Question 1 Define Accounting & Explain it’s objective?

Answer Accounting has rightly been termed as a language of the business. The basic
function of business is to serve as a mean of communication. Accounting
communicates the result of the business operations to various interested
parties such as owner, creditors, investors, government and others agencies.

In business, the need for accounting is of great importance. Accounting

records gives position as to:-

a) What the business owns (Assets & properties)

b) What the business owns (Liabilities)
c) What is the extent of profit earned or losses suffered in an accounting
period(Profit & Loss)
d) What is the capability of the business to honor the financial commitment
and obligations, as and when they fall due (Liquidity)

Accounting has been recognized as a tool for

mastering various economic problems. It provides information which can be
taken into the decisions to decide the future of the organization.

Definition of Accounting

Accounting can be defined as art of recording, classifying and summarizing

in terms of money transaction and events of financial character and
interpreting the results thereof. According to “American Accounting
Association ”, accounting is the process of identifying, measuring and
communicating information to permit judgment and decisions by the users
of accounts.

Objectives of Accounting

1. To keep systematic records :- Accounting is done to keep the systematic

records of the financial transaction. In the absence of accounting it
would become very difficult for a businessman to keep a proper record
of transactions of the business.
2. To protect business properties ;- Accounting is done to protect the
business properties from unjustified and unwanted use. This is done by
providing the following information as under
a) What the business owns?
b) What the business owes?
c) What amount of owner’s fund invested in business?
d) What amount had a business has to recover from others?

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 3. To ascertain the operational profit or loss: One of the main objectives of
accounting is to ascertain the operational profit and loss in an accounting
period. This is done by properly maintaining the of revenue & expenses
for a particular period.
4. To ascertain the financial position of the business: Ascertaining the
financial position of the business required the operation of balance sheet
and Profit & Loss A/c shows the performance of business during a given
period. Balance sheet shows the state of affairs of assets and liabilities
on a given point of time.
5. To help rational decision marking :- Accounting has been recognized as
a tool for mastering various economics problems. It’s objective is to
provides information which can be used to taken decisions to decide the
further of the organization.

Thus to conclude we can say that “Accounting is the

language of business through which the business house communicates”.

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Question 2. Explain the meaning & significance of the following :-

a) Dual Aspect b) Consistency c) Materiality d) Full Disclosure
e) Cost Concept

Answer…2
a) Dual Aspect:- Dual Aspect concept is the basis principal of accounting.
According to this concept , every transaction has a dual aspect i.e. two
fold effect. The principal is also called “Double-Entry System”. For
example- If Mr. Divya purchase a furniture for Rs. 10000/- in cash, than
the two fold effect in this transaction is increasing in asset i.e. cash. Thus
the accounting equation which it gives is
Assets = Liabilities + Capital

b) Consistency:- Consistency is one of the accounting conventions.

According to this convention accounting practices should remain the
same from one year to another year. For example in case of charging
depreciation either straight line method of written down method should
be consistently followed. However, consistency does not mean
inflexibility. If due to change in law or any other requirement a change is
required in the current system then this convention can be broken and
the effect of this change on profit or loss should be disclosed in the notes
of accounts.

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 c) Materiality :- Materiality is one of the accounting convention.
According to this convention an accountant should attach importance to
material details and ignore insignificant details. Now what is material
and what is immaterial is left to the discretion of accountant should treat
an item, as material if the knowledge of it would influence the decision
of investors. The importance of this convention is that it helps in
avoiding unnecessary burden on accounting.

d) Full Disclosure :- According to this convention all significant

information should be disclosed fully & fairly. Account should be
honestly prepared and all the material information which is important to
the creditors, investors, owners, government & other agencies which
should be duly disclosed.

e) Cost Concept :- Cost concept is one of the accounting concept.

According to this concept asset is recorded at the price paid to acquire it.
This cost is the basis for all subsequent accounting a for the asset. For
example Mr Nigam plot of land purchased for Rs 500000/- will be
recorded at this value, irrespective of market prices. One of the
advantage of cost concept is that it brings objective in the presentation of
financial statements.

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Question.3 “Trial Balance is a conclusive proof of Accounts”- Comment.

Answer ..3 A statement is made after the prepration of ledger to shoe separately the
debit & credit balances. This statement is known as Trial Balance. The
arithmetical accuracy ensured by the agreement of trial balance is not a
conclusive proof of accuracy. There exists a scope of following errors:-

i) Omission of an entry in the original books:- If an entry is omitted

from being recorded in the book of accounts it will not affect the trial
balance. For example if goods are sold on cash and this fact is
omitted from being recorded in the original books, than effect of it
would neither come in Sales A/c nor in Cash A/c but the trial will
agree.

ii) Positing an item on correct side but to the wrong A/c :- If an item is
posted on correct side but to a wrong A/c than also trial will agree.
For example- if a good are purchased on credit from Ram, but by
mistake we have credited in Rema A/c in place of Ram A/c, in this
case trial will not be affected.

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 iii) A wrong amount is entered in the books:- If by mistake wrong
amount is entered in the books in that case also trial will not be
affected For example- Purchase of good worth Rs 6000/- is wrongly
entered in purchase journal but still trial will agree.

iv) Compensating Errors:- When two or more errors are committed in

such a way that one error nullifies the effect of another error. For
example- a bookkeeper by mistake forgets to post Rs 1000/- on
debits side of a certain A/c and similarly forgets to post Rs 1000/- on
credit side of another A/c. This will have no effect on trial .

v) Error of Principle :- If fundamental principle of accounting are not

followed while recording a transaction it is known as error of
principal. Fore Example- wrong allocation of expenses between
capital & revenue, treating direct expenses as indirect expenses.
Such errors also not detected by trial balance.

vi) Errors of duplication:- When a transaction is recorded twice in the

book of account it is known as “Error of duplication”. Such error
also have no effect on trial.

Thus in spite of all the limitations, preparation of the trial balance is

important before preparation of final account.

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Question.4 You are required to pass the rectification entries & redraft the Trial Balance
Answer..4
Trial Balance

Particular Dr. Cr.

i) Drawings A/c Dr 1500
To Purchase 1500
(Being the error rectified)
ii) R’s A/c Dr 1250
To H’s A/c 250
To Suspense 1000
(Being the error rectified)
iii) Fittings A/c Dr 500
To Salaries & Wages 500
(Being the error rectified)
iv) Suspense A/c Dr 5000
To Atul 5000
(Being the error rectified)
v) Suspense A/c Dr 1000

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 To Arun’s A/c 500
To Ajay’s A/c 500
(Being the error rectified)
vi) Debtor’s A/c Dr. 3000
To Purchase A/c 1500
To Sales 1500
(Being the error rectified)
vii) Purchase A/c Dr 2000
Sales A/c Dr 2000
To Creditors A/c 4000
(Being the error rectified)

Redrafted Trail Balance

Particular Dr Cr
Capital 4500
Drawings( 6500+1500) 8000
Purchase (92750+2000-1500-1500) 91750
Sale (1,07,200+1500-2000) 106700
Salary & Wages (12250-500) 11,750
Fur. & Fittings (17500+500) 18,000
Debtors(30,250+3000) 33,250
Creditors (21,250+4000) 25250
Stationery 1,250
Cash at bank 5,700
B/R 15,750
B/P 9000
Rent & Rates 3200
K’s A/c 1250
Atul’s A/c 5000
H’s A/c 250
Arun’s A/c 500
Ajay’s A/c 500
Cash in hand 2300
1,92,200 1.92,200

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Question.5 What are the causes of difference in the bank balance as shown by the cash
book & the pass book.

Answer..5 Assets are the causes of difference in the bank balance as shown by the cash
book & pass book. It is not necessary that on a particular date balance
shown by cashbook & pass book agree. The reasons for such difference in
cash book & pass book are

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1) Cheques deposited into bank but not yet collected or credited by
bank:- When Cheques are deposited into the bank, in the books
of concern’s account bank A/c is debited but the bank will not
credit the concern’s A/c until cheques are collected and credited
by bank.

2) Cheques issued but not yet presented for payment:- When

cheques are issued in the books of the concern’s account the bank
A/c is credited but the bank will not debit the concern’s A/c until
cheques are presented for payment in the bank.

3) Bank Charges: - Bank renders many services to it’s clients and

charges for providing services. Entry for such charges are made
by bank but the corresponding entry for it in the concern’s book
is not made until the concern receives a statement from the bank
showing such charges.

4) Amount collected or credited by bank on standing instructions:-

Often concern issues standing instructions to bank to collect on
it’s behalf dividends, interest on investments etc. Banks after
collecting such amount credit the concern’s A/c but the concern
will not debit in bank A/c but it receives instruction from the
bank showing such collection made by the bank.

5) Amount paid or debited by bank on standing instruction:- Often

concern issues standing instructions to bank to pay on it’s behalf
the insurance premium, rent, payment of installments etc. The
bank often making such payments debit the concerns A/c but the
concern will not credit the bank A/c until it receives a statement
from the bank showing such payment made by the bank.

6) Interest credited by bank :- If banks provide some interest on

Current A/c than it will credit the concern’s A/c with the amount
of such interest but the corresponding entry for it will not appear
in the concern’s book until it receives an statement from the
bank.

7) Interest debited by bank on overdraft :- If bank has provided an

overdraft to the concern than bank will debit the concerns A/c
with amount of interest to be changed on such overdraft. But the
corresponding entry for it will not appear in the concern’s books
until it receives a statement from bank.

8) Direct payment by customer in the bank:- Sometimes customers

directly deposit the money in the concern’s A/c in the bank. The

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 bank after receiving such payments will credit the concern’s A/c
to corresponding entry for it will not appear in concern’s books
until a statement is received by it.

9) Dishonor of Cheque of Bill:- If any cheque of bill of a concern

is dishonored than the bank will not credit the concerns A/c
however the bank A/c has already been debited in the concern’s
book when the cheque were deposited.

10) Errors :- Errors in recording of transaction may also result in

difference in balance. Ex–cheque forgotten to send to bank but
are already entered in cash book.

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Question.6 From the particulars prepare the bank reconciliation statement as on 31st
December 2000
Answer...6
Bank Reconciliation Statement
as on 31st , December 2000

Particular Amount Amount

Balance as per Cash Book 6000

Add
Cheque Issued but not presented for 1000
payment (5000-4000)
Direct deposit by customer 500 1500
.
7500
Less
Cheque deposit but not yet credited 1400
Cheque deposit but dishonored 400
Bank charges debited by bank 20 1820

Balance as per pass book 5680

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Question.7 Prepare Machinery Account for the year 1999.

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Answer...7 Machinery Account

Date Particular Amount Date Particular Amount

1.1.99 To balance b/d 9,72,000 1.7.99 By bank 45,000
1.7.99 To bank 1,58,000 1.7.99 By P& L A/c 16,560
(150000+8000) (Loss on sale)
31Dec By P&L A/c 11,200
99 (Additional Dep)
31Dec By depreciation 1,23,140
99
31Dec By balance c/d 9,34,100

99
11,30,000 11,30,000

Working Note :
a. Calculation of the profit or loss on sales of machine :
Cost of machinery on 1.1.97 = 80000
Less Deprecation for the year = 8000
st
Closing Balance of machine on 31 Dec 97 72000
Less Deprecation for the year = 7200
Closing Balance of machine on 31st Dec 98 64800
Less Deprecation for the year = 3240
Closing Balance of machine on 31st Dec 99 61560
Therefore, loss on Sale = 61560-45000 =16560

b. Calculation of additional depreciation:

Cost of machinery on 1st Jan 97
972000 x (100/90) x (100/90) = 12,00,000
Less cost of Machinery sold = 80,000
11,20,000

Depreciation as per WDL

For the year 1997 = 1120000 x (10/100) = 112000
For the year 1998 = 1008000 x (10/100) = 100800
Total Depreciation as per WDV -> 212800

Depreciation as per SLM

For the year 1997 = 1120000 x (10/100) = 112000
For the year 1998 = 1120000 x (10/100) = 112000
Total Depreciation as per SLM -> 224000

c. Calculation of depreciation for the current year :

a) Dep on new machinery purchased= 158000 x (10/100) x (5/12)

= 7900

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 b) Dep on machinery sold = 3240
(Half year’s Dep)

c) Dep as per sum on balance of machinery = 112000 x (10/100)

= 112000

Total depreciation for current year = 7900+3240+112000

= 123140

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Question.8 Distinguish between:-

Answer..8
CAPITAL EXPENDITURE REVENUE EXPENDITURE
1. Capital Expenditure is incurred 1. Revenue Expenditure is incurred
either for acquiring a new asset for maintaining existing fixed
or for improving the existing asset or for meeting the routine
asset expenses of business.

2. Capital Expenditure increases 2. Revenue expenditure helps is

earning capacity of business.
3. Benefits of capital expenditure
are available over a period of
time.
4. Capital expenditure is record-
-ed in balance sheet.
maintaining the existing
capacity of business.
3. Benefits of Revenue Expenditure
restricted only to account period
in question.
4. Revenue expenditure is transfer-
-red either to trading or profit &
loss A/c

CAPITAL RECEIPT REVENUE RECEIPTS

1. Capital Recipts are normally 1. Revenue Receipts are normally

of non-recurring nature of recurring nature.
2. Receipt which are not revenue 2. Revenue receipts are obtained in
are regarded as capital receipts in course of normal trading
operations.
3. Capital receipts are not directly 3. Revenue receipts are directly
credited to income statement. Credited to income statement.
4. Capital receipt are normally not 4. Revenue receipt are available for
available for payment as profit distribution to the owner of the
to the owner of business. Business.

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Question.9 Prepare Manufacturing Trading Profit & Loss Account for the year ended
31st March 1998& balance sheet as at the end of the year.
Answer..9

Manufacturing Account

Particular Amount Particular Amount

To opening stock 5000 By closing stock
12000
(work in progress)
To Raw material 240000 By bal t/f to Trading A/c 313575
consumed
Add Op-Stock 30000
Add Purchase 250000
Less Cl-Stock 40000

To Carriage inward 4000

To Wages 50000
To Salaries 19500
To rent rates & taxes 6000
To Traveling & Convy. 875
To Dep. on furniture 200

3,25,575 3,25,575

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 Trading and Profit & Loss Account
For the year ended 31st March 1998

Particular Amount Particular Amount

To manufacturing A/c 313575 By closing stock 8000

To Op-Stock 16000 (finished goods)
(Finished good) By Sales 400000
To Purchase 8000
To Gross Profit 70425
408000 408000
To Salaries 6500 8900 By Gross profit b/d 70425
Add O/s 2400 By prov. for doubtful debt 500
To commission 3000
To bad debts 2000
To insurance 4000 3400
Less prepaid 600
To Rents &taxes 6000
To Communication 2800
To Tea & Tiffin 1600
To Trav. &Conv. 2625
To Carriage outward 4000
To dep on machinery 4000
To dep on furniture 300
(10% of 3000)
To Net profit t/f 33700
to capital A/c
70925 70925

Balance Sheet as on 31st March 1998

Liabilities Amount Assets Amount

Capital 72000 105700 Closing Stock 60000

Add Net Profit 33700 Work in Progress 12000
Raw Material 40000
Finished goods 8000
Outstanding Salary 2400 Insurance prepaid 600
Creditors 50000 Debtors 60000 57000

less Prov.for Debts 3000

Machinery 40000 36000
less dep. 4000
Furniture 50000
4500
less Dep. 500

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 158100 158100

Question.10 Under what headings, the following items will be classified.

a) Preliminary Expenses
b) Unclaimed dividend
c) Bills Receivable
d) Loose tools
e) Share Premium Account

Answer..10
Balance Sheet as on……

Liabilities Amount Assets Amount

CURRENT CURRENT ASSETS,

LIABILITIES & LOANS & ADVANCES:
PROVISIONS: Current Assets:
Current Liabilities: Loose Tools xxxx
Unclaimed dividend xxxx Loans & Advances
Bill Receivable xxxx
RESERVES & MISCELLANEOUS
SURPLUS E XPENDITURE:
Share Premium Account xxxx Preliminary Expenses xxxx

xxxx xxxx

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