Q1. Why do accountants value Closing Stock at lower of cost or net realisable value?
Ans. Accountants value Closing Stock at lower of cost or net realisable value because of the Prudence Concept of Accounting, whereby anticipated losses are accounted while anticipated profits are not.
Q2. Why do you need to provide Outstanding Expenses?
Ans. Outstanding Expenses are provided following the Accrual Concept of Accounting, i.e., expenses for the year, whether paid or not, should be accounted.
Q3. Why are Prepaid Expenses segregated from current year’s expenses and taken to Balance Sheet as a current asset?
Ans. Prepaid Expenses are segregated from current year’s expenses and taken to Balance Sheet; as a current asset because such expenses relate to next year, which have been paid in advance.
Q4. Why is Accrued Income credited to the Profit and Loss Account and shown as current asset in the Balance Sheet?
Ans. Because under the Accrual Concept of Accounting revenue is recognised when goods or services have been sold whether the amount has been received or not. Since income is credited to Profit and Loss Account, it is credited to the Profit and Loss Account. And since, the amount is due to the enterprise, it is shown as a current asset in the Balance Sheet.
Q5. Unearned Income is credited to Profit and Loss Account. Do you agree with the statement?
Ans. No, because Unearned Income means amount that has been received agninst which goods will be sold or services will he rendered in the next year.
Q6. If Depreciation reduces profit, reduces value of assets and also reduces capital of the proprietor, then why do enterprises provide Depreciation?
Ans. Depreciation is allocation of coot of fixed assets over their useful life. It is thus, a cost. Financial Statements must show true and fair view of the financial performance and position of the business. If Depreciation is not provided, both fixed asset and profit will be shown at inflated amounts.
Q7. The debts written off as had, if recovered subsequently, are credited to the Debtor’s Account. Why?
Ans. No, because Bad Debts when written off are debited to Bad Debts Account by crediting Debtor’s Account and the Debtor’s Account is closed. Therefore, when Bad Debts are recovered, they are credited to Bad Debts Recovered Account and becomes an income.
Q8. Under which accounting concept is Provision for Doubtful Debts made?
Ans. Under the Prudence Concept.
Q9. The Provision for Discount on Debtors is calculated before deducting the Provision for Doubtful Debts from debtors. Comment.
Ans. No, Provision for Discount on Debtors is calculated after deducting Provision for Doubtful Debts. It is so because discount is not allowed on debtors which are doubtful of recovery.
Q10. By providing for discount on debtors, which accounting concept is followed?
Ans. Prudence Concept.
Q11. At what value are the goods taken for personal use recorded in the books of accounts and why?
Ans. They are recorded at purchase cost because it is not a sale but drawing.
Q12. At what value are the goods distributed as free sample accounted and why?
Ans. They are accounted at purchase cost because it is not a sale but advertisement expense.