Book kepping Obj
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Book keeping Theory
1a)
A control account, often called a controlling account, is a
general ledger account that summarizes and combines all
of the subsidiary accounts for a specific type. In other
words, it’s a summary account that equals the sum of the
subsidiary account and is used to simplify and organize
the general ledger.
1b)
i)Control accounts provides a check on the accuracy of
entries made in the personal accounts in the sales ledger
and purchase ledger
ii)It could also assist in the location of errors, where
posting to the control accounts are made daily or weekly,
or even monthly
iii)Where there is a separate of clerical bookkeeping
duties, the control account provides an internal check.
1ci) Uses of Accounting ratios/Financial ratios
Financial ratios are not very useful on a stand-alone basis;
they must be benchmarked against something. Analysts
compare ratios against the following:
1. The Industry norm – This is the most common type of
comparison. Analysts will typically look for companies
within the same industry and develop an industry average,
which they will compare to the company they are
evaluating. Ratios per industry are also provided by
Bloomberg and the S&P. These are good sources of
general industry information. Unfortunately, there are
several companies included in an index that can distort
certain ratios. If we look at the food and beverage ratio
index, it will include companies that make prepared foods
and some that are distributors. The ratios in this case
would be distorted because one is a capital-intensive
business and the other is not. As a result, it is better to
use a cross-sectional analysis, i.e. individually select the
companies that best fit the company being analyzed.
2. Aggregate economy – It is sometimes important to
analyze a company’s ratio over a full economic cycle. This
will help the analyst understand and estimate a
company’s performance in changing economic conditions,
such as a recession.
3. The company’s past performance – This is a very
common analysis. It is similar to a time-series analysis,
which looks mostly for trends in ratios.
1cii) Limitations to Accounting ratios/Financial ratios
There are some important limitations of financial ratios
that analysts should be conscious of:
i)Many large firms operate different divisions in different
industries. For these companies it is difficult to find a
meaningful set of industry-average ratios.
ii)Inflation may have badly distorted a company’s balance
sheet. In this case, profits will also be affected. Thus a
ratio analysis of one company over time or a comparative
analysis of companies of different ages must be
interpreted with judgment
2a. Working capital is the amount of a company’s current
assets minus the amount of its current liabilities.
2b. Capital employed, also known as funds employed, is
the total amount of capital used for the acquisition of
profits. It is the value of all the assets employed in a
business and can be calculated by adding fixed assets to
working capital or subtracting current liabilities from total
assets.
2c. A fixed asset is an item with a useful life greater than
one reporting period, and which exceeds an entity’s
minimum capitalization limit .
2d. A current asset is cash and any other company asset
that will be turning to cash within one year from the date
shown in the heading of the company’s balance sheet. (If
a company has an operating cycle that is longer than one
year, an asset that will turn to cash within the length of its
operating cycle is considered to be a current asset.)
2e. The rate of stock turnover is a measure of the number
of times inventory is sold or used in a time period such as
a year. The equation for inventory turnover equals the cost
of goods sold or net sales divided by the average
inventory.
3a. The accrual concept in accounting means that
expenses and revenues are recorded in the period they
occur, whether or not cash is involved.
3b. The business entity concept states that the
transactions associated with a business must be
separately recorded from those of its owners or other
businesses. Doing so requires the use of separate
accounting records for the organization that completely
exclude the assets and liabilities of any other entity or the
owner.
3c. Dual Aspect Concept, also known as Duality Principle,
is a fundamental convention of accounting that
necessitates the recognition of all aspects of an
accounting transaction.
3d. PERIODICITY CONCEPT is the concept that each
accounting period has an economic activity associated
with it, and that the activity can be measured, accounted
for, and reported upon.
3e. The going concern principle is the assumption that an
entity will remain in business for the foreseeable future.
Conversely, this means the entity will not be forced to halt
operations and liquidate its assets in the near term at
what may be very low fire-sale prices.
4a)
A company is a legal entity made up of an association of
persons, be they natural, legal, or a mixture of both, for
carrying on a commercial or industrial enterprise.
4bi) An ordinary share represents equity ownership in a
company proportionally with all other ordinary
shareholders, according to their percentage ownership in
the company. All other shares of a company’s stock are,
by
definition , preferred shares
4b(ii)Preference shares, more commonly referred to as
preferred stock, are shares of a company’s stock with
dividends that are paid out to shareholders before
common stock dividends are issued. If the company
enters bankruptcy, the shareholders with preferred stock
are entitled to be paid from company assets first.
4b(iii) A debenture is a type of debt instrument that is not
secured by physical assets or collateral.
Debentures are backed only by the general
creditworthiness and reputation of the issuer. Both
corporations and governments frequently issue this type of
bond to secure capital.
4b(iv) The authorised capital of a company (sometimes
referred to as the authorised share capital, registered
capital or nominal
capital, particularly in the United States) is the maximum
amount of share capital that the company is authorised by
its constitutional documents to issue (allocate) to
shareholders.
5a) journal
(i)suspense purchase Dr GHC(19,000) , Cr GHC(19,000)
(ii)returns inwards suspenses Dr(8000), Cr(8000)
(iii)suspense cashbook Dr(19,600), Cr(19,000)
(iv)suspense cash ook Dr(98,000), Cr(98,000)
(v) repairs of plant and machinery Dr(11,000) , Cr(11,000)
(vi) customer sales Dr(158,980), Cr(158,950)
(vii) supplier suspense(25,500 *2) Dr(51,000) cr(51,000)
(5b)
Suspense A/C:
Debit side:
purchases(19,000)
cash book(19600)
cash book(98000)
credit side;
returns inward(8,000)
supplier (51,000)
c/f (77,600)
136,600
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