NCERT-COMMERCE-11TH

 

                                        Subject: Accountancy

    Class: 11th 

Unit-1

Introduction to Accounting

Q1: Define accounting? What are the objectives of accounting?

Ans: Accounting is the analysis and interpretation of book keeping records. It includes not only the maintenance of accounting records but also the preparation of financial and economic information which involves the measurement of transactions and other    events relating to the entity.

          In other words, accounting may be defined as the identifying, measuring, recording, and communication of financial information.

Objectives of Accounting:-

1. To keep systematic record of transaction in business.

2. To ascertain the operational profit or loss.

3. To ascertain the financial position of business.

4. To protect business properties.

5. To have information about the various assets and liabilities of the business.

6. To communicate the information of business results to the interested parties.

 

Qno2: What are limitations of Accounting?

Ans:

1. Accounting records only monetary transactions:-

          It records only those transactions which can be measured in terms of money.

2. Accounting does not provide timely information:- Accounting is designed to supply information in the form of statement for a period normally one year and not provide information at frequent intervals.

3. Accounting does not provide detailed analysis.

4. Accounting does not disclose the present value of business.

5 Accounting is historical in nature.

          Hence the information available through accounting has hardly any use for future.

 

Qno3: what are the advantages of accounting?

Ans: Following are the advantages of accounting:

1. Accounting helps in keeping a systematic and permanent record of business.

2. Accounting is helpful in tax assessment.

3. Accounting is helpful in debt collection.

4. Proper books of accounts maintained in systematic manner act as legal evidence in case of dispute.

5. Accounting helps in planning and controlling the business activities.

6. Accounting facilitates interfirm and intrafirm comparison.

7. Accounting is helpful at the time of insolvency.

 

Qno4:-What is book keeping?

Ans: Book keeping is that branch of knowledge which tells us how to keep a record of financial transactions. Book keeping is the art of recording business transaction in a systematic manner. The essential ideal behind maintaining such a record is to show the correct position regarding income and expenditure. Such record should be clear and systematic so that it can be easily understood. Under book-keeping a business transaction is identified and then recorded.

Book keeping shows the position of trading and also provides information of our debtor and creditors. It also shows the working capital of business.

 

Qno5: difference between book-keeping and accounting.

 

s.no	Book keeping	Accounting
1	Book keeping involves identification and recording of business transaction	Accounting involves classification & interpretation of business transaction and communicating information to the interested  parties
2	Book Keeping is primary stage	Accounting is the secondary stage. Accounting starts while book keeping ends.
3	It covers journalizing posting and extracting of balances	It covers preparation of final accounts and balance sheet.
4	It is the first step  before accounting commences	It follows after book keeping procedure are completed
5	Book keeping work is performed by junior staff and does not require any expert knowledge	Accounting work is performed by senior staff and require expert knowledge.

 

 

Qno6: Discuss various branches of accounting?

Ans: The important branches of accounting are given below:

1. Financial accounting:-

          The accounting which leads to preparation of final accounts is called financial accounting. It is concerned with the recording of transactions in the financial books in order to find out the trading results in terms of profit or loss and financial position of business for a given period. It is used by proprietors, creditors, investors, employees, etc.

2. cost Accounting: cost Accounting is concerned with determining the cost of goods produced or services rendered by the business enterprises. Cost accounting helps the business in controlling the cost by indicating available losses and wastes.

3. Management accounting: It is the presentation of accounting information  in such a way so as to assist the management in creation of policy and day to day operation of an undertaking. It also enables management in making  numerous other economic decisions.

 

 

Q7:Users of Accounting information

1. Internal users:- internal users of accounting information may be management, owners and present employees of the organisation. The internal users have direct interest in the accounting information of the organisation

The needs of internal users are:

a) Management:- Top level management is concerned with accounting information for planning and policy making, the middle level is concerned  with planning and controlling and bottom level management requires if or operational affairs.

b) owners:- The owner is sole trading business are the proprietors, in partnership firms are the partners and shareholders in companies.

c) Companies: They are interested in the account books due to bonus schemes and security of their employment. Account books provide information to the employees regarding the profits earned by the business.

 

ii) External users having direct interest

a) Creditors:- The users may be short term creditors(i.e. suppliers of raw materials or finished goods, lenders of temporary advance) or long term creditors (i.e mortages, debentures, holders etc).

b) Potential Employees:- the job seekers in a particular organizations are interested in its present and future profitability and solvency.

c) Tax authorities:- Tax authorities whether income tax, value added tax, wealth tax or any other tax, they need information to assess the tax liability of the enterprise.

iii) External users having indirect interest

a) public:- Public may be interested in the financial information of the institution with which they come in contact in their routine life

 

Qno 8: What are the qualitative characteristics of accounting information.

Ans: Qualitative information simplifies and expands on the financial figures to ensure easy understanding and comparability of results. Below are the qualitative characteristics that make the information content of the financial statement useful to its users.

1. Reliability:- Reliability is the quality of information that authorized users to depend on it with assurance this means it is verifiable, has faithful representation reproduction, and is reasonably free from errors and bias.

2. Relevance:- Accounting information must be relevant to the decision making needs of users. It help the user to evaluate past, present, and future events.

3. Understandability:- Accountants should produce financial information and present it in a form which can be easily understood and interpreted by this intended users. This can be made possible by giving relevant explanatory notes to explain the information given in financial statements.

4. Comparability:- Users should be able to compare financial statements of an enterprises through time order to assess their trend in performance and financial position. Comparability results when different enterprises apply the same accounting management to similar events.

 

 

Qno9: What do you mean by Assets? What are its types?

Ans: An asset is any physical object (tangible) or right (intangible) having money value. In other words assets are economic resources which are owned by a business and expected to benefit future operations

 

Types of Assets:

1. Fixed assets.

2. Current assets.

3. Fictitious assets.

 

1. Fixed assets:-

Fixed assets refer to those assets which have been purchased by the enterprise for long term use and not for resale in the ordinary course of business. Fixed assets may be classified as follows:

a. Tangible fixed assets:- it refers to those fixed assets which can be touched  and seen. Examples of these assets are: land, building, plant, machinery etc.

b. Intangible fixed assets:- it refers to those assets which cannot be  touched and seen. Examples of these assets are Goodwill, trademark, copyright, patient right etc.

 

2) Current assets:- or floating assets:

Current assets are those assets which are either already in cash form or which can be converted inot cash within a short period of time ranging upto 12 months. Examples of these are: cash in hand, cash at bank, stock of goods, debtors, bills receivable, short term, investment etc.

 

3. Fictitious Assets:- Fictitious assets refers to those assets which do not have any physical forma and have no realizable value, such assets cannot be converted  into cash.

 

Qno10: what do you mean by liabilities?

Ans: An amount owing by one person (a debtor) to another (a creditor) payable in money, or in goods or services. In other words, liabilities mean the amount which business has to repay to the owner or to the outsiders.

 

Types of liabilities:-

Liabilities can be classified:

1. Current liabilities.

2. Fixed liabilities

3. contingent liabilities.

1. Current liabilities:-current liabilities are also known as short term liabilities. It refers to those liabilities which fall due for payment in a relatively short period, normally within one year. Examples of current liabilities are: creditors, bills payable,short term loans etc.

2. Fixed liabilities:- Fixed liabilities are also known as long term liabilities .It refers to long term which are payable after a period of one year. Example of these liabilities are long term loans, owner’s fund etc.

3.Contingent liabilities:- Contingent liabilities refers to the amounts which may or may not become payable in future . Future event may decide wheather it is really a liabilities or not.

 

Qno11: what are debtors, creditors and drawings?

Ans: a. Debtors means the persons who owe money to business. The debtors are collectively called sundry debtors or total debtors. The amount due from debtors increase with every new credit sale. It decreases with cash received fro debtors, goods turned and discount allowed to debtors.

b. creditors means the person to whom business owes money the credit. The creditors are collectively called ‘sundry credtors or total creditors’. The outstanding amount towards creditors increase with every additional credit purchase. It decreases with payment made to the creditors goods returned to creditors and with discount allowed by the suppliers.

c) Drawing: it is the amount or benefit withdrawn by the owner for the business for personal or domestic use. It may be in the form of cash, goods or assets.

 

 

Qno12: write short note one:

 a. Expenses:- the amount of money that is needed to pay for or buy something. In other words something on which money is spent is called expenses. Business expenses can be classified into two categories.

i) Direct expenses:- the expenses which are directly related in production of goods are called direct expenses e.g. wages, carriage, on purchase, factory heating factory lighting etc.

ii) Indirect expenses:- are those expenses which are incurred after purchasing and production of goods e.g office expenses,  administration expenses, selling expenses, printing stationary expenses etc.

Income:- incomes refers to economic benefits earned by the business in the accounting year. Business income can be classified into two categories.

i) Direct income:- It includes incomes from sales of goods or services.

ii) Indirect income:- it includes all incomes other than sales. These includes commission received, rent received etc.

 

 

Qno13: write short notes on purchase, sales and stock.

Ans: the purchase of raw material for production or purchase of finished goods for sale is called as purchases. Business purchase can be of two types.

i) Cash purchase

ii) credit purchase

b. Sales: For the sale of finished good the term sales is used it may be cash sales or credit sales.

c) stock or inventory:-

The stock may be of raw materials, work in progress or finished goods the goods left unsold at the end of accounting period is called closing stock.The closing stock of one accounting period will becomes the opening stockf of next accounting period.

Q14: What do you mean by trade discount and cash discount?

Ans: Trade discount :

Trade discount is an allowance or concession granted by the producers to the whole sellers or by the wholesellers to the retailers on the bulk purchase in accordance with the customs of each particular trade. Trade discount is usually deducted in the purchase book, sales book or sales return book, and the net amount is posted to the ledger.

Cash Discount:-

Cash discount is an allowance made on the prompt payment of debt. It is allowed by the firm when the payment is made by its customers before time or is received by a form when payment is made to its creditors before time. Cash discount allowed is a loss and is debited  to discount allowed account and cash discount received is a gain and is credited to discount received account.

 

 

Qno15: What is transaction?  Define  classification of transaction?

Ans: any exchange (dealing) of goods or services for cash or on credit by the business with any other business or customers is called transaction. It is an economic activity of the business that causes a change. The organization’s financial   position or net worth resulting for normal business activity.

 

Classification of transaction

Transaction may be classified on different basis and modes e.g

 

a. Mode of payment involved:-

On the basis of payment involved in a transaction, the transaction can be classified as:

i) Cash transaction.

ii) Credit transaction

b) Entity involved:-

On the basis of entities involved in the transaction, the transaction are again of two types

i) external transaction

ii) internal transaction

c)Exchange:-

On the basis of exchange of value. The transaction be classified as:

i) Exhange transaction

ii) Non-exchange transaction

Q16. What do you mean of source document?

Ans: Source document serve as proof of business transaction. These transactions indicate their nature and amount involved. In other words source document are the evidence of business transaction which provide information about nature of the transaction and amount involved in it. The various sources of  documents are:

i. Inward invoices received from suppliers.

ii. Outward invoices issued to customers.

iii. Debit notes.

iv) Credit notes.

v) cash memo and bank receipts issued/ received, other cash vouchers.

Q17: What is a voucher? What are kinds of vouchers.

i. A voucher is documentary evidence in support of a business transaction. A voucher is a written document for the verification of business transaction.

ii. Kinds of vouchers:

     Vouchers can be broadly divided into two categories i.e:

a. Supporting vouchers:- these vouchers are the documentary evidence of the fact                 that business transaction has taken. Supporting voucher are of two types.

          i) External Supporting vouchers:- These are the vouchers which are prepared by third               parties.

          ii) Internal supporting vouchers:- vouchers are prepared by the organisation but are        verified by the third parties.

b. Accounting vouchers:- These are the secondary vouchers prepared on the basis  of supporting vouchers by the accountant and are countersigned by an authorized person of the organization. These vouchers are prepared for both cash and non-cash transaction. These can be classified into two categories.

          i) Cash vouchers:- These vouchers are documentary proof of cash receipts and payments. Cash vouchers are of two types:

                   a. Debit vouchers b. Credit vouchers

ii) Non-Cash vouchers:-  These vouchers are  the documentary evidence of all non-cash transactions of the business.

 

Q18: Define Debit voucher and credit Voucher.

Ans:- Debit Voucher:- These vouchers are prepared when cash payment are made to third parties. The various purpose for which debit voucher are issued are:-

i. Payment of goods purchased.

ii. payment of expenses.

iii. Payment of creditors etc.

Credit Vouchers:-

These vouchers are the documentary evidence of cash received by business. These vouchers are prepared to record the transaction which involve cash receipt.

 

Q19: What is an account? Give classification of account under traditional approach

Ans: The statement which record the transactions at one place relating to a particular subject is known as account. An account has two sides, the left hand side of account is termed as Debit side and the right hand side of account is termed as credit side. A transaction is based with on debit side or on credit side depending on the nature of account which can be classified on two bases.

i. Classification of traditional approach.

ii. Classification of modern approach.

 

i. Classification of accounts under traditional approach:

Under traditional approach accounts are divided into three categories:

a. Personal accounts:

b. Real accounts

c.  Nominal account

 

1.Personal Account: These represent the account related to individual, firms societies clubs, hospitals etc. the personal accounts are further classified as follows

i. Natural Personal Account:- These accounts related to human beings, for example, Anil’s account, Rahim’s Account etc.

ii.Artifical personal account:- These relate to artificial persons such as , accounts of firms, clubs, companies, colleges banks hospital etc.

iii. Representative personal account:- Sometimes special  accounts are  opened to represent indirectly a group of persons, these are called representative personal  account. Such as debtors, accounts, creditor account, salaries outstanding account share capital account

2. Real Account:- Real account are those account which relate to properties of business enterprise. It may be divided into two parts.

i. Tangible real account:- These accounts relate to assets which be touched, measured, and seen, for example plant account, building account, cash account.

ii. Intangible real accounts:- These accounts relate to those assets which cannot be touched or felt but can be measured in terms of rupee. For example Goodwill, copy right, trade mark etc.

 

3. Nominal Accounts:-

These accounts relate to business expenses, salaries and incomes. For examples salaries account, wages account, wages account, loss of goods by fire account, interest received account, purchase account etc.

 

 

UNIT-2

THEORY BASE OF ACCOUNTING

Q1: What is accounting principles?

Ans: The rules and guidelines that companies must follow when reporting financial data called  accounting principles. The accounting principles can be classified into two categories.

 

i. Accounting concepts.

ii. Accounting conventions.

Q2: What are accounting concepts?

Ans: Accounting concepts are those basic assumptions upon which basic process of accounting is based. The important acconting concepts  are:

i. Business entity concept

ii) Dual aspect concept.

iii) Going Concern concept

iv) Accounting period concept

v) cost concept

vi) Money measurement Concept

vii) Revenue matching concept

viii) Realization concept

Q3: Explain the following:

a. Business entity concept

According to this concept, the business has a separate legal identity than the person who owns the business. The accounting process is carried out for the business and for the person who is carrying out the business. The transactions that take place affect the business not the proprietor.

b. Dual Aspect Concept

According to this concept, every transactions has two effects debit and credit under this concept, every business transaction is recorded twice in the book of accounts. The basic relationship between assets and liabilities which means that the assets are equal to the liabilities remains the same. This concept given birth to an accounting equation which is:-

Capital+Liabilities= Assets

c. Going concern concepts:-  According to this concept the organization is going to be in continue for an indefinite period of time and is not likely to close down the business in the shorter period of time. Hence the accounts while voluntary the business assets d not take into account realizable value as present market value of assets. Assets are valued at cost price at which tehywere originally acquired less depreciation till date.

d. Accounting period concept:-Accounting to this concept the indefinite period of time is divided into shorter time periods, each one being in the form of accounting period, in order to facilitate the preparation of financial statements (P&l) Account and Balance sheet on periodical basis. This concept is simply intended for a periodical ascertainment and reporting of the results of the working of the business.

e. cost concept:- According to this concept, an asset is recorded at the cost at which it is  acquired instead of taking current market prices of various assets.

f. Money measurement concept:- According to this concept accounting records only those transactions which can be expressed in terms of money. Transactions which cannot be expressed in terms of money . Transactions which cannot be expressed in terms of money cannot find a place in the books. For example, the skill of the manager, the good employer etc. cannot be shown in the books of the business.

g.Revenue match concept:- According to this concept all the expenses and costs incurred during the period whether paid or not should be matched with the income generated during the period in order to determine the profit or loss in a particular accounting period.

h. Realization concept:- According to this concept, revenue is recognized only when the sale is made, whereas strictly speaking revenue earning is only a gradual process and it starts when the raw materials are purchased for production and ends with the sale. If no sale takes place no revenue is considered.

 

Q3: 1Discuss accounting conventions

Ans: The accounting conventions are discussed as follows

i. Conventions of full disclosure:- convention of full disclosure implies that accounts should make a full disclosure of all monetary or financial information that can impact the decision making of different parties. This accounting information is of interest to the management, current and potential investors and creditors of the business.

ii. convention of Materiality:- Accounting should report only what is material and ignore insignificant details while preparing their final accounts, if this is not done, the whole accounting process would become difficult and meaningless. What is material depends upon the circumstance and discreation of accountant. It is because of this convention. The cost of an asset or its written down vale along is shown in the balance sheet and not the other information about the asset.

iii. Convention of Consistency:- The convention of consistency specifies that the accounting practices and method used by an organization should remain consistent over the year. Consistency should be maintained within the inter-related financial statement for the same date. The performance of the company in one year  with the performance in the next year should be such that it can be compared.

iv) Convention of conservation:- This is the policy of playing safe. It takes into consideration all prospective losses but leaves all prospective profits. It is only an account of this convention that the inventory is values at cost  price or market price whichever is lower. Similarly provision far bad and doubtful debt is made in the books before ascertaining the profit.

Q4. International Financial Reporting Standards:

International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International accounting standards board (IASB). The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting.

 

Scope of IFRS

The scope of IFRS is described in the following points:

1. International Accounting Standards Board (IASB) standards are known as international Financial Reporting Standards (IFRS)

2.  IFRSs apply to general purpose financial statements and other  financial reporting by profit-oriented entitities- those engaged in commercial, industrial, financial and similar activities, regardless of their legal form.

3. Entities other than profit-oriented business entities may also find IFRSs appropriate.

4. General purpose financial statements are intended to  meet the common needs of shareholders, creditors, employees, and the public at large for information above at entity’s financial position, performance and cash flows.

5. IFRSs apply to individual companies and consolidated financial statements.

 

Q5: What is double entry system of book keeping? What are its advantages

Ans: Double entry system is the system under which cash transaction is regarded to have two fold aspects and  both the aspects are recorded to obtain complete record of dealing. The double entry system of book keeping is based upon the fact that every transaction has two parts and this will therefore affect two ledger accounts. This  means that every transaction must be recorded in two accounts, one account will be debited because, it receives value and the other account will be credited because it has given value.

The rule to remember is “debit” the receiver and credit the giver”

Advantages of Double Entry system:-

1. it enables to keep a complete  record of business transaction.

2. The accuracy of accounting records can be verified by preparing trail balance at the end.

3. It gives the results of business activities, either profit or loss during the accounting period.

4. It provides the financial of the business at a point of time by preparing a statement known as balance sheet.

5. comparison of current year’s result with those of previous years result can be made which  helps the owner to judge the progress of business.

6. it helps ascertain the details regarding any account easily and accurately.

 

Q6: Basis of accounting system

  Ans: A basis of  accounting is nothing more than a set of rules that the accountant follows in preparing three basic  financial reports-profit and loss account, balance sheet and cash flow statement. It tells him when to count certain transaction in the records and how to do it.

          The “when” is the biggest differences between the accrual method and the cash method of accounting.

1. Accrual (or mercantile) Basis is the method of recording incomes when they are earned, irrespective  of the fact whether cash is received are not. Example interest due but not received will be treated as income for the periods when it has occurred and not in the period when it is received.  Similarly expenses are recorded when they are incurred or become due, irrespective of the fact whether cash is paid or not. Example purchase made on credit will be included in the total purchases of the  period. Hence profit or loss  of a particular period in accrual basis is the result of matching the revenues earned and expenses incurred during that period.

2. Cash (or receptive) Basis: it is a method of recording transaction under which revenues , costs, assets, and liabilities are reflected in the accounts in the period in which actual receipts or actual payments are made.  Enties are made only when cash is actually received or paid. No entries is made in the books of business for the items  which are outstanding such as salaries due, rent unpaid, etc. The profit under this system is calculated on the basis of revenue received in cash during the accounting period less the expenditure incurred in cash during that period. The profit is calculated with the help of receipts and payments  accounts. This basis is useful for professionals like doctors, chartered accountants, architects etc.

UNIT-3

RECORDING OF BUSINESS TRANSACTIONS

 

Q1: Give classification of accounts under modern approach or accounting equation method.

Ans: Under this system the accounts  are divided into five categories:

          I. Asset account:- These accounts relate to tangible or intangible  real assets example are: cash account, machinery account, goodwill account, stock account.

          2. Liabilities account:- These account to the financial obligations of business towards outsiders like creditors account, bills payable account, bank loan account etc.

3. Capital account:- these accounts relate to the liabilities of the business towards owners

4. Revenue accounts: These accounts relate to the amounts charged for goods sold or services rendered.

5. Expenses account:- These accounts relate to the amount incurred in the process of earning revenue.

Q2: - What are the rules of debiting and crediting for personal account, real account and nominal account under traditional approach.

Ans: Rules for debiting and crediting under  traditional approach?

1. Rules for personal account

Debit the receiver and credit the giver.

2. Rules for real account:-

 Debit what comes in and credit what goes out.

3. Rules for nominal account:-

Debit all expenses and losses, credit all incomes and gains

 

Q3:  What are the rules for debiting and crediting under modern approach or accounting           equity  approval.

Ans: The Rules for debiting and crediting under modrn approach are:

          i. Rules for assets:

                   Increase in assets  Debit

                   Decrease in assets Credit

          ii. Rules for liabilities and capital

                   Increase in liabilities & capital credit

                   Decrease in liabilities and capital  debit

          iii. Rules for revenues & incomes

                   increase in incomes        credit

                   Decreae in incomes        debit

          iv. Rules for expenses

                   increase in expenses       debit

                   Decrease in expenses     credit

 

Qno4: What is journal? What are its features?

Ans: Journal  is a book of original entries in which all the business transactions are recorded  systematically. The word journal has been derived from the French word ‘jour’ which means ‘a day’. Thus journal means the book  which records all money transaction on daily basis. The transactions are recorded in chronological order i.e. in order of their occurrence. The first recording of transaction is done in journal. That is why it is called a book of original entry or prime entry.

          The following are the main features of journal:

i) it is a book of original entry because transaction are recorded at first stage in this book.

ii) it is also known as day book or diary because transactions are recorded in it on day to day basis as and when they take place.

iii) it keeps a chronological record of all transactions.

vi) the journal gives the complete picture of each business transaction and thus maintains 

     identity of  the transaction.

v)  Every entry in the journal is followed with narration which described briefly the true nature and context of the transaction.

Qno5:What is Narration?

Ans: Narration is a brief explanation of transaction. The narration starts with the word “being” without narration journal entry is considered incomplete.

 

 

Q6: What do you mean by cash book?

Ans: it is a book in which we record all the cash transactions of the business. Cash book is prepared to record cash receipts and cash payments during the period. The objectives of preparing cash book is to find out closing cash balance in hand at the end of period. All cash receipts are entered in credit side of cash book. Excess of cash receipts are entered in ents shows closing balance at the end of the period. In cash book entries are followed by narractic also cash book  can be prepared for a week, for a fortnight (15 night) or for a month cash book is of five types.

a. Single column cash book

b. Double column cash book.

c. Tripple column cash book.

d. Bank cash book.

e. Petty cash book.

 

Q7: What is petty cash book? What is imperest system of petty cash book?

Ans: Every business has to make payments involving smaller amount such as carriage , coolie, hir, postage, telegrams, etc. Such payments by their nature cannot be made by cheques. It is usual for the business units to maintain a separate cash book to record small payments only. Such cash book is known as petty cash book. A petty cashier may make such payment and maintain the petty cash book. He generally works  under a  main casher.

Impreset system of petty cash:- Under this system a fixed amount is advanced to the petty cashedr at the beginning of the period by the main casher. The petty cashier submit the petty cash book along with the supporting voucher to the head cashier at the end of the period. The heads  cashier makes the reimbursement of amount spent by the petty cashier. The petty cashier again has the same amount of petty cash in the beginning of new period. The imprest system of petty cash is considered better than the ordinary system.

 

Q8: What is Purchase book and sales book.

Ans: All the credit trade purchase are primary recorded in this book it records only the credit purchase of goods. This book records only purchase of goods which are meant for resale and which are normal purchase items for the business. Purchase book is also known as purchase journal bought day book. Invoice book and purchase register. Purchase book shows the names of the persons or firms from whom the goods have been purchase on credit. These persons or firms are called suppliers of the goods.

 

Sales book:-

          Sales book records only the credit sales of goods in which the trader deals two things are to be noted in this book,

i) Only credit sale is recorded in the sales book, cash sale of goods is recorded in the cash book

ii) The credit sale of only those only  those goods is recorded in this  book in which the firm is normally trading. Credit  sale of property and other assets is recorded in journal proper. This book is also named sales day book, sold day book, sales journal  and sales register sales book shows the names and places of the persons and firms whom the goods have been sold on credit. These person or firms are called customers/debtors.

 

Q9: What do you mean by Purchase return book and sales return book.

 Ans: Purchase return book: it is a book in which the goods returned to supplier are recorded. It is also called return outwards book. Goods may be returned because theyare of wrong kind or not up to the sample or they are damages etc.

Sales Return book: Sales return book is also called return inwards book. This book records goods which  are sold on credit and are returned by customers. It does not records return of goods which were sold for cash and also  does not record return of any assets sold either for cash or on credit.

Accounting for GST

 

Q10: Meaning of GST & its characteristics?

GST is an indirect tax on supply of goods and services.  No distinction is made between goods and services for levying GST. Tax is levied at the prescribed rate on every supply of goods or services. One nation one tax is levied at all stages right form manufacture up to final consumption. Every person is liable to pay GST on his output and is entitled to get input tax  credit (itc) for the tax paid on its inputs.

 

Characteristics of GST

The silent characteristics of GST are as under

1. Indirect Tax:- GST is an indirect tax. It is not borne by the trader for the business. It is  collected form the customers vbut is deposited by the trader or manufacturer to the Govt.

2. Destination Based: Destination based principle is applicable on GST as against the  present principle of origin based taxation. Destination principle implies that all goods and services are taxed,if they are consumed within the country. That is why the exports are exempted and imports are subjected to tax.

3. Compulsory Registration:- A business firm having an annual turn over of more than 20 lacs (10 lacs in case of north-eastern states) is required to get itself registration under the GST ACT, 2017

4. uniformity in Tax Rate Across States:- There is uniformity in GST rate on goods and not services across all states or union territories. Every state and union territory have their own goods and services tax Acts.

5. Differential Tax Rates on Goods/Services: Mainly four tax rates of GST applicable are 5%, 12%, 18%. However, some goods are taxed at special rates like 3% on diamond and jewellery.

 

Q11:Objectives of Goods and Services Tax (GST)

 

1. Uniformity of Taxes Across all states:- The differential tax rates across the states created many problems for the states/union territories. One nation one tax rate for the specific goods across all states or union territories has resolved many issues.

2.ease of doing business:-  The business enterprises have to register under one law i.e. GST and fulfill its requirements only. Hence it has eased in doing business

3. Avoiding the Duplication of taxes: GST avoids duplication of taxes as the tax is calculated on the value added at each stage of ownership.

4. Reducing the Burden of collecting various taxes:- There were multiple authorities and departments to collect various taxes, such as excise department, sales tax department, service tax department etc. Now, the indirect taxes are collected by GST department and that too is online collection.

5.Better Tax management:- GST being a single indirect tax is managed through computer system has resulted into better tax management.

 

Q12: Classification of Goods and service Tax (GST)

 

GST is levied under three categories  described below:-

1. Central GST (CGST):- CGST is levied on intra-state supply (i.e supply within the state) of goods and services. In the ease of intra-state supply of goods and services, both  CGST nad SGST (or UTGST)  are levied at half of the prescribed rerate of GST for specific goods or services.

2. State Gst (SGST) or Union Territory GST (UTGST): SGST (or UTGST) is also levied on intra-state supply of goods and / or services along with CGST. In case of intra-state  supply.  Both SGST (or UTGST)  and CGST are levied at half of the specified rate of GST for the particular goods and services.

3. Integrated GST(IGST): IGST is levied on inter-state supplies i.e. sales of goods and services outside the state. It is also levied on import of goods and services into  india  and export of goods and services from India.

 

 

Q13: What is Bank reconciliation statement ? Why is it prepared.

Ans: Bank reconciliation statement is a statement which explains how the bank statement can be made to agree with the company ledger. It is a statement prepared by a customer of a bank to reconcile the balances as shown by his cash book with that of pass book. Banbk reconciliation statement indicated the various items causing a difference between the bank balance as per pass book and bank balance as per cash book. On a particular date. The statement may be weekly, months or quarterly depending upon the number of transaction and size of business  enterprise.

When a businessman deposits into bank or withdraw money from the bank for various puposes. He records the same in the bank column of his cash book. Correspondingly. The bank records the same transaction in pass book opened by the banker in the customer’s name. The bank’s creditors pass book  whether money is deposited and debits the pass book when ever money is withdrawn. Thus the balance as shown by the businessman’s cash book should agree with the balance shown by bank’s passbook.

 

The following are some of the reasons responsible for the difference in the cash book and pass book  balances.

1. Cheques deposited but not yet collected.

2. Cheques issued but not yet presented for payment.

3. Bank charges debited by bank only.

4. interest credited by bank only.

5. Direct deposit by customers into bank.

6. Direct collections by bank.

7. Direct payment by bank.

8. dishonor of cheques.

9 Errors and omissions in cash book and pass book.

10 Retiring a bill under rebate by the bank.

 

 

 

Unit-4

Trial Balance and rectification of errors

 

Q1: What is trial balance what are its objectives?

Ans: it is an abstract or list of the ledger accounts at specified date, showing debit and credit balances for all the account and the cash book. It has two columns , one for debit amount and another for credit amount. It is prepared periodically, usually at the end of each month. Further, it should be noted that a trial balance can be prepared only when the posting to ledger is complete. The trial balance is neither a part of double entry system nor does it appear in actual book of accounts. It is a statement prepared to test the arthematical accuracy of the ledger account. It is just a statement not an account. The total of debit and credit columns to trial balance must tally.

Objective of preparing a trial balance:

a. Ascertaining the arithmetical accuracy of ledger accounts:- A trial balance is prepared to check the mathematical accuracy of ledger accounts.

b. Completion of double entry: it proves that both the aspects of each transactions are recorded. If totals of both sides are equal, it is believed that the records are complete.

c. Statement of ledger account balances. It is consolidated summarized statement of  balances of accounts on a certain date. It enables one to know the details of assets , liabilities, expenses, losses, incomes etc.

d. Helps in the preparation of final accounts: A trial balance is used as an connecting link between the ledger and the final accounts.  Trading and profit & loss account and balance sheet are prepared on its basis.

 

Q2: What do you mean by rectification of errors. What are its types?

Ans: Rectification means correcting or setting right the mistake. Errors in accounting may be rectified by

i. Removing the wrong figures and erasers, etc

ii. over writing

iii. Striking off the wrong figures and replacing it by the correct figures.

iv. passing an additional entry in the book.

If  first three methods are followed for the rectification of errors. This would lower down the reliability authenticity and genuiness of financial books. It may encourage falsification and frauds in the books. Overwriting cutting, erasing or altering also make the accounting books shabby and reduce their legal value as an evidence in the courty of law. Therefore, it is recommended that the first three methods must not be applied to rectify the errors. The fourth method to correct errors through rectifying entry is the most scientific and widely acceptable method.

 

Types of errors:

1. Errors of Principle: when a transaction is recorded against the fundamental principles of accounting. It is an error of principle. For example if revenue expenditure is treated as capital expenditure or vice versa. Repair charges on machinery, if wrongly debited to machinery account. paid

2.Errors of Omission: When a transaction is either wholly or partially not recorded in books. It is an error of omission. It may be with regard to omission to enter a transaction  in the books of original entry or with regard toomission to post a transaction for the books of original  entry to the concerned account in the ledger.

3. Errors of commission:- When an entry in incorrectly recorded either wholly or partially, incorrect posting, totaling or balancing, it is an error of commission. Some of the errors of commission affect the trail balance whereas other do not.

4. Compensating errors: Sometimes an error is counter-balanced by another error  in such a way that it is not disclosed by the trail balance Such errors are called compensating errors.

 

Q3: What is suspense account?

 

Ans: it is an imaginary account its nature is not certain. The suspense account is a temporary account in which the difference in trail balance is placed and is wiped off when the errors are located and corrected. The suspense account balance will be placed on that side of the trail balance which is found to be shorter in order to make the trail balance agree.Suspense account may be opened  in the following circumstances.

i. to balance a disagreed trail balance:

As stated above that suspense account is opened when a trail balance  does not agree. It is recorded on the shorter side of trail balance. The debit balance of suspense is written on the asset side of balance sheet. While credit balance is written on the liability side of  balance sheet. It is to be noted that the existence of suspense account in the books  is a clear proof of some deficiency in accounting.

ii. To post doubtful items:-

Sometimes an  item cannot be posted to the correct account. Suppose a merchant receives a bank draft of Rs. 3,000 from his customer, But the name of the sender is not known to him. He will pass the following entry in journal

Bank Account                Dr.              3000

          To suppose Account                                  3000

Later when the merchant comes to know that the draft was sent by (say) M/s. Gulbadan & Co. the journal entry would be.

Suspense Account                   Dr.              3000

          To M/s Gulbadan and  Co                          3000

 

 

Unit 5

 

Depreciation

 

Q1: Meaning of Depreciation and its need for charging

The word ‘depreciation ’ is derived from a latin word ‘Depretium’ where ‘De’ means decline and ‘pretium’ means price. Thus, the word ‘Depretium’ stands for decline in the value of assets in the modern context. It stands for a gradual and continuous decline in the book value of fixed assets, due to their use and allied reasons.

 

Need for charging Depreciation

 

Depreciation is recorded in the books due to the following reasons

 

1. Correct calculation of profits: one of  the objective of accounting is to determine the true profits of business.

2. True and fair view in balance sheet: if depreciation is not provided in the books of accounts, the fixed assets will be shown in the balance sheet at a higher value than its real value i.e, it will be overvalued.

3. Distribution of dividend out of profits only: When depreciation is charged to profit and Loss Account, the profit is reduced and the balance of profit left after depreciation is available for distribution as dividend to shareholders. 

4. Replacement of assets: Assets used in the business need replacement after the expiry of their useful life. Fresh funds are required to replace old assets.

5. Saving in income tax: When depreciation is debited to profit and loss account, the profit are reduced. Consequently the tax liability on profit is reduced.

 

Q2:Basic factors affecting Depreciation

Following points are considered for determining the amount of depreciation

1. Cost of assets:  The original cost of asset paid/payable on acquisition of asset, is increased with the amount spent on installation, freight, loading and unloading charges, transit insurance, octroi, import duty etc.

2. Estimated working life:-  The estimated working life of the asset may be measured in terms of years, months, days, hours, output (unit & weight ) of kilometers, etc.

3.  Salvage/ Residual/ Scrap value: it refers to the estimated amount which will be realised when asset is sold, discarded, or exchanged for a new asset at the end of its working life.

4. Depreciation in case of obsolescence: if the asset is likely to be of nil value due to some new inventions, more amount of depreciation should be provided. Lesser the period more will be the amount of depreciation.

6. Legal provision:-  if there are some legal provisions for providing depreciation on asset the same should be taken into consideration. Provisions of Companies Act, 1956 and Income Tax Act, 1961 are relevant in this regard

 

Q3:Methods of depreciation

 

Straight Line method

 Under this method, a fixed proportion of original cost of the asset in written off annually so that, by the time asset is worn out, its value in the books is reduced to zero or residual value. This method is also known as ‘Fixed installment Method’, or ‘Original Cost Method’.

In order to provide depreciation on straight on straight line method, we may be given:

i) Cost of Asset and rate of depreciation.

ii) Cost of Asset, estimated scrap value and life of asset in years.

          In case, it is estimated that the asset will have a scrap value on the expiry of its useful life,  the annual depreciation on the asset is calculated with the help of following symbolic expression:

                                     

 Annual depreciation = Original cost of fixed asset- Estimated scrap value

                                      Estimated life of asset in years

                   Or

                             D =   C-S

                                      N

The depreciation to be charged each year can also be expressed as a percentage of cost. This percentage can be calculated as follows:

                            

                   R = D x 100

                         C

          Where  R = Rate of depreciation

                     D= Annual amount of depreciation1

                     C= cost of asset.

 

Merits of Straight Line Method

Straight line method has go the following advantages

i)  simple: It is very easy method of providing depreciation and the calculations are very simple.

ii) Asset is fully written off: According to this method, the asset account is written off fully at the  end of its working life.

iii) Suitable for fixed life assets: this method is very suitable for those assets which have a fixed  working life e.g. furniture, leases, patents, etc.

 

Written down value method

Under this method, a fixed rate or percentage of depreciation is charged each year on the diminishing value of the asset till the amount is reduced to scrap value. Under this method, instead of a fixed amount, a fixed rate on the reduced balance of the asset is charged as depreciation every year. Since a constant percentage rate is being applied to the  written down value, the amount of depreciation charged every year decreases over the life of the asset. Though the percentage at which depreciation  is charged remains fixed, the amount of depreciation goes on decreasing year after year. This is because a constant percentage is applied to a diminishing figure.

          The fixed percentage rate, to be applied to the allocation of net cost as depreciation, can be obtained by following formula:

 

                                      R=1

 

Where  n= Expected useful life in years

            S= residual value.

            C = Acquisition cost

             R = Rate of depreciation to be applied

 

Merits of Written Down Value Method

 The following are the advantages of written down value method

 

1. Rational matching:- Under this method, higher depreciation is charged in earlier years when the machine is most useful and produces high revenues.

2.Obsolescence: Obsolescence does not effect much because the major part of the asset is written off as depreciation and the management has no difficulty in replacing the asset.

3. Recognition form Income-tax department:- This method assumes more significance because income-tax authorities recognize this method for accounting purpose.

 

Provision and Reserves

Q4: What  do you mean by reserve

Ans: The amount of reserve is an appropriation of profits. Hence profits retained in the business without having any of the attributes of a provision are to be treated as reserve.

 

Basically reserve are of two types:

Ans: The amount of reserve is an appropriation of profits. Hence profits retained in the business without having any of the attributes of a provision are to be reserve. Basically reserve are of two types.

1. Revenue Reserve.

2. Capital Reserve.

          The objectives of creating a reserve include

i) To strength the financial position of the business.

ii) To meet unforeseen abnormal losses.

iii) To increase working capital of business.

iv) To replace a wasting aasset.

 

Q5: What do you mean by provisions?

Ans:  Provisions refers to the amount retained by way of providing far any known liability of providing far any known liability of which the amount cannot be determined with substantial accuracy. It also refers to the amount written off or retained by way of providing far depreciation renewals or decrease in the value of assets.

 

The provisions are usually created by debiting the profit and loss account. They are either deducted on asset side of balance sheet or shown on the liabiltity side under appropriate heading provision is created under all the conditions whether the business is earning profits or not.

Q6: What is the difference between reserve and provisions?

Provisions	Reserve
A provisions is created far particular purpose and can be utilized only for the particular purpose	It is not necessary that a fund created by only utilized for a particular purpose.
It is a charge against the profits and is required to be created irrespective of the amount of profit	A reserve is a appropriation out of profits and can be created only if profits have been earned
A provision cannot be utilized far distribution by way of dividend	A reserve can be utilized distribution by way of dividend
Auditor must be check its adequacy	Auditor is not required to check adequacy
A provision is made mainly because of legal Necessity	A reserve is a matter of financial prudence.

 

 

Unit-6

Bills of  Exchange

Q1:Explain Promisory Note. What are its features

Promissory onte is a written promise made by one person to pay a certain sum of money due to another person or any other legal holder of the document.

                   A promissory note is defined by Section 4 of the Negotiable instruments Act as “an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument.”

 

Features of a Promissory Note

An instrument to be a promissory note must fulfill the following essentials

i) it must be in writing

ii) The promise to pay must be expressed.

iii) The promise to pay must be unconditional.

iv) it must be singed by the maker.

v)  The maker must be certain.

vi) The payee must be certain.

vii) The promissory note must be properly stamped.

ix) The amount payable must be in legal tender money of India

 

 

 

Q2:Parties to a promissory Note

There are two parties to a promissory note:

i) Maker:- he is the person who writes out the promissory note. He undertakes to pay the amount mentioned in the instrument. He must sign the document.

ii) Payee:- He is the person to whom the payment is to be made i.e. creditor or seller of goods.

 

Q3:What is Bills of Exchange and its features

Section 5 of the Negotiable Instrument Act defines a bill of exchange as “an instrument in writing containing an unconditional order, signed by the maker, directing a certain person or to the bearer of the instrument”.

          A bill of exchange is called a draft till the acceptance is given by the debtor. There are three parties to a bill of exchange, namely, drawer, drawee and payee. The maker of the billis called the drawer, the person who is ordered to pay is called the drawee and the person to whom or to whose order the money is directed to be paid is called the payee. In Some cases, drawer and payee may be one person.

 

Features of a Bill of exchange

 

A bill of exchange has the following characteristics

1. A bill of exchange is an instrument in writing.

2. it must be signed by the maker or drawer.

3. it contains an unconditional order. There is not condition attached to it.

4. The order must be to pay money and money only.

5. The sum payable must be specific.

6. The money must be payable to a definite person or to his order or to the bearer.

7. The amount must be paid within a stipulated time or on demand.

8. The name of drawee must be clearly mentioned in the document.

9. it must be dated and stamped.

 

Q4:Parties to a bill of exchange

 

There are three parties to a bill of exchange

 

1. Drawer: The person who draws or writes the bill is called the drawer or maker. The drawer must be the seller or creditior to whom money is owing.

2. Drawee: The drawee is the person on whom the bill is drawn. He is the purchaser or debtor who is ordered by the drawer to pay the amount.

3. Payee: The person who has the right to receive the amount of bill is called the payee. The payee may be a third person or drawer himself.

 

Q5:Elements of a Bill of Exchange

 

The important parts of a bill of exchange are as follows:

 

1) Date and place of bill: This is the date on which the bill is drawn and is written at the top right hand corner of the bill.

2) Term/Tenor Tenure of bill: Bills may be drawn payable at sight, on demand, on presentation, after date, after sight and so on.

3) Days of grace: A time bill or promissory note is entitled to three days of grace. Earlier, the days of grace were allowed as per the custom prevailing, but now it is compulsorily allowed under negotiable Insturment Act (i.e Under the law).

4) Due date: Maturity means the date on which a promissory note or a bill of exchange falls due. Every bill or promissory note which is not expressed to be payable on demand, at sight or on presentment, is at maturity on the third day after the day  on which it is expressed to be payable.

 

Q6:What do you mean by Discounting of bill?

Ans: if the drawer of the bill of exchange needs cash immediately, he need not to wait till the due date of the maturity of the bill. And may get the same discounted with the bank. An Act of selling of a bill to a bank or some other person to obtain the payment for it before its maturity is called discounting of the bill.

Q7: What do you mean by endorsement of the bill?

Ans: the endorsement means the transfer of the bill  by drawer to his creditor in full or part settlement of a debt provided that his creditor agrees to such an arrangement

Q8: What do you mean by bill sent to bank for collection?

Ans: When a bill is send to a bank with instructions that the bill should be retained till maturity and to be realised  on that date. It is known as bill sent to bank for collection. For this drawer opens a temporary account called ‘bills sent for collection account’

 

Unit-7

Financial statements of sole proprietorship

Q1: What do you mean by financial Statement? What are its objectives?

Ans: Financial Statement  are the statement which are prepared to show periodic performance of business organisation and its financial position at the end of such period. Usually trading and profit & lost account and balance sheet are collectively known as final account.

i. Trading and Profit & loss account: Which shows the financial performance of business  operational during an accounting period.

ii. Balance sheet: which shows the financial position of an enterprise at a particualr point of time.

Objectives

          The objectives of preparing financial statements are:

1. To find out the profit or loss (financial performance) of a business during one accounting period.

2. To know the financial position of business i.e, the position of assets, liabilities and capital at the end of accounting period.

 

Q2: What do you mean by trading account?

Ans: Trading account is the first part of financial statements which shows the results of buying and selling of goods and services during an  accounting  period. The main purpose of preparing trading account  is to ascertain the gross profit or gross loss of business arising from buying and selling of goods. The trading account shows opening stock and all direct expenses on the debit side and closing stock and sales on the credit side. Direct expenses incurred on the  purchase or manufacture of goods e.g, carriage, fright, import duty octrio  etc. The summary of direct expense helps the management to find out its percentage on sales.

 

Q3: What is profit and loss account?

Ans: After the preparation of trading account, the next step is to prepare profit and loss account with a view to ascertain net  profit or net loss during an accounting period. In other words the profit or loss account can be defined as the report that summaries the revenues and expenses of an accounting period. According to carter, a profit and loss account is an account into which all gains and losses are collected, in order to ascertain the excess of  gains over the losses.

          The account is credited with gross profit and with all other in direct incomes, it is debited with all indirect expenses in the nature of office and administrative expenses, financial expenses and selling and distribution expenses. Excess of credit total over debit total shows net profit and excess of debit total over credit total shows net loss.

 

Q4: What is balance sheet?

Ans: Balance sheet is the final phase in accounting cycle, it is a mirror which reflects the true position of the assets and liabilities of the business on a particular day.

In other words, a balance sheet is an item of assets and liabilities and proprietorship of a business at a certain date. Balance sheet is also called position statement.

Balance sheet has two sides called asset side and liabilities side. Right hand side called assets side and left-hand side is called liabilities side. The Performa of balance sheet are as follows

 

Liabilities	Amount	Assets
Current Liabilities Sundry creditors Bank overdraft Bills payable Outstanding expenses   Long Term liabilities Loan from bank Debentures Reserves and funds   Capital liabilities Operating balance		Current Assets  Cash in hand Cash  in bank Sundry debtors Prepaid expenses Bills receivable loose tools   Fixed Assets Good will Land and building Plant and machinery furniture and fixtures Trademark and patents Business premises Fictitious assets Discount on issue of shares and debentures Underwriters Commission

 

Q5: What are fictitious assets? Give example

Ans: Fictitious assets are those assets which are not represented by anything concrete or tangible. These are also called ‘nominal’ or ‘Imaginery’ assets. These assets are gradually written off through profit and loss account or through capital reserve account over a  number of years. The examples of fictitious assets are.

i. discount on issue of share and debenture.

ii. Preliminary expenses.

iii. underwriters commission

 

Q6: What are contingent liabilities? Give examples.

Ans: These are not actual liabilities, they would become liabilities in future provided the contemplated event occurs. If it does not occur, no liability is incurred. Sink such a  liability is not an actual liability. It is not shown in the balance sheet. Usually, it  is mentioned in the form of a foot note. Examples of contingent liabilities are:

i. Claims against the business not acknowledged as debts.

ii. Liability on bills discounted.

 

Q7: What is the difference between trading account and profit & loss account.

Ans: Following are the points of difference between trading account and  profit & loss account.

Trading Account	Profit & Loss Account
1. Trading account is prepared to find out the gross profit or gross loss.	P & L account is prepared to find out the Net Profit or Net loss
2. Trading account is prepared before preparing the profit and loss	P & L account is prepared after Preparing trading account.
3. It considers only direct expenses an incomes	P & L account considers all indirect, expenses  losses, incomes and gains and balancing figure of trading account.
4. An error in trading account will effect an error in  profit & loss account.	The P & L account has not effect on trading account.
5. The result disclosed by trading account are partial i.e trading only	The result disclosed  by P & L account are complete and final.

 

Q8. What is the difference between Gross profit and N. Profit.

 

Gross Profit	Net Profit
1. Gross profit is the excess of sale proceeds over the cost of goods sold	Net profit is the excess of gross profit and income over all expenses and losses.
2. Gross profit is revealed by trading account	Net profit is disclosed by profit and loss account
3.  Gross profit is transferred to Profit and loss account.	Net profit is transferred to the proprietor’s capital account.
4. While calculating gross profit, indirect expenses, and incomes are not considered	While calculating net profit, indirect expenses and incomes are taken into consideration.

 

 

 

Q9: Give the treatments of important adjustments.

Ans: Following are the treatments of important adjustments.

1. Adjustments of outstanding expenses.

These expenses are to be added which original figure in trading account or profit & loss account. These items are also shown in balance sheet as a liability side.

2. Adjustments for outstanding incomes.

These incomes are to be added in credit side of profit and loss account. These incomes are also to be shown in balance sheet as an asset.

3. Adjustments for prepaid expenses

This items are to be deducted for original figure in trading account or profit & loss account. This items are also shown in balance sheet as a asset.

4. Adjustments for depreciation

This  items is debited to profit and loss account of depreciation form concerned asset in the balance sheet.

5. Adjustments for interest on Capital:

This items is debited to profit and loss account and also add the amount of interest on capital to the capital on the liability side of balance sheet.

6. Adjustment for interest  on capital.

This  items is shown  on the credit side of profit and loss account and also the amount of interest on drawings is deducted form capital on the liability side of balance sheet.
7. Adjustment for managers commission outstanding.

This items is debited to profit and loss account and also shown in liability side of balance sheet.

 

 

Accounts for incomplete records

 

Q10: What is a single entry system? What are its advantages

Ans: Under the single entry system of book-keeping  both aspects of every transaction are not recorded in the books of accounts. Since only one aspect of every transaction is usually recorded under this system. Therefore the system is called single entry system.  Under this system, the  personal accounts of the debtor and creditors are maintained. In other words single entry system is a system of accounting under which a business  transaction recorded on once either on debit side or credit side of an account. Real and nominal account are not maintained under this system.

 

Disadvantages of  single entry system:-

Following are the disadvantages of single entry system:

1. the arithmetic accuracy  of the books of accounts  of a trail balance.

2. It is not possible to obtain accurate information regarding the results of business operational because nominal accounts  relating to losses  expenses, gains and incomes have not been maintained.

3. information relating to assets and liabilities cannot be reliable because respective account have not been maintained.

4. in the absence of various checks, fraud is more easily committed and it is very difficult to detect.

5. it is difficult to detect audit of such records.

 

 

 

Q11: What is difference between double entry system and single entry system.

 

Ans: Following are the difference between double entry and single entry system.

 

Double entry system	Single Entry System
1. it enables a trader to have complete records of all his business transactions	It fails to give a complete record of each and every transaction.
2. it records both the aspects of every transaction	Normally it records only one aspect of the transaction.
3. All types of accounts viz, personal, real and nominal are maintained under this system.	Only personal accounts  and cash  book is maintained under this system
4. Arithmetic accouracy of the records can be checked by preparing of trail balance	Arithmetic accuracy of the records cannot be checked since trail balance cannot be prepare
5. True profit or loss of a period can be determined by preparing a trading and profit  & loss account	In the absence Nominal accounts, trading and Profit & loss accounts cannot be prepared.
6. Final accounts are more reliable under double entry system.	It cannot ensure reliability of final accounts

 

 

Q12: What is difference between statement of affairs and balance sheet.

Ans: Following are the point of difference between statement of affairs and balance sheet.

 

Statement of affairs	Balance sheet
1. Assets & liabilities appear, partly at their book value and partly at estimated values	Assets and liabilities appear completely at book values.
2. Statement of affairs shows only the estimated financial position	Balance sheet show true financial position.
3. financial position disclosed by statement of affairs in unreliable	The financial position disclosed  is more reliable.

 

Q13: How profit is ascertaining under single entry system of book keeping?

 

Ans: it is not possible to prepare a regular trading and Profit & loss account, because no record is kept of the nominal accounts, therefore the exact profit or loss for a particular period cannot be ascertained. The net profit for a particular  period can be ascertained in a rough manner by comparing the  financial position of the business at the beginning of period with the financial position at the end of period. This requires the preparation of two statement of affairs, one in the beginning and other at the end. Opening and closing balances of capital can be ascertained by preparing statements of affairs at the two dates will reveal either profit or loss.

 

 

Unit-8

Financial statement of Non-Profit Organisation

 

Q1:What is Non-profit organisation or Non-trading Concern? What are its characteristics or features.

 

Ans: Generally not for profit is a organization that does not operate for the profit, personal gain or other benefit, of particular people, Non trading concerns do not deal in purchasing and selling of goods but deal is services with or without the objectives of making profit. In other words Non-Profit as organisation whose activities are primarily guided by service motive rather than by profit motive. These organizations include schools, hospital, clubs and religious organisations. A Non-Trading concerns prepare the following final accounts.

i. Receipt and payment accounts.

ii. Income and expenditure account.

iii. Balance sheet.

 

Charecteristics of Non-Profit Organisation.

Following are the characteristics of Non-Profit Organisations

i) Non-Profit organisation are established for service motive for the welfare of societies.

ii) They are generally set up a charitable societies with main objectives of rendering social, religious educational services.

iii) They prepare final account like income and expenditure account, receipts and  payments accounts and balance sheet.

 

Q2: what are receipts and payments account? What are its features.

Ans: it is simply a summary of cash book prepared under appropriate heads whereas the cash book records individual cash transactions date wise, the receipt and payment account shows totals of cash transaction under different heads. All receipts are recorded on the debit side and all the  payments are recorded in the credit side of  receipt and payment account. In other words it may be defined as an account showing summary of cash transaction of an accounting year.

 

Features of Receipt and payment account:

1. it is a summary of cash book all receipts are shown on the debit side and all payments are shown on the credit side.

2. it starts with opening balance of cash and ends with closing balance of  cash and bank.

3. it records both revenue and capital nature items.

4. it does not disclose any surplus and deficit.

5. No adjustments is made in the account.

 

Q3: What is the difference between receipt & payment and  and cash book

Ans: Following are the difference between receipt and payment account and cash book

Receipt & Payment Account	Cash Book
1. it is prepared by non-profit organisation and professionals only	It is prepared by trading and manufacturing concerns to record all cash transactions.
2. Transactions are not recorded datewise in the account	All cash transaction are recorded in date wise in this  account
3. it two sides are receipts and  payments	Its two sides are debit and credit
4. it is not posted into ledger	It is not posted  into ledger
5. it is a brief summary of cash transactions of the whole year.	All cash transactions are recorded in detailed manner and not in summarized form.

 

Q4: What do you mean by income and expenditure account?

Ans: This account is in the nature of revenue of account of non-profit organization which shows all revenue expenditure incurred and all incomes earned in a accounting period.

Only revenue items are shown in this account. It is similar to profit and loss account and is prepared on the same lines. All expenses  and losses of a revenue nature are recorded  on its debit side and all incomes  and gains of revenue nature on its credit side. When incomes  and gains exceeds the expenses and losses it will be  called surplus and when debit exceeds  the credit side, it will  be called deficiency or deficit.

Q5: What is difference between receipt and payment account and income and expenditure account?

Ans: The difference between receipt and payment account and Income & expenditure account are as follows.

1. it is prepared  to know the cash or bank revenue.	It is prepared to know the surplus or deficit for he year.
2. it is a real account	It is a nominal account
3. it is similar to cash book	It is similar to profit and loss account
4. its debit side is for  receipts and credit side for payment	Its debit side is for expenses and credit side for incomes.
5. it records both capital and revenue items	It record only revenue items
6. it starts with an opening balance of  cash and bank	It does not have any opening balance
7. Closing balance represents  cash in hand and cash at bank	Closing balance represents either surplus or deficit.

 

Q6: What are the basic  features of income and expenditure account

 

Ans: The following are the main features of income and expenditure account.

i. it is a nominal account

ii. it records the items of revenue nature only. Capital receipts and capital payments are not recorded  in it.

iii. it records all expenses and losses on its debit side and all incomes and gains on its credit side.

iv. it is prepared on accrual basis

v. it gives summary of all incomes  earned and expenditure incurred in  the current period.

 

Q7: What is capital fund?

Ans: Capital fund is the accumulated excess of income over expenditure capital fund also includes the items which are capitalized like entrance fees and life membership fees. Capital fund is used in place of the capital of the profit earning organizations. Capital fund is calculated  by preparing the  balance sheet at the beginning of the year.

 

Q8: What is subscription.

 

Ans: This is a major source of income for a  not-for profit organisation. It is an annually paid by each member of the organization. Subcription relating to the current year wheather  received or not shall be recorded on the income side of  income and expenditure account. Subscription received in advance during the year for the following year shall appear in the current year’s balance sheet as a liability only.

 

Q9: what is capital expenditure and Revenue expenditure? Give examples

 

Ans:

A.Capital Expenditure:-Any expenditure which increase the value of a fixed asset is a capital expenditure. It is also incurred on the acquisition of fixed assets. These fixed assets must be used in the business continuously for earning profit.

Examples of capital expenditure:

i. Expenditures incurred on the purchase  of plant and machinery, furniture etc.

ii. expenditure incurred on the improvement of fixed assets to increase their production capacity such as increasing the seating capacity in a cinema.

 B.Revenue expenditure:-  it is a recurring expenditure incurred every day on running and managing the business. It includes all expenses on repairs, replacements and maintenance of existing assets. These assets do not in any way add to the earning capacity of  the assets. It is incurred on the purchase of raw materials  for the machines.

i. Expenditure incurred on the purchase of goods for sale.

ii. Interest on Loan.

iii. Expenses incurred on insurance

iv. rent, rates and taxes paid  by the business.

 

Q10: What is difference between capital expenditure and revenue expenditure.

 

Ans: The difference between capital expenditure and revenue expenditure are as

Capital expenditure	Revenue expenditure
1. it is incurred on acquisition of fixed asset.	It is incurred on the maintenance of fixed asset.
2. it is incurred to increase the earning capacity of assets.	It is incurred on the day to day administration and management.
3. Its benefits lasts for a long period	Its benefits is short for current year only
4. it is non-recurring in nature	It is recurring in nature

 

Q11: What do you mean by differed revenue expenditure/

Ans: Deferred Revenue expenditure refers to those heavy amounts spend on such activities which benefits the business for  long time. Such expenses are spread over for number of years for debiting in profit and loss account. The portion of expnses which remain to be debited termed as deferred Revenue expenditure and are shown as fixations asset in balance sheet till they are written off. Examples of these expenses are:

i. Preliminary expenses

ii. permanent advertising expenses.

Compiled By Mr. Imran sir

MR.IMRAN SIR
CELL: 9797936211