Basic Accountancy Procedures | PAPER III – ACCOUNTING & FINANCIAL MANAGEMENT FOR BANKERS | MODULE B: FINANCIAL STATEMENTS AND CORE BANKING SYSTEMS

Basic Accountancy Procedures

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Key Concepts

Concepts of Accountancy: Fundamental ideas that form the basis for accounting principles and practices. These include the business entity concept, money measurement concept, going concern concept, and others.

Going Concern Entity: Assumption that a business will continue to operate indefinitely unless there is evidence to the contrary. This allows for assets to be valued at historical cost rather than liquidation value.

Double Entry System: Accounting method where every transaction affects at least two accounts - one account is debited and another is credited, maintaining the accounting equation (Assets = Liabilities + Equity).

Principle of Conservatism: Accountants should exercise caution when making estimates, recognizing expenses and liabilities as soon as possible but only recognizing revenues and assets when they are assured.

Revenue Recognition and Realisation: Revenue should be recognized when it is earned and realizable, regardless of when cash is received. The realization principle states that revenue should only be recognized when the earnings process is complete.

Accrual and Cash Basis:

• Accrual Basis: Transactions are recorded when they occur, regardless of cash flow
• Cash Basis: Transactions are recorded only when cash is received or paid

Multiple Choice Questions

1. Which accounting concept assumes that a business will continue to operate indefinitely?

   • A) Money measurement concept
   • B) Going concern concept
   • C) Business entity concept
   • D) Dual aspect concept

   Answer: B) Going concern concept

2. In the double entry system, every transaction affects:

   • A) Only one account
   • B) At least two accounts
   • C) Only the balance sheet
   • D) Only the income statement

   Answer: B) At least two accounts

3. The principle of conservatism suggests that accountants should:

   • A) Overstate assets and revenues
   • B) Understate liabilities and expenses
   • C) Recognize potential losses early but delay recognizing gains
   • D) Ignore potential risks

   Answer: C) Recognize potential losses early but delay recognizing gains

4. Revenue should be recognized when:

   • A) Cash is received
   • B) The product is manufactured
   • C) It is earned and realizable
   • D) The customer places an order

   Answer: C) It is earned and realizable

5. Which accounting method records transactions when cash is received or paid?

   • A) Accrual basis
   • B) Cash basis
   • C) Modified cash basis
   • D) Hybrid basis

   Answer: B) Cash basis

6. The accounting equation is represented as:

   • A) Assets = Liabilities - Equity
   • B) Assets + Liabilities = Equity
   • C) Assets = Liabilities + Equity
   • D) Assets - Equity = Liabilities

   Answer: C) Assets = Liabilities + Equity

7. Under the accrual basis of accounting, expenses are recorded when:

   • A) Cash is paid
   • B) They are incurred
   • C) The bill is received
   • D) At the end of the fiscal year

   Answer: B) They are incurred

8. Which of the following is NOT a fundamental accounting concept?

   • A) Business entity
   • B) Going concern
   • C) Historical cost
   • D) Customer satisfaction

   Answer: D) Customer satisfaction

9. The realization principle states that revenue should be recognized when:

   • A) An order is received
   • B) Production is complete
   • C) The earnings process is complete
   • D) Cash is collected

   Answer: C) The earnings process is complete

10. Which principle would lead an accountant to record an anticipated loss from a lawsuit?

    • A) Revenue recognition
    • B) Conservatism
    • C) Going concern
    • D) Materiality

    Answer: B) Conservatism