Eco 02 Ignou Book

Q What do you understand by Dual Aspect Concept ? Explain its accounting implications with examples. Ans. Dual Aspect Concept: This is a basic concept of accounting. According to this concept every business transaction has a two-fold effect. In commercial context it is a famous dictum that "every receiver is also a giver and every giver is also a receiver". For example, if you purchase a machine for Rs. 8,000, you receive machine on the one hand and give Rs. 8,000 on the other. Thus, this transaction has a two-fold effect i.e., (i) increase in one asset and (ii) decrease in another asset. Similarly, if you buy goods worth Rs. 500 on credit, it will increase an asset (stock of goods) on the one hand and increase a liability (creditors) on the other. 1 Mr. Gyan Chand started business with Rs. 50,000 cash: The cash received by the business is its asset. According to the business entity concept, business and the owner are two separate entities. Hence, the capital contributed by Mr. Gyan Chand is a liability to the business. Thus :Capital = Assets Rs. 50,000 = Rs. 50,000 (cash) 2 He purchased goods on credit from Chakravarty for Rs. 5,000: This increases an asset (stock of goods) on the one hand and a liability (creditors) on the other. Now the equation will be : Capital + Liabilities = Assets Rs. 50,000 + Rs. 5,000 = Rs. 5,000 + Rs. 50,000 Capital Creditors Stock Cash 3 He purchased furniture worth Rs. 10,000 and paid cash: This increases one asset (furniture) and decreases another asset (cash). Now the equation will be : Capital t Liabilities = Assets Rs. 50,000 + Rs. 5,000 = Rs. 10,000 + Rs. 5,000 + Rs. 40.000 Capital Creditors Furniture Stock Cash This equation can be presented in the form of a Balance Sheet (a statement of assets and liabilities) as follows :

Q (b) What is Trial Balance ? Explain the various forms in which it is prepared. Ans. After posting the journal entries into the ledger and balancing all accounts, we prepare a statement called Trial Balance. This statement shows the balances of all the accounts which appear in the ledger. The debit balances are shown in one column and the credit balances in the other. It is usually prepared just before preparing the final accounts. me purpose is to check the arithmetical accuracy of the books of account. There are two methods of preparing the Trial Balance: (i) Totals Method, and (ii) Balances Method. Under the first method we show the totals of each side of an account in the Trial

Balance. The debit side total of an account is shown h the debit column of the Trial Balance and the credit side total of the account in the credit column. Under the second method we show only the balances of each account in the Trial Balance. The second method is more convenient and commonly used because it eliminates all those accounts which have nil balance. Q (c) Explain Bank Reconciliation Statement and its advantages. Ans. Thus, Bank Reconciliation Statement can be defined as a statement which reconciles the balance as per cash book and the balance as per pass book showing all causes of difference between the two. Advantages of Bank Reconciliation Statement The main purpose of preparing Bank Reconciliation Statement is to account for the difference between the cash book and the pass book balances. This would ensure the accuracy of entries made in the cash book as well as those in the pass book. •

Regular comparison of these two books is necessary for preparing the Bank Reconciliation Statement. This helps in the detection of errors and taking timely action to correct them. •

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It is quite possible that the bank wrongly debits firm's account for cheques drawn by someone else. If reconciliatibn is not done, such mistakes will not be detected. Preparation of bank Reconciliation Statement also helps in preventing frauds in banking transactions. The cashier, for example, may omit to deposit some bearer bearer cheques in the bank and encash them himself. Such fraud is sure to be detected at the time of reconciliation when it is investigated as to why certain cheques remained uncollected. Thus, it acts as a moral check on the staff to refrain from indulging in such activities. Bank Reconciliation Statement is alsorequired for audit purposes. The auditor has to verify the bank balance before he would certify. the accounts.

Q (d) What is Journal Proper ? State the transactions that are usually recorded in Journal Proper. Ans. Journal proper 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 following are the examples of transactions which shall usually be recorded in Journal Proper. 1 Opening Entry 2 Closing Entries 3 Transfer Entries 4 Adjustment Entries 5 Rectification Entries 6 Miscellaneous Entries Q Differentiate between a Bill of exchange and a promissory Note. Ans. BASIS FOR BILL OF EXCHANGE PROMISSORY NOTE COMPARISON Meaning Bill of Exchange is an instrument in A promissory note is a written promise writing showing the indebtedness of made by the debtor to pay a certain sum a buyer towards the seller of goods. of money to the creditor at a future specified date. Defined in Section 5 of Negotiable Instrument Section 4 of Negotiable Instrument Act, Act, 1881. 1881. Parties Three parties, i.e. drawer, drawee Two parties, i.e. drawer and payee. and payee.

Drawn by Liability of Maker Can maker and payee be the same person? Copies

Creditor Secondary and conditional

Debtor Secondary and conditional

Yes

No

Bill can be drawn in copies.

Dishonor

Notice is necessary to be given to all the parties involved.

Promissory Note cannot be drawn in copies. Notice is not necessary to be given to the maker.

Q (b) What do you understand by Matching Costs against revenue? Explain the main implication of the Matching Concept. Ans.The matching concept is an accounting practice whereby firms recognize revenues and their related expenses in the same accounting period. Firms report revenues, that is, along with the expenses that brought them. The purpose of the matching concept is to avoid misstating earnings for a period. Reporting revenues for a period without reporting all the expenses that brought them could result in overstated profits. The Matching Concept thus has the following implications for ascertaining of profit or loss during a particular period. 1 We should ensure that costs should relate to the same accounting period as the revenues. For example, when we prepare the Profit and Loss Account for 1986, we shall take into account all those incomes that were earned during 1986, and similarly consider only those costs which were incurred in 1986 only. Any costs or incomes which relate to 1985 or 1987 shall be excluded. 2 We should ensure that all costs incurred during the accounting period (whether paid or not) and all revenues earned during that year (whether received or not) are bully taken into account. 3 We should consider only those costs which relate to the revenue taken into account. That is why we consider only the cost of goods sold, and not the cost of goods produced during that period. Q What is the difference between normal loss and abnormal loss ? Give examples. Ans. Normal Loss Abnormal Loss Normal loss is a loss which is depend upon the nature of the goods. Abnormal loss does not depend upon the nature of the goods . •

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Normal Loss cannot be avoided. Abnormal Loss can be avoided. It is charged to consignment A/c It is debited to Abnormal loss A/c & credited to consignment A/c 4 Value of stock is inflated to cover the normal loss. effect the value of goods.

This type of loss does not

Example : evaporation, leakage, driage etc. Example : loss by theft, fire

Q (b) What is Sectional Balancing ? How does it differ from self balancing ? Give proforma of a Total Debtors Account. Ans. The sectional balancing refers to a system uoder which only a section of the group of ledgers is self-balanced. If a firm which uses three ledgers viz., Debtors Ledger, Creditors Ledger and General Ledger, makes only one ledger self-balancing (normally the General Ledger) it will be called 'Sectional Balancing System'. Under this system only two Adjustment Accounts viz., Debtors Ledger Adjustment Account and Creditors Ledger Adjustment Account are prepared. Self-Balancing : (i) Control accounts are prepared in all the ledgers. In the general ledger, debtor’s ledger adjustment account and creditor’s ledger adjustment account are prepared.

(ii) A trial balance can independently be prepared from each one of the ledgers. (iii)All the ledgers form part of double entry system. Sectional Balancing (i) Control accounts are prepared in general ledger only. The names of these control accounts are total debtors accounts and total creditors account. Personal ledgers namely debtors ledger and creditors ledger have no control account. (ii) A trial balance can be prepared only from the general ledger. (iii) Double entry system is completed in the general ledger only. Debtor’ s ledger and creditor’s ledger serve only as memorandum books of account. Give proforma of a Total Debtors Account. Q Give journal entries for the following adjustments. (a) Interest received in advance Rs. 60,000. (b) Interest on drawings Rs. 12,000 (c) Provision for discount on creditors Rs. 2,000. (d) Loss of goods by theft Rs. 8,500. (e) Drawing of goods by the proprietor Rs. 7,500. (f) Outstanding wages Rs. 3,000. Ans. Q . The Trial Balance of Siva did not tally. The credit side exceeded by Rs. 1455. This amount was entered in the debit column against suspense account and the Trial Balance was made to tally. Later the following errors were discovered. (a) Goods worth Rs. 1,250 were sold to Mahesh on credit. This was entered in the sales book but was not posted. (b) Goods worth Rs. 313 were returned by Ahmed. The amount was credited to his account but was not recorded in the return inwards book. (c) Manoj paid Rs. 670 but his account was wrongly credited with Rs. 607. (d) An amount of Rs. 375 owed by Dinesh was omitted from the schedules of sundry debtors. (e) The sales book was undercast by Rs. 420. Give journal entries to rectify the errors and show the suspense account.

(a) It was decided to treat one half of the amount received on account of legacies and donations as income. (b) Liabilities to be provided for are. Rent Rs. 200 Salaries Rs. 300 Advertisement Rs. 50 (c) Insurance premium was paid in advance for three months. (d) Rs. 500 due for Interest on investment was not actually received.

Q What is significance of debit and credit balance in different types of accounts ? Explain with examples. Ans. Let us now understand the significance of a balance in respect of the various types of accounts in the ledger. Personal Accounts: Personal accounts are more frequently balanced as compared to any other class of accounts. Balance in a personal account indicates whether the party concerned By Balance c/d owes to thk business or the business is owing to him. When it shows a debit balance, it means that the party owes that amount to the business and he is a debtor to the business. Similarly, when it shows a credit balance, it would mean that the business owes that amount to him and he is a creditor of the business. If, however, the account shows a nil balance, it means that the account has been cleared, nothing is due to him or due from him. Real Accounts: Real accounts are normally balanced at the end of the accounting period primarily for the purpose of preparing the final accounts. The Cash Account, however, is balanced everyday because the actual cash is to be verified and confirmed with the closing balance shown by Cash Account. All real accounts show a debit balance as these are assets (property) accounts. Nominal Accounts: Nominal accounts are not to be balanced. They are simply closed by transfer to the Trading and Profit aid Loss Accounts, at the time of preparing the final accounts. However, for the purpose of understanding the procedure involved, nominal accounts have also been balanced. Even otherwise, the difference between the debit side and credit side totals have to be worked out for preparing the Trial Balance. Note that the accounts which relate to expenses or losses will show a debit balance; whereas those reiating to incomes and gains will have a credit balance. This is because all expenses and losses are debited and all incomes and gains are credited. Q What is Trial Balance ? State the type of errors that do not affect the trial balance. Ans. After posting the journal entries into the ledger and balancing all accounts, we prepare a statement called Trial Balance. This statement shows the balances of all the accounts which appear in the ledger. The debit balances are shown in one column and the credit balances in the other. It is usually prepared just before preparing the final accounts. There are five Different types of errors which don’t affect the trial balance , (1) Error of omission :- Where in the full transaction is omitted from the books of accounts. (2) Error of commission :- Where we have entered the correct amounts but in wrong person’s account. (3) Error of principle :- This type of error takes place when an item is entered in wrong head or class of accounts. (4) Error of compensation :- These are that errors which cancel the effects of each other. (5) Error of complete reversal of entries :- These errors occur when we debit and credit the two or more aspects of a transaction wrongly using correct figures or amounts. (6) Error of original entry Entering wrong original figure or amount in an accounts.

Q Why is journal sub-divided ? Name the special Journals generally maintained by business and state the type of transactions entered in each of them. Ans.

it is practically impossible to record all transactions in one book of prime entry. Hence, the journal is sub-divided into a number of subsidiary books. These are also called special journals. The sub-division is done in such a way that a separate book is used for each type of transactions which are repetitive in nature and are sufficiently large in number, In any large business the subsidiary books generally used are as follows : Cash Book: It is used for recording all cash receipts and cash payments including cash purchases and cash sales. Purchases Journal: It is used for recording all credit purchases of goods. Sales Journal: It is used for recording all credit sale of goods. Purchases Returns Journal: It is used for recording the returns of goods to suppliers. It is also known as 'Returns Outwards Book'. •

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Sales Returns Journal: It is used for recording the returns of goods by customers. It is also known as 'Returns Inwards Book'. Bills Receivable Journal: This book is meant for recording transactions relating to bills of exchange and promissory notes received from debtors. Bills Payable Journal: This book is meant for recording bills of exchange and promissory notes accepted by the business in favour of creditors. 8 Journal Proper: In this book only such transactions are recorded which are not covered, by any of the above named subsidiary books, for example, credit purchases of fixed assets, opening entry, rectification entries, etc. •

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Q Explain briefly the utility of Debit note and credit note and give the format of any one of these. Ans. Debit Note: A statement sent by the buyer to his supplier intimating that his account has been debited with the amount of goods returned to him. BASIS FOR COMPARISON DEBIT NOTE CREDIT NOTE Meaning Debit Note is a document which Credit Note is an instrument reflects that a debit is made used to inform that the other to the other party's account. party's account is credited in his books. Use of Blue Ink Red Ink Represents Positive Amount Negative Amount Which book is updated on Purchase Return Book Sales Return Book the basis of note? Effect Minimization in account Minimization in account receivables. payables. Exchanged for Credit Note Debit Note Q State the transactions recorded in Bill Receivable and Bill payable journals. Ans. Q Distinguish between cash Basis and accrual basis of accounting. Why do you consider accrual basis more rational ? Ans. BASIS FOR CASH ACCOUNTING ACCRUAL ACCOUNTING COMPARISON Meaning The accounting method in which the The accounting method in which the income or expense is recognized only income or expense is recognized on when there is actual inflow or mercantile basis. outflow of cash. Nature Simple Complex Method Not recognized method as per Recognized method as per companies companies act. act. Income statement Income statement shows lower income. Income statement will show a comparatively higher income.

Applicability of matching concept Recognition of revenue Recognition of expense Degree of Accuracy

No

Yes

Cash is received

Revenue is earned

Cash is paid

Expense is incurred

Low

Comparatively high

Q State the salient features of Joint venture. Distinguish it from consignment. Ans. From the above discussion thk essential features of a joint venture can be listed as follows: It is formed by two or more persons. The purpose is to execute a particular venture or project. No specific firm name is used for the joint venture business. It is of a temporary nature. Hence, the agreement regarding the venture automatically , stands terminated as soon as the venture is completed. The co-venturers share profit and loss in the agreed ratio. However, in the absence of any other agreement between the co-venturers, the profits and losses are to be shared equally. During the tenure of joint venture, the co-venturers are free to continue with their own business unless agreed otherwise. • • • •

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Q What is a single Entry System ? Distinguish it from Double Entry System. Ans. It simply refers to incomplele records or the defective double enlry system. Under this system neither all the transactions are recorded nor all the account books are maintained. In certain cases the two aspects of a transaction are duly recorded while in others only one aspect is recorded. Sotne transactions are simply ignored, they are not recorded at all. The Single Entry Syslem is thus a mixt~ueof double entry, single entry and no entry. The accounts maintained under this system are incomplete and unsystematic and, therefore, not reliable. The main defect in this system is that the arithmetical accuracy of the books of account cannot be checked, because a trial balance cannot be prepared. BASIS FOR COMPARISON

SINGLE ENTRY SYSTEM

DOUBLE ENTRY SYSTEM

Meaning

Nature Type of recording Errors Ledger Preferable for Preparation of Financial Statement Suitable for tax purposes Financial position

The system of accounting in which only one sided entry is required to record financial transactions is Single Entry System. Simple Incomplete

The accounting system, in which every transaction affects two accounts simultaneously is known as the Double Entry System. Complex Complete

Hard to identify Personal and Cash Account Small Enterprises Difficult

Easy to locate Personal, Real and Nominal Account Big Enterprises Easy

No

Yes

Cannot be ascertained easily.

Can be ascertained easily.

Q 4.The following information is extracted from the 12 books of businessman. Rs. Debtors as on 31.12.09 25000 Bad debts during 2009 1,000 Provision for Bad debts is to be maintained at 5% of debtors A provision for discount on debtors is also to be made at 2% you are required to calculate the amount to be set aside in respect of provision for bad debts and provision for discount on debtors respectively, and give the journal entries there of. 5.How would you rectify the following errors in 12 books of K and CO ? (a) The sales returns book has been undercast by Rs. 500. (b)The total of the Bill Receivable Book amounting Rs. 4500 has been posted to the credit of Bill Receivable Account. (c)While posting purchases book to be ledger the personal Account of Kumar has been credited with Rs. 221 instead of Rs. 212. (d)Rs. 10,000 paid for the purchases of a T.V. set for the proprietors is debited to General exp. A/c (e)An amount of Rs. 1000 paid by Pran has been credited to the account of Praneet. (f)Goods sold to Inder for Rs. 1,200 has been entered in the Purchases Book. 6. On July 1, 2006 a company purchased a plant for 12 Rs. 2,00,000. Depreciation was provided at 10% per annum on straight line method on December 31, every year. With effect from Jan. 2008, the company decided to change the method of depreciation to diminishing balance method @ 15% per annum. On 1St July 2009, the plant was sold for Rs. 1,20,000. Prepare Plant Account from 2006 to 2009.

Q (a) Distinguish between Income and Expenditure Account and Receipts and Payments Account. Ans. Receipts and Payments Account 1

2

3

Income and Expenditure Account

It is a summarized statement of all cash transactions during an accounting year. Only cash transactions are recorded here.

1

It is the account of revenue income and revenue expenditure of an accounting year.

2

The portion of income or expenditure which has been received or paid in cash this year, is recorded here

3

It is not confined to, cash transactions only, i.e. non-cash transactions are also included in it. The whole amount of income or expenditure — whether received or paid in cash or not —is recorded in it.

4

5 6 7 8 9

10

Transactions involving cash receipts are recorded on Debit side and those involving cash payments are recorded on Credit side. Transactions  —both capital and revenueare recorded here. Its balance can never be credit. Its balance is carried over to Receipts & Payments Account of the next year. This account shows opening balance except in the first year. The closing balance of this account represent in the first year.

4

All expenditures are recorded on Debit side and all incomes on Credit side.

5

Only revenue transactions are recorded here.

6 7

Its balance may be either debit or credit. Its balance is transferred to Capital Fund.

8

It has no opening balance.

9

Its. closing balance represents either surplus or deficit. Credit balance indicates surplus, while debit balance indicates deficit. Transactions relating to the current year only are recorded in it. Hence, adjustments are invariably made for pre-received or accrued incomes and pre-paid or outstanding expenses. In a word, it is prepared on Accrual basis.

11

This account records transactions relating to past, present and future, years. Hence, no adjustment is made for pre-received or accrued incomes and prepaid or outstanding expenses. In a word, it is prepared on cash basis. It is, in fact, an abridged Cash Book.

10

11

12 13 14

It is outside the Double Entry system. It is not accompanied by Balance Sheet. Its preparation is not compulsory.

12 13 14

It is, infect, similar to Profit & Loss ' Account of a profit-seeking business concern. It is within the Double Entry system. It is accompanied by Balance Sheet It is compulsory. It must be prepared in order to ascertain the true result of a concern.

Q What do you mean by invoice price ? Give reasons for consigning the goods at invoice price. Ans. the goods sent on consignment are recorded in Consignment Accaunt at cost price. Sometimes, the consignor does not want to reveal the cost of goods to the consignee and, therefore, invoices the goods at a price which is higher than the cost price. Such price is known as 'invoice price' and the difference between the invoice price and the cost price is called 'loading'. Consigning goods at invoice price aims to achieve the following merchandising objectives: 1. Increase turnover 2. Push old stocks 3. Clear old inventory for new ones 4. Promote another goods (tie up with consigned goods), and 5. Save storage space (producer/distributor pass storage/handling cost to wholesaler/retailer) Q What is cost concept ? Explain its accounting implications with examples. Ans. Cost Concept: Business activity, in essence, is an exchange of money. The price paid (or agreed to be paid in case of a credit transaction) at the time of purchase is called cost. According to the cost concept, all assets are recorded in books at their original purchase price. This cost also forms an appropriate basis for all subsequent accounting for the assets. For example, if the business buys a machine for Rs. 80,000 it would be recorded in books at IPS. 80,000. In case its market value increases to Rs. 1,00,000 later on (or decreases to Rs.50,000) it will continue to be shown at Rs. 80,000 and not at its market value.

Q Discuss briefly the utility of debit note, credit note and invoice. Ans Q What do you mean by Sectional Balancing ? How does it differ from self-balancing ? Ans. The sectional balancing refers to a system under which only a section of the group of ledgers is self-balanced. If a firm which uses three ledgers viz., Debtors Ledger, Creditors Ledger and General Ledger, makes only one ledger self-balancing (normally the General Ledger) it will be called 'Sectional Balancing System'. Under this system only two Adjustment Accounts viz., Debtors Ledger Adjustment Account and Creditors Ledger Adjustment Account are prepared. They are termed as Total Debtors Account and Total Creditors Account respectively. They are also known as control accounts. Q Differentiate between Provisions and Reserves. Ans. BASIS FOR PROVISION COMPARISON Meaning The Provision means to provide for a future expected liability. What is it? Charge against profit Provides For Known liabilities and anticipated losses Presence of Not necessary profit Appearance in Balance Sheet

Compulsion Payment of Dividend Specific use

In case of assets it is shown as a deduction from the concerned asset while if it is a provision for liability, it is shown in the liabilities side. Yes, as per GAAP Dividend can never be paid out of provisions. Provisions can only be used, for which they are created.

RESERVE Reserves means to retain a part of profit for future use. Appropriation of profit Increase in capital employed Profit must be present for the creation of reserves, except for some special reserves. Shown on the liabilities side.

Optional except for some reserves whose creation is obligatory. Dividend can be paid out of reserves. Reserves can be used otherwise.

Q Radha & Co., Bombay sent on consignment to Krishna & Co., Chennai 100 Fans, invoiced at Rs. 100 each on 5th June, 2009. Radha & Co. paid Rs. 2000 for dispatch of goods to the consignee. Consignee remitted Rs. 6000 as an advance by bank draft on 20th June 2009. The consignee is entitled to a commission of 10% on the sale proceeds. On receipt of goods the consignee paid Rs. 2000 for godown charges. On 30th June, 2009 Krishna & Co. sent an Account sales showing that the fans have realised Rs. 250 each. He remits the amount due to Radha & Co. Prepare ledger accounts in the books of the consignor.

Q

Closing stock was valued at Rs. 35000. Prepare trading account and Profit and Loss Account for the year ended 31.12.2010 and a Balance Sheet as on that date. 5. Birla Cotton Mill purchased a machine on 1st May 2006 for Rs. 90,000. On 1st July, 2007 it purchased another machine for Rs. 40,000. On 31.3.2008 it sold off the first machine purchased in 2006 for Rs. 58000 and on the same date purchased a new machine for Rs. 1,00,000. Depreciation is provided at 20% p.a. on the original cost each year. Accounts are closed on 31st December each year. Show Machine Account for three years. Q Write short note on the following : (a) Single Entry System, (b) Ledger, (c) Promissory Note Ans. ledger is a book where all accounts relating to different items are maintained and into which all journal entries must be posted. In fact, ledger is the principal book of entry which provides complete information about various transactions relating to all parties and all items of asset, incomes and expenses. Some persons have even suggested that we should record all transactions directly into ledger and do away with Journal. But, it is not advisable because in that case we will not have any date-wise record of the transactions and the details thereof. Such record is considered necessary for future reference. Promissory Note An instrument in writing (not being a hank note or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of a certain person, or to the bearer of the instrument". In case of a promissory note there are only two parties. They are : i) Maker: A person who makes the note and piomises to pay the amount. ii) Payee: A person who is to receive the amount.

(a) Capital + other liabilities = Total Assets. Explain this Accounting equation with examples.

Ans.

Q "Agreement of Trial Balance does not mean that there is no error in account books". Do you agree ? Explain. Ans. A trial balance is a basic accounting tool that lists all of a business's credits and debits in two side-by-side columns. If there are no errors, the two sides of the trial balance will be equal. An unequal trial balance indicates some sort of error, but even an equal trial balance can hide other types of accounting errors. These are the possible errors to be made: wrong columns,wrong amounts or typographical error and arithmetic error. Q Write a clear note on Cash concept Vs Accrual concept of accounting. Ans. Q Name the parties and their interests in financial statements of a company. Ans. 1. Shareholders: In every public limited company, shareholders are the real owners of the company. Hence, they want to know the way of utilizing their investments and ascertain the profitability and financial strength of the company. 2. Debenture holders: Debenture holders are the lenders or creditors of the company. They want to know the short term and long term solvency position of the company. Short term solvency is find out to know whether interest is payable by a company and long term solvency is find out to know whether principal amount is payable by a company. 3. Creditors: They are the suppliers of the raw materials and other necessary items on credit to the company. They are interested to know the liquidity position of the company. 4. Commercial Banks and Financial Institutions: Both commercial banks and financial institutions may lend both short term loan and long term loan. Hence, they are interested to know the short term solvency, long term solvency and profitability of the company.

5. Prospective Investors: Prospective investors who are going to buy the shares of the company in the very future. Hence, they are interested to know future prospects and financial strength of the company. 6. Employees: The regular payment of wages and salaries are based on the financial position of the company. Hence, they are interested to know financial position of the company. 7. Trade Unions: The interest of the employees is protected only by the trade union. The interest of the employees can be protected if the financial position of the company is very strong. Hence, they are interested to know the financial position of the company. 8. Loyal Customers or Regular Customers: Some customers are loyal to the company since they are buying the products for a long period continuously. Hence, they are interested to verify the financial strength of the company. 9. Tax Authorities: Tax payable is based on the amount of profits earned by the company. Hence, the tax authorities are using the financial statements for calculating profits earned by the company. 10. Government Departments: Department of company affairs and other government departments are dealing with the industry in which the company is engaged are interested in the financial information relating to the company. 11. Research Institutions and Researchers: Social research institutions and researchers are using the financial statements. They analyze the financial statements to find out the role of each industry in economic development of a nation. 12. Economists: The economists are using the financial statements information for assessing economic conditions of workers. 13. Editorial Board of Financial and Economic Dailies and Periodicals: They need financial data in respect of every type of business units and hence, they are interested m financial statements. 14. Members of Parliament: Some public limited companies are started as Government Companies. Such Government Company financial statements are placed before the members of parliament. In such cases, Public Accounts Committee and Estimates Committee are interested in the financial information. 15. Professional Societies: It includes Chambers of Commerce and Industry Indian Accounting Association, Confederation of Indian Industry, Employers’ Associations and the like. These are very much interested to know the financial status of the business concern since they are formed to protect the respective types of business units. 16. SEBI and Stock Exchanges: These are interested to assess the financial position and level of performance of listed companies with a view to protecting the interests of investors.

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Q State the entries that are usually passed for recording transactions in consignor's and consignee's books. Ans. ACCOUNTING ENTRIES IN THE BOOKS OF CONSIGNEE: (1) When consignment goods are received:No entry is made in the books of account. The consignee is not the owner of the goods and therefore he makes no entry when he receives the goods. (2) For expenses incurred by the consignee:Consignor’s personal account

To Cash account (3) When advance is given:Consignor’s personal account To Cash or bills payable account (4) When goods are sold:Cash or bank account To Consignor’s personal account (5) For commission due:Consignor’s personal account To commission account ACCOUNTING ENTRIES IN THE BOOKS OF CONSIGNOR: (1)

On dispatch of goods:Consignment account To Goods sent on consignment account

(2)

On payment of expenses on dispatch:Consignment account To Bank account

(3)

To Consignee’s personal account

To Consignment account

(With gross proceeds of sales)

For expenses incurred by the consignee (as per A/S):Consignment account To Consignee’s personal account

(6)

(With the amount cash or bill)

On the consignee reporting sale (as per A/S):Consignee’s personal account

(5)

(With the amount spent as expenses)

On receiving advance: Cash or bills receivable account

(4)

(With the cost of goods)

(With the amount of expenses)

For commission payable to the consignee:Consignment account To Consignee’s personal account

(With the amount of expenses)

Assuming that all the goods sent have been sold, the consignment account will show at this stage the actual profit or loss made on it. The same is transferred to profit and loss account. The entry in case of profit is:

Consignment account To profit and loss account

In case of loss the entry is:

Profit and loss account To Consignment account

Note: The

goods sent on consignment account may be closed by a transfer to trading account.

When Consignment is Partly Sold: When all the goods sent on consignment have not been sold., the value of unsold goods in the hands of the consignee must be ascertained and the profit or loss should be found out by taking this stock into account. The entry is:

Stock on consignment account To Consignment account Q What steps are required to be taken to convert single entry into double entry system of book keeping ? Explain. Ans. To convert single-entry to double-entry bookkeeping, you first need an opening statement of accounts. From this you will post all of the transactions into a double-entry journal system as a debit, then as a credit. Next, you should open two bank accounts. One should be for expenses, and the other for income. Each of these accounts should have a double-entry debit and credit on your journal and ledgers. From there, you will take two more steps. Run a trial balance of the journal and ledger to assure that your entries are correct. Then prepare an income statement to compare the single to double-entry balances. Once everything is in balance, prepare a finalized balance sheet. In summary, it is fairly challenging, but not impossible to convert a single-entry bookkeeping system to a double-entry bookkeeping system. Either system should have an independent audit done regularly to ensure accuracy and to provide accountability. Q What is an Accommodation Bill of Exchange ? Explain with an example. On 1st Jan. 2012, X draws a bill amounting to Rs. 12000 for 3 months, on Y for mutual benefit. Y accepts the bill and return to X who discounted the same with his banker @ 12% per annum and remitted half of the proceeds to Y. On due date X sends therequisite amount to Y who met the bill on maturity. Pass the necessary entries in the books of X and Y.

December, 2015 Q Explain the concepts of 'Conservatism and 'Consistency' with examples? Ans. This is also known as Prudence Concept. This concept tries to ensure that all uncertainties and risks inherent in business are adequately provided for, Accountants generally prefer understatement of assets or revenues, and overstatement of liabilities or costs. This is in accordance with the traditional view which states anticipate no profits but anticipate all losses. In other words, you should account for profits only when they are actually realised. But in case of losses, you should take into account even those losses which may be a remote possibility. That is why the closing stock is valued at cost price or market price whichever is lower. For example, the entity should recognize the liabilities that claim to employee for legal case even the entity not sure if they are fail. And the recognition should be at the highest value. But, entity should recognize assets for legal claim from employee unless there is clear statement from the court. And if assets are recognize, it should be at the lowest value. In this case, it is helping users of FS to understand all types of liabilities and expenses that probably happen to entity. And, it assures that the revenues recorded are realistic. Conservatism principle assume entity could possibly try to overstate assets and revenues, and understate expenses and liabilities.

The principle of consistency means conformity period to period with unchanging policies and procedures. It means that accounting method adopted should not be changed from year to year. For example, the principle of valuing closing stock at cost price or market price whichever is lower should be followed year after year. Similarly, if depreciation on fixed assets is provided on straight line basis, it should be followed consistently year after year. Consistency eliminates personal bias and helps in achieving comparable results. Company A has been using declining balance depreciation method for its IT equipment. According to consistency concept it should continue to use declining balance depreciation method in respect of its IT equipment in the following periods. If the company wants to change it to another depreciation method, say for example the straight line method, it must provide in its financial report, the reason(s) for the change, the nature of the change and the effects of the change on items such as accumulated depreciation. Q State the difference between Capital Expenditure and Revenue Expenditure. Ans. BASIS FOR CAPITAL EXPENDITURE REVENUE EXPENDITURE COMPARISON Meaning The expenditure incurred in acquiring a Expenses incurred in regulating capital asset or improving the capacity day to day activities of the of an existing one, resulting in the business. extension in its life years. Term Long Term Short Term Capitalization Yes No Shown in Income Statement & Balance Sheet Income Statement Outlay Non-recurring Recurring Benefit More than one year Only in current accounting year Earning Seeks to improve earning capacity Maintain earning capacity capacity Matching Not matched with capital receipts Matched with revenue receipts concept Q What is 'Net Worth'? How is it computed? Explain with an example. Ans. Net worth is the value of all the non-financial and financial assets owned by an institutional unit or sector minus the value of all its outstanding liabilities.[1] Thus, net worth can refer to companies, individuals, or governments. It can also refer to economic sectors such as the sector of financial corporations or to entire countries. Calculating your net worth really isn’t all that hard. It just takes a bit of time, some scratch paper, and a calculator.

Make a list of all of your assets. This includes retirement savings, your current checking and savings account balances, any bonds you might have, the total value of any stock holdings you might have, your home, and your automobiles. I usually don’t include any physical assets less valuable than my car, but you can do this if you wish. Once you’ve listed every asset you can think of, write TOTAL in big letters over on the left, then add up the numbers. Once you have this total, you’ve got the total value of your assets. Make a list You should home loans, DEBTS, with right, with

of all of your debts. list all of your credit card balances, personal loans, student loans, auto loans, and so forth. Much like with the assets list, I recommend a big header that says each debt listed below that on the left side and the amount of the debt over on the the decimals lined up for easy figuring.

Once you’ve listed all of your debts, write TOTAL in big letters on the left, then add up all of the debt numbers. This total is the total amount of all of your debts.

Subtract. Take your total assets and subtract from that your total debt. The resulting number is your net worth. For example, an individual with total assets of $100,000 and $30,000 of total debt would have a net worth of $100,000 – 30,000 = $70,000 Q What do you understand by Self-Balancing System ? State its advantages. Ans. Self-balancing system is a system whereby separate Trial Balance can be taken out from each ledger. “General Ledger Adjustment Account” will be maintained in each of the sales and bought ledger. It is the reverse of the Total Debtors Account in Sales Ledger and Total Creditors Account in Bought Ledger. Under this system ledgers are made self-balancing by opening adjustment accounts. When goods of Rs 1,000 sold to Ram, then Ram’s Account is debited with Rs 1,000 in Sales Ledger and Goods Account is credited with Rs 1,000 in General Ledger. The main advantages of self-balancing system are as follows: 1 It is easy to locate the errors because we prepare separate Trial Balance for each ledger. If the Trial Balance of a particular ledger agrees, it implies that there are no errors in that. ledger. The detection work is confined only to the accounts in a ledger whose Trial .Balance does not agree. For-instance, if an error is committed in the personal account of a customer neither the General Ledger nor the Creditors Ledger is affected. It is only the Debtors Ledger which is affected and its Trial Balance will not agree. Hence you will look for the errors in Debtors Ledger only. Similarly, if the Trial Balance of General Ledger does not agree you will check entries in the nominal and real accounts only. This narrows down the area of detection work and the errors can be quickly detected: 2 The maintenance of ledgers can be divided amongst many persons. This helps in quick posting and fixation of responsibility in case of errors and frauds. 3 The main ledger becomes less bulky because the personal accounts of customers and suppliers are excluded. The system is very useful when the number of customers and suppliers is 'large. 4 'lt is easy to check the accuracy of each ledger independently with the help of Adjustment Accounts. 5 It facilitates the preparation of interim accounts whenever required by including the figure of total debtors and total creditors. There is no need to go through the Debtors and Creditors Ledgers. Q On 1st April, 2013 a firm of Sportswear, Delhi 12 sent a consignment of 500 swimming suits to M/s Ram Niwas and Sons of Kanpur (consignee) valuing Z 1,25,000. The consignor incurred an amount of Z 1500 in sending the goods to the consignee. At the end of the month, the consignee sent a statement of sales showing that 400 suits were sold @ Z 350 per suit and his selling expenses amounted to Z 8000. The consignee is entitled for a commission of Z 25 per suit sold. The unsold stock is to be valued at cost plus proportionate expenses. The consignee had also spent Z 500 on consignment received. You are required to show necessary ledger accounts in the books of the consignor. Q On January 1, 2010, a firm purchased a Machine 12 for Z 75,000 and spent Z 5,000 on its erection. On 1st July, the same year, a second machine was purchased for Z 40,000. On 1st July 2011, the firm sold the machine which had been purchased on 1-1-2010, for Z 55,000. On July 1, 2012, a new plant costing Z 60,000 was added and the machinery purchased on 1st July 2010 was disposed off for Z 30,000. Firm charges depreciation annually @ 10% on fixed instalment basis. Prepare Machinery Account for 3-years showing balance as it would appear on 1-1-2013. Q Write short notes on any two of the following : (a) Joint Venture as a temporary partnership. (c) Selection of a method of charging depreciation.

(b) Secret reserves. (d) Types of Assets.

Ans. With individuals, when two or more persons come together to form a temporary partnership for the purpose of carrying out a particular project, such partnership can also be called a joint venture where the parties are "co-venturers". The venture can be a business JV (for example, Dow Corning), a project/asset JV intended to pursue one specific project only, or a JV aimed at defining standards or serving as an "industry utility" that provides a narrow set of services to industry participants. Some major joint ventures include MillerCoors, Sony Ericsson, Penske Truck Leasing, and OwensCorning - and in the past, Dow Corning. Ans. The term 'Secret Reserve' is applied to reserve, the existence of which does not appear on the face of the Balance Sheet. When secret reserves exist, the financial position of the business is better than what may appear on the face of the balance sheet. The main purpose of creating secret reserve is to reduce the disclosed profit so that during bad period this hidden profit, or a portion of it, may be merged into the ' earnings and thus help in equalising the dividends. Methods of creating Secret Reserves : Secret Reserves may be created in one of the following ways : i) Writing off accessible depreciation ii) Undervaluation of closing stock iii) Charging capital expenditure to Profit and Loss Account iv) Making excessive provision for bad and doubtful debts v) Showing contingent liabilities as actual liabilities vi) Retaining appreciating assets at cost price Ans. Straight Line Method This method, depreciation is calculated as a fixed proportion on the original value of the asset. The depreciation is charged as fixed in volume on the original value of the asset at which it was purchased. The original value of the asset is nothing but the purchase value of the asset. Ans. Cash and cash equivalents. Marketable securities. Prepaid expenses. Accounts receivable. Inventory

June, 2012 Q What is Business Entity Concept ? Explain its accounting implications with examples Ans. The business entity concept states that the transactions associated with a business must be separately recorded from those of its owners or other businesses. Doing so requires the use of separate accounting records for the organization that completely exclude the assets and liabilities of any other entity or the owner. Without this concept, the records of multiple entities would be intermingled, making it quite difficult to discern the financial or taxable results of a single business. The accounting system gives information only about the business and not its owner@). In other words, we record those transactions in the books of account which relate only to the business. The owner’s personal affairs (his expenditure on housing, food, clothing, etc.) will not appear in the books of account of his business. However, when personal expenditure of the owner is met from business funds it shall also he recorded in the business books. It will be recorded as drawings by the proprietor and not as business expenditure. Another implication of business entity concept is that the owner of a business is to be treated as a creditor who also has a claim over the assets of the business. As such, the amount invested by him (capital) is regarded as a liability for the business.

Q Define 'Accounting'. Explain any three functions of accounting. Ans. It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity. Accounting provides information on the resources available to a firm, the means employed to finance those resources, and the results achieved through their use. • • •

Three functions of accounting Recording: This is the basic function of accounting. It is essentially concerned with not only ensuring that all business transactions of financial character are in fact recorded but also that they are recorded in an ord erly manner. Recording is done in the book “Journal”. Classifying: Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place. The work of classification is done in the book termed as “Ledger”. Summarizing: This involves presenting the classified data in a manner which is understandable and useful to the internal as well as external end-users of accounting statements. This process leads to the preparation of the following statements: (1) Trial Balance, (2) Income statement (3) Balance sheet. Analysis and Interprets: This is the final function of accounting. The recorded financial data is analyzed and interpreted in a manner that the end-users can make a meaningful judgment about the financial condition and profitability of the business operations. The data is also used for preparing the future plan and framing of policies for executing such plans. Q What is Bank Reconciliation Statement ? State any five causes that lead to disagreement in the balances of cash book and pass book. Ans. Checks Issued or Drawn to Creditors But Not Paid by Bank: When a check is issued to a creditor, it is recorded on the credit side of the cash book in bank column. The bank will record it on the date when it is paid. In most of the cases a check cannot be presented for the payment by the creditor on the date on which it is drawn. So long the check is not presented to the bank, the cash book balance and the pass book balance will differ. Checks Deposited for Collection But Not Yet Collected and Credited by the Bank: When a check is received from a debtor, it is recorded in the cash book on the date when it is deposited with the bank for collection. But the bank will record it in depositor's account on the ate when it is actually collected by the bank from the concerned bank. So long the bank cannot collect the amount, the cash book balance and pass book balance will disagree. Amount Deposited Directly into the Bank by Debtors: Sometimes the debtors deposit the amount directly to our bank a/c instead of paying cash to us. In such a case the bank will transfer the amount to our account and sends us an intimation of this transaction. But usually, there is some delay in receiving this information from the bank. So long the intimation is not received by us, the cash book balance and the pass book balance will disagree. For this, the cash book will show less balance and the pass book will show more balance.

Income Collected by the Bank: Sometimes the bank collects and credits our account with dividend on shares, interest on govt. securities etc. as per our instructions and sends an intimation to us. But it takes a few days to receive this intimation from the bank and we record it in cash book on the date of receipt of this intimation. For this, the cash book will show less balance and the pass book will show more balance. Interest on Deposits: The bank allows us interest on our deposits and credits the amount of interest to our account and sends intimation to us On receipt of the intimation, we record it in the cash book. So long the information is not received by us, the cash book balance and the pass book balance will not agree. For this, the cash book will show less balance and pass book will show more balance. Expenses Paid by the Bank Directly: Sometimes the bank pays insurance premium, factory rent, interest on debentures, trade subscription etc. on our behalf as per standing order. The bank debits our accounts and sends intimation to us. On receipt of intimation for the bank, we record it in our cash book. For this, there will be a disagreement between cash book and pass book. The Bank Charges: Our account is debited with bank charges and interest on overdraft and intimation is sent to us by the bank. On receiving the intimation from the bank, we record them in the cash book. For this the cash book will show more balance and the pass book will show less balance. Q Define depreciation. Explain the objectives of providing depreciation. Ans. Depreciation is a method of reallocating the cost of a tangible asset over its useful life span of it being in motion. Businesses depreciate long-term assets for both tax and accounting purposes. The following are objectives of providing depreciation: 1. Ascertainment of true profits.  When an asset is purchased, it is nothing more than a payment in advance for an expense. For example, if a building is purchased for Rs 10,000 for business, the effect of such a purchase will be saving in the cost of rent in the future. But, after a certain number of years, the building will become useless. 2. Presentation of true financial position. The assets get depreciated in their value over a period of time on account of various factors, as explained before. In order to present a true slate of affairs of the business, the assets should be shown in the Balance Sheet, at their proper values. 2. Replacement of assets. Assets used in the business need replacement after the expiry of their service life. By pmviding depreciation a part of the profits of the business is kept in the business which can be used for purchase of new assets on the old fixed assets becoming useless. Q Distinguish between Sales and Consignment. Ans. BASIS FOR CONSIGNMENT COMPARISON Meaning When the goods are delivered to the agent by the owner for selling purposes, is known as Consignment. Parties Consignor and Consignee Relationship Principal and Agent between parties Possession and Possession is transferred, but Ownership ownership is not transferred,

SALE A transaction in which goods are exchanged for a price is known as a sale. Seller and Buyer Creditor and Debtor Both are transferred with the transfer of goods.

Returning back of goods

Risk of loss Expenses incurred Consideration

until they are sold to the final consumer. The consignee can return the unsold stock to the consignor.

Borne by consignor Met by consignor

The buyer cannot return the goods to the seller until and unless the seller agrees to the same. Borne by buyer Met by buyer

Commission to the agent.

Profit to the seller.

Q What is a Joint Venture ? Explain the essentials features of a joint venture. Ans. A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. ’ Uppar hai Q What is single entry system ? Discuss the drawbacks of single entry system of accounting Ans. 1.Unscientific And Unsystematic The single entry system is unsystematic and unscientific system of recording financial transactions. It does not have any set of fixed rules and principles for recording and reporting the financial transactions. 2. Incomplete System Single entry system is incomplete system because it does not record the two aspects or accounts of all the financial transactions of the business. It does not maintain any record of the transactions relating to the nominal account and real account except cash account. 3. Lack Of Arithmetical Accuracy Single entry system is not based on the principles of debit and credit. It fails to provide the arithmetical accuracy of the books of accounts. Trial balance can not be prepared under this system to check the arithmetical accuracy of books of accounts. 4. Does Not Reflect True Profit Or Loss Under single entry system, the true amount of profit or loss can not be ascertained because it does not maintain the nominal accounts. 5. Does Not Reflect True Financial Position The single entry system does not maintain real accounts except cash book. Therefore, it can not reveal the true financial position of the business. 6. Frauds And Errors The single entry system of book-keeping is incomplete, inaccurate and unscientific. It does not help to check the arithmetical accuracy of the books of accounts. Therefore, there is always a possibility of committing frauds and errors in the books of accounts. Q Give journal entries for any three the following adjustments. (i) Outstanding Rent Rs. 4,000. (ii) Loss of goods by fire Rs. 6,000. (iii) Proprietor withdrew Rs. 5,000 for personal use. (iv) Commission received in advance Rs. 10,000. (v) Provision for discount on debtors Rs. 1,000. (vi) Interest on capital Rs. 5,000. Q Rectify the following accounting errors : (a) Machine purchased for Rs. 10,000 has been debited to purchases account. (b) Rs. 3,000 being the sale proceeds of old furniture has been credited to sales account. (c) Goods purchased from Sanjay for Rs.4,000 was recorded in purchase book as Rs. 400. (d) Rs. 5,000 paid to Anil for salary were debited to his personal account. (e) Rs. 1,000 paid for cartage for the newly purchased machine has been debited to cartage account. (f) Rs. 5,000 received from 'Ram' has been credited to 'Shyam' account.

Q Explain briefly the various types of reserves with examples. Ans.

Open Reserves . There are two ways of creating reserves: (1) by debiting the amount to Profit and Loss Account and clear1 y showing it in the Balance Sheet in one form or the other, and (2) by undervaluation of assets or overproviding for losses. The first category of reserves can be easily identified from the financial statements and are termed as open reserves Capital Reserve : A reserve created out of capital profits is called 'Capital Reserve. Capital profits may arise on account of revaluation or sale of fixed assets. In case of companies the following items are also regarded as capital profits. i) credit balance left in Forfeited Shares Account after the re-issue of such shares, ii) premium received on issue of shares on debentures, iii) profit realised on the purchase of company's own debentures from the market, iv) profits made prior to incorporation. Revenue Reserve : Any reserve other than capital reserve can be called a revenue reserve. Revenue reserves are usually created out of business profits which are available for distribution of dividends. They are meant for specific purposes or general purposes and are accordingly known as specific reserves or a 'general reserve'. The term 'Secret Reserve' is applied to reserve, the existence of which does not appear on the face of the Balance Sheet. When secret reserves exist, the financial position of the business is better than what may appear on the face of the balance sheet. The main purpose of creating secret reserve is to reduce the disclosed profit so that during bad period this hidden profit, or a portion of it, may be merged into the earnings and thus help in equalizing the dividends. Q Receipts and payment Account of a sports club showed that Rs 50,000 were received by way of subscription for the year ended 31.12.2010. The additional information was as follows : (i) Subscription outstanding on 31.12.2009 were Rs. 5000. (ii) Subscription received in advance on 31.12.2009 were Rs. 3000. (iii) Subscription outstanding on 31.12.2010 were Rs. 10,000. (iv) Subscription received in advance on 31.12.2010 were Rs. 6,000. Show how above information would appear in the final accounts for the year ended 31st December 2010 of Sports Club.