Table of Contents
Q.1. What are Golden Rules of Accounts? Explain them with the help of a chart and examples. (10)
The Golden Rules of Accounting
1. Debit The Receiver, Credit The Giver
This principle is used in the case of personal accounts. When a person gives something to the organization, it becomes an inflow and therefore the person must be credit in the books of accounts. The converse of this is also true, which is why the receiver needs to be debited.
2. Debit What Comes In, Credit What Goes Out
This principle is applied in case of real accounts. Real accounts involve machinery, land and building etc. They have a debit balance by default. Thus when you debit what comes in, you are adding to the existing account balance. This is exactly what needs to be done. Similarly when you credit what goes out, you are reducing the account balance when a tangible asset goes out of the organization.
3. Debit All Expenses And Losses, Credit All Incomes And Gains
This rule is applied when the account in question is a nominal account. The capital of the company is a liability. Therefore it has a default credit balance. When you credit all incomes and gains, you increase the capital and by debiting expenses and losses, you decrease the capital. This is exactly what needs to be done for the system to stay in balance.
Examples – Three Golden Rules of Accounting
• Purchased furniture for 10,000 in cash
|
Accounts Involved |
Debit/Credit |
Rule Applied |
|
Furniture A/C |
10,000 |
Real a/c – Dr. what comes in |
|
To Cash A/C |
10,000 |
Real a/c – Cr. what goes out |
• Paid 15,000 cash to Unreal Pvt Ltd.
|
Accounts Involved |
Debit/Credit |
Rule Applied |
|
Unreal Pvt Ltd. A/C |
15,000 |
Personal a/c – Dr. the receiver |
|
To Cash A/C |
15,000 |
Real a/c – Cr. what goes out |
• Paid 18,000 from the bank as rent.
|
Accounts Involved |
Debit/Credit |
Rule Applied |
|
Rent A/C |
18,000 |
Nominal a/c – Dr. the expenses |
|
To Bank A/C |
18,000 |
Personal a/c – Cr the giver |
OR Explain any five accounting concepts and conventions with examples.
Accounting principles involve both accounting concepts and accounting conventions. Here are brief explanations.
Accounting Concepts
1. Business entity concept: A business and its owner should be treated separately as far as their financial transactions are concerned.
2. Money measurement concept: Only business transactions that can be expressed in terms of money are recorded in accounting, though records of other types of transactions may be kept separately.
3. Dual aspect concept: For every credit, a corresponding debit is made. The recording of a transaction is complete only with this dual aspect.
4. Going concern concept: In accounting, a business is expected to continue for a fairly long time and carry out its commitments and obligations. This assumes that the business will not be forced to stop functioning and liquidate its assets at “fire-sale” prices.
5. Cost concept: The fixed assets of a business are recorded on the basis of their original cost in the first year of accounting. Subsequently, these assets are recorded minus depreciation. No rise or fall in market price is taken into account. The concept applies only to fixed assets.
6. Accounting year concept: Each business chooses a specific time period to complete a cycle of the accounting process—for example, monthly, quarterly, or annually—as per a fiscal or a calendar year.
7. Matching concept: This principle dictates that for every entry of revenue recorded in a given accounting period, an equal expense entry has to be recorded for correctly calculating profit or loss in a given period.
8. Realisation concept: According to this concept, profit is recognised only when it is earned. An advance or fee paid is not considered a profit until the goods or services have been delivered to the buyer.
Accounting Conventions
There are four main conventions in practice in accounting: conservatism; consistency; full disclosure; and materiality.
Conservatism is the convention by which, when two values of a transaction are available, the lower-value transaction is recorded. By this convention, profit should never be overestimated, and there should always be a provision for losses.
Consistency prescribes the use of the same accounting principles from one period of an accounting cycle to the next, so that the same standards are applied to calculate profit and loss.
Materiality means that all material facts should be recorded in accounting. Accountants should record important data and leave out insignificant information.
Full disclosure entails the revelation of all information, both favourable and detrimental to a business enterprise, and which are of material value to creditors and debtors.
Q.2. Journalise the following transactions:
|
2004 |
Particulars |
Amount (Rs.) |
|
Ram started business with cash |
4,00,000/- |
|
|
March 5 |
Deposited into bank |
20,000/- |
|
March 6 |
Purchased furniture by paying cheque |
25,000/- |
|
March 6 |
Purchased machinery from Rajkamal Electrical’s |
40,000/- |
|
March 8 |
Loan given to Mahesh by cheque |
50,000/- |
|
March 10 |
Goods purchased from Mohan |
70,000/- |
|
March 11 |
Paid to Mohan in full settlement |
69,500/- |
|
March 20 |
Sold goods to Vinod, Trade Discount 15% |
30,000/- |
|
March 21 |
Purchased computer from Ram Electronics on credit |
45,000/- |
|
March 31 |
Cash received from Vinod |
25,000/- |
OR Explain the process of journalizing and journal book with the formats. (10)
A journal may be defined as the book of original or prime entry containing a chronological record of the transactions from which posting is done to the ledger. The transactions are recorded first in the journal in the order in which they occur.
The process of recording the transactions in a journal is called as journalizing.
The prescribed format of a journal is shown below:
Explanation:
1. Date: The date on which the transaction takes place is entered here. z
2. Particulars: The name of the account to be debited is written in the first line and the abbreviation ‘Dr.’ is written against it. In the second line, the account to be credited is written preceded by the word ‘To’. An explanation of the entry known as ‘narration’ is also given within bracket explaining briefly about the transaction.
3. L.F: Stands for Ledger Folio, which means the page number in the ledger in which the entry is posted.
4. Debit: In this column the amount to be debited against the ‘dr’ account is entered.
5. Credit: In this column, the amount to be credited against the ‘cr’ account is entered.
Procedure for Journalizing:
From the given business transaction, the receiving aspect and the giving aspect should be identified.
Depending upon the nature of 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 what comes in Credit what goes out
- Nominal Account Debit all expenses and losses Credit all incomes and gains
These rules may be used either jointly or separately for journalizing each and every transaction. The examples given below would explain the same.
Transaction 1: 1-1-2002 Vignesh started business with Rs. 60, 000.
Journal: In this transaction, the receiving aspect is that ‘cash’ is received by the business, which is distinct from Vignesh’s private or personal property and the giving aspect is that Vignesh is the giver. Proprietor’s personal account is represented by Capital a/c.
The journal entry in the business books is as follows:
Debit what comes in, here cash comes in, hence cash a/c is debited. Proprietor is the giver; hence, capital a/c is credited. A short explanation to explain the entry is given within brackets, by way of narration.
Note that separate rules are used for debiting and crediting the accounts. Real account rule is used for making the debit entry and personal account rule for making credit entry.
Q.3. Explain Bank Reconciliation Statement. What are the causes for the difference between Cashbook and Passbook. (10)
Q.4. What is Capital and Revenue Expenditure? Explain with examples. (5)
Definition of Capital Expenditure
The amount spent by the company for possessing any long-term capital asset or to enhance the working capacity of any existing capital asset, or to increase its lifespan to generate future cash flows or to decrease the cost of production, is known as Capital expenditure. As a huge amount is spent on it, the expenditure is capitalizedd, i.e. the amount of expenditure is spread over the remaining useful life of the asset.
Definition of Revenue Expenditure
The expenditure which is incurred on a regular basis for conducting the operational activities of the business are known as Revenue expenditure like the purchase of stock, carriage, freight, etc.. As per the accrual accounting assumption, the recognition of revenues is done when they are earned while expenditure is recognized when they are incurred. Therefore, the revenue expenditure is charged to the Income Statement as and when they occur. This satisfies the fundamental principle of Accounting i.e. Matching Principle in which the expenses are recorded in the period of their incurrence.
Example
If a company deals in computers and opens a new branch at a different location for which it acquires a building. The acquisition of the building will be a capital expenditure while the purchase of computers will be a revenue expenditure. Let’s look it another way If a company is involved in property dealing business the purchase of the buildings will be a revenue expenditure while the purchase of machinery would be a capital expenditure.
Q.5. Prepare the accounts of Jaiswal and Co. from the following information:
|
2004 |
Particulars |
Amount (Rs.) |
|
|
Dec 1 |
Balance due from Jaiswal & Co. |
10,000/- |
|
|
Dec 4 |
Cash sales to Jaiswal & co. |
4,000/- |
|
|
Dec 8 |
Bought furniture from Jaiswal & Co. |
20,000/- |
|
|
Dec12 |
Jaiswal & Co. purchased goods from us |
6,000/- |
|
|
Dec15 |
Jaiswal & Co. returned goods |
400/- |
|
|
Dec20 |
Jaiswal and Co. settled his accounts by cheque and received discount |
300/- |
|
Q.6. Enter the following in subsidiary books:
|
2004 |
Particulars |
Amount (Rs.) |
|
Feb 1 |
Sold goods to Gopal Traders |
3,300/- |
|
Feb 3 |
Sold goods to Hari & Co. |
16,200/- |
|
Feb 8 |
Goods returned by Gopal Traders |
50/- |
|
Feb12 |
Sold goods to Krishna |
14,200/- |
|
Feb15 |
Goods returned by Hari & Co. |
200/- |
|
Feb18 |
Sold goods to Sairam |
1,500/- |
|
Feb20 |
Goods returned by Krishna |
300/- |
|
Feb28 |
Goods returned by Sairam |
1,500/- |
OR Explain the sub-division of a journal. Give all the formats of subsidiary books and explain each. (10)
In small concerns only one journal and one ledger may serve the purpose, because the number of transactions is very small. But in large business concerns the number of transactions are numerous, just one journal and one ledger will not do the job. So, In a large business concern a journal is divided into parts so that several clerk/employees could work at the same time. This is known as subdivision of journal.
The five types of subsidiary books, (As per Syllabus prescribed by NCHM)
1. Purchase Book
2. Sales Book
3. Purchase Returns
4. Sales Returns
5. Journal Proper
1. Purchase Book or Purchase Journal:
Purchase book is a book of original entry in which only credit purchases of goods are recorded. Cash purchases of goods are recorded in the cash book. Credit purchases of other assets are also not recorded in the purchase book; they are recorded in the journal proper. Goods here mean the items or articles in which business enterprise is dealing with or we can say that goods are the items which are used by the business enterprise for regular sale.
|
Purchase Book |
|||||
|
Date |
Invoice No |
Name of Supplier (Amount to be credited) |
L.F. |
Details ₹ |
Total Amount ₹ |
|
Purchase A/c. Dr. |
|
||||
2. Sales Book or Sales Journal:
Sales book is a book of original entry in which only credit sales of goods are recorded. Cash sales of goods are recorded in the cash book. Credit sales of other assets are also not recorded in the sales book; they are recorded in the journal proper.
|
Sales Book |
|||||
|
Date |
Invoice No |
Name of Customer (Amount to be debited) |
L.F. |
Details ₹ |
Total Amount ₹ |
|
Sales A/c. Cr. |
|
||||
3. Purchases Return Book or Purchases Return Journal:
Purchases return book is a book of original entry in which transactions related to the return of purchases of goods are recorded.
|
Purchases Return Book |
|||||
|
Date |
Debit Note |
Particulars |
L.F. |
Details ₹ |
Total Amount ₹ |
|
Purchase Return A/c. Dr. |
|
||||
4. Sales Return Book Or Sales Return Journal:
Sales return book is a book of original entry in which transactions related to the return of sales of goods are recorded. The sales return book does not record return of goods sold on cash basis.
|
Sales Return Book |
|||||
|
Date |
Credit Note |
Particulars |
L.F. |
Details ₹ |
Total Amount ₹ |
|
Sales Return A/c. Dr. |
|
||||
5. Journal proper is book of original entry (simple journal) in which miscellaneous credit transactions which do not fit in any other books are recorded. It is also called miscellaneous journal. The form and procedure for maintaining this journal is the same that of simple journal.
|
Journal Proper |
||||
|
Date |
Particulars |
L.F. |
Dr. Amount ₹ |
Cr. Amount ₹ |
Q.7. Prepare a three column cash book for recording the following transactions: (10)
|
2011 |
Particulars |
Amount (Rs.) |
|
March 1 |
Cash in hand |
10,000/- |
|
March 1 |
Cash at bank |
8,000/- |
|
March 2 |
Sold goods for cash with cash discount @10% |
6,000/- |
|
March 5 |
Paid by cheque for direct purchases |
1,500/- |
|
March 7 |
Paid rent in cash |
1,000/- |
|
March 9 |
Deposited cash into bank |
2,000/- |
|
March 10 |
Received cheque from Arun after a discount of Rs.100/- |
900/- |
|
March 11 |
Received commission in cash |
700/- |
|
March 12 |
The cheque received from Arun was dishonoured |
900/- |
|
March 14 |
Paid cash wages |
100/- |
Q.8. Prepare a Trading, Profit & Loss Account and Balance Sheet from the following.
Trial Balance adjustments: (20)
- Closing stock valued at 40,000/-
- Depreciate furniture and fixture @10%, plant and machinery @20%
- Wages outstanding 2,000/-
- Salaries prepaid 1,000/-
|
Particulars |
Debit (Rs.) |
Credit (Rs.) |
|
Sales |
1,00,000/- |
|
|
Capital |
2,00,000/- |
|
|
Furniture & fixtures |
50,000/- |
|
|
Plant & Machinery |
80,000/- |
|
|
Debtors |
30,000/- |
|
|
Creditors |
20,000/- |
|
|
Bank Overdrafts |
10,000/- |
|
|
Purchase |
20,000/- |
|
|
Wages |
10,000/- |
|
|
Cash in hand |
20,000/- |
|
|
Power & fuel |
9,000/- |
|
|
Carriage outwards |
6,000/- |
|
|
Rent |
20,000/- |
|
|
Electricity |
5,000/- |
|
|
Advertisement |
15,000/- |
|
|
Salary |
10,000/- |
|
|
Drawings |
45,000/- |
|
|
Opening Stock |
10,000/- |
|
|
3,30,000/- |
3,30,000/- |
Q.9. What is Trial Balance? Explain the methods of preparing Trial Balance. (10)
A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit columns. A company prepares a trial balance periodically, usually at the end of every reporting period. The general purpose of producing a trial balance is to ensure the entries in a company’s bookkeeping system are mathematically correct.
There are three methods of preparing Trial Balance
(i) Balance Method (ii) Total Method (ii) Balance Totals Method
(i) Balance Method:
In this Balance method, the balance of each account (which may be debit balance or credit balance) is extracted and written against each account; we write debit balance in the debit column and credit balance in the credit column.
(ii) Total Method:
In this method the total of both sides of every account in the ledger is written against the name of the respective account without balancing them in the form of debit and credit balances respectively.
(iii) Balance totals Method:
Trial Balance is prepared by combining the first and second methods. However, in practice the trial balance is prepared with debit and credit balances of various accounts in the ledger. Normally balance method is used.
OR What is Trial balance? Explain what are the advantages of Trial Balance. (10)
A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit columns. A company prepares a trial balance periodically, usually at the end of every reporting period. The general purpose of producing a trial balance is to ensure the entries in a company’s bookkeeping system are mathematically correct.
The purpose of a trial balance is to ensure that all entries made into an organization’s general ledger are properly balanced. A trial balance lists the ending balance in each general ledger account. The total dollar amount of the debits and credits in each accounting entry are supposed to match. Therefore, if the debit total and credit total on a trial balance do not match, this indicates that one or more transactions were recorded in the general ledger that were unbalanced.
The important advantages of a trial balance are:
1. Helps To Prove Arithmetical Accuracy
Trial balance proves the arithmetical accuracy of the books of accounts by checking and comparing debit and credit balances. If debit and credit balance are identical it ensures that transaction records are accurate.
2. Helps To Locate Accounting Errors
Trial balance helps to uncover accounting errors by comparing both sides (debit and credit) of journals. If debit and credit amount are not identical it indicates that there is an error in the books of accounts.
3. Helps To Provide Transaction Summary
Trial balance helps to simply and summarize transactions records of different. ledger account. So, it is known as the summary report of the ledger.
4. Helps To Prepare Final Accounts
Trial balance is a basis for preparing final accounts of the business. Preparation of profit and loss account and balance sheet is possible because trial balance brings all the balances of different ledger accounts together.
5. Helps To Ascertain Profitability And Financial Position
Profit and loss account shows the profitability of the firm. Similarly, balance sheet indicates the financial position of the firm. Both profit and loss account and balance sheet are prepared on the basis of trial balance
Q.10. State True or False: (5)
(a) Petty cash book is called as subsidiary book and ledger account. False
(b) Discount allowed is a loss. True
(c) Real account says debit the receiver credit the giver. False
(d) Outstanding salary is a liability. True
(e) Every transaction has minimum two accounts. True