Financial Accounting part 3

Financial and Management Accounting

Unit 3

Unit 3

Double Entry Accounting

Structure: 3.1

Introduction

3.2

Meaning of double entry accounting

3.3

Cash and mercantile system of double entry system

3.4

Accounting trail

3.5

Transactions and events

3.6

Preparation of vouchers

3.7

Financial statements and their nature

3.8

Accounting equation

3.9

Effect of transactions on accounting equation

3.10 Meaning and rules of debit and credit

3.1 Introduction The dual aspect concept of accounting is a full-proof system of recording, having the advantage of internal checking. The very fact that every transaction is recorded of its debit and credit aspects indicates that the final accounts of an organization takes into consideration every small or big transaction and the impact is every account is absorbed in the preparation of final financial statements. Double entry book keeping is definitely an improvement and more systematically designed than single entry system, where only a few personal and real accounts are considered. In this unit, the process of accounting  – recording, journalizing, posting, ledger balancing, preparation of trial balance, preparation of final statements of accounts  – is described along with the effect of every transaction on accounting equation. The rules of debit and credit as applicable to various types of accounts are also discussed.

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Learning Objectives: After studying this unit, you should be able to understand the following: 1. To know what double entry book keeping means. 2. To understand the process of accounting, known as accounting trail. 3. To know the nature of financial statements. 4. To formulate an Accounting Accounting equation basing on debits and credits. 5. To know practically the impact of each transaction on the Accounting Equation. 6. To summarize the rules of debit and credit as applicable to different types of accounts. The students should be able to appreciate the double entry system and know the accounting process.

3.2 Meaning of Double Entry Accounting We have learnt that the dual aspect recording is the most important accounting concept. According to the concept, every business transaction involves receiving aspect and giving aspect. If capital is brought in by the owner of the business unit, the owner is the giver of the benefit and the business unit is the receiver of the benefit. It is a liability to the business unit and it is equally balanced by an asset in the business unit, in the form of cash received towards capital. Therefore every liability is represented by an asset. This is also expressed as every debit has an equivalent credit. The logic adopted in double entry accounting can well be understood by an illustration. We shall consider five transactions and show how they are accounted for in the books of the business. a. Mr. Abhi brings Rs.100000 cash as capital into his business. b. He purchases furniture to his shop Rs.10000 c. He buys goods for cash Rs.50000 Page No.: 39

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d. He sells goods worth Rs.30000 for Rs.40000 on credit to Arjun e. He pays wages to servants Rs.1000 In the first transaction, the business receives capital in cash and so capital account and cash account are affected. Capital is a liability and cash is an asset to the business. Capital Rs.100000 (Liability) = Cash Rs.100000 (Asset) In the second transaction, Furniture is purchased for cash and so furniture account and cash account are affected. This transaction can be reflected as under Capital

Rs.100000

Cash Rs. (100000- 10000)

90000

Furniture

10000

100000

100000

The third transaction is buying goods for cash, which means that stock of goods are received and cash balance is reduced and this can be reflected in the statement as under. Capital

Rs.100000

Cash Rs (90000  – 50000)

40000

Furniture

10000

Stock of goods

50000

100000

100000

The fourth transaction is a credit transaction of selling goods for Rs40000, the cost of which is only Rs. 30000 to Arjun. So the accounts affected are goods account, Arjun account and profit account. Since the profit belongs to the owner and it is fair to add it to the owner’s capital. The effect of this

transaction can appear on the statement as shown below:

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Capital

Rs. 100000

Profit

10000

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Cash

40000

Furniture

10000

Stock of goods(50000-30000)

20000

Arjun (Debtor)

40000

110000

110000

The fifth transaction is payment of wages, which means that cash account is affected and profit is reduced as a result of the expenditure(wages account). This changes the statement as shown below: Capital

Rs. 100000

Profit (10000-1000) 9000

109000

Cash (40000  – 1000)

39000

Furniture

10000

Stock of goods

20000

Arjun

40000 109000

From the above illustration, it is clear that every transaction has dual effect and

recording these two aspects which are known as debit and credit

aspects is the fundamental idea behind double entry system of book keeping. So the meaning of double entry system is that every transaction is recorded by identifying the two or more accounts affected therein and suitably reflect them in the financial statements. This is a system where internal cross checking is ensured. Self Assessment Questions 1:

1. The system of recording transactions based on dual aspect concept is called i)

Double account system

ii) Double entry system iii) Single entry system

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2. Show the dual aspect effect of the following transactions on the assets and liabilities of business. a. Purchased goods for cash Rs.80000 b. Purchased delivery van on credit for Rs.400000 c. Paid Rs.5000 to a supplier of goods on credit d. The proprietor withdrew Rs.20000 from the bank account of business for Personal expenses.

3.3 Cash and mercantile system of double entry system There are two systems of double entry book keeping namely cash system and mercantile system. In case of cash system, transactions are recorded only if cash is received or paid. Government accounting is done basing on this system. On the other hand, mercantile system is one where both cash and credit transactions are recorded. Besides, outstanding expenses or incomes also find place in the mercantile system. It is fair enough to adopt mercantile system because when an event takes place, it gets recorded irrespective of its immediate impact on the cash position. In case of credit transactions, cash does not flow immediately but it takes place at a future point of time. Transactions like sales

or purchases on credit, salary

payable, rent receivable, interest accrued but not received, depreciation provided etc., influence on the financial position of the business unit and therefore they should be recorded. Mercantile system facilitates this. Hence double entry recognizes the fact that every transaction, whether cash or credit, influences at least two accounts  – one representing debit aspect and another credit aspect. Self Assessment Questions 2:

1. The two systems of double entry book keeping are ________ and  __________ .

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2. Government accounting is based on mercantile system. True or false? 3. All credit transactions come under mercantile system. True or False? 4. Interest receivable, rent receivable, dividend receivable are recorded in cash system of book keeping. True or False?

5. Profit as per cash system and mercantile system of double entry show different figures. True or False

3.4 Accounting Trail Accounting trail is the process of identifying the transactions or events, preparation of vouchers, recording them as journal entries, preparation of ledger

accounts,

balancing

the

ledger

accounts,

incorporating

all

adjustments, preparation of a trail balance and finally preparing the financial statements and balance sheet. It is a sequential order in which the accounting process flows. All transactions are recorded first in a book called  journal. The transactions are posted to the respective accounts, maintained in a separate book called ledger. Later, all adjustments such as opening entries, closing entries, adjusting entries are made in a book called journal proper and there from, the ledger balances are summarized to form a trial balance. From trial balance, trading account, profit and loss account and balance sheet are prepared. The identification of the accounts affected in the transactions is a major task. There are three types of accounts, namely personal accounts, real accounts and nominal accounts. An account is a summary of transactions pertaining to a particular head. Personal accounts include accounts of natural persons, such as Abhi account, Mohan’s account, Sonali account etc; artificial personal accounts such as Syndicate Bank account, X Co. Ltd account, a club account etc;

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representative personal account like outstanding rent account, salaries payable account etc. Real accounts are those which may be tangible real accounts and intangible real accounts. Tangible real accounts relate to things that can be touched, felt, physically measurable. Building account, furniture account, stock account, cash account etc are tangible real accounts. Intangible real accounts are such that they can not be seen or touched. They can be measured in terms of money such as goodwill, patent rights etc. Nominal accounts are also known as impersonal accounts. They are in the form of expenses or losses, incomes or gains. They do not really exist in physical form, but behind every nominal account cash is involved. For example, salary account is a nominal account and when salary is paid, the reality is the cash goes out and there is nothing salary in physical form. Therefore salary account is regarded as nominal account. Similarly all expenses and losses and all incomes and gains accounts are regarded as nominal accounts. Self Assessment Questions 3: 1. Accounting trial is a process starting from identifying the transactions or events to preparation of final statement of accounts. True or False 2. There are three types of accounts namely ____________ and  ________________. 3. A trial balance is the summarized form of ledger balances. True or False 4. Classify the following accounts into personal, real and nominal i) Bank of Baroda Account

ii) Printing and stationery expenses

Machinery Outstanding salary iii) Copy Rights iv) Sock of goods v) Loan given to Krishna vi) Loan from Bank

vii) Dividend received

viii) Discount Account

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3.5 Transactions and Events A transaction is a business activity involving transfer of money or money’s

worth. It may be cash transaction or credit transaction. In cash transaction cash flows immediately where as in credit transaction cash will be paid or received at future date. Assets acquired or sold, liabilities incurred or paid, expenses paid or payable, incomes received or receivable  – are all business transactions. But there are events which are neither cash nor credit transactions but it has an impact on the financial position of a business. These events may include provision for bad debts, provision for repairs, depreciation, taxation, transfer of profit towards reserve fund or sinking fund or investment fluctuation fund, etc., Events happen as a result of internal policies or external needs. In accounting, transactions and events have equal relevance and they must be recorded to arrive at the financial results of the business concern. Self Assessment Questions 4: 1. A transaction is a business activity where there is transfer of money or money’s worth. True or False

2. An event happens as a result of internal policy of an organization. True or False 3. Business transactions and events have equal importance in finding the financial results of the business concern. True or False? 4. Identify the following as transactions or events as the case may be. i) Depreciation of assets ii) Tax rates iii) Acquisition of assets iv) Selling an asset v) Transfer of profits to Reserve Fund

3.6 Preparation of Vouchers A voucher is a document in support of a business transaction. It may be a receipt, a counterfoil of a receipt, an invoice or even correspondence with

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the concerned parties. Usually in large organizations, voucher system is adopted to record payments. Some organizations will have printed voucher book and each voucher contains the number of voucher, date, the name of payee to whom the payment is made, the amount, the purpose for which payment is made, signature of the person authorized to pay and the person who receives the payment. For instance, Ram has supplied to us goods worth Rs5000, for which he has given an invoice. This invoice itself can be regarded as voucher, against which the payment is made. If carriage charges of Rs100 are paid, we prepare a voucher and take the signature of the person who receives it. When we pay cash, the receiver will give us a receipt, that itself becomes a voucher. Vouchers are often prepared basing on the invoices received or goods received returns. The actual payment may be made partially or completely and it may be made in course of time. In such cases, they are entered in Voucher register. The payment of a voucher is recorded in cheque register. The system has the following advantages: 1. It safeguards all cash disbursements 2. Total amount payable to creditors can be found out with the help of unpaid 3. vouchers. 4. Internal check is ensured 5. Information about future cash requirements can be found out. However, the system is not suitable for small organizations because it involves personnel and the cost of maintenance. Self Assessment Questions 5: 1. Voucher system is adopted to record payments. True or False? 2. Voucher system is suitable for small organizations. True or False?

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3. Voucher is a document showing the__________for which payment is made. 4. Voucher system ensures internal check . True or False?

3.7 Financial statements and their nature Financial statements are prepared to find out the profit or loss at the end of an accounting period. In a trading concern, trading account and profit and loss account are prepared. The purpose of preparing trading account is to find out the gross profit / loss. Similarly, profit and loss account is prepared to find out net profit / loss. Both these accounts are revenue accounts. In other words, all revenue receipts and revenue payments are considered. Revenue expenses are those which are incurred in day to day business activities. Examples may include wages, carriage expenses, insurance premium paid on stocks, salaries, printing, stationary, administrative expenses, selling expenses and so on. Revenue receipts are called incomes and the examples include rent received, sales made, interest received,

dividend

received,

discount

received,

royalty

received,

compensation received etc. More details about trading and profit and loss account are given in Unit 7. After preparing final accounts, a balance sheet is prepared containing capital and liabilities on one side and assets on the other side of a statement. Balance sheet is a statement of affairs and not an account. Liabilities of a business include trade creditors, bills payable, bank over draft, loans payable, outstanding expenses, pre-received incomes etc. Capital of the owner, which is called equity, is added with liabilities on the left side of the balance sheet. Assets of a business include fixed assets like buildings, plant, machinery, furniture etc; current assets like sundry debtors, bills receivable, closing stock of materials, outstanding incomes, prepaid Page No.: 47

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expenses, cash in hand, cash at bank etc., Trading account or profit and loss account and balance sheet are prepared at the end of a particular accounting period, say one year. In Unit 7, details about balance sheet preparation are given. Self Assessment Questions 6: 1. Trading account and Profit and loss account are revenue accounts. True or False? 2. What is the purpose of preparing Trading Account? 3. What is the end result of preparing profit and loss account? 4. Is balance sheet an account? What is it otherwise? 5. What items are shown on the left hand side of balance sheet? 6. Assets are shown on which side of balance sheet? 7. What is the purpose of preparing a balance sheet?

3.8 Accounting equation The preparation of balance sheet is the final step in accounting process. The accounting equation indicates that the sources of funds should be equal to uses of funds. In other words, proprietor’s equity and liabilities to

outsiders should be equal to assets. Sources of Funds = Application of funds

OR

Owner’s equity

= Asset

OR

= Assets

OR

Owner’s equity + out side liabilities

L+P

=

A, where L is liabilities, P is

proprietor’ equity and A means assets. From this equation, the following

expressions can be obtained L = A – P P = A – L A – L – P = Zero

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Self Assessment Questions 7: 1. Liabilities plus Equity is equal to ____________________________. 2. Assets minus liabilities to outsiders is equal to __________________. 3. If assets are Rs.5 lakhs, liabilities are Rs.3 lakhs, find out equity. 4. If Owner’s equity is Rs3 lakhs, Outsider liabilities are Rs.2 lakhs, Owner’s share of profit is Rs.1 lakhs, find out the total value of assets.

5. Every transaction influences balance sheet and it is shown by accounting equation True or False?

3.9 Effect of Transactions on Accounting Equation As said earlier, every transaction has its effect on the balance sheet equation. This has been amply illustrated while discussing the meaning of double entry. The dual aspect of a transaction is reflected on the balance sheet, ultimately making liabilities side equal to asset side of a balance sheet. The following are the possible sets of transactions that can change the values of assets and liabilities but the changes are equal on both sides of balance sheet. 1. Increase in one asset with a decrease in another asset. For example, goods are purchased for cash. It affects cash balance to come down and stock balance increases and both of them are assets. 2. An increase in one asset with an equal amount of increase in liability. For example, a building is purchased for business for Rs500000 by raising a loan from bank. Here an asset is created and a loan is also raised and the balance sheet tallies. 3. An increase in asset with an equivalent rise in the proprietor’s equity. When an additional capital is obtained in cash, Cash account on the asset side increases and capital account on the liabilities side also increases with the same amount.

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4. An increase in a liability

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causing an equal amount of decrease in

another liability. Ex: A bank’s overdraft is pa id out of debenture amount

collected. Here debenture liability increases with an equal amount of decrease in bank’s overdraft.

5. Increase in a liability, followed by decrease in proprietor’s equity. If  debentures are issued for the purpose of paying redeemable preference shares, the owner’s equity gets reduced and an additional liability of 

debentures is added up. 6. Decrease in an asset and equivalent decrease in a liability. For instance, bills payable are paid out by cheque. The bank balance which is an asset is decreased and correspondingly the liability of bills payable is also decreased. 7. Decrease in an asset and corresponding decrease in owner’s equity. If  capital is paid out for any reason, cash to that extent is decreased on the asset side and the capital is reduced to that extent on the liabilities side. Self Assessment Questions 8: 1. The principle of accounting equation is that the total of assets should be equal to total of liabilities side. True or False. 2. Show how the accounting equation is affected in the following transactions a. Lal started business with Rs20000 cash b. He purchased goods on credit Rs.80000 c. He sold goods costing Rs.25000 for Rs.30000 on cash. d. He purchased furniture for cash Rs14000 e. He sold goods to Hari costing Rs500 for Rs.800 f.

He received dividend on securities Rs.2000

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3.10 Meaning and rules of debit and credit Debit and credit are the two words basic for accounting. Debit represents receiving aspect and credit represents giving aspect. However the meaning of debit and credit depends upon the classification of accounts. An account, as we have understood is a summary of transactions pertaining to a particular head. The account may be personal, real and nominal. Before grasping the rules of debit and credit as applicable to various classes of accounts, it is necessary to know how an account appears in the books of accounts. An account is recorded in a ‘ T ‘ form, the left side indicating the

debit of the account and the right side representing the credit of the account. On the left side of an account the columns are - date, particulars, ledger folio and amount and similarly on the right side (credit side), the columns are date, particulars, ledger folio and amount. The following illustration may be observed: CASH ACCOUNT Debit Side Date particulars

Credit Side Ledger

Amount

Folio

(Rs)

2005

Date Particulars

Amount

Folio

(Rs)

2005

Jan. 1 To Balance brought down

20000

Jan 05 By salaries

Jan15 To Joseph

35

10900

Jan 25 By Furniture

Jan 28 To Sales

18

108900

139800

10900 123

6000

Jan 30 By purchases

19

Jan 31 By Rent

298

By balance c/d

Feb 1 To balance b / d

Ledger

58800 7500 56600 139800

56600

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Observe from the above form of an account the following: 1. The balance brought down is the closing balance of the last month, December, 2004 2. The amount received from Joseph is Rs.10900 and his account is prepared in the in the page number 35 of the ledger. Similarly from sales and its account is found in the ledger folio (page) 18. 3. The credit side contains payment of cash towards salary, furniture, purchase of goods and rent respectively on different dates. 4. The balance carried down is the closing balance on the last day of January, 2005 and it is brought down as opening balance on Feb,1 5. On the debit side, ‘To’ and credit side ‘By’ are the prefix used for every entry as a matter of convention. There is a standard form of drawing a ledger account. It is similar to that of a pass book issued by a bank. The above illustration is shown in the standard form. CASH ACCOUNT Date

Particulars

2005

Post. Ref.

Debit

Credit

Balance

LF

Rs

Rs

Rs

Jan 1

Opening balance b /d

20000

20000

Jan 5

Salaries

Jan 15

Joseph

Jan 25

Furniture

Jan 28

Sales

18

Jan 30

Purchases

19

58800

64100

Jan 31

Rent

298

7500

56600

10900 35

10900

123

9100 20000

6000 108900

14000 122900

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The rules of debit and credit for different classes of accounts are the following 1. In respect of personal accounts : Debit the receiver and credit the giver 2. In respect of real accounts

: Debit what comes in and credit what goes out

3. In respect of nominal accounts

: Debit all expenses and losses and credit all incomes and gains.

The following steps should be remembered to apply debit and credit principles a) Identify the accounts affected in a transaction from business point of view b) If a personal account is involved, find whether the person is receiver or giver of benefit c) If the real account is affected, find whether it is coming in or going out d) If the account is nominal account, find out if it is expenditure or income or loss or gain. e) Apply the suitable principle to debit or credit the respective affected account. Illustration: Show what accounts are affected in the following transactions. Also show the accounting equation for the transactions 1. Madan commenced business with cash 2. Purchased goods on credit 3. Withdrew for private use 4. Goods purchased for cash 5. Paid wages 6. Paid to creditors

Rs. 70000 14000 3000 12000 5000 10

7. Sold goods on credit (cost price Rs18000)

22000

8. Sold goods for cash (Cost price Rs.3000)

6000

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9. Purchased furniture for cash 10. Received from debtors

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5000 11000

Solution: Transaction No

Accounts affected in the books of the business

Account to be debited and account to be credited

01

Capital account and cash account

Cash account being real account is debited and Capital account being personal account is credited

02

Goods account and creditors account

Goods account being real account is debited and creditor’s account being personal account is credited

03

Personal drawings account and cash account

Drawings account being personal account is debited and cash account being real account is credited

04

Goods account and cash account

Goods account being real account is debited and cash account being real account is credited

05

Wages account and cash account

Wages account being nominal account is debited and cash account being real account is credited

06

Cash account and creditors account

Creditor’s account being personal account is debited and cash account being real account is credited

07

Goods account, Debtor’s account and profit account

Debtor’s account being personal account is debited, profit transferred to capital account being personal account is credited and goods account being real account is also credited

09

Furniture account and Cash account

Furniture account being real account is debited and cash account being real account is credited

10

Cash account and debtor’s account

Cash account being real account is debited and debtor’s account being personal account is credited.

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Accounting equations for the transactions Transaction

Assets = Cash

01

+

Goods +

Liabilities Equity Debtors +

Furniture + =

+

Creditors +

70000

02 - 3000

04

- 12000

05

- 5000

06

-10000

07 +6000

09

-5000

10

+11000

End equation

52000+

14000 -3000

+12000 -5000 -10000 -18000

08

Madan’s capital

70000 14000

03

Owners

22000

+4000

- 3000

+3000 5000 - 11000

5000

+

11000 +

5000 +

73000

4000 +

69000

73000

Self Assessment Questions 9: 1. Rules of debit and credit are different for different types of accounts. True or False? 2. Debit the receiver and _______________ the giver. 3. Debit all assets and credit all ________________. 4. Debit _____________________ and credit what goes out. 5. All expenses are ___________________ type of accounts. 6. Incomes and gains are always _________ as per principle of debit and credit for nominal accounts. 7. Capital is ____________________ when it is withdrawn. 8. When cash is received from debtors, debtor’s account is ______ .

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Terminal Questions 1.

The accounting equation is Assets = _______________

+

 _______________. 2.

State the meaning of double entry book keeping.

3.

State the remarkable difference between cash system and mercantile system of

double entry.

4.

State the important accounting trail.

5.

Classify the following accounts as personal, real and nominal a. Land account

b. outstanding expenses account

c. capital account d. ABC co Ltd., account f. salaries 6.

e. Discount received account

account

A voucher is a document which _______________ cash disbursement.

7.

What is a trading account?

8.

The result of a trading account is ____________ or  _______________.

9.

Net profit or net loss is the result of ____________________account.

10.

Give a list of any four items of assets.

11.

Name any four items that appear on the liabilities side of balance sheet.

12.

Balance sheet is a ________________________ of affairs of a business.

13.

Find the value of the following: a. If the total assets are Rs87000 and the liabilities are Rs47000, find out the amount of capital.

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b. If the capital of proprietor is Rs400000 and the total assets are Rs600000, what is the amount of liabilities to outsiders? c. If creditors are Rs56000, bank overdraft is Rs100000 and outstanding expenses are Rs.8000, what is the total amount of assets? d. Fixed assets are Rs.70000 and current assets are Rs.100000 and the creditors are Rs.30000. What is capital? 14.

Show the effect of the following transactions on assets, liabilities and owner’s

Equity of the business: i. Ganesh started business with a capital of Rs.40000 9.

He purchased stock of goods Rs.30000

10.

Sold goods on cash Rs.40000, cost of which is Rs25000

11.

Bought goods on credit Rs.10000

12.

Sold goods on credit for Rs18000, the cost of which being

Rs10000 13.

Paid Sales commission Rs.5000

14.

Received cash discount Rs3000

15.

Purchased furniture Rs.10000.

16.

Received cash from debtors Rs.15000

17.

Paid cash to creditors Rs.6000.

Answer for Self Assessment Questions Self Assessment Questions 1:

1. Double entry system 2. a. Stock of goods increases and cash balance is reduced b. Delivery Van is an asset and the supplier of the delivery van becomes a creditor and it appears as liability

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c. Creditor’s balance is reduced on liabilities side and cash paid brings down the cash balance on the asset side d. The bank balance comes down on asset side and capital account is reduced by the amount of drawings on the liabilities side. Self Assessment Questions 2: 1. Cash system, Mercantile system 2. False 3. True 4. False 5. True. Self Assessment Questions 3: 1. True 2. Personal, real and nominal 3. True

i. Personal ii. Nominal iii. Real iv. Personal v. Real vi. Real vii. Personal viii. Personal ix. Nominal x. Nominal Self Assessment Questions 4: 1. True 2. True Page No.: 58

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3. True 4. i) Event ii) Event iii) Transaction iv) Transaction v) Event Self Assessment Questions 5:

1. True 2. False 3. Purpose 4. True Self Assessment Questions 6: 1. True 2. To find out gross profit or gross loss 3. To find out net profit or loss 4. No. It is a statement of assets and liabilities 5. Capital, liabilities are shown on the left hand side of Balance Sheet 6. On right hand side 7. To know the financial position of the business. Self Assessment Questions 7: 1. Assets 2. Equity 3. Rs.2 lakh 4. Assets are Rs.6 lakh 5. True Self Assessment Questions 8: a) True b) i.

Lal’s capital increases on liabilities side and Cash balance increases

on the asset side by Rs.20000 ii. Creditors on liabilities side and stock of goods on the asset side increase by Rs.80000 Page No.: 59

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iii.

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Profit of Rs.5000 is added to capital on the liabilities side, stock of goods

is reduced by Rs.25000 and Cash balance increases by

Rs.30000 iv. Furniture value increases by Rs.14000 on the asset side, Cash balance is reduced by Rs.14,000, thus making no effect on liabilities side. v. Hari appears as debtor on the asset side for Rs.800, Stock of goods gets reduced by Rs.500 on the asset side but on liability side the profit of Rs.300 is added to capital. vi. Cash balance on asset side increases by Rs2000, dividend being income results in profit

of Rs.2000 and so added to capital on

liability side. Self Assessment Questions 9: 1. True 2. Credit 3. Liabilities 4. What comes in 5. Nominal 6. Credited 7. Debited 8. Credited. Answers for Terminal Questions: 1. Liabilities + Owner’s capital 2. Every transaction has two aspects, debit and credit and for every debit, there is equivalent credit. 3. 3.All cash transactions are recorded in cash system, while both cash and credit transactions are recorded in mercantile system

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4. Identification of accounts affected in transactions, recording them in Journal, post them to ledger, balance the ledger accounts, prepare trial balance, finally prepare final accounts. 5. a) Real b) Personal c) personal d) Personal e) Nominal f) Nominal 6. Records 7. Account showing the result of trading activities (Purchase and sale of goods) 8. Gross profit or gross loss 9. Profit and Loss Account 10. Land and Buildings, Plant and Machinery, Furniture and Fixtures, Debtors, Cash in hand, and Bank, Closing stock etc. 11. Bills Payable, creditors, Bank overdraft, Capital etc., 12. Statement 13. a) Rs.40000 b) Rs.200000 c) Rs.164000 d) Rs.140000 14. Refer to Illustration under sub head 9.

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