Financial Accounting important 5 Marks Theory Question and Answer

 5 Marks

 

1. Causes of Depreciation:

Wear and Tear: Continuous use or aging of assets causes physical deterioration. Machinery, vehicles, and equipment often experience wear and tear through regular use, reducing their value over time.

Obsolescence: Assets can become outdated due to technological advancements, changes in market demand, or new production methods. For instance, a computer might depreciate rapidly due to technological advancements making newer models more efficient.

Passage of Time: Some assets naturally degrade simply due to time passing. Natural assets like buildings or infrastructures can face depreciation over time.

Inadequacy: Assets might depreciate due to inadequacy, meaning they are no longer sufficient for the purpose they were intended for. This can occur if changes in technology or business requirements make the asset less effective or functional.

 

2. Different Types of Errors:

    Errors of Omission: Occur when a transaction is completely or partially omitted from the accounting records. This can lead to an imbalance in the ledger.

    Errors of Commission: Arise from incorrect data entry or recording of transactions. For example, posting a wrong amount to an account or recording a transaction in the wrong account.

    Errors of Principle: Involve recording transactions against accounting principles, such as treating a capital expense as revenue.

    Compensating Errors: Mistakes that offset each other, leading to a balanced statement despite errors in entries.

    Errors of Original Entry: Errors made when recording transactions in the original books, like journals or subsidiary books. These can affect subsequent entries and calculations.

 

3. Preparing Statement of Fire Claims:

    Assessment of Loss: Evaluate and document the extent of damage or loss caused by the fire incident.

    Understanding Insurance Policy: Review the terms and conditions of the fire insurance policy to understand the coverage available for the damage incurred.

    Documenting Loss: Gather evidence and document the loss with photographs, reports, and other relevant proof of damage.

    Contacting Insurer: Inform the insurance company about the fire incident, and follow their procedures for making a claim.

    Completing Claim Form: Fill out the claim form accurately, providing all necessary details about the incident and the losses suffered.

    Submission and Followup: Submit the completed claim form along with supporting documents to the insurer and follow up to ensure timely processing and settlement of the claim.

 

4. Objectives of Accounting:

    Recording Transactions: Systematically record all financial transactions to maintain a complete and accurate financial record.

    Financial Analysis: Analyze financial data to assess the company's performance, identify strengths and weaknesses, and make informed business decisions.

    Financial Reporting: Prepare financial statements like the balance sheet, income statement, and cash flow statement to communicate the company's financial health to stakeholders.

    Compliance: Ensure compliance with accounting standards, regulations, and legal requirements.

    Assisting Decision Making: Provide relevant and timely financial information to aid management in making strategic decisions and planning for the future.

 

5. Various Types of Fire Insurance Policies:

    Specific Policy: Covers a specific property against fire damage for a defined amount as stated in the policy.

    Valued Policy: Specifies the value of the insured property, irrespective of its actual worth at the time of loss. The insured amount is predetermined and mentioned in the policy.

    Floating Policy: Provides coverage for movable properties at various locations under a single policy. It's beneficial for businesses with assets in different places.

    Comprehensive Policy: Offers broader coverage, including fire damage along with other perils like theft, floods, vandalism, etc. It provides comprehensive protection against various risks.

    Replacement Policy: Pays for the cost of replacing the damaged property with a new one, irrespective of its original value. It covers the cost of new replacements.