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“A Centre for Quality Education & Learning”
K - 3, Green Park (Main), N. D. - 16.
# 2651 8500, 2696 8844.
" By R. K. Saini
1. ACCOUNTING – MEANING, OBJECTIVES AND TERMINOLOGY
Meaning
In 1941 The American Institute of Certified Public Accountants (AICPA) defined accounting as: The arts of recording, classifying and summarising in a significant manner and in terms of money transactions and events, which are in part, at least, of a financial character and interpreting the result thereof.
Accounting Process
1. Identifying the business transactions 2. Classifying the business transactions 3. Recording the business transactions 4. Summarising the business transactions 5. Interpreting the business transactions Accounting Year
Books of accounts are closed annually. From the balances of different ledger accounts we prepare income statement and position statement. Income statement shows gross and net income of the business. Position statements traditionally known as Balance Sheet is a mirror, which reflects the true value of assets and liabilities on a particular date. There is no legal restriction bout the accounting year of sole proprietorship and partnership firm. They may adopt
the accounting year of their choice. It may be between January 1st to December 31st of the same year
or July 1st of the year to June 30th of the next year or between two Dewalis or even financial year,
i.e. April 1st to March 31st of the next year. The only restriction is that the accounting period must
consist of 12 months. Companies must adopt financial year as its accounting year. Entry
An entry is the systematic record of business transactions in the books of accounts. While passing entries, the principle 'every debit has got its corresponding credit' is adopted. Different accounts are debited and credited in the entry with the same amount.
Objectives Of Accounting
A. Maintaining proper record of business. B. Calculation of profit or loss.
C. Depiction of the financial position.
D. Providing effective control over the business. E. Making information available to various
groups. Advantages From Accounting
A. Replacing memory.
B. Assessing the performance of the business. C. Assessing the financial status of the
business.
D. Documentary evidence.
E. Assisting in realization of Debts. F. Facilitating the sale of the business. G. Preventing and detecting frauds.
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H. Helpful to management. Limitations Of Accounting A. Incomplete information. B. Inexactness.C. Showing valueless assets.
D. Manipulation.
E. Ignorance about the present value of business. Difference Between Book –Keeping And Accountancy
Point of difference Book-keeping Accountancy
1. Object The object of book of accounts. It is
restricted to journal, subsidiary books and ledger accounts only.
The object of accounting is to record. Analyze and interpret the business transactions.
2. Scope It has limited scope and is concerned
with the recording of business transactions.
It has wider scope as comp-red to book-keeping.
3. Level of work It is restricted to low level of work.
Clerical work is involved in it. It is concerned with low level, medium level and even top level
management. Low level clerks prepare the accounts, medium level report it and top level interpret it.
4. Mutual dependence
Book keeping is only art of recording transactions, so it has to depend upon accounting which makes it more meaningful and purposeful.
Accounting is based upon book-keeping which is its initial and vital part. It depends upon book-keeping.
5. Result of the business
It does not show the net result of the
financial position of business. Accountancy shows the net result of the business. It tells us about
the profit earned and also about the assets and liabilities of the business.
6. Principles of Accountancy
In book-keeping, accounting concepts
and conventions are followed. The methods of reporting and interpretation in accounting may
vary from firm to firm. Users of Accounting Information
Users of Accounting Information
i) Internal Users ii) External Users (Management at all levels)
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a) Direct Interest
(Investors and Creditors)
b) Indirect Interest
(Tax authorities, Regulatory agencies, Customers,Govt. agencies, Labor unions, Trade associations, Stock exchange,
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“A Centre For Quality Education & Learning ”
K - 3, Green Park (Main), N. D. - 16.
# 2651 8500, 2696 8844.
" By R. K. Saini
2. THEORY BASE OF ACCOUNTING
Operating Guide Lines
Professionals in accounting have developed the following guide lines, which are classified as under: Operating Guide Lines
1. Basic Assumptions 2. Basic Principles 3. Modifying principle
a. Acc ounting Equity b. Going Concern c. Money Measurement d. Verifiable Objectives e. Accounting period a. Revenue Realisation Matching c. Full Disclosure d. Dual Aspect e. Historical Cost Principle a. Materiality b. Consistency c. Conservatism d. Timeliness e. Industry Practice f. Cost Benefit 1. Basic Assumptions Accounting Entity Assumptions
In accounts, we distinguish between the business and its proprietors. Business is assumed to have distinct entity i.e. existence other than the existence of its proprietors and other business units. As an accountant we are concerned with the business not the business man. We have to record business transactions from firm's point of view and never from the view point of proprietors. We record transactions in the books of shop, establishment, factory firm, company and enterprise and never in the books of proprietor, partners and share-holders.
The capital introduced by the proprietor in its own business is considered liability from business point of view. The logic behind treatment of capital as liability is that the firm has borrowed funds from its own proprietors instead of borrowing it from outside parties. It would have been a liability if the funds would have been borrowed from outside agency, then why not, if is being invested by the proprietor himself. We also allow interest on capital to the proprietors because capital is supposed to be a liability. Interest on capital is an expense of the business, therefore, it will reduce the profit of the firm.
Going Concern Assumption
While recording business transactions in the books of accounts, we assume that the business will be carried on indefinitely. This is why, the business purchases fixed assets like land and building, plant and machinery, vehicles and furniture etc. If the assumption of going concern may not have been there, we would have hired these assets and not parched. These assets have been acquired for use and not for sale, so we maintain individual assets account and charge necessary depreciation on it.
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According to international Accounting standard, "The enterprise is normally viewed as a going concern, that is as continuing in operation for the foreseeable future". It is viewed that the enterprise has an intention to be carried on for longer period.
Money Measurement Assumption Concept
In accounting, we identify and record only those business transactions which are financial in nature. Accounting transactions must have their monetary value. There is never any accounting record in metres. Litres, kilogram and quintals. We evaluate the vale of the commodities in terms of money and accordingly record them in the books of accounts. Recording transactions in monetary terms makes the information more meaningful. For example, statement that the business was started with Rs. 50,000 cash and 20,000 metres of silk is meaningless and fails to tell us the capital of the business. If the value of 20,000 metres of silk is estimated to be Rs. 5,00,000 we can safely say that the business was started with Rs. 50,000 + 5, 50,000 which will be meaningful.
The qualitative aspects of the business howsoever important are not recorded in the books of accounts, because they cannot be evaluated in terms of money. The efficiency of the management, harmonious relationship between workers and management, change in economic, industrial and fiscal policies of the government, change in consumers' preferences and fashion etc. vitally affect the performance of the business but are not recorded in the books of account because these qualitative aspects cannot be measured in terms of money.
Verifiable Objectives
The assumption of verifiable objectives means that every business record must be based and supported by documentary evidence. We do not pass any entry or make any positing in the subsidiary books unless there is a voucher used as documents for recording business transactions.
Objectivity of the documents means that these vouchers contain facts presented in an unbiased way they neither show favour nor prejudice to either the party making payment or the party receiving the payment. Verifiability here means examination or the scrutiny to the documents before they are recorded in the books of accounts. After accounting of the transaction entries and positing in the books of accounts are checked with reference to the vouchers by auditors.
Assumption of Accounting period
Strictly speaking the result of the business can be had at the end of its life. If a firm was started with a capital of Rs. 50,000 and at the end of its life the capital was Rs. 5,00,000 we can say that the firm earned a profit of Rs. 4,50,000 i.e., 5,00,000 – 50,000 during its life. In this way, business as a going entity will continue indefinitely and we will have to wait for the results, so the life span of accounting should be split into shorter and convenient period. At present, accounting periods are regarded as twelve months.
Proprietorship and partnership can choose their own accounting period but the difference between the closing date of two final accounts should not exceed twelve months. This period may a
calendar year i.e., 1st Jan. to 31st Dec. of the year, and assessment year i.e., 1st April to 31st March of
the next year or even Diwali to Diwali but always restricted to one year i.e. 12 months. In this way, accounting period concept may also be known as known as accounting year concept. In case of
companies, accounting year must be the financial year i.e., 1st April to 31st March of the next year.
The assumption of accounting period facilitates the business in assessing its worth after a year. In order to make accounting meaningful, useful and legal accounting year concept cannot be ignored by any business house.
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2. Basic Principles In Accounting Revenue Realisation
In accounting terminology, 'revenue' is the amount received or receivable from the sale of goods. We can determine the revenue as realised on the following basis:
a. Sales basis = Sales is supposed to be complete when title to goods is passed to the buyer and payment or promise to make payment is received from him in exchange. The principle explains that mere transfer of possession is not sale, as in the case of consignment where transfer of goods to the consignee, the agent is not a sale. In the same way all the payment received or receivable are not the revenue. Revenue will result only if there is an exchange of title to goods or services and payment received or receivable. For revenue the sale must be complete in the eyes of Indian sales of goods act. revenue is supposed to have been realised even if the payment becomes legally due to the buyer of goods or beneficiary of services. b. Cash basis = Revenue is supposed to have been realised when actual payment is received.
The case basis is adopted when there is doubt regarding realisation of the payment. In case of sales on hire purchase and installment basis, payment is made mom certain installments, split over a period of certain years. Sales in these cases will be supposed to be complete for the part of goods whose payment has been received.
c. Production basis = Revenue is supposed to be realised for part of work completed. Sale of goods or realization of sales proceeds is not the criteria according to production basis. This basis of ascertaining revenue is adopted, when sales basis and cash basis fail to identify revenue. In construction works, revenue is determined on production basis. The contractor engaged in construction of a multi-storeyed building is not paid the full value of work completed by him during the accounting period, so he prefers to determine his revenue on the basis of the work completed by him during the year.
The Concept Of Expense
According to Finney and Miller, "Expense is the cost of use of things or services for the purpose of generating revenue".
Principle Of Matching Cost & Revenue
Reasonable profit is the object of every business enterprise. The whole business structure is based upon the desire to earn profit. It has been the duty of accountants all over the world to evolve principle of calculating exact and accurate profit. The result of these efforts was the introduction of the principle of matching cost and revenue. According to this principle income can be ascertained by matching revenue of the business with its costs. Sales of Rs. 20,00,000 are revenue of the business but not the profit. We cannot determine profit or loss if only one information i.e., sales is given. We require cost of goods sold to calculate profit. In the above information regarding sales, if it is mentioned that the cost of goods sold (expense) and the result will be gross income. In this case, Rs. 20,00,000, - 16,00,000 = 4,00,000 is the gross income. Net income will be calculated after deducting selling and distribution expenses from the gross income.
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Gross income or Gross profit
Gross income = Revenue – Expense Or
= Net sales – Cost of goods sold.
Net Sales = Sales – Sales returns
Cost of goods sold = Opening stock + Purchases + Direct expenses – Closing stock.
Net income or net profit
Net income = Gross income – Indirect expenses + Revenue receipts. Net income = Gross income – Indirect expenses
Indirect expenses – Gross profit = Net loss.
Cost of goods sold = Opening stock + Net Purchases + Direct expenses – closing stock. Cost of goods sold = Sales – Gross profit.
Principle of Dual Aspect
Assets :- These are the valuable articles owned by the business. Expenditure incurred in acquiring valuable things for the firm is assets.
Capital :- Capital is that part of wealth which is used for further production. In the context of dual concept capital supplies necessary funds to the business to purchase certain assets. In the absence of capital, there will be no funds with the enterprise and thus the question of acquiring assets does not arise. Capital = Assts.
Liabilities :- Capital invested by the proprietor falls short so the business has to borrow funds and thus the loan on the one side is the liability of the firm and on the other side it will be in the form of cash or other assets. The amount represented by both loan and assets are equal.
Assets = Capital + Liabilities Or
Capital = Assets – Liabilities Or
Liabilities = Assets – Capital Historical Cost Principal
Accounting to this principle all business transactions must be recorded in the books of accounts at their monetary cost of acquisition. The principle is called historical, because the balance of assets and liabilities is carried forward from year to year at its acquisition cost, irrespective of increase or decrease in the market value of assets. Historical approach of presenting assets and liabilities has clear advantage over other approaches of valuation, because it is reliable, verifiable and definite. The use of historical cost as the basis provides verifiable and objective accounting information.
3. Modifying Principles Modifying Principle Of Materiality
Accounting should disclose all the material information. Materiality here means the information which would have changed the results of the business, if it would have been disclosed. It does not mean that accounting should be over-burdened with information. Certain unimportant information may be avoided and others may be merged with important information. Certain information may also be furnished in footnotes. Most common information given in footnotes are:
I. Information regarding contingent liabilities.
II. Information regarding market price of investments.
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The accountant should always keep in mind that materiality does not mean leaking business secrets. It stresses not to conceal vital information with malafide intention. The principle because the material information for one business unit may not be material for the other. Materiality will differ with the size, nature and traditions of the business.
Modifying Principle Of Consistency
It is also known as convention of consistency. Business is a going concern. It has to continue indefinitely. Important conclusions are drawn by comparing accounting statements of the current year with statements of the previous year. Accurate comparisons can be made, if the methods and practice of recording and presentations of accounts does not change. If the business has been charging depreciating on its fixed assets according to straight line method, it should go on charging depreciation with the same method every year according to the principle of consistency.
The principle of consistency will be supposed to be applie in certain cases where there is apparently inconsistency. For example, stock and investment are valued at cost or market price whichever is lower. It may be just possible that stock would have been valued at cost price during the previous year but during the current year stock is valued at market price because market price is lower than the cost price. such valuation seems to be inconsistent but actually it is in accordance with the principle of consistency because the principle remains constant. The principles states that financial reports should be prepared on the basis consistent with the preceding person.
Modifying Principle Of Conservatism (Prudence)
The business according to this principle adopts a very safe policy. It accounts for all the prospective losses but leaves aside all the prospective profits. Prudence in financial statements demands that we should avoid uncertainties and make sufficient provisions for unforeseen losses. For example, we value stock at cost price or market price whichever is lower. We go on depreciating land and building, though there may be appreciation in its value. It shows that the business has been adopting the policy of playing safe. Application of the principle of conservatism is evident from the following fats:
(i) Valuation of stock at cost or market price whichever is lower.
(ii) Valuations of investment at cost or market price whichever is lower. (iii) Creation of investment fluctuation fund.
(iv) Maintaining provision for bad and doubtful Debts.
(v) Showing depreciation on fixed assets and not appreciation. (vi) Ignoring discount on creditors.
According to this principle business transactions should be recorded in such way that profits should not be over stated.
Accounting is criticized for adopting the policy of conservatism. It does not accord equal treatment to prospective losses and prospective profits. It ignores prospective and expected income but highlight even the distant possibilities of losses.
Modifying Principle of Timeliness
This is one of the latest conventions of accounting. The principle means 'appropriate recording of business transaction at appropriate or proper time'. We record business transactions in order and sequence of dates. The business transactions of the particular day should preferably be recorded the same day while recording these transactions into books of accounts we follow the
policy of 'first come, first served' i.e., transactions taking place on 1st January will be recorded
before the recording of the transaction of 2nd January.
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Assignments1. Point out whether following statements are true or false:
i. Assets will be equal to capital if there are no liabilities.
ii. It is binding upon every business to adopt basic assumption in accounting, while maintaining their books of accounts.
iii. 'Timeliness' is the basic assumption of accounting.
iv. 'Verifiable objectives' is the modifying principle of accounting. v. Income = Revenue – Expense.
vi. Amount received in cash is an income.
vii. Every accounting record must be based on documentary evidence. viii. Basic assumptions bring uniformity in accounting.
ix. According to business entity concept the existence of business and proprietors is one and the same.
x. Valuation of stock at cost price or market price whichever is lower does not observe the modifying principle of consistency.
2. Supply the missing word/words in the following statements:
i. Recording business transaction on the basis of documents is to observe accounting assumptions of ……….
ii. Treatment of capital in the books of the firm as liability observes the accounting assumption of …………
iii. The qualitative aspect of the business is not recorded in the books of accounts according to the basic assumption of ……….
iv. According to companies act, every company must close its books of accounts on ……. of the year.
v. Accounting period consists of ….
vi. In construction works, revenue is identified on the basis of….. vii. ……….. of accounting can never be ignored.
viii. Revenue is identified on the basis of cash realised in case of …. System. ix. Expenses are…….. incurred but losses are ….. burden.
x. Disclosing important information in accounting observes the principle of ….. 3. What do you mean by accounting concepts? Explain the following concepts:
i. Business entity concept ii. Money measurement concept iii. Accounting period concept. 4. Explain principles:
i. Modifying principle of full disclosure ii. Revenue realisation concept
iii. Modifying principles of industrial practice iv. Dual concept
v. Principle of matching revenue with cost 5. Name five direct expenses.
6. Differentiate between Gross Profit and Net Profit. 7. Mention the full form of GAAP.
8. Sales during the year is Rs. 2,00,000. Gross profit is 25% on cost. Find out gross profit.
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9. Calculate sales, if cost of sales is Rs. 80,000 and the Gross Loss is Rs. 33,000. [Rs. 47,000]
10. Calculate capital, if total assets are Rs. 1,50,000 creditors for goods are Rs. 90,000 and creditors
for expenses are Rs. 15,000. [Rs. 45,000]
11. Calculate cost of goods sold in the following cases. Necessary information are as under:
a. Opening stock 20,000Rs. Purchases 50,000 Wages 10,000 Carriage 2,000 Rent 3,000 Closing stock 12,000
b. Sales Rs. 1,00,000 and gross profit 25% on sales.
[Cash A/c Rs. 70,000 ; B.Rs. 75,000] 12. The following figures are available relating to a business for the year 1993
Rs. Rs.
Opening stock 20,000 Closing stock 10,000
Purchases 1,00,000 Indirect expenses 10,000
Purchases return 10,000 Sales 1,25,000
Direct expenses 15,000 Sales Return 5,000
i. Cost of goods sold. ii. Gross Profit
iii. Net profit. [Ans. (a) Rs. 1,15,000 (b) Rs. 5,000 (c) Rs. 5,000.]
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K - 3, Green Park (Main), N. D. - 16.
# 2651 8500, 2696 8844.
" By R. K. Saini
3. ACCOUNTING EQUATION
Introduction Of Creditors' Liability In Accounting Equation
It has been accepted fact that business does not possess any thing of its own. The business receives funds from proprietors and creditors and retains all of them in the form of various assets. This shows that capital + liabilities are always equal to assets. The fact can be presented in terms of accounting equation as under:
Equations:- Capital + Liabilities = Assets Or C + L = A Or
Assets = Liabilities + Capital Or A = L + C Or
Liabilities = Assets – Capital Or L = A – C Or
Capital = Assets – Liabilities Or C = A – L Or
Assets – Liabilities – Capital = Zero Or A – L – C = Zero.
Accounting equation is a statement of equality between debits and credits. Practice questions
1. From the following information draft on equation for Mr. Varun on 31/12/1997. a. Started business with a bank account of 1 lakh.
b. Withdrew = Rs. 10,000 from bank for office use.
c. Purchased goods worth Rs. 40,000 on credit.
d. Paid wages Rs. 10,000
e. Wages due but not paid = 5,000
f. Sold goods costing Rs. 30,000 for 10% profit on cost.
g. Goods worth Rs. 4,000 was stolen from the factory.
h. Commission due but not received by the firm amounted to Rs. 5,000.
i. Purchased machinery worth Rs. 25,000 from 'X' limited.
j. Interest on capital to be paid to an extent of Rs. 500 .
k. Purchased a bike for personal use Rs. 20,000
l. Interest on drawings to be charged for the month amounted to Rs. 100.
m. Depreciate machinery @ 10% per month
n. Insu. premium paid during the month amounted to Rs. 800 which expired On 31/03/98. o. Received Rs. 500 from Mr. Hari whose debt was considered bad debt during the year. 2. Following is the accounting equations of Mr. Lal on 1998
Asset. Rs. 1,00,000; Liability Rs. 40,000; Capital Rs. 60,000. Given below are some
transactions that took place in that month, incorporate them in the A/cing equations. a. Purchased shares costing Rs. 6,000 at Rs. 10,000
b. Refund of insurance premium by the Insurance Company Rs. 1000
c. Sold goods costing Rs. 5,000 at Rs. 8000 to Varun. He paid Rs. 3,000 is cash accepted a bill of exchange for the balance.
d. Outstanding salary Rs. 2,000
e. Received security deposit from tenant Rs. 25,000
f. Discharge the Liability of 10, 000 in full settlement by a Cheque of Rs. 8,500 g. Paid salary for Jan & feb. Rs. 4,000
h. Received Rs. 5000 from a debtor in full settlements of his debt. of Rs. 5500
i. Received a bill receivable for Rs. 2000 & cash Rs. 1000 from 'B' for sale of furniture j. Wages due but not paid Rs. 2000
k. Depreciate office furniture by Rs. 1000
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l. Cash embezzled (fraud) by the accountant Rs, 1500
m. Purchased goods from Rakesh worth Rs. 25,000 paid him Rs. 5000 on account. n. Commission received in advance Rs. 1300
o. Interest on capital is to be paid @ 12% for the month.
3. How will you deal with the following transactions in Accounting Equation: a. Interest on capital.
b. Rent due but not received. c. Outstanding salaries.
d. Amount withdrawn by the proprietor.
e. Sale of goods costing Rs. 3,000 for Rs.
4,000 on credit.
f. Interest on loan borrowed by the firm.
g. Commission received in advance. 4. Calculate total equity if:
a. Owner's
equity is Rs. 60, 000.
b. Creditors
equity is Rs. 50000.
c. Revenue earned during the period Rs. 70,000.
d. Expenses during the period Rs. 65, 000.
5. Supply missing figures on the basis of Accounting equation mentioned as under:
Assets = Liabilities + Capital
40,000 = 20,000 + ?
? = 10,000 + 15,000
50,000 = ? + 35,000
6. Prove that the Accounting Equation is satisfied in all the following transaction of suresh: a. Commenced business with cash Rs. 60,000.
b. Paid rent in advance Rs. 500.
c. Purchased goods for cash Rs. 30,000 and credit Rs. 20,000. d. Sold goods for cash Rs. 30,000 costing Rs. 20,000.
e. Paid salary Rs. 500 and salary outstanding Rs. 100. f. Bought motor-cycle for personal use Rs. 5,000.
[Ans. Assets = Rs.. 84,500: Liabilities = Rs. 20,100; Capital = Rs. 64,400]
7. Use Accounting Equation to show the effect of following transactions on assets, liabilities and capital and also show the final Balance Sheet:
Rs.
a. Started business with cash
b. Purchased goods on credit
c. Purchased machinery
d. Payment made to creditors in full settlement
e. Depreciation on machinery 70,000 18,000 20,000 17,500 2,000
[Ans. Assets = Rs. 68,500 and Capital = Rs. 68,500] 8. Prepare accounting equations on the basis of the following:
a. Rahim started business with cash Rs. 20,000. b. Rahim purchased furniture for cash Rs.2,000. c. Rahim paid rent Rs. 200.
d. Rahim purchased goods on credit Rs. 3,000.
e. Rahim sold goods (cost price Rs. 2,000) for Rs. 5,000 on cash.
[Ans. Assets = Rs. 25,800; Liabilities = Rs. 3,000; Capital = Rs. 22,800]
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“A Centre For Quality Education & Learning ”
K - 3, Green Park (Main), N. D. - 16.
# 2651 8500, 2696 8844.
" By R. K. Saini
4. JOURNAL
Summary of rules of Debit and Credit (Modern Approach)
Debit Credit
Increase in assets
Increase in expense or loss Decrease in liability
Decrease in capital
Decrease in revenue and profit
Decrease in assets
Decrease in expense or loss Increase in liability
Increase in capital
Increase in revenue or profit
The above approach towards debit and credit is termed as American approach or modern scientific approach. The rules have been developed after scientific study and analysis. They have been tested and verified in the real situations of accounting and therefore prove to be true for accounting record of all business transactions. The earlier conventionalor traditional approach towards recording business transac- tions and its rules for debit and credit were different. The traditional approach is discussed as under:
Traditional Rules of Debit and Credit Classification Of Accounts
Personal A/c Real A/c Normal A/c
Q 1. Explain the rule of debit and credit in case of the following:
a. Revenue b. Expense
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Nominal Accounts
Debit all expenses or losses Credit all incomes or gain Debit the receiver
Credit the giver Tangible Real A/c
Debit what comes in Credit what goes out Natural Personal A/c
Intangible Real Accounts Real Accounts
Impersonal Accounts
Artificial Personal A/c Personal Accounts
Representative Personal A/c
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c. Real A/c d. Capital e. NominalA/cQ 2. Explain the term:
a. Opening journal entry
b. Compound journal entry
c. Narration d. Ledger folio Q 3. Point out to which type of account, the following accounts belong:
a. Capital A/c
b. Interest on capital A/c
c. Drawings d. Debtors A/c e. Creditors A/c f. Machine A/c g. Wages A/c h. Purchases A/c i. Sales A/c
j. Sales returns A/c
Q 4. In what respects Bad Debts and Bad Debts recovered Accounts are different from each other from Accounting points of view.
Q 5. According to the modern approach of debiting and crediting accounts are classified in five basic terms. Name these terms.
Q 6. We receive lesser amount in case of discount allowed and also bad Debts. In what respects these two situations different.
Q 7. Complete the following sentences:
a. Assets are debited for increase but liabilities are debited for….. b. Expenses are debited for increase but revenue is debited for…… c. Capital account is credited for increase but debited for….. d. Capital increases with revenue but decreases with….
e. In case of nominal accounts expenses are debited but incomes are…. f. Decreases in assets are credited but decrease in capital is …..
g. Goods returned to supplier is purchases return but goods returned by purchaser is ….
Q 8. Point out whether following statements are true or false: a. Every debit has it corresponding credit.
b. Expenses decrease proprietors equity. c. Assets have debit balance.
d. Liabilities have credit balance.
e. Purchasing furniture for cash involves assets only. f. Trade discount is shown in the journal entry.
g. In case of making payment of wages for construction of building wages account will be debited.
Q 9. Identify the following accounts as personal, real and nominal:Drawing account a. Punjab National Bank account
b. Prepaid Insurance account c. Appreciation account d. Loan account
e. Bad Debts account
f. Bad debts recovered account g. Purchases account
h. Stationery A/c
Q 10. Record the following transactions in the Journal of Shyam Sunder: -1994 Jan.
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1 Shyam Sunder started business with Cash Rs. 75,000; Goods Rs. 30,000 and Typewriter Rs. 5,000.
2 Sold goods to Bhushan of the list price of Rs. 10,000 at trade discount of 10%.
5 Bhushan returned goods worth Rs. 1,000.
10 Received from Bhushan Rs. 8,000 in full settlement of his account. 12 Purchased Furniture for Rs. 6,000.
Purchased goods from Navin for Rs. 25,000 less trade discount 12%. 15 Returned goods to Navin goods of the list price of Rs. 2,000.
16 Cleared the account of Navin by paying Cash, under a discount of 5%. 20 Sold goods to Ajay Rs. 10,000 and Vijay Rs. 16,000.
20 Received Cash from Ajay Rs. 9,800 in full settlement of his account. Paid insurance premium Rs. 750.
22 Paid for Shyam Sunder’s Life Insurance premium Rs. 1,200.
24 Purchased goods for 8,000 for Cash at a trade discount of 10% and Cash discount 2%. 26 Received Cash from Vijay at a Cash discount of 5% in full settlement of his account. 31 Paid Rent Rs. 800; Advertisement Rs. 1,000; and Salaries Rs. 4,000.
31
Received Commission Rs.500. [Ans. Grand Total Rs. 2,45,450]Q 11.
Following balances appeared in the books of Radhika Traders as on 1st January, 1994;Assets – Cash Rs. 8,000; Cash at Bank Rs. 7,000; Stock Rs. 30,000;
Debtors – Mohan Rs. 10,000; Sohan Rs. 12,000; Dinesh Rs. 14,000; Furniture Rs. 5,000; Building Rs. 25,000.
Liabilities – Creditors – X Rs. 5,000; Y Rs. 6,000.
January 1994, the following transactions took place: Rs.
2 Bought goods of the list price of Rs. 6,000 from Khanna Brothers
Less 15% trade discount and 2% Cash discount and paid 40% price at the same time.
2 Received a draft from Mohan in full settlement and deposited it into Bank 9,750
3 Purchased goods from Suresh of the list price of Rs. 8,000 at 20%
Trade discounts and paid him by cheque.
8 Sold goods for Cash and received a cheque. 25,000
10 Deposited the above cheque into Bank.
12 Sohan deposited in our Bank A/c 4,000
16 Paid Income Tax 5,600
20 Received a cheque from Sohan and sent to Bank 7,800
Discount allowed 200
21 Withdrew from Bank -- for office 2,000
for private use 4,000
23 Sent a cheque to X in full settlement of his A/c 4,900
26 Cheque of Sohan returned by the bank as dishonoured.
28 Dinesh was declared insolvent and a payment of 60 paise. In a rupee received from his
estate
31 Bank allowed Interest 350
Paid for Rent by cheque 1,500
Paid for traveling expenses by cheque 500
Pass Journal for the above transactions.
[Ans. Capital Rs. 1,00,000; Grand Total Rs. 2,35,450] Q 12. Journalise the following transactions, post them into Ledger, balance the accounts and
prepare a Trial Balance:
-March, 1994 Rs.
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2 Purchased goods for Cash 36,000
3 Machinery purchased for Cash 4,000
4 Purchased goods from Raghu 22,000
Dilip 30,000
6 Returned goods to Raghu 4,000
8 Paid to Raghu, in full settlement of his account 17,500
10 Sold goods to Mahesh Chand & Co. for Rs. 32,000 at 5% trade discount
13 Received Cash from Mahesh Chand & Co, 19,800
Discount allowed 200
15 Paid Cash to Dilip 14,850
Discount received 150
20 Sold goods for Cash 25,000
24 Sold goods for Cash to Sudhir Ltd. 18,000
25 Paid for Rent 1,500
26 Received for commission 2,000
28 Withdrew by proprietor for his personal use 5,000
28 Purchased a fan for Proprietor’s house. 1,200
[Ans. Cash balance Rs. 64,750; total of trial balance Rs. 1,74,850] Q 13. Pass Journal Entries for the following
transactions:-1. Provided depreciation on furniture Rs 500 and on machinery Rs. 2,000. 2. Received Cash Rs. 1,000 for bad debts written off last year.
3. Ajay Singh was declared bankrupt. He owed Rs. 25,000 to us. This amount was written off
as bad.
4. Rs. 20,000 for wages and Rs. 4,000 for salaries are outstanding.
5. Purchased furniture for Rs. 6,000 for the proprietor and paid the amount by cheque. Q 14. Journalise the following transactions of Raj Kumar, a timber
merchant:-1. Purchased timber from Kuldeep Kumar for Cash Rs. 2,000 and credit Rs, 10,000. 2. Paid to Kuldeep Kumar in full settlement of his account Rs. 9,950.
3. Paid rent in advance Rs. 480.
Q 15.
Following was the position of Harish as on 1st January1994:-Cash in hand Rs. 10,000; 1994:-Cash at Bank Rs. 16,800; Furniture Rs. 8000; Stock Rs. 50,000; Debtors - Ram Rs. 8,000; Shyam Rs. 12,000; Creditors-Anil Rs. 4,000; Sunil Rs. 5,000.
Following transactions took place during January 1994:-Jan., 1994
2 Received a Cheque from Ram in full settlement of his account after deducting 5% Cash discount.
4 Deposited the above cheque into Bank.
5 Goods purchased for 20,000 at 10% trade discount and 5% Cash discount.
Payment made by cheque.
6 Received a cheque from Shyam for Rs. 3,860 and discount allowed to him Rs. 140.
Cheque deposited into the bank on the same day. 10 Cash paid to Anil after deducting 2% Cash discount. 15 Old furniture sold for Rs. 800.
16 Sold goods to Shiv Parsad of the list price of Rs. 10,000 at a trade discount of 15%. 18 Shiv Parshad returned goods of the list price of Rs. 1,000.
20 Paid for furniture repairs to Bahadur Singh Rs. 100.
25 Received a cheque from Shiv Parshad after deducting 4% Cash discount. Cheque was deposited into bank.
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28 Bank charged Rs. 50 for ‘Bank Charges’.
31 Received Commission Rs. 200.
[Ans.Capital Rs. 95,800; Grand Total Rs. 1,64,550.] Q 16. Following balances appeared in the books of Ram & Shyam on January 1,
1994:-Assets:- Cash in hand Rs. 30,000; Stock Rs. 36,000; Lal Chand Rs. 7,600; Mukesh
Khanna Rs. 16,200; Furniture Rs. 8,000.
Liabilities:- Ghanshyam Rs. 6,000; Vinod Rs. 8,000 Following transactions took place
during Jan
1994:-2 Purchased Typewriter for Rs. 7,500
4 Sold goods for Cash of the list price of Rs. 25,000 at 20% trade discount and 5%
Cash discount.
6 Sold goods to Gopal Seth for Rs. 10,000.
8 Gopal Seth returned goods for Rs 1500.
12 Purchased goods from Arun Rs. 12,000 ; and from Varun Rs. 15,000.
13 Settled Arun’s account in full after deducting 5% for Cash discount. 14 Paid Cash to Ghanshyam in full settlement of his account.
16 Received Rs 7,500 from Lal Chand in full settlement of his account.
17 Purchased a Scooter for office use Rs. 18,000
20 Sold goods for Cash Rs. 20,000.
22 Received from Gopal Seth Rs. 4,850 and discount allowed Rs. 150.
26 Paid for wages Rs. 7,000 and salaries Rs. 3000.
28 Withdrew goods for Rs. 2,000 and Cash Rs. 1500 for private use.
29 Paid for Life Insurance Premium of the proprietor Rs. 1600.
Journalise the above transactions, post them into ledger, balance them and prepare a trial balance. [Ans.Cash balance Rs. 25,350; Trial balance Total Rs. 1,56,800.] Q 17. Pass Journal entries for the following
transactions:-1. Purchase Machinery for Rs. 20,000 and paid Rs. 200 for its carriage.
2. Received a cheque of Rs. 4,850 from X in full settlement of his account of Rs. 5,000. 3. Received a first and final payment of 60 paise in a rupee from Y who owed us Rs. 10,000. 4. Sold goods to Z for Rs. 10,000 at a trade discount of 20%. Next day a cheque was received
from him after deducting 5% Cash discount. Cheque was immediately deposited into Bank.
5. Goods costing Rs. 20,000 sold to Manoj at a profit of 20% on cost less 10% trade discount. Q 18. Journalise the following
transactions:-1 Goods for Rs. 5000 were destroyed by fire.
2 Goods worth Rs. 1,800 were distributed as free samples and Rs. 2,000 were given away as charity in Cash.
3 Goods worth Rs. 2,500 and Cash Rs. 4,000 were taken away by the proprietor for his personal use.
4 Cash worth Rs. 2,000 and Cash Rs. 500 were given away as charity. 5 Cash Rs. 10,000 was stolen from the Iron Safe of the trader.
Q 19. Journalise the following transactions in the Journal of Sh Navin
Gupta:-1. Paid Insurance premium in advance Rs. 1500.
2. Credit purchases from Ram & Co. for Rs. 5,000. Cash discount will be
received at 5% on payment of bill within 10days.
3. Cash paid to Ram & Co. and discount availed of.
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4. Paid income tax Rs 2,000.
5. Goods costing Rs. 20,000 sold for Cash at a profit of 10%.
6. Goods sold to Khanna & Co for Rs. 5,000 and charged 8% sales tax on it.
7. Received an order for goods from Surya Parkash for Rs. 6,000.
8. Supplied the above goods at 5% trade discount.
Q 20. Journalise the following transactions:-1. Charge depreciation on machinery. 2. Salary due to office clerks.
3. Received Cash for bad debts written off last year.
4. Purchased goods from Ashok & Co for Rs. 5,000 at 20% Trade Discount. Half the payment was made in Cash.
5. Issued cheque to Ashok & Co. in full settlement. 6. Paid Life Insurance Premium.
7. Proprietor used goods for household purposes. 8. Goods given free to a hospital out of business. Q 21. Journalise the following transactions:
1. Purchased a Motor Car for Rs. 60,000 and paid Rs. 5,000 for its repair and renewal. 2. Received rent Rs. 500.
3. Goods worth Rs. 2,000 were distributed as free samples. 4. Charge depreciation on Motor Car Rs. 6,500.
5. Rent due to Landlord Rs. 1,000 and salary due to clerks Rs. 8,000. 6. Charge depreciation on motorcar Rs. 6,500.
7. Rent due to landlord Rs. 1,000 and salary due to clerk Rs. 8,000. 8. Goods uninsured worth Rs. 5,000 were destroyed by fire.
9. Paid Rs. 1,000 for expenses on goods sold to Ramesh. This amount is to be realised from Ramesh.
10. Cash Rs. 500 and goods worth Rs. 2,000 were stolen by an employee. Q 22. Journalise the following
transactions:-1990 March.
1 Started business with Cash. 50,000
2 Purchased Machinery for Cash. 20,000
Paid installation charges on machinery. 2,000
5 Purchased goods from X of the list price of Rs. 25,000. Trade discounts 20% and Cash discount 5%. Payment was made in Cash immediately.
10 Sold goods to Y costing Rs. 10,000 at 30% profit on cost less 10% trade discount.
15 Paid Rent 1,000
20 Goods stolen from business. 2,000
22 Given as charity ; Cash 100
Goods 200
31 Purchased Post Cards and Envelops 50
31 Purchased a typewriter for business. 5,000
Q 23. From the following transactions to M/s Read and Write, write up the Journal in proper form: 1990 Jan.
1 Assets: Cash in hand Rs. 2,000 Cash at bank Rs. 68,000, Stock of goods Rs. 40,000,
Machinery Rs. 1,00,000, Furniture Rs. 10,000, M/s Surya Bros. Owe Rs. 15,000, M/s Balu Bros. Owe Rs. 25, 000.
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Liabilities: Loan Rs. 50,000, Sum owing to Jain ltd. Rs. 20,000. Rs.
2 Bought goods on credit from Samuel & Co. 10,000
3 Sold goods for Cash to Dhiraj & Co. 4,000
4 Sold goods to Surya Bros.on credit 10,000
5 Received from Surya Bros. in full settlement of amount due on Jan.1 14,500
6 Payment made to Jain Bros. Ltd. by cheque 9,750
they allowed discount 250
9 Old furniture sold for Cash 1,000
10 Bought goods for Cash 7,500
11 Balu Bros. Pay be cheque; Cheque deposited in bank 25,000
Paid for repairs to machinery 1,000
13 Bought goods of Jain Bros. Ltd. 10,000
Paid carriage on these goods 500
16 Received cheque from Surya Bros., cheque deposited in bank 9,500
Discount allowed to them 500
17 Paid cheque to Jain Bros. Ltd. 10,000
18 Bank intimates that cheque of Surya Bros. has been returned unpaid
19 Sold goods for Cash to Kay Bros. 6,000
21 Cash deposited in bank 5,000
24 Paid Municipal Taxes in Cash 1,000
25 Borrowed from Maheshwari Investment Co. Ltd for constructing own
Premises. Money deposited with bank for the time being 10,000
26 Old newspapers sold 200
28 Paid for advertisements 1,000
31 Paid rent by cheque 1,500
Paid salaries for the month 3,000
Drew out of bank for private use 2,500
Surya bros. Becomes insolvent, a dividend of 50P. In the rupee is received
An old amount, written off as bad debt in 1987 is recovered 1,500
Q 24. Journalise the following transactions, post them in the ledger and prepare a Trial Balance: Jan.1, 90
Assets: Cash in hand Rs. 550, Cash at bank Rs. 7,450, Stock Rs. 4,000, Machinery Rs. 10,000, Furniture Rs. 5,000, amount due from Ramesh & Co. Rs. 1,000, & from Suresh Rs. 2, 000. Liabilities: amount due to Rama Rs. 4,500, amount due to Ranjeet Rs. 2,000, & to Shyam
Rs.1,500. 1990 Jan. Rs.
1 Purchased goods from Ajay. 4,500
3 Sold goods for Cash 1,500
5 Paid to Himanshu by cheque 5,500
10 Deposited in bank 2,800
13 Sold good on credit to Mukesh 1,700
15 Paid for postage 100
16 Received Cash from Rakesh 2,200
17 Paid telephone charges 250
18 Cash sales 1,500
20 Purchased govt. securities 500
22 Purchased goods worth Rs. 1,600 less 20% trade discount and 5% Cash
discount from Mahesh & Co. for Cash and supplied them to Ramesh & Co. At list, price less 10% trade discount
25 Cash purchases Rs. 16,500
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27 Goods worth Rs. 500 were damaged in transit, a claim was made on the
railway authorities for the same.
28 Suresh is declared insolvent and a dividend of 50 paise in the rupee is received
from him in full settlement
28 Bought a horse for Rs. 2,600 and a carriage for Rs. 1,200 for delivering
goods to customers, paid by cheque
30 The horse bought on Jan.29 dies, and its car-case was sold for Rs. 1,000
31 Allowed interest on capital @ 10% p.a. for one month
31 Paid for: salaries Rs. 150, rent Rs. 60
Q 25. The following entries have been passed by a student. You have to state whether these entries are correctly passed. If not so, pass the correct journal entries.
(i) Cash A/c Dr. 7,000
To interest A/c 7,000
(Being interest paid)
(ii) Mohan Dr. 10,000
To purchase A/c 10,000
(Being purchase of goods from Mohan)
(iii) Hari Dr. 5,000
To sales A/c 5,000
(Being credit sales of goods to hari)
(iv) Mukesh Dr. 1,000
To bank A/c 1,000
(Being salary paid to Mukesh)
(v) Freight A/c Dr. 1,000
To Cash A/c 1,000
(Being freight paid)
(vi) Repairs A/c Dr. 1,000
To Cash A/c 1,000
(Being charges paid for overhauling an old Machine purchased)
(vii) Cash A/c Dr. 200
To rakesh 200
(Being an amount of debt which was written off as bad debt last year, is received during the year)
(viii) Purchases A/c Dr. 1,000
To Hari 1,000
(Being goods sold to hari earlier, now returned by him) Q 26. Prepare journal entries of the following
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(i) Purchases A/c To Cash A/c 2,000
(ii) Salaries A/c To Cash A/c 1,500
(iii) Interest A/c
By Cash A/c 800 (iv) Mohan A/c
To Cash A/c 5,000
Q 27. Give journal entries of the following posting in the ledger accounts. Dividends By Cash 1,500 Insurance To A 2,000 Discount To Bank 20 Rent To Cash 1,200 Plant To Cash To Manohar 20,000 40,000 Sales By Cash By Naresh 54,00037,000 20
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L
E-VAL
A
CADEMY
“A Centre For Quality Education & Learning ”
K - 3, Green Park (Main), N. D. - 16.
# 2651 8500, 2696 8844.
" By R. K. Saini
5. LEDGER ACCOUNTS
Distinction Between Journal & Ledger
Difference between Journal and Ledger Points of
Difference
Journal Ledger
1. Primary record Journal is the primary record of
business transactions.
It is the principal book of business transactions, not primary record.
2. Information Information regarding different
Account is shown at one place. Information regarding particular Account is shown at one place.
3. Basis Ledger Accounts are prepared
taking Journal entries and subsidiary books as basis.
Ledger accounts are used as a basis for preparing Trial balance. 1. Take into consideration the following accounts mentioned below and point out whether their
balance will be transferred to (i) Trading A/c (ii) P/l A/c or the account will be closed as balance c/d. a. Cash A/c b. Salaries A/c c. Wages A/c d. Capital A/c e. Machine A/c
f. Bank overdraft A/c g. Debtors A/c and h. Creditors A/c 2. Ledger is the principal book of business? Explain.
3. On which side of the Assets A/c, you will record its opening balance? 4. What will be the closing balance of Liabilities A/c, whether debit or credit?
5. While closing Assets A/c we use the term Balance c/d, tell us whether Balance c/d will be written at the debit side or credit side of the account.
6. Mention the balance of stock A/c, Purchases A/c and Wages A/c. How will you close these accounts?
7. What is the balance of Prepaid Rent A/c? whether it debit or credit. 8. Mention two examples of each Assets, Liabilities, expenses and income. 9. Point out whether the following statements are true or false:
a. The balance of expenses A/c is transferred to P/L A/c.
b. In order to calculate net Purchases, returns outward is deducted from Purchases. c. Posting is made at the debit side of an account credited in the Journal Entry.
d. Posting is made at the debit side of the A/c, which has been debited in the Journal Entry. e. Cash A/c need not be prepared, if Cash Book is maintained.
f. Personal A/cs may have both the debit and credit balance. g. Assets A/c may have either debit or credit balance.
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h. If drawings exceed the capital introduced in the business, capital A/cs may have dr. balance. i. While preparing Capital A/c of the current year, the balance of the previous year is shown
as 'By Balance b/d'.
j. While preparing a particular account. We do not use the name of the same A/c whether at the debit or credit side.
10. Complete the following sentences:
a. Posting is made at the ….. side of the accounts appearing at the debit side of the Cash Book.
b. Posting is made at the …… side of accounts appearing at the credit side of Cash Book.
c. While preparing parties A/c on the basis of Purchases book posting is made at the …. side of parties A/c.
d. While preparing accounts appearing in the Sales Return book posting is made at their…..side.
e. The balance of Purchase Return book is always…..
11.
On 1st Jan.,2000 the following were the ledger balances of Rajan and Co:Cash in band, ks. 900: Cash at bank, Rs. 21,000 : Soni (Cr.) Rs. 3,000; Zahir (Dr.) Rs. 2,400; Stock, Rs. 12,000; Prasad (Cr.) Rs. 6,000; Sharma (Dr.), Rs. 4,500, lall (Cr.) Rs. 2,700. Ascertain Capital.
Transactions during the month were:
2000 Rs.
Jan. 2 Bought goods from Prassad 2,700
Jan. 3 Sold to Sharma 3,000
Jan. 5 Sold to Lall goods for cash 3,600
Jan. 7 Took goods for personal use 200
Jan. 13 Received from Zakir in full settlement 2,350
Jan. 17 Paid to Soni in full settlement 2,920
Jan. 22 Paid cash for stationary 50
Jan. 29 Paid to Prasad by cheque discount allowed 2,650
Jan. 30 Provided interest on capital 100
Rent due to landlord 200
Journalise the above transactions and post them to ledger.
[Ans. Opening balance of Capital Rs. 29,100; Closing balance of cash Rs. 3,880] 12. Post of the following transactions in the simple Cash Book and post them into ledger:
2001 Rs.
Nov. 1 Cash in hand 2,000
Nov. 8 Paid for wages 200
Nov. 12 Outstanding salaries 100
Nov. 15 Cash Purchases 700
Nov. 28 Cash sales 400
Nov. 31 interest on capital 20