Financial Accounting Important Theory Q&A Model Exam

2 Marks

1. Accounting:

   Accounting is a systematic process of recording, summarizing, analyzing, and reporting financial transactions of a business or entity, enabling informed decision-making.

 

2. Double Entry System:

   It's an accounting method requiring every transaction to have at least two entries (debit and credit), ensuring balance in financial records and maintaining the accounting equation.

 

3. Error of Commission:

   An error made during accounting that involves an incorrect amount, account, or party, affecting the accuracy of financial records due to a wrong entry or commission.

 

4. Single Entry System:

   A basic accounting method that records only one side of transactions, often cash or bank transactions, lacking the structured balance maintained by the double entry system.

 

5. Trading Account (Trading A/c):

   An account summarizing direct costs (purchases, expenses, sales) related to buying and selling goods, determining the gross profit or loss.

 

6. Average Clause:

   An insurance provision adjusting claims when insured property is underinsured, proportionately reducing claims if the property's value exceeds insurance coverage.

 

7. Depreciation:

   The systematic allocation of a tangible asset's cost over its useful life, representing the asset's decrease in value due to wear, tear, or obsolescence.

 

8. Noting of the Bill of Exchange:

   A formal certification by a notary public for a dishonored bill of exchange, serving as evidence for non-payment and enabling legal actions for recovery.

 

9. Revaluation Method of Depreciation:

   An approach reassessing the asset's value periodically based on current market value, adjusting depreciation if there's a change from its original cost.

 

10. Net-Worth Method:

    A technique determining an entity's value by subtracting liabilities from total assets, calculating the net worth or equity of the entity.

 

11. Bank Reconciliation Statement:

    A document reconciling an entity's bank statement with its accounting records, identifying discrepancies such as outstanding checks, errors, or deposits to ensure accurate cash records.

 

12. Purchase Book:

    An accounting record detailing credit purchases made by a business, listing information like supplier name, invoice details, quantity, and cost of goods purchased.

 

5 Marks

Minimum Rent:

   Minimum rent, also known as 'base rent' or 'flat rent', refers to the fixed amount payable periodically by a lessee to a lessor for the use of a property or asset. It's the minimum payment stipulated in a lease agreement and might be a constant sum or a predetermined minimum level regardless of the lessee's usage or profits earned from the property.

 

Sublease:

   Sublease occurs when a lessee (the original tenant) rents out all or a portion of the property or asset they are renting from the lessor to another party. In this arrangement, the original lessee becomes a sublessor or sublandlord, and the new tenant is known as the sublessee or subtenant. The sublessee pays rent to the original lessee, who, in turn, pays rent to the lessor, assuming the responsibility for the property during the sublease period.

 

Types of Errors

Errors in rectification of accounts can be classified into several types:

1. Errors of Omission: These occur when a transaction is entirely left out from the accounting records. It could involve not recording a purchase, sale, expense, or income transaction.

2. Errors of Commission: These errors involve making incorrect entries in the accounting records. It could be a mistake in the amount, account, or date while recording a transaction.

 3. Errors of Principle: These errors arise due to violations of accounting principles. For example, using the wrong accounting method or treating a capital expense as revenue expense.

4. Compensating Errors: These errors occur when two or more mistakes counterbalance each other, resulting in the final trial balance being correct, despite individual errors in the accounts.

5. Errors of Reversal: This type of error occurs when the figures are reversed while posting to the ledger accounts. For instance, posting a debit entry as a credit and vice versa.

6. Errors in Original Entry: Mistakes made at the time of recording transactions initially, such as errors in calculation, transcription, or understanding the nature of the transaction.

Rectification of these errors involves identifying, analyzing, and correcting the mistake through appropriate adjustments in the accounting records. This process aims to ensure the accuracy and reliability of financial statements and reports.