A-AS Level (CIE) Accounting Paper-2: Specimen Questions with Answers 17 - 18 of 53

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Question 17

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What are the kinds of share capital?

Explanation

Share capital means the capital raised by a company by the issue of shares. In the context of company capital means share capital. The reason is that though many individuals and institutions contribute varying sums to capital yet there is no separate capital account for each of these individuals or institutions:

Kinds of share capital are:

  • Authorized, Registered or nominal Capital: Authorized capital refers to the amount which is stated in the memorandum of association. This is the maximum capital for which a company is authorized to issue shares during its lifetime.
  • Issued capital: Issued capital is that part of authorized capital which is offered to the public for subscription. The remaining part of the authorized capital is known as the unissued capital which can be issued later.
  • Subscribed capital: Subscribed capital is that part of issued capital which has been subscribed for the public for subscription.

Question 18

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What do you mean by Accrual basis of accounting?

Explanation

Accrual Basis of Accounting

Under this basis, incomes are recorded when they are earned or accrued, irrespective of the fact whether cash is received or not, e. g. , sales made on credit will be included in the total sales of the period. Similarly, expenses are recorded when they are incurred or become due and not when the cash is paid for item, e. g. , rent due to the landlord but not paid will be treated as expense for the period when it is due and not in the period when it is paid. Hence, in accrual basis, profit or loss of a particular period is the result of matching of the revenues earned and expenses incurred during the period. This makes it necessary to consider outstanding expenses, prepaid expenses, accrued incomes, incomes received in advance etc.

Advantages

  • It discloses true profit or loss for a particular period and depicts true financial position of the business at the end of a particular period because it considers all transactions relating to a particular period and considers all adjustments like outstanding expenses, prepaid expenses, accrued income, and income received in advance.
  • It follows the matching principle of accounting.

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