Name AAGJA KETANKUMAR DAHYABHAI

Roll Number 510821891

Learning Centre 02798
Subject Accounting Principles & Practice
Assignment No BT0048-01
Date of Submission 23/10/2009

1. Briefly explain the functions of accounting.

1. Recording – It is the basic function and concerned with recording of all business transactions in a
systematic manner. It consists in recording the day-to-day transactions in journal and subsidiary
books.

2. Classifying – It is concerned with the systematic analysis of the recorded transactions with a
view to group transactions of similar nature. The work of classification is done in ledger.

3. Summarizing – The classified data is summarized in the form of trial balance, profit and loss
account and balance sheet. They help in ascertaining the operational efficiency and the financial
strength of a business organization. In short it is the preparation and presentation of financial
statements like profit and loss account and the balance sheet.

4. Dealing with Financial Transactions – It records only those transactions and events in terms
of money, which are of financial character. Other transactions are not recorded in the books of
accounts.

5. Analyzing and Interpreting – Analyzing and interpreting means re – arranging the summarized
data in the financial statements and explaining the significance of those data in a manner that the
end users can make decisions about the financial conditions and profitability of the business
concern.

6. Communicating – After analysis and interpretation, accounting data are communicated in a

proper form and manner. Therefore accounting reports are prepared which include not only income
statement and balance sheet, but also additional information in the form of ratios, graphs,
diagrams, funds flow and cash flow statements, schedules, etc.

2. Explain the three branches of accounting.

There are three main branches of accounting. viz.

 Financial Accounting
 Management Accounting and
 Cost Accounting

Financial Accounting consists of the classification, recording and analysis of the transactions of a
business in a subjective manner according to the nature of expenditure so as to enable the
presentation at periodic intervals, of statement of profit or loss of the business and on a specified
date its financial state of affairs (AICPA). In short it is that accounting which is concerned with the
profit or loss of the business for a particular period and the financial position of the business as on a
particular date.

Shilling Law has broadly defined cost accounting as the body of concepts, methods and procedures
used to measure, analyze or estimate the cost, profitability and performance of individual products,
departments and other segments of the operations of a business concern. In short cost accounting
is that branch of accounting which is mainly concerned with costing information, which is useful to
the management for purpose of cost ascertainment and cost control.

According to the Institute of Chartered Accountants of England and Wales “Any form of accounting
which enables a business to be conducted more efficiently can be regarded as management
accounting”. It is the accounting, which provides necessary information to the management for
discharging its functions, such as planning, organizing, directing and controlling more efficiently.

Management accounting is a system of accounting which is concerned with internal reporting of

information to management for –
1. Planning and controlling operations
2. Decision making on special matters and
3. Formulating long range plans
 3. What is single entry system? What are the advantages and
disadvantages of Single entry system?

Single Entry System:

Most of financial accounting is based on double-entry bookkeeping. To understand and appreciate
the advantages of double entry, it is worthwhile to examine the simpler single-entry bookkeeping
system. In its most basic form, a single-entry system is similar to a checkbook register and is
characterized by the fact that there is only a single line entered in the journal for each transaction.
In a simple checkbook, each transaction is recorded in one column of an account as either a positive
or a negative amount in order to represent the receipt or disbursement of cash.

Single-entry system of book-keeping refers to any system of book-keeping, which is not a complete
double entry system. As only one aspect is recorded for most of the transactions, this system is
called single entry system. With the single-entry system, you record a daily and a monthly summary
of business incomes and a monthly summary of business expenses. Single entry is not a complete
accounting system, but it shows income and expense in sufficient detail for tax purposes. For each
transaction, only one entry is made. A cheque book, for example is a single entry bookkeeping
system, with receipts listed as deposits and expenses listed as cheques or withdrawals. This system
focuses on the business' profit and loss statement and not on its balance sheet. The single entry
system is an "informal" record keeping system.

Advantages:
1. It is a simple method of recording business transactions.
2. It is less costly when compared with double entry system and suitable for small business
concerns.

Disadvantages:
1. This system is an incomplete system of book-keeping, because the two aspects of cash and every
transaction are not recorded in the books of accounts.
2. It does not track asset and liability accounts such as inventory, accounts receivable and accounts
payable. These must be tracked separately.
3. It facilitates the calculation of income but not of financial position. There is no direct linkage
between income and the balance sheet.
4. Under this system errors may go undetected and often are identified only through bank
reconciliation statement.

Because of these drawbacks, a single-entry system is not practical for many organizations such as
those having many thousands of transactions in a reporting period, significant assets, and external
suppliers of capital.

4. Briefly explain the types of business transaction.

Business transactions are classified into four types.

(a) Cash Transaction: A cash transaction refers to any business transaction which involves
immediate (i.e., ready) payment or receipt of cash. Purchase of goods for cash, sale of goods for
cash, purchase of an asset for cash, sale of an asset for cash, borrowing of money, lending of
money, payment of any expense, receipt of any income, etc., are examples of cash transactions.

(b) Credit Transaction: A credit transaction is a business transaction where the payment or the
receipt of money is postponed to a future date. Purchase of goods on credit, sale of goods on credit,
purchase of an asset on credit, sale of an asset on credit, interest on loan due to the lender, any
unpaid expense etc., are examples of credit transactions.
(c) Barter Transaction: A barter transaction is a business transaction where, no doubt, receiving
of something and giving of something take place simultaneously but there is no exchange of cash.
Sale of furniture in exchange of purchase of typewriter, giving of goods for furniture purchased,
giving of goods to an employee in settlement of his salaries, giving of furniture to the manager in
settlement of his salary, etc., are examples of barter transactions.

(d) Non-cash Transaction or Paper Transaction: A non-cash transaction or paper transaction is

a business transaction where there is no payment or receipt of cash either immediately or at a
future date. Examples of non-cash or paper transactions are depreciation charged on any fixed
asset, bad debts written off, and loss of goods by fire etc.

5. What do you mean by Bank reconciliation statement?

Banks send statements to their depositors each month. Bank reconciliation compares the
information in the bank statement with the company's cash account, and finds any discrepancies.
The bank column of the cash book shows bank transactions: receipts and payments; and, the
balance in the bank column as on a particular date represents the amount of money lying with the
bank as on that date. The receipt side of the bank column records cheques deposited in the bank by
the business entity in its account as also cheques received by the bank directly on behalf of the
business. The second category of cheques is recorded in the bank column of the cash book only
after getting intimation from the bank. When a cheque is deposited into the bank for collection it
must accompany a receipt known as, ‘pay-in-slip.’ Thus, pay-in-slips are the documents supporting
cheque deposits. The issue side of the bank column records cash withdrawn by the business for its
own use as cheques issued to suppliers or others to whom the business owes.

A bank reconciliation statement is a means of checking that your cashbook agrees with your bank
statement. Thus, the bank balance as per the cash book as on a particular date should tally with the
balance shown by the bank as per the bank statement. Every bank maintains a ledger account for
each of its customers. Each such customer account records the transactions between the bank and
the customer. So, it can be said that the account maintained by the bank for its customer is a
‘mirror-version’ of the bank column of the cash book maintained by the customer. Therefore, they
should tally. But in reality these do not tally in most cases.

A bank reconciliation statement is a statement prepared by a customer to explain the causes

responsible for the disagreement between the bank balance as shown by the cash book and the
bank balance as shown by the pass book as on a particular date. In other wards a form that allows
individuals to compare their personal bank account records to the bank's records of the individual's
account balance in order to uncover any possible discrepancies.

Since there are timing differences between when data is entered in the banks systems and when
data is entered in the individual's system, there is sometimes a normal discrepancy between
account balances. The goal of reconciliation is to determine if the discrepancy is due to error rather
than timing.

6. What are the different classifications of error?

1. Errors of Omission: As the name indicates, the error of omission is one where a transaction has
not been recorded in the books of account either wholly or partially. When the transaction has been
completely omitted in the books of accounts, it is an error of complete omission. For example, if a
credit purchase of goods is omitted to be entered in the purchase book, it is an error of complete
omission. Such an error will not affect the trial balance and the omission will not even be apparent.
But sometimes it is apparent from the balance of an account that an entry has been omitted e.g.,
the rent account may show that the rent for the 12 th month has not been paid. This type of error can
be detected by careful observation On the other hand, if one of the items or aspects of a transaction
recorded in a subsidiary book is omitted to be posted from the subsidiary book to a ledger account,
the error is an error of partial omission. For e.g. if salaries paid to clerks recorded in the cash book is
omitted to be posted to salaries account in the ledger, the error is an error of partial omission.

2. Errors of Commission: Error of commission refers to errors resulting from something, which
ought not to be done. In other words when a transaction has been recorded but has been wrongly
entered in the books of original entry or posted in the ledger, error of commission is said to have
been made, e.g. a purchase invoice for Rs. 1,320 was entered in the purchase book as Rs. 1,230.
Such an error may be intentional or unintentional. This type of error usually occurs in the process of
totalling, postings, carries forward and balancing of subsidiary books.

3. Errors of Principle: If a transaction is recorded in the books of account against the fundamental
principle of double entry book keeping the error is known as error of principle. Such errors arise
when the entries are not recorded according to the fundamental principles of accountancy, e.g.,
wrong allocation of expenditure between capital and revenue, ignoring the outstanding assets and
liabilities, valuation of assets against the principles of book-keeping.

4. Compensating Errors or off-setting Errors: A compensating error or off-setting error is one

which is counter balanced by any other error or errors, e.g., if A’s account was to be debited for Rs.
100 but was debited for Rs. 10 while B’s account which was to be debited for Rs. 10 was debited for
Rs. 100. Thus, both the accounts have been debited for a total sum of Rs. 110 which amount ought
to have been debited or a sale of Rs. 10 to A is posted to the debit of B as Rs. 5, and the purchases
book is over-cast by Rs. 5. Again, an over-casting of an account may be counter balanced by the
under-casting of another account to the same extent. These errors are most dangerous and are
difficult to guard against. This type of error will not be detected by the trial balance. Such an error
will not affect the trial balance and will not be detected easily. This error may or may not affect the
profit and loss account.

5. Errors of Duplication: Such errors arise when an entry in a book of original entry has been
made twice and has also been posted twice.

7. How do you rectify the error?

Stages of correction of accounting errors

All types of errors in accounts can be rectified at two stages:

(i) Before the preparation of the final accounts; and

(ii) After the preparation of final accounts.

Errors rectified within the accounting period

The proper method of correction of an error is to pass journal entry in such a way that it corrects the
mistake that has been committed and also gives effect to the entry that should have been passed.
But while errors are being rectified before the preparation of final accounts, in certain cases the
correction can't be done with the help of journal entry because the errors have been such. Normally,
the procedure of rectification, if being done, before the preparation of final accounts is as follows:

(a) Correction of errors affecting one side of one account Such errors do not let the trial balance
agree as they effect only one side of one account so these can't be corrected with the help of
journal entry, if correction is required before the preparation of final accounts. So required amount
is put on debit or credit side of the concerned account, as the case maybe. For example:

(i) Sales book under cast by Rs. 500 in the month of January. The error is only in sales account, in
order to correct the sales account, we should record on the credit side of sales account 'By under
casting of. sales book for the month of January Rs. 500".I'Explanation:As sales book was under cast
by Rs. 500, it means all accounts other than sales account are correct, only credit balance of sales
account is less by Rs. 500. So Rs. 500 has been credited in sales account.

(ii) Discount allowed to Marshall Rs. 50, not posted to discount account. It means that the amount of
Rs. 50 which should have been debited in discount account has not been debited, so the debit side
of discount account has been reduced by the same amount. We should debit Rs. 50 in discount
account now, which was omitted previously and the discount account shall be corrected.

(iil) Goods sold to X wrongly debited in sales account. This error is affecting only sales account as
the amount which should have been posted on the credit side has been wrongly placed on debit
side of the same account. For rectifying it, we should put double the amount of transaction on the
credit side of sales account by writing "By sales to X wrongly debited previously."

(iv) Amount of Rs. 500 paid to Y, not debited to his personal account. This error of affecting the
personal account of Y only and its debit side is less by Rs. 500 because of omission to post the
amount paid. We shall now write on its debit side. "To cash (omitted to be posted) Rs. 500.

Correction of errors affecting two sides of two or more accounts

As these errors affect two or more accounts, rectification of such errors, if being done before the
preparation of final accounts can often be done with the help of a journal entry. While correcting
these errors the amount is debited in one account/accounts whereas similar amount is credited to
some other account/ accounts.

Correction of errors in next accounting period

As stated earlier, that it is advisable to locate and rectify the errors before preparing the final
accounts for the year. But in certain cases when after considerable search, the accountant fails to
locate the errors and he is in a hurry to prepare the final accounts, of the business for filing the
return for sales tax or income tax purposes, he transfers the amount of difference of trial balance to
a newly opened 'Suspense Account'. In the next accounting period, as and when the errors are
located these are corrected with reference to suspense account. When all the errors are discovered
and rectified the suspense account shall be closed automatically. We should not forget here that
only those errors which effect the totals of trial balance can be corrected with the help of suspense
account. Those errors which do not effect the trial balance can't be corrected with the help of
suspense account. For example, if it is found that debit total of trial balance was less by Rs. 500 for
the reason that Wilson's account was not debited with Rs. 500, the following rectifying entry is
required to be passed.

Difference in trial balance

Trial balance is affected by only errors which are rectified with the help of the suspense account.
Therefore, in order to calculate the difference in suspense account a table will be prepared. If the
suspense account is debited in' the rectification entry the amount will be put on the debit side of the
table. On the other hand, if the suspense account is credited, the amount will be put on the credit
side of the table. In the end, the balance is calculated and is reversed in the suspense account. If
the credit side exceeds, the difference would be put on the debit side of the suspense account.
Effect of Errors of Final Accounts

1. Errors effecting profit and loss account

It is important to note the effect that an en-or shall have on net profit of the firm. One point to
remember here is that only those accounts which are transferred to trading and profit and loss
account at the time of preparation of final accounts effect the net profit. It means that only mistakes
in nominal accounts and goods account will affect the net profit. Error in these accounts will either
increase or decrease the net profit.
How the errors or their rectification effect the profit-following rules are helpful in understanding it:

(i) If because of an error a nominal account has been given some debit the profit will decrease or
losses will increase, and when it is rectified the profits will increase and the losses will decrease. For
example, machinery is overhauled for Rs. 10,000 but the amount debited to machinery repairs
account -this error will reduce the profit. In rectifying entry the amount shall be transferred to
machinery account from machinery repairs account, and it will increase the profits.

(il) If because of an error the amount is omitted from recording on the debit side of a nominal
account-it results in increase of profits or decrease in losses. The rectification of this error shall have
reverse effect, which means the profit will be reduced and losses will be increased. For example,
rent paid to landlord but the amount has been debited to personal account of landlord-it will
increase the profit as the expense on rent is reduced. When the error is rectified, we will post the
necessary amount in rent account which will increase the expenditure on rent and so profits will be
reduced.

(iil) Profit will increase or losses will decrease if a nominal account is wrongly credited. With the
rectification of this error, the profits will decrease and losses will increase. For example, investments
were sold and the amount was credited to sales account. This error will increase profits (or reduce
losses) when the same error is rectified the amount shall be transferred from sales account to
investments account due to which sales will be reduced which will result in decrease in profits (or
increase in losses).

(iv) Profit will decrease or losses will increase if an account is omitted from posting in the credit side
of a nominal or goods account. When the same will be rectified it will increase the profit or reduce
the losses. For example, commission received is omitted to be posted to the credit of commission
account. This error will decrease profits (or increase losses) as an income is not credited to profit
and loss account. When the error will be rectified, it will have reverse effect on profit and loss as an
additional income will be credited to profit and loss account so the profit will increase (or the losses
will decrease). If due to any error the profit or losses are affected, it will have its effect on capital
account also because profits are credited and losses are debited in the capital account and so the
capital shall also increase or decrease. As capital is shown on the liabilities side of balance sheet so
any error in nominal account will affect balance sheet as well. So we can say that an error in
nominal account or goods account effects profit and loss account as well as balance sheet.

2. Errors effecting balance sheet only

If an error is committed in a real or personal account, it will affect assets, liabilities, debtors or
creditors of the firm and as a result it will have its impact on balance sheet alone. Because these
items are shown in balance sheet only and balance sheet is prepared after the profit and loss
account has been prepared. So if there is any error in cash account, bank account, asset or liability
account it will affect only balance sheet.

8. Briefly explain the characteristics of Bill of exchange.

The important characteristics of a bill of exchange are:

1. It must be in writing.
2. It must be an order to pay, and not a request to pay.
3. The order must be unconditional.
4. The order must be signed by the maker, i.e., the drawer.
5. The order must be directed to a certain person.
6. The order must be for the payment of money only.
7. The money payable must be certain, and not vague.
8. The money must be payable to a certain person mentioned in the instrument or to his order or to
the bearer of the instrument.
9. It must bear the required revenue stamp.