KSLU Solved Question Papers
Financial Accounting
Previous Year Question Paper with Solution
B.B.A. LL.B. (Five Years) · Sem 1
2014 Jun Examination
munotes.in
Mumbai
B.B.A. LL.B. (Five Years) Sem 1 Financial Accounting 2014 Jun Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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Contents
The questions below are the paper as Karnataka State Law University set it at the 2014 Jun examination, in the order it was set.
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2014 Jun examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 20 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1
Unit I
(a)What do you mean by accounting conventions ? Explain the various accounting conventions.[15]
Answer
For full marks, cover: the meaning of accounting conventions and why accounts need them; how a convention differs from a concept; the four conventions (consistency, full disclosure, conservatism and materiality), each with its meaning, its reason, examples from the final accounts and its limits; where AS 1 places them today; and how the four work together.
Meaning of accounting conventions
The word "convention" means a custom, a way of doing things that people accept by common consent. Accounting conventions are the customs that accountants have followed for a long time while preparing and presenting accounts. No law enacted them. They grew out of practice, proved useful, and became the normal way of reporting.
Concepts and conventions together make up the generally accepted accounting principles. Concepts are the basic assumptions on which recording rests, such as the business entity, going concern and dual aspect concepts. Conventions guide the accountant at the next stage. They shape how the recorded figures are valued, grouped and reported in the final accounts.
Why conventions are needed
Accounting leaves many choices open. Stock can be valued in more than one way. Depreciation can be charged by the straight line method or the written down value method. A small purchase can be treated as an asset or written off at once. If each accountant chose freely each year, the reported profit would depend on the choices as much as on the trading.
Conventions narrow these choices. They make the accounts cautious, so that profit is not overstated. They make them comparable from year to year and complete in what they show. They also keep them practical, so that small items do not cost more effort than they are worth. Owners, lenders, investors and the tax authorities can then rely on the figures.
How conventions differ from concepts
| Point | Accounting concepts | Accounting conventions |
|---|---|---|
| Nature | Basic assumptions and ideas | Customs and practices |
| Origin | The logic of double entry | Long usage and common consent |
| Stage | Recording the transactions | Preparing and presenting the accounts |
| Point | Accounting concepts | Accounting conventions |
|---|---|---|
| Purpose | Decide what is recorded and how | Decide how results are valued and reported |
| Examples | Business entity, going concern, dual aspect | Consistency, disclosure, conservatism, materiality |
1. Convention of consistency
Meaning. Once a method of accounting is chosen, it should be followed year after year. The same item should be treated in the same way in every period.
Reason. The profit of two years can be compared only if both are measured on the same basis. Suppose a trader values closing stock at cost this year and at selling price next year. The second year's profit rises, though the trading did not improve.
Examples.
- A firm that depreciates its machinery by the written down value method keeps to that method every year.
- A firm that values stock on the first in, first out basis does not switch to another basis to raise a weak year's profit.
- Items are grouped under the same headings in the balance sheet each year.
Limits. Consistency does not forbid every change. A change is proper when a statute or an accounting standard requires it, or when the new method gives a fairer view. The change and its effect on the profit must then be disclosed. AS 1 (Disclosure of Accounting Policies) makes consistency a fundamental accounting assumption. It says: "If a fundamental accounting assumption is not followed, the fact should be disclosed."
2. Convention of full disclosure
Meaning. The accounts must show honestly and fully every fact that matters to the people who use them. Nothing important may be hidden or buried in an unclear note.
Reason. Owners who do not run the business, lenders and investors never see the books. They see only the final accounts. A balance sheet that omits a large guarantee or a pending claim can mislead a lender into a bad loan.
Examples.
- A bill discounted but not yet due, or a claim against the firm disputed in court, is shown as a contingent liability in a note.
- The method of valuing stock and of charging depreciation is stated.
- The market value of investments is shown beside their cost.
- A material event after the balance sheet date, such as the loss of a large debtor, is reported.
In law. For companies, Schedule III of the Companies Act, 2013 sets out the form of the balance sheet and the statement of profit and loss. It also lists the notes to be given. That schedule puts this convention into law. AS 1 itself, as its title shows, is an application of disclosure.
Limits. Disclosure stops short of trade secrets, and too much detail can hide the important facts. The rule is to disclose everything material, not everything.
3. Convention of conservatism (prudence)
Meaning. The rule is often put as "anticipate no profit, but provide for all possible losses". Where two values are possible, the accountant chooses the one that gives the lower profit or the lower asset.
Reason. Business is uncertain. An expected gain may never arrive, while an expected loss usually does. If profit is overstated, the owner may withdraw money the business needs. A company may even pay dividends that its trading never earned.
Examples.
- Closing stock is valued at cost or net realisable value, whichever is lower. Stock bought for ₹ 60,000 that can now be sold for only ₹ 52,000 is shown at ₹ 52,000. AS 2 lays down the same rule: inventories "should be valued at the lower of cost and net realisable value."
- A provision for doubtful debts is made before any debt has actually gone bad.
- Goods sent on sale or return are not treated as sold until the customer accepts them.
AS 1 lists prudence among the considerations in choosing accounting policies. It says that profits "are not anticipated but recognised only when realised though not necessarily in cash."
Limits. Too much conservatism is itself a fault. If assets are deliberately undervalued, secret reserves arise. This year's profit is then understated and a later year's overstated. The accounts no longer show a true and fair view. The convention asks for caution, not for hiding profit.
4. Convention of materiality
Meaning. An item is material if knowing it might change the decision of a person who reads the accounts. Material items receive full and careful treatment. Items that are not material may be treated in the simplest convenient way.
Reason. Recording every small item with full precision costs time and money and tells the reader nothing useful. Materiality lets the accountant spend effort where it matters.
Examples.
- A calculator costing ₹ 400 will last several years, yet it is charged as an expense in the year it is bought.
- Published accounts round their figures to the nearest thousand or lakh of rupees.
- A loss of ₹ 5 lakh by fire is shown as a separate item, though routine office expenses are grouped together.
Judging materiality. It depends on both the size and the nature of the item. ₹ 20,000 may be material for a small shop and trifling for a large company. Some items are material by their nature whatever their size, such as a loan to the owner's relative. AS 1 names materiality, with prudence and substance over form, as a consideration in selecting accounting policies.
The four conventions at a glance
| Convention | The rule in one line | Where it shows in the final accounts |
|---|---|---|
| Consistency | Same methods every year | Depreciation and stock methods unchanged |
| Full disclosure | Show every material fact | Notes, contingent liabilities |
| Conservatism | Provide for losses, not profits | Stock at the lower value, provision for doubtful debts |
| Materiality | Treat small items simply | Small tools written off, rounded figures |
How the conventions work together
The four conventions support one another. Conservatism keeps the profit realistic, and consistency keeps it comparable over the years. Disclosure tells the reader which methods were used and when they changed. Materiality keeps the accounts free of clutter, so the important figures stand out.
A change of depreciation method tests all four at once. The change must be justified, and the new method then followed consistently. The change must be disclosed, with its effect on profit shown where that effect is material. Accounts that pass these tests are accounts a reader can trust.
Conclusion. Accounting conventions are the customs that accountants follow by common consent while valuing and reporting the recorded figures. The four conventions are consistency, full disclosure, conservatism and materiality. They make the accounts comparable, complete, cautious and practical. AS 1 now gives them formal shape: consistency as a fundamental assumption, and prudence and materiality as considerations in choosing accounting policies.
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