Chapter financial-statements-ii: Financial Statements - II Long Questions | accountancy Class 11 CBSE

ByteNotes

Chapter financial-statements-ii: Financial Statements - II Long Questions | accountancy Class 11 CBSE | ByteNotes.in

Long Answer

Medium difficulty • Structured explanation

Medium

Question 1

Long Form

Explain the need for adjustments in the preparation of financial statements. List all items that typically require adjustments.

Under the accrual concept, profit is determined based on revenues earned and expenses incurred, not on cash received or paid, making adjustments essential for an accurate profit figure.
Some expenses may be incurred but not yet paid (outstanding), or paid in advance (prepaid), affecting how much expense belongs to the current period.
Certain incomes may be earned but not received (accrued) or received but relating to the next period (unearned), requiring adjustment before recording in the Profit and Loss Account.
Without adjustments, the final accounts would fail to show the true and fair view of profitability and financial position, violating the accrual and matching principles.
The main items requiring adjustment are: closing stock, outstanding expenses, prepaid expenses, accrued income, income received in advance, depreciation, bad debts, provision for doubtful debts, provision for discount on debtors, manager's commission, and interest on capital.

ByteNotes

Long Answer

Medium difficulty • Structured explanation

Medium

Question 2

Long Form

Describe the accounting treatment of outstanding expenses and prepaid expenses in final accounts. How do they differ from each other?

Outstanding expenses are incurred but unpaid at year end; the entry is: Concerned Expense A/c Dr. To Outstanding Expense A/c, recording the liability and increasing the expense.
Prepaid expenses are paid in advance; the entry is: Prepaid Expense A/c Dr. To Concerned Expense A/c, recording an asset and reducing the expense for the current period.
Outstanding expenses are added to the relevant expense in the Profit and Loss Account and shown on the liabilities side of the Balance Sheet as current liabilities.
Prepaid expenses are deducted from the relevant expense in the Profit and Loss Account and shown on the assets side of the Balance Sheet as current assets.
The key difference is that outstanding expenses represent amounts still owed by the business (liability), while prepaid expenses represent future benefits already paid for (asset).

ByteNotes

Long Answer

Hard difficulty • Structured explanation

Hard

Question 3

Long Form

Explain the step-by-step procedure for calculating the net amount to be debited or credited to the Profit and Loss Account when provision for doubtful debts already exists.

First, bad debts already in the Trial Balance are noted, and any further bad debts given as additional information are added to compute total bad debts for the year.
The old provision from the Trial Balance is transferred to the Bad Debts Account; if old provision exceeds bad debts, the excess is credited to Profit and Loss Account.
Good debtors are calculated by deducting further bad debts from the debtors balance in the Trial Balance.
New provision is calculated on good debtors at the specified rate; this new provision is then compared with the remaining old provision (after adjusting bad debts).
The net shortfall (new provision exceeds old provision) is debited to the Profit and Loss Account, while a net surplus (old provision exceeds new provision) is credited.

ByteNotes

Long Answer

Hard difficulty • Structured explanation

Hard

Question 4

Long Form

Compare the treatment of depreciation when it appears inside the Trial Balance versus when it is given as additional information outside the Trial Balance.

When depreciation is inside the Trial Balance, it means the entry has already been passed during the year; it is directly transferred to the debit side of the Profit and Loss Account.
When depreciation is given as additional information (outside the Trial Balance), a fresh journal entry must be passed: Depreciation A/c Dr. To Asset A/c.
In both cases, depreciation is ultimately debited to the Profit and Loss Account as an expense, reducing net profit for the year.
When depreciation is inside the Trial Balance, the asset in the Trial Balance already reflects the reduced book value; no further deduction is made in the Balance Sheet.
When depreciation is given as additional information, the asset in the Trial Balance is at its pre-depreciation value, and depreciation must be deducted from it in the Balance Sheet to show the net book value.

ByteNotes

Long Answer

Hard difficulty • Structured explanation

Hard

Question 5

Long Form

Analyse how manager's commission is calculated differently when based on profit before and after charging such commission. Illustrate with a suitable example.

When commission is based on profit before charging commission, the formula is: Commission = Net Profit x Rate/100; this is straightforward as the commission is simply a percentage of the pre-commission profit.
When commission is based on profit after charging commission, the formula is: Commission = Net Profit x Rate/(100 + Rate); this accounts for the circular dependency since commission reduces the base on which it is calculated.
Example: Net profit before commission is Rs 1,10,000 and commission rate is 10%. Commission before charging = 1,10,000 x 10/100 = Rs 11,000.
Commission after charging = 1,10,000 x 10/110 = Rs 10,000; net profit after deducting this commission = Rs 1,00,000, and 10% of Rs 1,00,000 is indeed Rs 10,000 — confirming the formula.
In both cases, manager's commission is debited to the Profit and Loss Account and shown as Manager's Commission Outstanding on the liabilities side of the Balance Sheet.

ByteNotes

Long Answer

Hard difficulty • Structured explanation

Hard

Question 6

Long Form

Explain the complete accounting treatment of bad debts and provision for doubtful debts, including the effect on the Profit and Loss Account and Balance Sheet.

Bad debts already in the Trial Balance are directly shown on the debit side of the Profit and Loss Account; further bad debts given as additional information are added to existing bad debts after passing the entry: Bad Debts A/c Dr. To Debtors A/c.
Good debtors for the purpose of provision are calculated as: Total Debtors less Further Bad Debts.
Provision for doubtful debts is calculated on good debtors at a specified rate, and the entry is: Profit and Loss A/c Dr. To Provision for Doubtful Debts A/c.
In the Profit and Loss Account, total bad debts (including further bad debts) and the new provision are debited, reducing net profit.
In the Balance Sheet, further bad debts are deducted from debtors and the provision for doubtful debts is also deducted, showing debtors at their estimated realizable value.

ByteNotes

Long Answer

Medium difficulty • Structured explanation

Medium

Question 7

Long Form

Describe the accounting treatment of accrued income and income received in advance. How do they affect profitability?

Accrued income is income earned but not received; the entry is: Accrued Income A/c Dr. To Concerned Income A/c, increasing the income shown in the Profit and Loss Account.
Income received in advance is income received but not earned; the entry is: Concerned Income A/c Dr. To Income Received in Advance A/c, decreasing the income in the Profit and Loss Account.
Accrued income increases the net profit by including the earned portion not yet received, while income received in advance decreases net profit by excluding the unearned portion.
Accrued income is an asset (shown on the assets side of the Balance Sheet), while income received in advance is a liability (shown on the liabilities side).
Both adjustments ensure compliance with the accrual concept and matching principle, so only income pertaining to the current period is reflected in the Profit and Loss Account.

ByteNotes

Long Answer

Medium difficulty • Structured explanation

Medium

Question 8

Long Form

Analyse the significance of interest on capital in ascertaining true business profit. Explain its accounting treatment in detail.

Interest on capital is provided to recognize the opportunity cost of funds invested by the proprietor, helping ascertain the true profit earned by the business beyond the return on capital.
It is calculated at a predetermined rate on the opening capital; if additional capital is introduced, interest is calculated on it from the date of introduction till year end.
Journal entry: Interest on Capital A/c Dr. To Capital A/c — this increases the capital balance while recognizing the expense.
Interest on capital is debited to the Profit and Loss Account, reducing the net profit transferred to capital.
However, when interest on capital is added to the capital balance in the Balance Sheet, the net effect on capital is neutral — the reduction in profit added to capital is offset by the interest added directly.

ByteNotes

Long Answer

Hard difficulty • Structured explanation

Hard

Question 9

Long Form

Examine the two methods of treating closing stock in the Trading Account. Under what circumstances is the adjusted purchases method used?

Method 1 (Normal method): Closing stock is credited to the Trading Account on the credit side and shown as a current asset on the Balance Sheet; opening stock appears separately on the debit side.
Method 2 (Adjusted purchases method): Closing stock is adjusted through the Purchases Account — the entry is Closing Stock A/c Dr. To Purchases A/c, reducing the purchases figure shown in the Trading Account.
Under Method 2, opening stock is also adjusted into purchases: Purchases A/c Dr. To Opening Stock A/c; thus, the Trading Account shows only adjusted purchases (opening stock + purchases – closing stock).
The adjusted purchases method is used when the Trial Balance does not show opening stock separately but shows adjusted purchases and closing stock instead.
In both methods, closing stock appears as a current asset in the Balance Sheet; the key difference is whether closing stock appears separately on the credit side of the Trading Account.

ByteNotes

Long Answer

Medium difficulty • Structured explanation

Medium

Question 10

Long Form

Explain provision for discount on debtors — its need, calculation basis, journal entry, and treatment in final accounts.

Provision for discount on debtors is created to anticipate the cash discount that will be allowed to debtors who pay their dues promptly, matching the expense to the correct period.
It is calculated only on good debtors — the balance after deducting further bad debts and provision for doubtful debts from total debtors.
Journal entry: Profit and Loss A/c Dr. To Provision for Discount on Debtors A/c — reducing profit by the estimated discount.
In the Profit and Loss Account, provision for discount on debtors is shown on the debit side as an expense.
In the Balance Sheet, it is deducted from debtors (after already deducting provision for doubtful debts), showing the most realistic estimated realizable value of debtors.

ByteNotes

Premium Access

Unlock all Long Questions

You are viewing 10 free long questions from this chapter. Upgrade to Premium to unlock the remaining 10 questions.

Upgrade to Premium10 questions locked

Chapter sections

Chapter financial-statements-ii: Financial Statements - II | Long Questions

Explain the need for adjustments in the preparation of financial statements. List all items that typically require adjustments.

Describe the accounting treatment of outstanding expenses and prepaid expenses in final accounts. How do they differ from each other?

Explain the step-by-step procedure for calculating the net amount to be debited or credited to the Profit and Loss Account when provision for doubtful debts already exists.

Compare the treatment of depreciation when it appears inside the Trial Balance versus when it is given as additional information outside the Trial Balance.

Analyse how manager's commission is calculated differently when based on profit before and after charging such commission. Illustrate with a suitable example.

Explain the complete accounting treatment of bad debts and provision for doubtful debts, including the effect on the Profit and Loss Account and Balance Sheet.

Describe the accounting treatment of accrued income and income received in advance. How do they affect profitability?

Analyse the significance of interest on capital in ascertaining true business profit. Explain its accounting treatment in detail.

Examine the two methods of treating closing stock in the Trading Account. Under what circumstances is the adjusted purchases method used?

Explain provision for discount on debtors — its need, calculation basis, journal entry, and treatment in final accounts.

Unlock all Long Questions