UGC NET Commerce – Unit 2: Accounting & Auditing

Flashcards cover key definitions, principles, methods, ratios and audit concepts from the full set of lecture notes on Accounting & Auditing for UGC NET Commerce Unit 2.

How does the American Institute of CPAs define Financial Accounting?

The art of recording, classifying and summarising in a significant manner and in terms of money transactions and events of a financial character and interpreting the results thereof.

What is the main distinction between book-keeping and accounting?

Book-keeping is limited to routine recording of transactions, whereas accounting also measures, summarises and communicates financial information.

In practice, what thin line differentiates ‘Accounting’ from ‘Accountancy’?

Accounting explains the nature of the work performed, while Accountancy refers to the profession itself.

Why is accounting regarded as a science?

Because it has a systematised body of knowledge based on fundamental principles such as the double entry system.

Why is accounting considered an art?

It requires skill, knowledge and experience to maintain books efficiently.

Describe accounting as an information system.

It links an information source (accountant), a communication channel (financial statements) and receivers (external users).

What is recorded under the cash system of accounting?

Only actual cash receipts and cash payments; credit transactions are ignored until settled in cash.

Which system of accounting recognises income receivable and expenses payable?

The mercantile (accrual) system of accounting.

State the basic accounting equation.

Assets = Liabilities + Owners’ Equity.

What are Natural Personal Accounts? Give an example.

Accounts of real persons, e.g., Rajesh’s A/c.

Differentiate Tangible and Intangible Real Accounts.

Tangible relate to physical assets (machinery); intangible relate to non-physical assets (goodwill).

Which accounts record incomes, expenses, gains and losses?

Nominal Accounts.

What is the debit rule for a Real Account?

Debit what comes in; credit what goes out.

List the four main steps of the accounting cycle.

Identify, record (journalise), classify (post to ledger), summarise (trial balance & final accounts).

Why is the journal called the book of prime entry?

Because every transaction is first recorded there in chronological order before posting to the ledger.

What is a compound journal entry?

A single entry that records two or more interconnected transactions simultaneously.

Name the three amount columns in a triple-column cash book.

Discount, Cash, Bank.

Define a contra entry with an example.

A transaction affecting both cash and bank columns, e.g., cash withdrawn from bank.

What is the purpose of an imprest petty cash system?

To advance a fixed float to the petty cashier and reimburse exactly the amount spent at period-end.

Why are opening entries passed?

To bring forward previous year’s closing balances of assets, liabilities and capital at the start of a new period.

What is a trial balance expected to prove?

That total debit balances equal total credit balances owing to double entry.

Give two examples of errors of omission.

Completely omitting a sales invoice; recording a purchase of ₹5,500 as ₹550.

Which errors are self-balancing and do not affect the trial balance?

Compensating errors.

What two statements constitute the basic financial statements for a sole trader?

Income Statement (Trading & P/L A/c) and Position Statement (Balance Sheet).

State two ways of marshalling a balance sheet.

Order of liquidity and order of permanence.

What are wasting assets? Give an example.

Assets with depleting physical content, e.g., a coal mine.

Define contingent liability with an example.

A possible obligation depending on a future event, e.g., outstanding lawsuit.

What is depreciation in one sentence?

Systematic allocation of the cost of a fixed asset over its useful life.

Under the straight-line method, how is annual depreciation calculated?

(Original cost – Residual value) ÷ Useful life.

Which depreciation method sets aside funds for replacement by investing the annual charge?

Depreciation Fund (Sinking Fund) Method.

State the core idea of the diminishing balance method.

Depreciation is a fixed percentage of the written-down value, so the charge decreases each year.

Name two methods suited to wasting assets.

Depletion method and Sum-of-Years’ Digits method (also acceptable: Depletion & Units-of-production).

What does GAAP stand for and why is it needed?

Generally Accepted Accounting Principles; to ensure comparability and uniformity in financial reporting.

Which concept separates the business from its owner?

Separate Business Entity Concept.

Explain the money measurement concept’s limitation.

Non-monetary factors like employee morale are not recorded, and it assumes a stable currency.

What is the matching concept?

Revenues of a period are matched with the expenses incurred to earn them in that period.

Define materiality with an example.

Trivial items may be expensed immediately, e.g., charging a ₹100 calculator fully in the year of purchase.

According to the conservatism convention, how is inventory valued?

At cost or net realisable value, whichever is lower.

What is ASB and when was it formed?

Accounting Standards Board of ICAI, formed in 1977 to formulate accounting standards.

Which Indian accounting standard corresponds to IAS 16?

Ind AS 16 – Property, Plant and Equipment.

Differentiate capital expenditure from revenue expenditure.

Capital expenditure yields benefit beyond one period and is capitalised; revenue expenditure relates to current period income and is expensed.

What is deferred revenue expenditure?

A revenue-nature expense whose benefit extends over several years, e.g., heavy launch advertising.

State the legal definition of partnership.

The relation between persons who agree to share the profits of a business carried on by all or any of them acting for all (Sec 4, Partnership Act 1932).

Under the fixed capital method, where are drawings recorded?

In a separate Current Account, not in the Capital Account.

When is a Profit & Loss Appropriation Account prepared?

To distribute net profit among partners after accounting for interest, salary, commission etc.

What is sacrificing ratio?

Old partners’ share surrendered to a new partner = old ratio – new ratio.

Why is a Memorandum Revaluation Account used?

When partners agree to revalue assets/liabilities but keep book values unchanged.

Define goodwill in partnership.

The value of a firm’s reputation reflected in expected future super-normal profits.

What does the Garner v. Murray rule state?

Deficiency of an insolvent partner is borne by solvent partners in ratio of their last agreed capitals.

Distinguish authorised and issued share capital.

Authorised is the maximum capital a company can issue; issued is the portion actually offered to the public.

What is minimum subscription as per Companies Act?

At least 90% of the issued amount must be subscribed before allotment.

How is securities premium presented in the balance sheet?

Credited to ‘Securities Premium Account’ under Reserves & Surplus.

Explain calls-in-advance.

Amount received from shareholders before it is actually called; shown as a liability and attracts interest.

When are shares forfeited?

When a shareholder fails to pay allotment or call money by due date, after due notice.

What is Capital Redemption Reserve?

A reserve created from profits equal to the nominal value of shares redeemed out of profits.

State the present DRR requirement for listed companies.

After 2019 revision, listed companies are exempt from creating a Debenture Redemption Reserve.

Define amalgamation.

Combination of two or more companies into one, either by merger or absorption.

List any two conditions required for an amalgamation to be treated as a ‘merger’ under AS-14.

i) All assets & liabilities of transferor become those of transferee; ii) At least 90% of shareholders of transferor become shareholders of transferee; (others acceptable).

What is purchase consideration?

The amount payable by the transferee company to shareholders of the transferor for taking over its business.

Under the pooling of interests method, how are reserves of the transferor company treated?

They are carried forward in the transferee’s books without change (subject to policy uniformity).

What is internal reconstruction?

Re-organisation of a company’s affairs by altering capital structure, revaluing assets/liabilities and writing off past losses without winding-up.

Who are B-list contributories in liquidation?

Shareholders who transferred partly-paid shares within one year before winding-up and may be called to pay unpaid amounts.

How is minority interest calculated in a consolidated balance sheet?

Share capital pertaining to outsiders plus their share of reserves and profits of the subsidiary.

Distinguish upstream and downstream intra-group transactions.

Upstream: subsidiary sells to holding; downstream: holding sells to subsidiary.

What is social accounting?

Reporting of an enterprise’s social welfare activities and their effects on society.

Name two inflation accounting approaches.

Current Purchasing Power (CPP) method and Current Cost Accounting (CCA) method.

Define human resource accounting.

Identification and reporting of investments in, and value of, an organisation’s human resources.

Give the CIMA definition of cost accounting.

Classification, recording and appropriate allocation of expenditure for determining product or service costs and supplying information for control and guidance.

What constitutes prime cost?

Direct Material + Direct Labour + Direct Expenses.

Differentiate cost centre and cost unit.

Cost centre: location/person/function for which costs are collected; cost unit: a measurable unit of product/service to which cost is ascertained.

Explain cost allocation versus cost apportionment.

Allocation assigns whole costs to a cost centre; apportionment splits costs among centres on an equitable basis.

What is marginal cost?

Aggregate of variable costs – prime cost plus variable overhead.

State the formula for Contribution.

Contribution = Sales – Variable Cost (or Fixed Cost + Profit).

Define P/V ratio.

Profit-Volume Ratio = Contribution ÷ Sales × 100.

How is break-even point (units) computed?

Fixed Costs ÷ Contribution per unit.

What is margin of safety?

Excess of actual (or budgeted) sales over break-even sales.

Give the formula for material price variance.

(Standard Price – Actual Price) × Actual Quantity.

What does a flexible budget do that a fixed budget cannot?

It adjusts allowed costs to the actual level of activity, aiding more meaningful variance analysis.

Which ratio is considered ideal at 2:1?

Current Ratio.

How is the quick ratio calculated?

Liquid Assets ÷ Current Liabilities (ideal 1:1).

Define Return on Investment (ROI).

Profit after tax ÷ Capital Employed × 100 – measures overall efficiency.

What is a fund flow statement’s primary objective?

To show sources and applications of funds and explain changes in working capital between two balance sheet dates.

Which activity section of a cash flow statement includes interest received and dividends paid (for non-finance companies under AS-3)?

Interest received – Investing; Dividends paid – Financing.

Give one key difference between fund flow and cash flow statements.

Fund flow analyses changes in working capital; cash flow analyses changes in cash and cash equivalents.

What is normal process loss?

Inherent loss expected under efficient operating conditions and absorbed by good units.

How is abnormal process gain treated in accounts?

Credited to Abnormal Gain A/c and ultimately to Costing P&L A/c.

What is the concept of equivalent units in process costing?

Conversion of partly processed units into an equivalent number of fully complete units for cost assignment.

Differentiate FIFO and Weighted Average methods in process costing.

FIFO values closing WIP at current period cost; Weighted Average blends opening WIP cost with current costs.

Explain target costing in one sentence.

Setting a cost objective by deducting desired profit from market-based selling price and designing the product to meet that cost.

What does JIT aim to minimise?

Inventory levels by receiving or producing items just as they are needed.

Give Montgomery’s definition of auditing.

Systematic examination of books and records to ascertain and report on the financial results and operations.

Name the four categories of engagement standards issued by AASB.

Standards on Auditing (SA), Review Engagements (SRE), Assurance Engagements (SAE), Related Services (SRS).

State two key differences between internal audit and statutory audit.

Internal audit is by employees, continuous and advisory; statutory audit is by external auditor, legally required and opinion-oriented.

Who can act as a Secretarial Auditor under Companies Act?

A practising Company Secretary.

Under which section of Companies Act 2013 is cost audit dealt with?

Section 148.

What opinion is issued when financial statements give a true and fair view without reservations?

Unqualified (clean) opinion.

When does an auditor give a disclaimer of opinion?

When sufficient appropriate audit evidence is not obtainable to form an opinion.

Define vouching.

Examining supporting documents (vouchers) to verify the authenticity of recorded transactions.

What is an audit programme?

A detailed written set of procedures and instructions to carry out the audit plan.

Describe energy audit as per Energy Conservation Act 2001.

Verification, monitoring and analysis of energy use with recommendations for efficiency improvements and cost-benefit analysis.