2nd Sem | Accountancy | Solved Papers | 2014-2015

Q.1. The Trial Balance given below contains certain mistakes. Redraft the Trial Balance: (10)

Particulars	Debit (Rs.)	Particulars	Credit (Rs.)
Machinery	17,000/-	Capital	73,600/-
Bad Debts	2,800/-	Interest received	2,600/-
Bank overdraft	10,000/-	Sales	1,04,000/-
Building	60,000/-	Debtors	60,000/-
Cash	400/-	Furniture	5,600/-
Purchase return	2,600/-
Discount received	3,000/-
Purchases	1,00,000/-
Creditors	50,000/-
	2,45,800/-		2,45,800/-

Corrected Trail Balance

Dr			Cr
Particulars	Dr Amount	Particulars	Cr Amount
Machinery	17,000/-	Bank Overdraft	10,000/-
Bad Debt	2,800/-	Capital	73,600/-
Building	60,000/-	Interest Received	2,600/-
Cash	400/-	Creditors	50,000/-
Furniture	5,600/-	Discount Received	3,000/-
Debtor	60,000/-	Sales	1,04,000/-
Purchases	1,00,000/-	Purchase Return	2,600/-
	2,45,800/-		2,45,800/-

Debit Side:- All Asset & Expenses

Credit Side:- All Liabilities, Capital & Income

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OR(5+5=10) (a) What is the meaning and purpose of Trial Balance.

A trial balance is a fundamental tool in accounting that summarizes all the balances in a company’s general ledger accounts. Its main purpose is to ensure that the total debits and credits are equal, thereby verifying the accuracy of financial records and confirming the accounting equation (Assets = Liabilities + Equity) is in balance. Preparing a trial balance is a crucial step in the accounting cycle and provides a foundation for other financial reports. It helps identify errors and discrepancies in the accounting system, which can be corrected before preparing financial statements. Overall, a trial balance is a critical component of the accounting process that ensures reliable financial records.

Purposes of Trial Balance:

1. Facilitating the preparation of financial statements: A trial balance provides a summary of all the ledger account balances, which makes it easier to prepare financial statements such as income statements and balance sheets.
2. Detecting errors and fraud: Preparing a trial balance helps detect errors and fraud in the accounting system. If the trial balance does not balance, it indicates that there is an error or fraud in one or more ledger accounts.
3. Providing a basis for adjusting entries: Adjusting entries are made to correct errors or omissions in the accounting system. The trial balance provides a basis for making these adjustments.
4. Helping with auditing: A trial balance is an essential tool for auditors. It provides a starting point for their audit and helps them ensure that financial records are accurate and reliable.

(b) Explain the methods of preparing Trial Balance.

There are two methods of preparing a trial balance: the total method and the balance method.

1. Total Method: Under this method, the total of all the debit balances in the ledger accounts is calculated, and the total of all the credit balances is also calculated. These two totals are then compared, and if they are equal, the trial balance is considered balanced. If they are not equal, an error is assumed to have occurred, and the accountant must identify and correct it.
2. Balance Method: Under this method, all ledger accounts are listed in a single column, and their balances are entered in either the debit or credit column, depending on their nature. The balances are then totaled for each column, and the difference between the two totals is calculated. If the difference is zero, the trial balance is considered balanced. If it is not zero, there is an error that must be identified and corrected.

Both methods are widely used, but the balance method is more commonly used in practice. The balance method provides more detailed information about each account’s balance, which can be useful in identifying errors. However, the total method is faster and simpler, making it suitable for smaller businesses or when time is of the essence.

Apart from the total method and balance method, there is another method of preparing a trial balance called the statement method.

3. Statement Method: Under this method, a trial balance is prepared directly from the financial statements. The starting point is the income statement, which lists all revenues and expenses for a given period. The net income or loss is then transferred to the retained earnings account on the balance sheet.

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Q.2. What is the meaning of Journal? Explain the contents of Journal format and show how posting is done in it by any two imaginary transactions.(10)

Journal is a book of original entry in which all financial transactions of a business are recorded in chronological order. It is the first step in the accounting process and provides a complete record of all the company’s financial transactions. The journal is an essential document as it is the source for recording transactions in other accounting records such as ledgers and financial statements.

Contents of Journal Format: The journal format includes the following columns:

1. Date: This column records the date of the transaction.
2. Account Title and Description: This column records the name of the account and a brief description of the transaction.
3. Debit Amount: This column records the amount debited from the account.
4. Credit Amount: This column records the amount credited to the account.
5.  L.F: Stands for Ledger Folio, which means the page number in the ledger in which the entry is posted.

Posting in Journal: Posting is the process of transferring information from the journal to the ledger accounts. This process involves identifying the accounts affected by the transaction, determining the debit and credit amounts, and recording them in the appropriate ledger accounts.

Let’s take two imaginary transactions to understand how posting is done in the journal.

Date	Account Title and Description	Ledger Folio	Debit	Credit
01/01/2023	Accounts Receivable – sold goods to XYZ (Sold goods to XYZ on credit)	101	INR 10,000
01/01/2023	Sales – goods sold to XYZ (Goods sold to XYZ on credit)	201		INR 10,000
15/01/2023	Cash – received payment from XYZ (Received INR 8,000 in cash from XYZ against outstanding dues)	301	INR 8,000
15/01/2023	Accounts Receivable – received payment (Received INR 8,000 from XYZ against outstanding dues. This clears the account with XYZ for now)	101		INR 8,000

Note: Ledger folio refers to the page number of the ledger account where the transaction is posted. The account titles and narration have been modified to provide more clarity on the transaction.

Procedure for Journalizing:

From the given business transaction, the receiving aspect and the giving aspect should be identified.

Depending upon the nature of the account that is affected by the transaction, the rule for journalizing should be selected as follows:

Nature of account Rule for debiting an account Rule for crediting an account

• Personal Account Debit the Receiver a/c Credit the Giver a/c
• Real Account Debit is what comes in Credit what goes out
• Nominal Account Debit all expenses and losses Credit all incomes and gains

The prescribed format of a journal is shown below:

 

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Q.3. (2 ½ +2 ½ =5) (a) Explain briefly any five Generally Accepted Accounting Principles

here are brief explanations of five Generally Accepted Accounting Principles:

1. Business Entity Principle – This principle states that a business should be treated as a separate entity from its owner/s, and financial transactions of the business should be recorded and reported separately from personal transactions of the owner/s.
2. Cost Principle – This principle states that assets should be recorded at their original cost at the time of acquisition, rather than at their current market value. This principle ensures consistency and objectivity in financial reporting.
3. Matching Principle – This principle requires that expenses be matched with the revenue they help generate in a given accounting period. This principle ensures that financial statements accurately reflect the profitability of the business.
4. Full Disclosure Principle – This principle requires that all material information relevant to financial statements be disclosed in the financial statements or in the accompanying notes. This principle ensures that financial statements are transparent and provide users with all the necessary information to make informed decisions.
5. Conservatism Principle – This principle suggests that when there are multiple acceptable accounting methods for a transaction, the method that will result in lower profits or higher liabilities should be chosen. This principle helps avoid overstatement of assets and income, and understatement of liabilities and expenses.

 

(b) How Accounting, Book-keeping and Accountancy are different?

      

Topic	Accounting	Book-keeping	Accountancy
Definition	The process of recording, classifying and summarizing financial transactions to provide information that is useful in making business decisions.	The process of recording financial transactions in a systematic manner in a set of books to keep track of all financial transactions of a business.	The profession or practice of accounting, includes auditing, taxation, financial reporting, and management accounting.
Focus	Focuses on the preparation and interpretation of financial statements.	Focuses on the systematic recording of financial transactions.	Focuses on the application of accounting principles to specific situations, such as audits, tax planning, and financial analysis.
Objective	To provide financial information to stakeholders, such as investors, creditors, and management, to help them make informed decisions.	To keep accurate and up-to-date records of financial transactions.	To provide specialized accounting services to clients, such as auditing, taxation, and financial analysis.
Functions	Record-keeping, classification, and summarization of financial transactions.	Recording financial transactions, maintaining ledgers and preparing financial statements.	Financial reporting, auditing, tax planning and compliance, and financial analysis.
Skills Required	Strong knowledge of accounting principles and standards, analytical skills, and attention to detail.	Accuracy and attention to detail, knowledge of accounting software, and organization skills.	Strong knowledge of accounting principles and standards, analytical skills, and the ability to apply them to specific situations.
Scope	Covers all financial transactions of a business, including assets, liabilities, revenue, and expenses.	Covers the systematic recording of financial transactions.	Covers a broad range of accounting-related services, such as auditing, tax planning, and financial analysis.
Example Tasks	Preparing financial statements, analyzing financial data, and advising management on financial matters.	Recording transactions in a general ledger, reconciling bank statements and preparing financial reports.	Conducting audits, preparing tax returns, and providing financial advice to clients.

Q.4. What do you understand by Bank Reconciliation Statement? Briefly explain any four reasons for preparing this statement. (5)

A bank reconciliation statement is a summary of banking and business activity that reconciles an entity’s bank account with its financial records. The statement outlines the deposits, withdrawals, and other activity impacting a bank account for a specific period. A bank reconciliation statement is a useful financial internal control tool used to thwart fraud.

The differences in the two balances arise due to 3 main reasons: Timing, Errors, and Transactions only known to the bank. Overall, the main reason for preparing BRS is to have a strict internal control over company’s cash inflows and outflows. To be more precise, these are a few reasons why we prepare BRS.

S.No.	Scope	Comments
1	Mistakes and Errors	Bank reconciliation statement helps to detect any errors and mistakes in cash or a passbook.
2	Explains Delay	Any delay in clearance or collection of checks can be identified.
3	Fraud Detection	Timely reconciliations help prevent and find any frauds related to cash.
4	Actual Bank Balance	It helps to identify the actual bank balance of a business.
5	Valid Transactions	It helps in separating valid and invalid transactions such as a wrongly charged fee by the bank.

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Q.5. Enter the following transactions in a suitable Cash Book: (10)

2013		In Rupees
April 1	Cash balance	50,000/-
	Bank balance	1,70,000/-
April 6	Rent paid by cheque	20,000/-
April 10	Goods purchased for	35,000/-
April 18	Received interest in cash	7,000/-
April 22	Withdrew from bank for office use	15,000/-
April 27	Sold goods for cash	17,000/-
April 29	Paid wages	3,000/-
April 30	Purchased stationery	4,000/-
April 30	Received cheque from Rishi	10,000/-
April 30	Paid to Hari by cheque	25,000/-

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OR (2+3+3+2=10) (a) Why Cash Book is maintained in the business?

Cashbook is maintained to serves the advantages a business gets from cash book:-

a. It prevents duplication of work in entering cash transaction in journal and then posting the same into the ledger.

b. Cash and Bank transactions can be recorded in cash book.

c. It is possible to find out daily cash and bank balance.

d. Cash book also serves the purpose of book of original entry as well as ledger.

e. Frauds involving cash are likely to be minimized and where committed are likely to be detected at an early stage.

(b) Give format of three column cash book.

The format of a triple/three column cash book is given below:

The triple column cash book has 7 columns on both debit and credit sides. The purpose of each column is briefly explained below:

1. Date: The date column is used to enter the transaction date.

2. Description: The description column is used to write the name of the account to be debited or credited in the ledger as a result of cash or bank transaction.

3. Voucher number (VN): A voucher is a document in support of a transaction. The serial number of the voucher is entered in this column.

4. Posting reference (PR): Each account in the ledger is assigned a unique numbered. The number each ledger account that is written in description column is entered in PR column.

5. Discount: The amount of discount allowed is recorded on debit side and the amount of discount received is recorded on credit side in discount column.The totals of debit column and credit column are posted to discount allowed account and discount received account respectively.

6. Cash: The amount of cash received (net of any discount allowed) is entered on the debit side and the amount of cash paid (net of any discount received) is entered on the credit side in cash column. This column is totaled and balanced like a ledger account.

7. Bank: The amount of all receipts and payments made by the bank account are entered in bank column of the cash book. This column is also totaled and balanced like a ledger account.

(c) What is the difference between Cash Book and Petty Cash Book?

Petty Cash Book –It is another Cash Book which is  maintained, generally, in large business concerns to reduce  the burden of ‘Main Cash Book’, in which numerous  transactions involving petty (small) amounts are recorded.

Cash Book – contains all cash receipts and payments,  including bank deposits and withdrawals. Entries in the  cash book are then posted into the general ledger. The cash  book is periodically reconciled with the bank statements as an internal method of auditing.

(d) What is ‘Contra Entry’?

In the dual-entry accounting system, a Contra Entry is an entry which is recorded to reverse or offset an entry on the other side of an account. If a debit entry is recorded in an account, it will be recorded on the credit side and vice-versa.

Debit and credit aspects of a single transaction are entered in the same account but in different columns. Each entry, in this case, is viewed as a contra entry of the other. Remember the word contra as “Against” or “Opposite”.

Q.6. (5+5=10) (a) Explain why ‘Ledger’ is the principal book of business. Give the procedure for balancing Ledger account.

The journal provides a complete listing of the daily transactions of a business. But it does not provide information about a specific account in one place. For example, to know how much cash balance we have, the accounting clerk would have to check all the journal entries in which cash is involved, and this is very laborious job; because there are hundreds or even thousands of cash transactions recorded on different pages of journal. To avoid this difficulty, the debit and credit of journalized transactions are transferred to ledger accounts. Thus all the changes for a single account are located in one place – in a ledger account. This makes it easy to determine the current balance of any account.

Ledger Account Balance

The ledger account is a collection of all the debits and credits made in relation to an account head at a single place.

The debits and credits, which are actions of opposing nature, are collected separately on either side of the account.

Ledger account balance is the net amount obtained by setting off the sum of all debits and sum of all credits against each other.

In setting off, we always assume that the greater sum is being set off from the smaller one. Thus the ledger account balance is also interpreted as

• Debit side total − Credit side total(if debit side total is greater)

• Credit side total − Debit side total(if Credit side total is greater)

Mathematically, ledger account balance is the absolute difference between the credit side total and the debit side total.

⇒ Ledger Account Balance = | Debit side total − Credit side total |

Ledger Balancing

Dr			Cash A/c				Cr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
15/06/_5 19/06/_5 24/06/_5 24/06/_5	To Capital a/c To Goods/Stock a/c To Mr. Natekar a/c To Commission Received a/c	– – – –	2,00,000 12,000 2,000 500	17/06/_5 17/06/_5 18/06/_5 18/06/_5 21/06/_5	By Furniture a/c By Rent Paid a/c By Bank a/c By Goods/Stock a/c By Wages Paid a/c	– – – – –	20,000 5,000 1,50,000 10,000 5,000
	Sub Total		2,14,500		Sub Total		1,90,000

The act of finding the balance in a ledger account is called Ledger Balancing.

Illustration

The total of the debit side is 2,14,500 and that of credit side is 1,90,000.

⇒ The balance in this Ledger account is 24,500 (2,14,500 − 1,90,000).

Debit side total is greater than the credit side total

∴ Nature of balance is debit.

This ledger account has a debit balance of 24,500.

(b) Differentiate Ledger and Journal.

BASIS FOR COMPARISON	JOURNAL	LEDGER
Meaning	The book in which all the transactions are recorded, as and when they arise is known as Journal.	The book which enables to transfer all the transactions into separate accounts is known as Ledger.
What is it?	It is a subsidiary book.	It is a principal book.
Also known as	Book of original entry.	Book of second entry.
Record	Chronological record	Analytical record
Process	The process of recording transactions into Journal is known as Journalizing.	The process of transferring entries from the journal to ledger is known as Posting.
How transactions are recorded?	Sequentially	Account-wise
Debit and Credit	Columns	Sides
Narration	Must	Not necessary.
Balancing	Need not to be balanced.	Must be balanced.

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OR Post the following transactions into Ledger. Balance each Ledger at the end of the month: (10)

• 04.05.2013 Purchased furniture worth Rs.65,000/-
• 13.05.2013 Paid wages Rs.5,000/-
• 21.05.2013 Sold goods to M/s. Durga Traders for Rs.80,000/-
• 24.05.2013 Purchased equipment and paid cheque of Rs.27,000/- for it.
• 28.05.2013 Purchased stationery for Rs.3,000/-
• 30.05.2013 Sold goods for Rs.90,000/-

Q.7. Explain the three types of Accounts with examples. Give their respective rules of journalising the transactions. Is it possible to pass a single journal entry for two or more transactions? (6+3+1=10)

There are mainly three types of accounts in accounting: Real, Personal and Nominal accounts, personal accounts are classified into three subcategories: Artificial, Natural, and Representative.

1. Real Accounts

All assets of a firm, which are tangible or intangible, fall under the category “Real Accounts“.

Golden rule for real accounts for journalising the transactions

Debit what comes in, Credit what goes out

Example

The transaction below shows the interaction of two different real accounts: one is furniture and the other is cash, both of them are assets of the company and hence classified as real accounts.

• Purchased furniture for 10,000 in cash 

Accounts Involved	Debit/Credit	Rule Applied
Furniture A/C	Debit	Real A/C – Dr. what comes in
To Cash A/C	Credit	Real A/C – Cr. what goes out

*Amount will be 10,000 in both debit and credit.

2. Personal Accounts

These accounts are related to individuals, firms, companies, etc. A few examples of personal accounts include debtors, creditors, banks, outstanding/prepaid accounts, accounts of credit customers, accounts of goods suppliers, capital, drawings, etc.

Golden rule for personal accounts for journalising the transactions

Debit the receiver, Credit the giver

Example

The transaction below demonstrates the interaction between two different personal accounts, one of which is a private limited company and the other one is a bank.

• Paid Unreal Pvt Ltd. 24,000 by check

Accounts Involved	Debit/Credit	Rule Applied
Unreal Pvt Ltd. A/C	Debit	Personal – Dr. the receiver
To Bank A/C	Credit	54Personal – Cr. the giver

*Amount will be 24,000 in both debit and credit. 

3. Nominal Accounts

Accounts which are related to expenses, losses, incomes or gains are called Nominal accounts. The dictionary meaning of the word “nominal” is “existing in name only” and the meaning remains absolutely true in accounting sense too, because nominal accounts do not really exist in physical form, but behind every nominal account money is involved. E.g. Purchase A/C, Salary A/C, Sales A/C, Commission received A/C, etc.

Golden rule for nominal accounts for journalising the transactions

Debit all expenses & losses, Credit all incomes & gains

Example

The following example shows a transaction where a nominal account deals with a real a/c.

• Purchased good for 15,000 in cash

Accounts Involved	Debit/Credit	Rule Applied
Purchase A/C	Debit	Nominal A/C – Dr. all expenses
To Cash A/C	Credit	Real A/C – Cr. what goes out

The amount will be 15,000 in both debit and credit.

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Q.8. State in which subsidiary books the following transactions will be recorded: (10)

(a) Credit sale of assets.
a) journal proper

(b) Cash purchases of goods.
b) Cash book

(c) Loss of goods by fire.
c) Journal proper

(d) Credit sale of goods.
d)  Sales book

(e) Return of goods to the business which was sold earlier.
e) Sales return book

(f) Furniture purchased for cash.
f) Cash book

(g) Withdrawal of goods for personal use from the business.
g) Journal proper

(h) Purchased machinery on credit.
h) Journal proper

(i) Goods purchased earlier returned back to the supplier as being damaged.
i) Purchase return book

(j) Sold goods in cash.
j) Cash book

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Q.9. (a) Explain the meaning and purpose of preparing Final Accounts. (4)

Final accounts is a somewhat archaic bookkeeping term that refers to the final trial balance at the end of an accounting period from which the financial statements are derived. This final trial balance includes all of the journal entries used to close the books, such as:

• Wage and payroll tax accruals
• Income tax accruals
• Asset write downs
• Adjustments to reserves for returns, bad debts, and obsolete inventory
• Depreciation and amortization
• Overhead allocation
• Customer billings

Thus, final accounts can refer to the final trial balance or the financial statements upon which they are based. The primary financial statements are the income statement, balance sheet, and statement of cash flows.

Since final accounts refers to a company’s ending account balances, which in turn are used to create financial statements, this means that the final accounts reveal the results of the business during a period, its financial position at the end of that period, and its sources and uses of funds during that period (which is the purpose of the financial statements).

A final account, or final accounting, can also be the summarized statement issued when a business transaction has been concluded. For example, when someone leaves a hotel, they are given a final accounting of what they owe the hotel.

(b) Identify the following under Capital Expenditure, Revenue Expenditure and Deferred Revenue Expenditure: (6)

1. Maintenance charges paid for machinery of the business. Revenue Expenditure

2. Purchased laundry machine for commercial use. Capital Expenditure

3. Installed photocopier in the office. Capital Expenditure

4. Purchased material for production. Revenue Expenditure

5. Expenditure on purchase of stationery. Capital Expenditure

6. Expenditure incurred on research and experiments. Deferred Revenue Expenditure

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Q.10. From the following Trial Balance, prepare Trading Account and Profit & Loss Account for the year ended 31st March 2013 and a Balance Sheet as on that date: (20)

TRIAL BALANCE AS ON 31ST MARCH 2013

Particulars	Debit (Rs.)	Credit (Rs.)
Capital		2,00,000/-
Drawings	17,000/-
Plant & Machinery	1,20,000/-
Furniture	26,000/-
Debtors	36,000/-
Creditors		26,000/-
Purchases	20,000/-
Sales		42,000/-
Wages	8,000/-
Cash at Bank	26,000/-
Salaries	8,000/-
Repairs	1,900/-
Opening stock	16,000/-
Rent	4,500/-
Manufacturing expenses	1,500/-
Bills payable		23,500/-
Bad debts	5,000/-
Carriage	1,600/-
	2,91,500/-	2,91,500/-

Adjustments:

1. The value of closing stock is Rs.16,000/-
2. Outstanding wages Rs.1,500/-
3. Prepaid rent is Rs.500/-
4. Depreciate Plant & Machinery by 10% and Furniture by 15%.