Professional Documents
Culture Documents
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.
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.
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.
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 (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 .
4 Value of stock is inflated to cover the normal loss. This type of loss does not
effect the value of goods.
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, debtors ledger
adjustment account and creditors 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. Debtors ledger and
creditors ledger serve only as memorandum books of account.
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.
December, 2011
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 dont 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 persons
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'.
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.
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 No Yes
matching concept
Recognition of Cash is received Revenue is earned
revenue
Recognition of Cash is paid Expense is incurred
expense
Degree of Low Comparatively high
Accuracy
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.
December, 2012
Q (a) Distinguish between Income and Expenditure Account and Receipts and Payments Account.
Ans.
Receipts and Payments Account Income and Expenditure Account
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)
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 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.
December, 2014
(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.
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.
\
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:
Consignment account
To Consignment account
Note: The goods sent on consignment account may be closed by a transfer to trading 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.
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.
Calculating your net worth really isnt all that hard. It just takes a bit of time, some
scratch paper, and a calculator.
Once youve 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, youve got the total value of your assets.
Once youve 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
Under this system ledgers are made self-balancing by opening adjustment accounts. When goods of
Rs 1,000 sold to Ram, then Rams Account is debited with Rs 1,000 in Sales Ledger and Goods
Account is credited with Rs 1,000 in General Ledger.
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.
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.
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 owners 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.
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.
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.
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.
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 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.
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.