Ans 1.

An asset may be defined as a resource with economic value, owned or controlled by a business
entity that will provide a benefit in current and future periods for the business. They add value to the
business and increase its equity. Assets are resources which often help to reduce expenses, enhance
profitability and generate lots of cash flow as they help convert raw materials or can be converted into cash
or cash equivalents. As these resources are of economic value, they can be quickly sold or exchanged. In
simple terms, assets are what a business owns or controls. That implies that assets are defined in terms of
control than ownership. In the balance sheet, assets are shown on the right side. Some examples of assets
are as follows,
1. Inventory
2. Cash
3. Land
4. Prepaid insurance
5. Plant and machinery
6. Goodwill
7. Buildings
8. Investments
9. Accounts receivables
10. Furniture

Assets are classified into two types i.e., current assets and non-current assets

A. Current Assets: Current assets can be defined as assets that can be easily converted into cash within one
year. These assets are invested with an intention to make revenues within a short period of time (within
one year). A company relies on its current assets for funding the cost of its day-to-day operations. This
ensures smooth functioning of business activities. These have a shorter life span. Some examples are
bills receivables, inventory and cash. Current assets are classified into the following,

1. Cash and cash equivalents: These refer to the assets of a company that can be converted into cash
or are cash. They are highly liquid. The investments here are meant to be short-term and they
must mature in less than three months. Some examples of cash are bank drafts, currency, petty
cash and some examples for cash equivalents are treasury bills, commercial paper, account
balances, short-term government bonds and money market funds.

2. Marketable securities: Marketable assets are those highly liquid assets that can be converted into
cash quickly i.e., within a year and are generally short-term investments. Some examples of
marketable securities are savings accounts, common stock, certificate of deposit and banker’s
acceptance.

3. Accounts receivables: These refer to the payments or amounts owed to the company by its
customers for purchasing goods and services on credit basis. An example could be the following
scenario, Ever since Virendra opened a Subway outlet in his locality, he has been looking for
buying furniture, particularly tables. The tables cost Rs.70,000 and he doesn’t have money at the
time of sale. The furniture company selling tables would invoice him and allow him 30 days to
pay off his debt. At this time, the furniture company would record Rs.70,000 in their accounts
receivable. Once Virendra pays it off, the money would go back to the sales amounts.

4. Inventory and supplies: These refer to raw materials, components and finished goods/products
that a business holds for sale to customers in the near future. An example could be a car
dealership selling trucks.

5. Prepaid expenses: These refer to the future expenses paid by the business in advance. Some
examples of prepaid expenses are insurance premium paid in advance and rent paid in advance
B. Non-current Assets: Non-current assets are those assets that represent a company’s long term
investment. These assets cannot be liquidated into cash. Generally, these type of investments last long
with the business and have the ability to generate economic benefits to the company for more than a
year. Some examples of non-current assets are land, security deposits, goodwill, trademarks etc. Non-
current assets are classified into the following types,

1. Tangible assets: Tangible assets are those assets that can be seen and touched. They are physical
and measurable resources. Some examples of tangible assets are machinery, furniture, inventory,
land, bonds, cash, stocks, and building etc.

2. Intangible assets: Intangible assets may be defined as a non-physical asset that cannot be seen
and touched. They have an economic value. Some examples of intangible assets are goodwill,
research and development, licensing and rights, intellectual property, and brand equity etc.

3. Natural resources: Natural resources, also known as wasting assets, are those resources provided
by nature that are used over time. It declines over time. Some examples of natural resources are
oil, gas, ore deposits, mineral deposits and metals such as gold, silver, bronze etc.

On the other hand, liabilities may be defined as the debts or financial obligations that a business entity has
to pay some time in future, thus resulting in outflow of resources or company’s future sacrifices of economic
benefits to other entities or businesses. At one point in time, every business entity, whether large or small,
needs to borrow money or purchase goods on credit. In simple terms, liability is what a business owes. In the
balance sheet, liabilities are shown on the left side. Some examples of liabilities are:
1. Wages
2. Accounts payable
3. Bonds and debentures
4. Interest payable
5. Debt payable
6. Capital leases
7. Outstanding expenses
8. Mortgage payable
9. Sundry creditors
10. Short term borrowings

Liabilities are classified into three types, i.e., current liabilities, non-current liabilities and contingent
liabilities

A. Current liabilities: Current liabilities are those short-term financial obligations or debts that need to
be paid by the business within an year. Current liabilities are usually settled against current assets
since current liabilities are the primary determinants of the liquidity of the business. Some examples
of current liabilities are bank loans, accounts payable, dividends payable, income taxes payable,
interest payable, deferred revenues, customer deposits, wages payable and short-term borrowings.

B. Non-current liabilities: Non-current liabilities are those long-term financial obligations that are
expected to be paid after an year. This type of liability help the existing capital requirement of a
business to invest into projects or expansion. It is written as a separate entry in the balance sheet.
Some examples non-current liabilities are mortgages, bonds payable, debentures, long-term loans,
deferred tax liabilities and pension benefit obligations.

C. Contingent liabilities: Contingent liability, as the name suggests, may be defined as a liability that
may occur in the future depending on the outcome of an unanticipated or unforeseen event. Some
examples of contingent liabilities are product warranty, potential lawsuits and pending
investigations.
 Sources:
 https://www.investopedia.com/ask/answers/030215/what-difference-between-current-assets-and-
noncurrent-assets.asp
 https://byjus.com/commerce/what-are-non-current-assets/
 https://www.wallstreetmojo.com/examples-of-assets/
 https://www.investopedia.com/terms/c/currentassets.asp
 https://www.freshbooks.com/hub/accounting/liabilities-accounting
 https://tallysolutions.com/business-guides/cash-and-cash-equivalents/
 https://www.freshbooks.com/hub/accounting/accounts-receivable
 https://www.accountingcoach.com/blog/what-is-a-current-liability
 https://www.investopedia.com/terms/n/noncurrent-liabilities.asp
 https://www.wallstreetmojo.com/contingent-liabilities/

Ans 2. Being an accounts manager of this company, it is observed that the purchase of machinery by the
firm along with its additional expenses, such as import charges, transportation charges, and one-time
installation fees come under capital expenditure. These transactions come under capital expenditure because
the business has purchased a long-term asset (in this case, machinery) that will be used to generate revenue
over a longer period. In other words, the company has invested in machinery to maintain or expand its
business and to generate profits. The cost incurred on the machinery along with the additional expenses help
to improve efficiency or capacity of the business. Purchase of assets generally increases the earning capacity
of the business and increases capacity of production. Simply put, capital expenditure is an amount spent to
acquire a long-term asset or the amount spent to improve its capacity. Capital expenditures are usually quite
expensive and are crucial for a business as it can increase the earning capacity of the business. Capital
expenditures are recorded in the balance sheet as an asset.

On the other hand, the maintenance charges of the machinery per annum (i.e., Rs.20,000) comes under
revenue expenditure. This particular transaction comes under revenue expenditure because it is a recurring
expense, i.e., expenditure relating to the day-to-day trading of the organization. In other words, costs
targeted towards the maintenance of a long-term or fixed asset. Revenue expenditure is the amount of
money spent by an organisation on general operating costs like maintenance, rent, salaries, wages etc. These
costs do not provide any benefits to the company like generating revenues but only help in the maintenance
of the machinery. These costs are incurred after the asset has been put to use and helps the asset to be in
working order which is why this particular transaction comes under revenue expenditure.

Calculation of depreciation to the given question:

Given transactions,

Machinery. : 10,00,000
Import charges. : 2,00,000
Transport charges : 1,00,000
Installation fees : 50,000

Total cost of machinery = Rs.13,50,000

10
Depreciation on the cost of machinery for 12 months = 13,50,000 ×
100

= 1,35,000
Sources:
 https://www.accountingcoach.com/blog/capital-expenditure-revenue-expenditure
 https://www.investopedia.com/ask/answers/021115/what-difference-between-capital-expenditure-
and-revenue-expenditure.asp

Ans 3a. A profit and loss account may be defined as a financial report or account that shows a company’s
revenue and expenses over a particular period. In simple terms, it shows the net profit or net loss of a
business for an accounting period. These figures tell whether the business has made a profit or loss over that
period. It is a component of final accounts. It helps in comparing expenses of the current year with that of
the previous year. The profit and loss account gives investors and other interested parties an insight into the
operations of a company and whether it can generate profits. It also helps a business make the right decision,
for instance, on where more profit can be generated, where the business is suffering losses, etc. On the debit
side of the profit and loss account, gross loss (transferred from the trading account if a loss has occurred i.e.,
the debit side is more than the credit side in the trading account) and all indirect expenses can be seen.
On the credit side of the profit and loss account, gross profit (transferred from the trading account if profit
has occurred i.e., the credit side is more than the debit side in the trading account) and all indirect revenues
can be seen.

Below are the trading account and the profit and loss account of ABC Ltd for the year ended 31st March
2020
Trading account of ABC Ltd. for the year ended 31st March 2020
Dr Cr
Particulars Amount (₹) Particulars Amount (₹)

To Purchases a/c 6,00,000 By Sales a/c 8,00,000

To Gross Profit 2,00,000

8,00,000 8,00,000

Profit and loss account of ABC Ltd. for the year ended 31st March 2020
Dr Cr
Particulars Amount (₹) Particulars Amount (₹)
To Salaries a/c 1,10,000 By Gross Profit b/d 2,00,000

To Rent a/c 60,000 By Interest a/c 1,000

To Stationary a/c 7,000

To Discount a/c 5,000

To Net Profit 19,000

2,01,000 2,01,000
Ans 3b. A balance sheet is a statement that shows the financial position of a business at a specified time,
usually calculated after every quarter, six months, or one year. It reports the assets, liabilities, and
shareholder's equity of the business at a given point in time. A balance sheet includes assets on the right side
and liabilities on the left side. The total of both sides must be equal or in other words, balanced, else an error
might have occurred. A balance sheet is important for a business as it provides insights about a business.
They are the following,

1. Liquidity: A business can get a clear picture of the liquidity of the company, or how much cash that
business has readily available by comparing the business’s current assets and liabilities.

2. Efficiency: A business can check its efficiency in usage of its assets by comparing its income
statement to the its balance sheet. This shows how the business can use its assets to generate revenue.

3. Leverage: The balance sheet can tell how much financial risk a business might face, i.e., how much
leverage a business has.

A balance sheet is crucial as it helps in understanding the performance of a business. It helps the business to
understand its financial health. It also helps in comparing previous years balance sheets that further helps in
determining the growth of the company. It is important as it is an essential document to obtain a business
loan. It also helps the ability of the firm to undertake expansions and unforeseen expenses by analysing the
balance sheet of the company. It also helps in identifying the source of business funding, such as, equity
finding or debt funding.

Below is the balance sheet of ABC Ltd for the year ended 31st March 2020.

Balance Sheet
Dr Cr
Liabilities Amount (₹) Assets Amount (₹)

Capital 10,00,000 Cash a/c 4,03,000

Investment a/c 1,00,000

Plant & Machinery a/c 2,50,000

Bank a/c 2,46,000

12,19,000 12,19,000

Sources:
 https://byjus.com/commerce/trading-and-profit-and-loss-account/
 https://www.kashflow.com/accounting-terms/profit-and-loss-account/
 https://www.ig.com/en/glossary-trading-terms/profit-and-loss-definition
 https://www.freshbooks.com/hub/accounting/balance-sheet
 https://scripbox.com/mf/balance-sheet/