Accounting Process-I – CS Foundation Fundamentals of Accounting and Auditing Notes

→ Accounting cycle is the name given to the collective process of recording and processing the accounting events of a company.

→ Steps in Accounting Cycle
Following are the major steps involved in the accounting cycle,

  • Analyzing and recording transactions via journal entries
  • Posting journal entries to ledger accounts
  • Preparing unadjusted trial balance
  • Preparing adjusting entries at the end of the period
  • Preparing adjusted trial balance
  • Preparing financial statements

→ Journal
In accounting, a first recording of financial transactions as they occur in time, so that they can then be used for future reconciling and transfer to other official accounting records such as the general ledger is a jounal. A journal will state the date of the transaction, which accounts) were affected and the amounts related to transaction. A journal details all the financial transactions of a business and the type of accounts these transactions affect. All business transaction are initially recorded in a journal using the double entry method or single entry method of bookkeeping. Journalising is the root of accounting.

Items are entered in the general journal or the special journals via journal entries. Journal entries are prepared after examining the source document to see if a business transaction has taken place. If a business transaction has taken place, that is a transaction that causes a measurable change in the accounting equation then a journal entry is necessary. Journal entries include the date of the transaction, titles of the accounts debited and credited (credited account is indented several spaces), the amount of each debit and credit; and L.F. (ledger folio)

→ Steps for the process of journalizing
Following are the steps involved in the process of journalizing a transaction:

  • Determine the titles of the accounts involved.
  • Understand nature of the accounts. ‘
  • Apply the rule of Debit & Credit described above.
  • And make the necessary journal entry.

Mr. A invests Rs 5000 cash in business on 1st April ,2013. Let us analyze the transaction
I. Date of transaction: 2013 April 1
II. Title of relevant account: cash and capital
III. Nature of account assets and equity
IV. Apply the rule: Cash Dr. and Capital Cr.
V. Journal entry: Cash Dr. 5000 and Capital Cr.5000

Examples of journal entry:
1. Cash brought in by proprietor for starting the business Rs.30000
(a) What comes in business will be debited
Cash has come in business; cash account will be debited in journal entry.
(b) Who is giver, he will be credited
Proprietor is giver of cash to business but he has business motive and he gives the money to business as capital.
Journal Entry ⇒ Cash Account Debit 30, 000
Proprietor’s capital Account Credit 30,000

2. Goods purchased for cash Rs. 500
(a) Goods come in,
so goods or purchase account will be debited
(b) Cash goes out,
so cash account will be credited.
Journal Entry ⇒ Purchase account debit 500
Cash account credit 500

3. Goods sold for cash Rs.2000
(a) Cash comes in,
so cash account will be debited.
(b) Goods go out,
so goods or sale account will be credited.
Journal Entry ⇒ Cash account debit 2000
Sale account credit 2000

4. Rent paid for shop to landlord 2000
(a) Rent is an item of expenses so it will be debited.
(b) Cash is an item of asset and it goes out, so it will be credited.
Journal Entry ⇒ Rent Account Debit 2000
Cash Account Credit 2000.

5. Goods sold on credit to Dev Raj Rs. 1600
(a) Dev Raj is receiver of goods,
so his personal account will be debited.
(b) Goods go out,
so, goods or sale account will be credited.
Journal Entry ⇒ Dev Raj Account Debit 1600
Sale Account Credit 1600

6. Commission received in cash 2000
(a) Cash comes in,
so cash account will be debited.
(b) Commission is an item of income,
so commission account will be credited.
Journal Entry ⇒ Cash Account Debit 2000
Commission Account Credit 2000

7. Cash deposited into bank 5000
(a) Bank is receiver of cash,
so bank account will be debited.
(b) Cash goes out,
so cash account will be credited.
Journal Entry ⇒ Bank Account Debit 5000
Cash Account Credit 5000

8. Cash withdrawn from bank for office use Rs.2000
(a) Cash comes in the business,
so cash account will be debited.
(b) Bank is the giver,
so bank account will be credited.
Journal Entry ⇒ Cash Account Debit 2000
Bank Account Credit 2000

9. Cash drawn by proprietor from business for personal use Rs.3000
(a) Proprietor is the receiver of cash, but business will give him as drawing which is decrease in his capital, so proprietor’s drawing account will be debited.
(b) Cash goes out, so cash account will be credited.
Journal Entry ⇒ Drawing Account Debit 3000
Cash Account Credit 3000

10. Goods given as charity Rs. 1000
(a) Charity is an expense of business, so it will be debited.
(b) Goods go out,
so goods or purchase account will be credited.
Journal Entry ⇒ Charity Account Debit 1000
Purchase Account Credit 1000

11. Bad Debts written off Rs. 50
(a) Bad debt is loss of business due to not paying the amount by our debtors, so it will be debited.
(b) There is decrease in debtor. We are applying what goes from business, debtor is also our asset, if he does not pay, and it means this asset has gone from business,
so its account will be credited.
Journal Entry ⇒ Bad Debt Account Debit 500
Debtor Account Credit 500

12. Bad debts recovered in cash Rs.300
(a) Cash comes in,
so cash account will be debited.
(b) Bad debts recovered are an income, so its account will be credited.
Journal Entry ⇒ Cash Account Debit 300
Bad Debts Recovered Account Credit 300

13. Carriage paid on machinery (expenses on purchase of asset) Rs. 1000
(a) Carriage on purchase of machinery is part of cost of machinery, so machinery account will be debited.
(b) Cash goes out,
so cash account will be credited.
Journal Entry ⇒ Machinery Account Debit 1000
Cash Account Credit 1000

14. Depreciation on fixed assets Rs. 500
(a) Depreciation on fixed assets is the loss of business, so loss will be debited.
(b) There is a decrease in asset and we will apply what goes from business on it. , so, asset account will be credited.
Journal Entry ⇒ Depreciation Account Debit 500
Fixed Asset Account Credit 500

15. Goods given as free samples Rs. 1500
(a) Goods are given for advertising, advertising is an expense of business, so advertising account will be debited.
(b) Goods go out at the cost price,
so goods or purchase account will be credited.
Journal Entry ⇒ Advertising Account Debit 1500
Purchase Account Credit 1500

→ Ledger account: Ledger is a principal book of account. It is a collection of entire group of similar accounts such as sales account, purchase account etc. Characteristic features of ledger are

  • It sorts out all the entries in journal under appropriate accounts for example all transactions related to cash are put in one account.
  • Ledger account is divided into debit and credit. Debit is left hand side of the ledger and is denoted by Dr. and credit is shown towards the right hand side of ledger and is denoted by Cr.
  • J.F. denotes the page number of the journal from where the entry is taken
  • It is customary to use To and By in ledger
  • To is used with the account shown on the debit side and By is used with accounts which appear on credit side
  • The concerned account which has been debited in journal should also be debited in ledger. Likewise the account which has been credited in journal should be credited in ledger
  • The date of the transaction is written in the date column
  • The debit and credit entries in the ledger are totaled if they are same account is closed
  • If debit side is more than the difference is put in credit side by writing the word “ By balance c/d”
  • If credit side is more than the difference is put on the debit side by writing “To balance c/d”

→ Difference between journal and ledger

  • Journal – Is the book of prime entry
    Ledger – Is the book of final entry.
  • Journal – Transactions are recorded in order of occurrence
    Ledger- Transactions are classified according to the nature and are grouped in the concerned accounts
  • Journal Final accounts can’t be prepared directly from journal.
    Ledger – Ledger is the basis of preparing final accounts
  • Journal – Journal is not balanced
    Ledger – ledger is balanced
  • Journal – Accuracy of the books can’t be tested
    Ledger – Accuracy of the books is tested with the help of list of balances

Let us understand by Example
Example: Enter the following transactions in journal and post them into ledger.

2005, jan. 1
1. Mr javed started business with cash Rs 100,00
2. He purchased furniture for Rs 20,000
3. He purchased goods for 60,000
4. He sold goods for cash Rs 80,000
5. He paid salaries Rs 10,000
Answer:
Accounting Process - I – CS Foundation Fundamentals of Accounting and Auditing Notes 1
Accounting Process - I – CS Foundation Fundamentals of Accounting and Auditing Notes 2
Accounting Process - I – CS Foundation Fundamentals of Accounting and Auditing Notes 3
Accounting Process - I – CS Foundation Fundamentals of Accounting and Auditing Notes 4
It should be noted that nominal accounts are not balanced, the balance in them are transferred to Profit and Loss A/C. Only personal and real accounts ultimately show balances

→ Kinds of Subsidiary Books
There are different kinds of subsidiary books which includes

  • purchase day book,
  • Sales day book,
  • purchase returns book,
  • Sales returns book,
  • Bills receivable books,
  • Bills payable books,
  • Cash book.

→ Purchase book: Purchase day book is used for recording credit purchase of goods only. This will not record any cash purchase or credit purchase of any assets. The term goods means all the commodities and services in which the company deals in day to day activities. The preparation of purchase day book involves the Date column, Particulars column, Invoice number column, Ledger folio column, inner amount column and Amount column.

→ Sales book: Sales day book is mainly used for recording credit sales of goods and services in an organization. This will not record any cash sales or assets sales. The ruling for the preparation of this book is same as like Purchase day book. This involves the Date column, Particulars column, Invoice number column, Ledger folio column, inner amount column and Amount column.

→ Purchase returns book: This is maintained to record the transactions of goods returned to the supplier when purchase on credit. The ruling of the preparation of purchase return book or returns outward book involves Date, Particulars, Debit note number, Ledger folio and amount column.

→ Sales returns book: This book is used to record the goods returned by the customer the goods sold on credit. The ruling of the preparation of Sales return book or returns inward book involves Date, Particulars, credit note number, Ledger folio and amount column.

→ Bills receivable books: It is used to record the transactions when the bills received from the customer for credit sales. This provides a medium for posting bills receivable transaction. The preparation of this book involves Date when received, Drawer, Acceptor, Where payable, date of bill, term, due date ledger folio, Amount, remarks columns.

→ Bills payable books: This is used to record the acceptances given to the suppliers for credit purchase. The preparation of bills payable book involves Date of acceptance, giver, payee, Where payable, date of bill, term, due date, ledger folio, Amount, remarks columns.

→ Cash book: The cash book is used to record all the receipts and payments of cash. For the preparation of cash book there are different rules are available according to the nature of business. The different forms of cash book are as follows:

  • Simple Cash book – This is the simple form of cash book.
  • Two column cash book – This type of cash book have two columns like cash column and discount column.
  • Three column cash book – This involves three columns such as Bank column, cash column and discount column.

→ Petty cash book – This is used to record petty expenses like postage, cartage, printing and stationery etc in the day to day business activities.

Feature of Cash Book: All cash receipts and cash payments are entered chronologically in the cash book. It never shows a credit balance. It serves the functions of Journal also.

→ Journal proper or General Journal is book of original entry (simple journal) in which miscellaneous credit transactions which do not fit in any other books are recorded. It is also called miscellaneous journal. The form and procedure for maintaining this journal is the same that of simple journal.
The use of journal proper is confined to record the following transactions:

→ Opening entries
At the beginning of the financial year opening entries are passed to open the books by recording the assets, liabilities and capital appearing in the balance sheet of previous year

→ Closing entries
These are used for closing of accounts at the end of the year. These accounts are closed by transferring balances to trading and profit and loss account

→ Transfer entries
These are passed for an item entered in one account to another account

→ Purchase of fixed assets or stationary
When assets or stationary are purchased on credit then entry is made in general journal

→ Adjustment entries
At the end of year adjustment entries are passed for outstanding expenses , income received and advance etc.

→ Rectification entries
The errors which have been put in the book of account are recorded in general journal

  • Entries for which there is no special journal
  • Entries for rare transactions

→ Trial balance
Trial Balance may be defined as a statement which contains balances of all ledger accounts on a particular date. It is the aggregate of all debit and credit balances at the end of an accounting period that

  • shows if the general ledger is in balance (total debits equal total credits) before making closing entries
  • serves as a worksheet for making closing entries,
  • provides the basis for making draft financial statements.

Trial Balance has three columns : Name of the Ledger Account, Debit Amount and Credit Amount. Trial balance is the third step in preparation of financial accounts.

→ Objectives of Preparing a Trial Balance

  • To help in preparing Financial Statements
  • To check arithmetical accuracy
  • Helps in locating errors
  • Helps in making adjustments

→ Various methods of preparing trial balance
I. Totals Method – In this method the total of both sides of every account in the ledger is written against the name of the respective account without balancing them in the form of debit and credit balances respectively. For example if the total of debit item of cash account is Rs 1,25,000 and credit total is Rs 95,000 then both these totals will be shown to their respective side without taking out the difference. Thus in trial balance cash account will show
Dr. 1,25,000 and Cr.95,000

II. Balance Method – In this Balance method, the balance of each account (which may be debit balance or credit balance) is extracted and written against each account; we write debit balance in the debit column and credit balance in the credit column. The excess of debit total over credit total is put to the debit column and excess of credit total over the total of debit is put towards the credit column of trial balance. Taking the above example cash account in the trial balance will show Dr.30,000.

Trial Balance is not an account. It is only a list or schedule of balances of ledger accounts including cash and bank balances.

Accounting Process – I MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
The expired portion of capital expenditure shown in the financial statement is:
a. An income
b. An expense
c. An asset
d. A liability
Answer:
b. An expense

Hint:
Depreciation is treated as expenses, it is transferred to debit side of P/L a/c.

Question 2.
Maintaining petty cash book is:
a. Mandatory
b. Necessary
c. Dependant on nature of business
d. All of the above.
Answer:
c. Dependant on nature of business

Hint:
Petty cash book – This is used to record petty expenses like postage, cartage, printing and stationery etc in the day to day business activities.
In big organisation, it is not possible to maintain petty expenses for main cashier. In small organisation the number of petty Expenses is less so such a book can be maintained- by cashier. Maintaining such a book is not compulsory.
So, maintaining petty cash book is dependent on nature of business.

Question 3.
Purchase book records:
a. All purchases made by the firm
b. All purchases of fixed asset used by the firm
c. Credit purchases of goods dealt in by the firm
d. Cash purchases of goods dealt in by the firm.
Answer:
c. Credit purchases of goods dealt in by the firm

Hint:
Purchase day book is used for recording credit purchase of goods only. This will not record any cash purchase or credit purchase of any assets.

Question 4.
CA/CS Book is prepared:
a. On the basis of Cash Book
b. On the basis of copies of invoices.
c. Both (a) and (b)
d. On the basis of sA/cs order
Answer:
b. On the basis of copies of invoices.

Hint:
Sales book is prepared on the basis of copies of invoice sent to customers. Sales book has the Date column, Particulars column, Invoice number column, Ledger folio column, inner amount column and Amount column.

Question 5.
Expenses paid in cash and recorded as assets before they are used are called-
a. Accrued Expenses
b. Interim Expenses
c. Prepaid Expenses
d. Unearned Expenses
Answer:
c. Prepaid Expenses

Hint:
Prepaid expenses are future expenses that have been paid in advance.

Question 6.
In which book does the cash SA/cs will be recorded-
a. Cash Book
b. Purchase Book
c. General Journal
d. SA/cs Book.
Answer:
a. Cash Book

Hint:
The cash book is used to record all the receipts and payments of cash.

Question 7.
Which of the following transactions would have no impact on owner’s’ capital?
a. Purchase of land from the proceeds of a bank loan
b. Withdrawal of profits
c. Net loss
d. Cash brought in by owner as additional capital
Answer:
a. Purchase of land from the proceeds of a bank loan

Hint:
Purchase of land from the proceeds of a bank loan would have no impact on owner’s capital.
The entries to be passed on purchase of land are
Accounting Process - I – CS Foundation Fundamentals of Accounting and Auditing Notes 5
Thus no impact on owner’s capital

Question 8.
Which of the following accounts will be credited, when the goods are purchased for cash?
a. Stock Account
b. Cash Account
c. Supplier’s Account
d. Work in progress Account
Answer:
b. Cash Account

Hint:
So, cash A/c will be credited.

Question 9.
Which of the following would not be regarded as an asset?
a. A piece of equipment owned by a business
b. A sum of money owned by the business
c. An inventory of goods that is yet to be sold
d. A building that has been taken on rent by the business for its use.
Answer:
d. A building that has been taken on rent by the business for its use.

Hint:
An asset is an economic resource. Anything tangible or intangible that can be owned or controlled to produce value and that is held to have positive economic value is considered an asset.
A building that has been taken on rent by the business for Its use would not be regarded as an assets because company have no ownership of that building.

Question 10.
Withdrawal of cash from bank for official use will result into:
a. Increase of assets
b. Increase of expenses
c. No impact on assets
d. None of the above.
Answer:
c. No impact on assets

Hint:
This entry will have nil impact on assets since, on one hand cash A/c will increases and on the other hand bank A/c will decrease.
The entry to be passed is
Accounting Process - I – CS Foundation Fundamentals of Accounting and Auditing Notes 6

Question 11.
Franchise rights, goodwill and patents are the examples of:
a. Liquid Assets
b. Tangible Assets
c. Intangible Assets
d. Current Assets
Answer:
c. Intangible Assets

Hint:
An intangible asset is an asset that lacks physical substance and usually is very hard to evaluate. It includes patents, copyrights, franchises, goodwill, trademarks, trade names.

Question 12.
Which of the following is not an example of current asset?
a. Prepaid Expenses
b. Account Receivables
c. Short term securities
d. Unearned Income.
Answer:
c. Short term securities

Hint:
A current assets is cash and any other company asset that will be turning to cash within one year from the date shown in the company’s balance sheet.
Short term securities are regarded as Liquid Assets and not as current assets.

Question 13.
The three columns on each side of a three columnar cash book represent:
a. Real and personal accounts
b. Real and nominal accounts
c. Personal and nominal accounts
d. Real, personal and nominal accounts.
Answer:
d. Real, personal and nominal accounts.

Hint:
Three column cash book – This involves three columns such as Bank column, cash column and discount column.

Bank column Personal account
Discount column Nominal account
Cash column Real account

Question 14.
A chronological record of transaction may be found in:
a. Balance Sheet
b. Trial Balance
c. Ledger
d. Journal.
Answer:
d. Journal.

Hint:
In accounting, a first recording of financial transactions as they occur in time, so that they can then be used for future reconciling and transfer to other official accounting records such as the general ledger is a jounal.

Question 15.
A purchased an old computer costing Rs. 10,000 and incurred Rs. 1,000 on its repairs and Rs. 500 on its packing. He sold the computer at 20% margin on selling price. The sA/cs value will be:
a. Rs. 12,500
b. Rs.11,000
c. Rs.14,375
d. Rs. 13,800
Answer:
c. Rs.14,375

Hint:
Total cost of computer =10,000 + 1,000 + 500 = 11,500 Margin is 20% on selling price which means it is 25% on cost.
Sales value = 11,500 + 25%
= Rs. 14,375/-

Question 16.
The imprest system pertains to-
a. Purchase book
b. SA/cs book
c. Cash book
d. Petty cash book.
Answer:
d. Petty cash book.

Hint:
The imprest system is an accounting system for paying out and subsequently replenishing petty cash. A cashier maintaining petty cash is given a definite sum of money in the beginning of a period and is reimbursed for payments made at the end of the period. Thus, he will have again the fixed amount in the beginning of the new period. This system is known as the imprest system of petty cash book.

Question 17.
The statement showing balance of all the ledger accounts is known as-
a. Trial balance
b. Balance sheet
c. Bank reconciliation statement
d. Profit and loss account.
Answer:
a. Trial balance

Hint:
Trial Balance may be defined as a statement which contains balances of all ledger accounts on a particular date.

Question 18.
A General Cash book acts as a
a. Journal
b. Ledger
c. Both
d. None.
Answer:
c. Both

Hint:
A cashbook is a book of prime entry in which cash and bank transactions of business are recorded. It acts as a book of original entry and a ledger. Hence, it is both Journal and Ledger

Question 19.
Debit note is related with the
a. Sates book
b. SA/cs return book
c. Purchase return book
d. Journal proper.
Answer:
c. Purchase return book

Hint:
Purchase returns book: This is maintained to record the transactions of goods returned to the supplier when purchase on credit. A debit note is issued by a seller to advise the amount owed by the buyer.

Question 20.
If assets are increased by 2,000 and liabilities are increased by 1,200.
What will be the effect on business equity?
a. 800
b. 2,000
c. 3,200
d. 1,200.
Answer:
a. 800

Hint:
Equity = Total assets – Total outside liabilities
= 2,000 – 1,200 = 800

Question 21.
In case of Trial Balance, balance comes from
a. Journal
b. Ledger
c. Balance Sheet
d. Profit & Loss A/c.
Answer:
b. Ledger

Hint:
Trial Balance may be defined as a statement which contains balances of all ledger accounts on a particular date.

Question 22.
Cost of goods sold – 60,000. SA/cs- 95,000 Expenses – 20,000 Gross Profit will be?
a. 20,000
b. 15,000
c. 35,000
d. 1,75,000.
Answer:
c. 35,000

Hint:
Gross Profit = Sales – Cost of Goods Sold = 95,000-60,000 = 35,000

Question 23.
Why ledger is made?
a. To classify all items appearing in Journal
b. To record the transaction
c. Both (a) and (b)
d. None of these
Answer:
a. To classify all items appearing in Journal

Hint:
Ledger sorts out all the entries in journal under appropriate accounts for example all transactions related to cash are put in one account.

Question 24.
In case of three column cash book, contra entry is related with –
a. Cash; Discount
b. Cash; Bank
C. Bank; Discount
d. None of these.
Answer:
b. Cash; Bank

Hint:
The entry which involves both cash and bank transactions is called contra entry.

Question 25.
In case of three columnar cash book, contra entry.
a. Bank account only
b. Cash and discount account
c. Cash account only
d. Cash and bank account
Answer:
d. Cash and bank account

Hint:
In a case of Contra Entry of cash book when a transaction involves both cash and bank accounts, it is entered on both sides of the cash book, one in the cash column and other in the bank column, though on opposite sides.

Question 26.
The closing entry for transfer of Salaries Paid Nc appearing in the Trial Balance will be:
a. Debit Salaries A/c, Credit P&L A/c
b. Debit Salaries A/c, Credit Trading A/c
c. Debit Trading A/c, Credit Salaries A/c
d. Debit P&L A/c, Credit Salaries A/c
Answer:
d. Debit P&L A/c, Credit Salaries A/c

Hint:
The closing entry for transfer of salaries paid A/c appearing in trial balance will be.
Accounting Process - I – CS Foundation Fundamentals of Accounting and Auditing Notes 7

Question 27.
Which of the following statement is incorrect with respect to a journal entry?
a. It is prepared to record all transactions in alphabetical order
b. It should always end with a narration explaining the need for it
c. It should De substantiated by appropriate voucher and authority
d. It should always consist of a debit entry matched by a corresponding credit entry.
Answer:
a. It is prepared to record all transactions in alphabetical order

Hint:
In Journal Transactions are recorded in order of occurrence i.e. chronological order and not alphabetical order.

Question 28.
Which of the following entries will be entered in the Journal proper?
a. Sold goods on credit
b. Goods purchased and paid by cash
c. Furniture purchased on credit
d. Purchase goods on credit.
Answer:
c. Furniture purchased on credit

Hint:
Journal proper or General Journal is book of original entry (simple journal) in which miscellaneous credit transactions which do not fit in any other books are recorded. It is also called miscellaneous journal.
Some entries confined to general journal (or journal proper) are:

  • Opening entries
  • Closing entries
  • Adjustment entries
  • Rectification entries
  • Purchase of fixed assets etc.

Question 29.
Which of the following account will be credited for profit on safe of fixed assets?
a. Depreciation Account
b. Cash Account
c. Fixed Asset Account
d. Profit and Loss Account.
Answer:
d. Profit and Loss Account.

Hint:
When a fixed asset is sold at a profit then the account to be credited will profit and loss account.

Question 30.
A chronological record of transactions may be found in
a. Trial balance
b. Journal
c. Balance sheet
d. Ledger
Answer:
b. Journal

Hint:
Features of Journal

  • Is the book of prime entry
  • Transactions are recorded in order of occurrence i.e. chronological
  • Final accounts can’t be prepared directly from journal.
  • Journal is not balanced
  • Accuracy of the books can’t be tested

Question 31.
The imprest system pertains to:
a. Purchase book
b. Cash book
c. SA/cs book
d. Petty Cash book.
Answer:
d. Petty Cash book.

Hint:
The imprest system is an accounting system for paying out and subsequently replenishing petty cash. A cashier maintaining* petty cash is given a definite sum of money in the beginning of a period and is reimbursed for payments made at the end of the period. Thus, he will have again the fixed amount in the beginning of the new period. This system is known as the imprest system of petty cash book.

Question 32.
After the preparation of income statement, it was discovered that accrued expenses of (1,000 have been ignored and closing inventory has been overvalued by (1,300. This will have result in:
a. An understatement of net profit of Rs 2,300
b. An overstatement of net profit of Rs 300
c. An understatement of net profit of Rs 300
d. An overstatement of net profit of Rs 2,300
Answer:
d. An overstatement of net profit of Rs 2,300

Hint:
If accured expenses of Rs 1,000 have been ignored this will increase the net profit by Rs. 1,000
If closing inventory is overvalued, it will also result in increasing the net profit by Rs. 1,300
Thus, net effect will be profit increased by Rs. 2,300 (1200 + 1300)

CS Foundation Fundamentals of Accounting and Auditing Notes