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

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

Short Answer

Easy difficulty • Direct answer format

Easy

Question 1

Quick Recall

Why are adjustments necessary when preparing final accounts?

Under the accrual concept, revenues must be recorded when earned and expenses when incurred, not when cash is received or paid.
Without adjustments, the Profit and Loss Account would not reflect the true profit or loss of the business for the period.
Adjustments ensure that expenses and incomes are matched to the correct accounting period, giving a true and fair view of financial position.

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Short Answer

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Easy

Question 2

Quick Recall

What is meant by outstanding expenses? Give one example.

Outstanding expenses are expenses that have been incurred during the current accounting period but remain unpaid at the end of the year.
They are shown on the liabilities side of the Balance Sheet as a current liability since the business owes these amounts.
Example: Salaries for March 2017 paid on April 7, 2017 are outstanding salaries for the accounting year ended March 31, 2017.

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Short Answer

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Medium

Question 3

Quick Recall

State the journal entry and Balance Sheet treatment for prepaid expenses.

Journal entry: Prepaid Expense A/c Dr. To Concerned Expense A/c — this records the portion of expense whose benefit is yet to be received.
In the Profit and Loss Account, the prepaid amount is deducted from the total expense on the debit side to show only the expense relating to the current period.
In the Balance Sheet, prepaid expenses appear on the assets side as a current asset, since they represent a future economic benefit.

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Easy

Question 4

Quick Recall

What is accrued income? How is it treated in final accounts?

Accrued income is income earned during the current accounting year that has not yet been received in cash by the end of the year.
In the Profit and Loss Account, accrued income is added to the relevant income on the credit side, ensuring the full amount earned is recorded.
In the Balance Sheet, the Accrued Income Account is shown on the assets side as a current asset, representing the amount due to the business.

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Medium

Question 5

Quick Recall

Distinguish between income received in advance and accrued income.

Income received in advance is income already received in cash but belonging to a future accounting period, while accrued income is income earned in the current period but not yet received.
Income received in advance is a liability (shown on the liabilities side of the Balance Sheet), whereas accrued income is an asset (shown on the assets side).
Income received in advance reduces the income shown in the Profit and Loss Account, while accrued income increases the income shown.

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Short Answer

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Medium

Question 6

Quick Recall

What is the journal entry for income received in advance? Where is it shown in the Balance Sheet?

Journal entry: Concerned Income A/c Dr. To Income Received in Advance A/c — this removes the unearned portion from the income account.
In the Profit and Loss Account, the income is reduced by the advance portion so that only the income pertaining to the current year is credited.
In the Balance Sheet, Income Received in Advance is shown on the liabilities side as a current liability, as it represents an obligation to provide services in the future.

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Easy

Question 7

Quick Recall

What is depreciation and what journal entry is recorded for it?

Depreciation is the decline in the value of a fixed asset due to wear and tear, passage of time, or obsolescence, and is treated as a business expense.
Journal entry: Depreciation A/c Dr. To Concerned Asset A/c — this reduces the book value of the asset and records the expense.
Depreciation is debited to the Profit and Loss Account, and in the Balance Sheet, the asset is shown at cost minus accumulated depreciation.

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Medium

Question 8

Quick Recall

What are bad debts? How are further bad debts treated in the final accounts?

Bad debts are amounts that a business is unable to recover from its debtors, treated as a loss charged to the Profit and Loss Account.
Further bad debts are additional irrecoverable amounts discovered at the time of preparing final accounts and given as additional information outside the trial balance.
Further bad debts are added to existing bad debts in the Profit and Loss Account and deducted from debtors in the Balance Sheet.

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Medium

Question 9

Quick Recall

Why is provision for doubtful debts created? State the journal entry.

Provision for doubtful debts is created because it is normal in business for some debtors to default; the provision provides for estimated future bad debts to present a realistic debtor figure.
It is created by debiting the Profit and Loss Account and crediting the Provision for Doubtful Debts Account, applying a percentage on good debtors.
In the Balance Sheet, provision for doubtful debts is shown as a deduction from sundry debtors on the assets side.

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Medium

Question 10

Quick Recall

Explain the concept of old provision and new provision for doubtful debts.

Old provision (opening provision) is the provision for doubtful debts created at the end of the previous year and carried forward to the current year.
New provision is the fresh provision calculated at the end of the current year on good debtors after deducting further bad debts.
In the Profit and Loss Account, only the net amount — new provision minus old provision after adjusting bad debts — is charged or credited.

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Medium

Question 11

Quick Recall

On what amount is provision for discount on debtors calculated?

Provision for discount on debtors is calculated only on good debtors, not on the total debtors balance.
Good debtors are arrived at by deducting further bad debts and the provision for doubtful debts from the total debtors balance.
This ensures the discount provision is realistic, covering only those debtors likely to make prompt payments and avail cash discounts.

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Short Answer

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Medium

Question 12

Quick Recall

How is manager's commission calculated when it is based on profit before charging such commission?

When commission is based on profit before charging it, the formula is: Commission = Net Profit (before commission) x Rate of Commission / 100.
For example, if net profit before commission is Rs 110 and commission rate is 10%, then commission = 110 x 10/100 = Rs 11.
In the absence of specific instructions, it is assumed that the commission is calculated on profit before charging such commission.

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Short Answer

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Hard

Question 13

Quick Recall

State the formula for calculating manager's commission on profit after charging such commission.

When commission is based on profit after charging it, the formula is: Commission = Net Profit (before commission) x Rate / (100 + Rate).
For example, if net profit before commission is Rs 110 and commission rate is 10%, commission = 110 x 10 / (100 + 10) = Rs 10.
This formula accounts for the fact that the commission itself reduces the profit on which it is based.

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

Why are adjustments necessary when preparing final accounts?

What is meant by outstanding expenses? Give one example.

State the journal entry and Balance Sheet treatment for prepaid expenses.

What is accrued income? How is it treated in final accounts?

Distinguish between income received in advance and accrued income.

What is the journal entry for income received in advance? Where is it shown in the Balance Sheet?

What is depreciation and what journal entry is recorded for it?

What are bad debts? How are further bad debts treated in the final accounts?

Why is provision for doubtful debts created? State the journal entry.

Explain the concept of old provision and new provision for doubtful debts.

On what amount is provision for discount on debtors calculated?

How is manager's commission calculated when it is based on profit before charging such commission?

State the formula for calculating manager's commission on profit after charging such commission.

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