possible, use Bill Pay instead of
checks to limit account number dissemination
exposure and to obtain better electronic record
keeping
==Do not use account numbers, your social
security number, or other account or personal
information when creating account nicknames
or other titles
==Review historical reporting features of your
online banking application on a regular basis to
confirm payment and other transaction data
==Never leave a computer unattended while
using Online Banking
==Never conduct banking transactions while
multiple browsers are open on your computer
==An FBI recommended best practice is to
suggest that company users dedicate a PC
solely for financial transactions (e.g, no web
browsing, emails, or social media).
==Whenever possible, register the computer
you use specifically for Online Banking in order
to avoid having to re-send a security code and
other authentication information with each login
==Take advantage of and regularly view system
alerts; examples include:
--Balance alerts --Transfer alerts --Password
change alerts
==Do not open e-mail from unknown sources
==Never respond to a suspicious e-mail or click
on any hyperlink embedded in a suspicious e-
mail.
==Install latest anti-virus and spyware detection
software on all computer systems.
==Ensure computers are patched regularly,
particularly operating system and key application
with security patches.
==Clear the browser cache before starting an
online banking session in order to eliminate
copies of Web pages that have been stored on
the hard drive
Short Note:
 Accounting cycle:
The accounting cycle is the process of accepting,
recording, sorting, and crediting payments made
and received within a business during a particular
accounting period. Companies generally balance
their books each quarter and then again at year-
end, though others may prefer to settle the books
every day or every week – that’s a lot of work, but
it can be done if you choose to.
Based on the transactions recorded as part of the
accounting cycle, financial statements such as
cash flow reports, profit and loss statements, and
balance sheets can be prepared. Once all the
business accounts have been balanced, they are
closed out for that period and new ones created
for the next accounting period.
Steps in the Cycle
Depending on whom you talk to, the accounting
cycle can have anywhere from seven to nine
steps, based on how detailed each step is.
==Financial transactions occur, such as selling
inventory, buying raw materials, or making lease
payments, for example.
==Those transactions are noted in the appropriate
financial journal, depending on what the money
was spent on or originated from. Debits are used
to indicate money spent and credits are used for
money that is received.
==The transactions are then posted to the
account in the general ledger, which is the list of
all the business’ financial accounts that it impacts,
such as rent or wages or marketing.
==At the end of the accounting period, you run a
trial balance to see if all the numbers balance.
Frequently, they won’t, so adjustments are
necessary.
==The next step is trying to find the cause of the
imbalance and correcting it.
==Once the accounts are balance, financial
statements are prepared.
==At the end of the period, the books are closed
out and new revenue and expense accounts
created with zero balances. These are used for
the next accounting period.
6/ (a). What is angel of incidence in breakeven
point? What does it mean in breakeven
analysis and show it graphically.
Angle of Incidence at Break Even Point:
This is the angle formed at the break-even point
at which the sales line cuts the total cost line.
This angle indicates rate at which profits are
being made. Large angle of incidence is an
indication that profits are being made at a high
rate.
On the other hand, a small angle indicates a low
rate of profit and suggests that variable costs
from the major part of cost of production. A large
angle of incidence with a high margin of safety
indicates the most favorable position of a
business and even the existence of monopoly
conditions.
Graphical Presentation of Break-Even
Analysis: Break-even point can be ascertained
with the help of a break-even chart. According to
London Management Centre “A breakeven chart
is a strategic tool used to plot the financial
revenue of a business unit against time or sales
to determine the point when sales output is equal
to revenue generated. This is recognized as the
breakeven point.”
It is an analysis which makes use of fixed cost
and variable cost to calculate total cost. Then this
total cost is compared with sales. Graphically
total cost line and sales or sales revenue line
meet at a point. This is break-even point.
Let us understand this concept by a break-even
graph. We will do everything step by step.
We will take level of production in units on x-axis
and sales revenue or cost and profit on y- axis
1. Determine the Total Fixed Cost
These are the costs that do not change with
change in volume of production. Thus, fixed cost
line is a line parallel to x-axis showing that it
remains constant for any level of production.
Figure 6: Fixed Cost
Number of units produced fixed cost will remain
same.
2. Determine the Total Variable Cost:
Variable cost as the name implies varies with the
level of production. It is directly related to number
of units produced. As the level of production
increases variable cost also increases and vice
versa. When there is no production variable cost
is zero and as the production increases variable
cost also increases accordingly.
Figure 7: Variable Cost
In the above figure, the red line represents
variable cost. It starts from origin showing zero
cost for zero units produced and then sloping
upward to show increase in cost with increase in
units produced.
3. Determine Total Cost: Short Note:
The next step is to plot the total cost line. We all
know that in any firm  Accumulated depreciation:
Accumulated depreciation is the total amount of a
plant asset's cost that has been allocated to
depreciation expense since the asset was put into
service. Accumulated depreciation is associated
with constructed assets such as buildings,
machinery, office equipment, furniture, fixtures,
At zero level of production the only cost burden to vehicles, etc.
any firm is of fixed cost because there is no Accumulated Depreciation is also the title of the
variable cost at this level. Therefore the total cost contra asset account which is credited when
line starts from the intercept of fixed cost level Depreciation Expense is recorded each
and then the total cost line keeps increasing. As accounting period.
we know that the variable cost increases with The amount of accumulated depreciation is used
increase in output and thus the total cost (sum of to determine a plant asset's book value (or
fixed cost and variable cost) also increases carrying value). For example, a delivery truck
continuously. having a cost of $50,000 and accumulated
4. Determine Total Sales: depreciation of $31,000 will have a book value of
Total sales can be determined by multiplying $19,000. (It is important to note that an asset's
selling price per unit with the quantity sold. It is book value does not indicate the asset's market
also upward sloping as sales revenue increases value since depreciation is merely an allocation
with increase in number of units sold. technique.)
The accumulated depreciation of each plant asset
cannot exceed the asset's cost. If an asset
remains in use after its cost has been fully
depreciated, the asset's cost and its accumulated
depreciation will remain in the general ledger
accounts and the depreciation expense stops.
When the asset is disposed (sold, retired, etc.)
the asset's cost and accumulated depreciation
are removed from the accounts.
 Unadjusted trial balance:
The unadjusted trial balance is the listing of
Accounting is a set of concepts and techniques
general ledger account balances at the end of a
that are used to measure and report financial
reporting period, before any adjusting entries are
information about an economic unit. The
made to the balances to create financial
economic unit is generally considered to be a
statements. The unadjusted trial balance is used
separate enterprise. The information is reported
as the starting point for analyzing account
to a variety of different types of interested parties.
balances and making adjusting entries. This
These include business managers, owners,
report is a standard one that can be issued by
creditors, governmental units, financial analysts,
many accounting software packages. It can also
and even employees. In one way or another,
be manually compiled.
these users of accounting information tend to be
If a company creates financial statements on a
concerned about their own interests in the entity.
monthly basis, the accountant would print an
Business managers need accounting information
unadjusted trial balance at the end of each month
to make sound leadership decisions. Owners and
to initiate the process of creating financial
investors hope for profits that may eventually lead
statements. Alternatively, if the company only
to distributions from the business. Creditors are
creates financial statements once a quarter, one
always concerned about the entity’s ability to
would print the unadjusted trial balance on a
repay its obligations. Governmental units need
quarterly basis.
information to tax and regulate. Analysts use
In a computerized accounting system, it may not
accounting data to form opinions on which they
even be apparent that an unadjusted trial balance
base investment recommendations.
is available; instead, the accountant may simply
Importance:
work from the general ledger report, and adjust it
The role and importance of the accounting
as necessary to create financial statements.
information in the bank activity is derived from the
An unadjusted trial balance is only used in double
role and functions of commercial banks
entry bookkeeping, where all account entries
themselves. Banks are the great financial
must balance. If a single entry system is used, it
intermediaries in economy. From exercising their
is not possible to create a trial balance where the
main functions banks generate extremely useful
sum of all debits equals the sum of all credits.
accounting information, both for the bank
management and for the clientele. These
functions or operations, traditional for the banks,
confirmed by law, generators of accounting
information, refer mainly to: − accepting deposits
from clients; issue and management of payment
instruments and credit; payments; fund transfers;
transactions in the clients’ accounts; mandate
operations, etc. The classification of bank
operations in active and passive depending on
the way they are found in the bank balance sheet,
also underline the role and importance of
accounting information in the whole bank activity.
Active bank operations generate accounting
information regarding the placement of bank
resources.
9) (a). What is Financial Statement? Discuss
the components of Financial Statement.
Ans: Financial statement is a formal record of the
financial activities and position of a business,
person, or other entity.
Relevant financial information is presented in a
structured manner and in a form easy to
understand. They typically include basic financial
statements, accompanied by a management
discussion and analysis.
Components of Financial Statement:
Four types of financial statements are given
below:
Income Statement
The income statement details income sources
and expenses and shows the net income. The
first section of the statement lists all income of the
business. This usually breaks down into
categories to show sources of income, which add
up to a total income figure. The next section
shows a total of all expenses associated with the
business.
Balance Sheet
The balance sheet of a business reveals its net
worth. This is the difference between all assets
and all liabilities. Some businesses are generic in
this statement and simply list generalized
categories of assets and liabilities, with the asset
category being first on the statement. Larger
businesses break down the asset and liability
categories into current and non-current or short-
term and long-term. Assets minus liabilities equal
the company’s net worth.
Cash Flow Statement
The cash flow statement shows the cash that
flows in and out of the business. This is actual
cash and does not include credit, loans, payables
or receivables not yet received or paid out. Cash
inflows list first followed by cash outflows. The
difference between the two should correspond to
the bank account balances of the business.
Statement of Changes in Equity
Statement of Changes in Equity, also known as
the Statement of Retained Earnings, details the
movement in owners' equity over a period. The
movement in owners' equity is derived from the
following components:
== Net Profit or loss during the period as reported
in the income statement
== Share capital issued or repaid during the
period
== Dividend payments
== Gains or losses recognized directly in equity
== Effects of a change in accounting policy
9) b. Discuss the limitation of financial
statement.
Some of the important limitations are as
follows:
1. Incomplete Information
Generally, the financial statements are prepared
for an accounting period. Hence, there is a
possibility of disclosing incomplete information.
The correct financial position and exact financial
strength of the company can be known when the
business is closed down.
2. No Brief Information
Accounting rules, methods and conventions are
applied for preparing financial statements.
Sometimes experiences of the accountancy
profession is also used for preparation. These
lead to detailed information included in the
financial statements.
3. Qualitative Information is ignored
Only quantitative information are included in the
financial statements and are expressed in
monetary terms. But, the qualitative information
such as efficiency of management executives,
goodwill of the company, employee and employer
relationship, efficiency of workers, customer
satisfaction, loyalty of customers, competitive
strength and the like are not expressed in
monetary terms.
4. Disclose Wrong Financial Position
The financial position of a business concern is
affected by several factors such as economic,
social and financial. But, the financial statements
include only financial factors.
5. Shows only Historical Information
The financial statements are prepared taking into
account of recorded historical costing information.
They do not consider present value of money and
cost of living index in the price level changes.
6. Static Financial Position of the Company
A balance sheet is prepared on a specified date
and reflects the financial position on such date.
The real financial position of the company may be
changing day to day.
7. Financial Statements are Dumb
The financial statements cannot speak
themselves. They need detailed analysis and
interpretation.
8. Balance Sheet is not a Valuation Statement
Various assets and liabilities are recorded in the
balance sheet at their book value. But, the real
value is different from the book value. Hence, it is
clear that real financial position of the company
cannot be judged from the balance sheet.
9. Real Profit is not disclosed by Profit and
Loss Account
Both operating expenses and non-operating
expenses are recorded in the Profit and Loss
Account. They are recorded only on estimation
but not on the basis of actual incurred expenses.
10. No Comparison of Financial Statements
The financial statements are prepared by different
companies in different accounting methods. The
reason is that there are different accounting
policies and size of business concern differs from
one company to another.
Short Note:
 Closing Entries:
A closing entry is a journal entry made at the end
of the accounting period in which data is moved
into the permanent accounts on the balance
sheet from temporary accounts on the income
statement. The purpose of the closing entry is to
bring the temporary account balances to zero on
the general ledger, including revenue, expense
and dividend accounts. All income statement
balances are eventually transferred to retained
earnings.
We prepare closing entries for the temporary
accounts such as the revenue and expense
accounts (see earlier Q&A). The closing entries
are recorded after the financial statements for the
accounting year are prepared. The reason for the
closing entries is to ensure that each revenue and
expense account will begin the next
accounting year with a
zero balance. The closing entries require
that a debit be entered into each of the temporary
accounts having a credit balance. The debit
entered must be exactly the amount of the credit
balance prior to the closing entry. The objective is
to get the account balance to be zero.
The closing entries also require that a credit be
entered into each of the temporary accounts
having a debit balance. The credit amount that is
entered must be exactly the amount of the debit
balance prior to the closing entry.
 Petty cash:
Petty cash, in simple terms, is an amount of
money that a business has available to pay for
something inexpensive, so an employee doesn’t
have to use their own money.
Some examples of occasions when you might
use petty cash are:
==If you’re posting an important business letter
and need to buy a stamp
==If you’re reimbursing an employee for buying
food or drink for the company
==If you’re covering travelling costs for an
employee who is going away on a business trip
The petty cash procedure:
Larger businesses will appoint a junior member of
staff as the petty cashier — who is then
responsible for looking after the petty cash on
behalf of the main cashier. The main cashier, will
hand over a particular sum of money (usually
agreed in advance), which is referred to as a
‘float’.