· Web viewAs name suggests the financial accounting is based on Financial terms the transaction which has the financial i.e. money value and can be measured in terms of money

IIMT College of Management

Solved Question Bank

BBA-I

BBA N-104

Book Keeping and Basic Accounting

Unit-1Very Short Questions

Q.1 Name any two external users directly concerned with accounting information.

Ans. (i) Creditors (ii) Bankers or Financial InstitutionsQ.2 Vinod & Sons received a order form Karbon Textile Co. for Rs.35,00,00. Will it be recorded in the books of account of the firm? Give Reason.Ans. It will not be recorded in the books because it is not a transaction.

Q.3 Vinod Bros. not following the Double Entry System while preparing books of accounts. They are preparing accounting on the basis of Single Entry System. Give any two limitations which they may face in future.

Ans. (i) Difficult to find correct profit (ii) Balance sheet does not reflect the true picture.

Short Questions

Q.1 Explain the following Assumptions/Principles of Accounting:

(i) Prudence Principle/Concept(ii) Historical Cost Principle/Concept(iii) Accrual Assumption/Concept

Ans. Prudence Principle: This principle is nothing but a formal expression of the maxim “Anticipate no profits and provide for all possible losses.” In other words, it considers all possible losses but ignores all possible profits.

Historical Cost Principle: According to this concept all fixed assets are recorded in the books at cost i.e. the price paid to acquire them. Any subsequent increase or decrease in their value will not be shown in the records except the depreciation of these assets. In subsequent years, therefore fixed assets are shown at cost less depreciation provided on them up to date. Continuous charging of depreciation on the asset will ultimately eliminate the asset from the books.

Accrual Assumption: Under this assumption of accounting, all transactions are recorded inthe books of accounts (Cash and Non-Cash). Entries are made on the Accrual basis, it means cash and Non-cash both transactions are recorded in the books of accounts when it is entered into and not when the settlement takes place.

Q.2 Define the Financial Accounting.Ans. As name suggests the financial accounting is based on Financial terms the transaction which has the financial i.e. money value and can be measured in terms of money are called the financial transaction and only those are eligible to get recorded in the accounts of financial accounting system.

Under the Financial Accounting System the recording of financial transaction are done in the Cash and Journal Book, in other Accounting as Sales, Purchase and various books, depends on size and requirements of the concerned business then all transactions are posted in their respective ledgers and all those ledgers are summarized in form of a Trial Balance , P&L and finally the Balance Sheet. So in nutshell we can say that the main object of financial accounting is to show the Profit & Loss and Balance Sheet and communicating the same to the final users of the company or organization.

Q.3 Write a detailed note on Internal Users of the Financial Statements.Ans. Basically the biggest internal user of a Financial Statement is considered as Management and secondly it can be considered to its Employees and Workmen, the detailed explanation of the Internal Users is explained further.Internal Users: Owners, Management and Employees and workers can be included. Since the owner put the capital to run a business, he is always at risk, he would like to know the profit and cash position of the company, for it he will be depending on the Accounts prepared by this company.

In large organization management is the separate part of the company, they manage with the instructions from owners or directors of the company, they are either on salary based or they can have a stake in profit as per agreement with owners of the company. Managers are depend on their juniors to bring the result, they would like to increase the organizational efficient in coming year, they need to know the accounting status for taking future decision based on current financial position of the concerned organization .Employees and workers get a bonus besides of their wages and salary at the end of every month, they are also interested in knowing the financial position of the company, because bonus is always depends on the profit made by the company.

Q.4 When should revenue be recognised? Are there exceptions to the general rule?

Answer :Revenue should be recognised when sales take place either in cash or credit and/or right to receive income from any source is established. Revenue is not recognised, in case, if the income or payment is received in advance or the payment is actually received from the debtors. In a nutshell, revenue will be recognised when the right to receive income is established. For example, Mr. A sold goods in January and received payment in February; then revenue is considered to be recognised in the month of January and not in February. However, if Mr A received cash in advance, i.e. in December and goods are sold in January, then the revenue is recognised in January and not in December.The exceptions to this rule are given below.

Hire purchase- When goods are sold on hire-purchase system , the amount received in installments is treated as revenue.

Long term construction contract- The long term projects like construction of dams, highways, etc. have long gestation period. Income is recognized on proportionate basis of work certified and not on the completion of contract.

Long Questions

Q.1 Explain the following Assumptions/Principles of Accounting:

( i )Going Concern Assumption( i i )Consi s tency Assumpt ion( i i i ) Ma tch ing Pr inc ip l e

Ans. Going Concern Assumption: This assumption assumes that every business has a long and indefinite life. Since financial statements are prepared cii the basis of this assumption, all fixed assets are shown in the books at their cosi ignoring their market value. In fact market value of a fixed asset has no relevance under this assumption, since these assets are acquired for continuous use in the business and not to sell them at a profit. It is a gain even though they may be unsaieabk:.

Consistency Assumption: The accounting informai ion provided by the financial statements would be useful in drawing conclusions regarding the working of an enterprise only when it allows comparisons over a period of time as well as with the working of other enterprises. Thus, both inter-firm and inter-period comparisons are required to be made. This can be possible only when accounting policies and practices followed by enterprises are uniform and are consistent over the period of time.

Matching Concept: This pririci ple states that it is necessary to charge all the expenses Incurred to earn revenue during the accounting period against that revenue, in order to

Ascertain the net income trading results of the business. The matching principle Which is so closely related to accrual principle and accounting period principle helps a Businessman in realising his objective i.e. in ascertaining the trading results or profit Or loss from the busines ,,

Q.2 Define accounting and state its objectives.

Answer :

Accounting is a process of identifying the events of financial nature, recording them in the journal, classifying in their respective accounts and summarising them in profit and loss account and balance sheet and communicating results to users of such information, viz. owner, government, creditor, investors, etc.

According to American Institute of Certified Accountants, 1941, "Accounting is the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events that are, in part at least, of financial character and interpreting the results thereof."

In 1970, American Institute of Certified Public Accountants changed the definition and stated, "The function of accounting is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions."

Objectives of Accounting:

1. Recording business transactions systematically- It is necessary to maintain systematic records of every business transaction, as it is beyond human capacities to remember such large number of transactions. Skipping the record of any one of the transactions may lead to erroneous and faulty results.

2. Determining profit earned or loss incurred- In order to determine the net result at the end of an accounting period, we need to calculate profit or loss. For this purpose trading and profit and loss account are prepared. It gives information regarding how much of goods have been purchased and sold, expenses incurred and amount earned during a year.

3. Ascertaining financial position of the firm- Ascertaining profit earned or loss incurred is not enough; proprietor also interested in knowing the financial position of his/her firm, i.e. the value of the assets, amount of liabilities owed, net increase or decrease in his/her capital. This purpose is served by preparing the balance sheet that facilitates in ascertaining the true financial position of the business.

4. Assisting management- Systematic accounting helps the management in effective decision making, efficient control on cash management policies, preparing budget and forecasting, etc.

5. Assessing the progress of the business- Accounting helps in assessing the progress of business from year to year, as accounting facilitates the comparison both inter-firm as well as intra-firm.

6. Detecting and preventing frauds and errors- It is necessary to detect and prevent fraud and errors, mismanagement and wastage of the finance. Systematic recording helps in the easy detection and rectification of frauds, errors and inefficiencies, if any.

7. Communicating accounting information to various users- The important step in the accounting process is to communicate financial and accounting information to various users including both internal and external users like owners, management, government, labour, tax authorities, etc. This assists the users to understand and interpret the accounting data in a meaningful and appropriate manner without any ambiguity.

Q.3 Describe the role of accounting in the modern world.

Answer :

The role of accounting has been changing over the period of time. In the modern world, the role of accounting is not only limited to record financial transactions but also to provide a basic framework for various decision making, providing relevant information to various users and assists in both short run and long run planning. The role of accounting in the modern world are given below.

1. Assisting management- Management uses accounting information for short term and long term planning of business activities, to predict the future conditions, prepare budgets and various control measures.

2. Comparative study- In the modern world, accounting information helps us to know the performance of the business by comparing current year's profit with that of the previous years and also with other firms in the same industry.

3. Substitute of memory- In the modern world, every business incurs large number of transactions and it is beyond human capability to memorise each and every transaction. Hence, it is very necessary to record transactions in the books of accounts.

4. Information to end user- Accounting plays an important role in recording, summarising and providing relevant and reliable information to its users, in form of financial data that helps in decision making.


Q.1 The Process of doing the total of both side of Debit and Credit of an Account is called as ?Ans. The process of doing total for both of the sides of an Account is called as Casting of an Account.

Q.2 What is the Rule of Real Account? Ans. The rule of the Real Account is “Debit what comes in and credit what goes out”

Q.3 Write a comment “Amount withdrawn for personal use”.Ans. Amount withdrawn for person use is referred as Drawings, which is made by a partner or proprietor of a firm. They can get the salaries, commission if same has been mentioned the Partnership Agreement. A partner can do a withdrawal of money for personal use on a regular intervals of whenever its required to him.

Short Questions

Q.1 Prepare Cash Book with Bank Column of Vinod from the following transactions:

Jan. 1 Cash in hand Rs.2,300 and Bank overdraft Rs.12,000 Jan. 7 Cheque received from Rakesh Rs.4,000.Jan. 9 Deposited the above cheque into Bank.Jan. 12 Goods sold for Rs.15,000 and deposited into the bank on the same day. Jan. 18 Money withdrawn from bank for office use Rs.2,000.Jan. 23 Money withdrawn from bank for personal use Rs.1,000. Jan. 31 Bank charges Rs.200.

Ans.Date Particulars L.F Cash Bank Date Particulars L.F Cash Bank

Jan 1 To Balance b/d 2,300 Jan. 1 By balance 12,000

9 To Cheque in hand 4,000 18 By Cash C 2,000

12 To Sales 15,000 23 By drawings 1,000

18 To Bank C 31 By bank charge 200

31 By balance 2,300 3,800

2,300 19,000 2,300 19,000

Feb 1 To Balance b/d 2,300 3,800

Q.2 Vinod has the following transactions. Show accounting equation for the same: (i) Commenced business with cash Rs.80,000.(ii) Paid rent in advance Rs.1,000.(iii) Purchased goods for cash Rs.30,000 and credit Rs.20,000.(iv) Sold goods costing Rs.20,000 for Rs.30,000.(v) Paid Salary Rs.800 and Salary outstanding Rs.200.

Ans. Accounting Equation

Particulars Assets = Liabilities

Cash + Stock + Prepaid Rent = Creditors + Capital

(i) Commenced Business 80,000 + 0 + 0 = 0 + 80,000

(ii) Paid Rent in advance (1,000) + 0 + 1,000 = 0 + 0

New Equation 79,000 + 0 + 1,000 = 0 + 80,000

(iii) Purchased goods (30,000) + 50,000 + 0 = 20,000 + 0

New Equation 49,000 + 50,000 + 1,000 = 20,000 + 80,000

(iv) Sold goods 30,000 + (20,000) + 0 = 0 + 10,000

New Equation 79,000 + 30,000 + 1,000 = 20,000 + 90,000

(v) Salary paid & outstanding (800) + 0 + 0 = 200 + (1,000)

Final Equation 78,200 + 30,000 + 1,000 = 20,200 + 89,000

Q.3 What is petty cash book? How it is prepared?Answer :

Petty Cash Book is used for recording payment of petty expenses, which are of smaller denominations like postage, stationery, conveyance, refreshment, etc. Person who maintains petty cash book is known as petty cashier and these small expenses are termed as petty expenses.

It is prepared by two methods:

1. Ordinary system: In this case, a fixed sum of money is paid to petty cashier for the payment of petty expenses and after spending the whole amount, the account is submitted by the petty cashier to the main cashier.

2. Imprest system: In this case, a fixed sum of the money is given to the petty cashier in the beginning of a period and at the end of the period the amount spent by him is reimbursed, so that he has a fixed amount in the beginning of every new period.

Q.4 What is difference between trade discount and cash discount?

Answer :

Basis of Difference Trade Discount Cash DiscountMeaning It is allowed when goods are

purchase or sold.It is allowed at the time of payment.

Recording in books It is recorded in invoice/bill but not in the books.

It is recorded in the discount column of the Cash Book's debit side, if allowed, and credit side, if received.

Purpose It is allowed to increase sale. It is allowed for earlier payment.Deduction It is deducted from the price-list

of the goods.It is not deducted from the price-list of the goods.

Long Questions

Q.1 M/s Vinod & Sons showing following transactions. Prepar accounting equation [4] for the same:

( i ) C o m m e n c e d b u s i n e s s w i t h c a s h .....................................Rs.3,00,000.( i i ) P u r c h a s e d g o o d s f o r c a s h ................................................ Rs.80,000.( i i i ) P u r c h a s e d m a c h i n e r y o n c r e d i t R s . 1 , 2 5 , 0 0 0 .( i v ) Pur chased o ld ca r f o r pe r sona l use fo r ...................... Rs.1,00,000.

Ans. Accounting Equation

Particulars Assets = LiabilitiesCash 4.- Stock + Machinery = Creditors + Capital

(i)Commenced Business 3,00,000 + 0 + 0 0+ 3,00,000(i i ) Purchased goods (80,000) + 80,000 + 0 0 + 0

New Equation 2,20,000 + 80,000 + 0 = 0 + 3,00,000

( i i i ) P u r c h a s e d M a c h i n e

0 + 0 + 1,25,000 = 1,25,000+ 0

New Equation 2,20,000 + 80,000 + 1,25,000 = 1,25,000 + 3,00,000

( i v ) P u r c h a s e d c a r (1,00,000) + 0 + 0 = 0 + (1,00,000)

Final Equation 1,20,000 + 80,000 + 1,25,000 = 1,25,000 + 2,00,000

Q.2 Prepare a double column cash book with the help of following information for December 2005 :

01 Started business with cash

03 Cash paid into bank

05 Purchased goods from Sushmita

06 Sold goods to Dinker and received a cheque

10 Paid to Sushmita cash

14 Cheque received on December 06, 2005 deposited into bank

18 Sold goods to Rani

20 Cartage paid in cash

22 Received cash from Rani

27 Commission received

30 Drew cash for personal use

Ans.

Cash Book

Dr. Cr.

Date Particulars L.F.

Cash

Rs

Bank

Rs Date Particulars L.F.

Cash

Rs

Bank

Rs

2005 2005

Dec.01 Capital 1,20,000 Dec.03 Bank C 50,000

Dec.03 Cash C 50,000 Dec.10 Sushmita 20,000

Dec.06 Dinker 20,000 Dec.14 Bank C 20,000

Dec.14 Cash C 20,000 Dec.20 Cartage 500

Dec.22 Rani 12,000 Dec.30 Drawings C 2,000

Dec.27 Commission 5,000 Dec.31 Balance c/d 64,500 70,000

1,57,000 70,000 1,57,000 70,000

Q.3 Jouranlise the following transactions in the books of Harpreet Bros.:

(a) Rs 1,000 due from Rohit are now bad debts.

(b) Goods worth Rs 2,000 were used by the proprietor.

(c) Charge depreciation @ 10% p.a for two month on machine costing Rs 30,000.

(d) Provide interest on capital of Rs 1,50,000 at 6% p.a. for 9 months.

(e) Rahul become insolvent, who owed is Rs 2,000 a final dividend of 60 paise in a rupee is received from his estate.

Ans.

Books of Harpreet Bros.

Journal

S. No. Particulars L.F.Debit

Amount Rs

Credit Amount

Rs

(a) Bad Debt A/c Dr. 1,000

To Rohit (Debtors) 1,000

(Due from Rohit became bad debt)

(b) Drawings A/c Dr. 2,000

To Purchases A/c 2,000

(Goods withdrawn by proprietor for personal use)

(c) Depreciation A/c Dr. 500

To Machinery A/c 500

(Depreciation charged on machinery for two

months)

(d) Interest on Capital A/c Dr. 6,750

To Capital A/c 6,750

(Interest on capital at 6% due for 9 months)

(e) Bad Debt A/c Dr. 800

Cash A/c Dr. 1,200

To Rahul (Debtor) 2,000

(Received from Rahul 60 paise in a rupee and rest amount considered as bad debt)


Q.1 Define the Bill Payable.

Ans. When a Bill of Exchange is accepted by the Drawee it becomes the Bill payable for them, he needs to pay it in future, what is the difference between paid and payable is that payment aspect paid means the payment have been paid while payable mean it has to be paid in the future. Bills Payable are the part of Liabilities and shown under the Liabilities column of a Balance Sheet.

Q.2 Write two points of distinction between bills of exchange and promissory note.Answer :

Basis of Difference Bills of Exchange Promissory NoteDrawer It is drawn by a creditor. It is drawn by a debtor.

PartiesThere are three parties involved, namely drawer, drawee and payee.

There are two parties involved, namely maker and payee.

Q.3 What is a bank overdraft?

Ans. Bank overdraft is a liability to an account holder. When the account holder withdraws excess amount over his/her available bank balance, he/she runs a negative bank balance. The negative bank balance is an obligation to the account holder and is called bank overdraft. In other words, bank overdraft is the excess of withdrawal over deposits.

Short Questions

Q.1 Vinod owed Rs.10,000 to Mohan. Mohan wrote a bill of exchange for Rs.10,000 on Vinod for three months, which was duly accepted by Vinod. Mohan discounted the bill with Bank at a discount of Rs.100. On maturity, Bill was dishonored. Bank paid Rs.20 as noting charges. Pass journal entries in the books of Mohan. Ans.

Mohan’s Journal

Date Particulars L. Debit Credit

F.

Bills Receivable A/c Dr10,000

10,000

To Vinod

(Being acceptance received)

Bank A/c Dr. 9,900

Discount A/c Dr 100

To Bills Receivable A/c 10,000

(Being bill discounted)

Vinod Dr. 10,020

To Bank 10,020

(Being bill dishonoured and noting charges paid by

bank)

Q.2 On 1st January, 2014, A drew a bill on B for Rs.10,000 payable after 3 months. B accepted the bill and returned it to A. After 10 days, A endorsed the bill to his creditor, C. On the due date, the bill was dishonored and C paid Rs.200 as noting charges. Record the transactions in the books of A, B and C

Particulars Detail Detail

Amount Amount

Balance as per passbook (overdraft) 20,000

Add: Cheque issued but not presented 25,00045,000

Less: Insurance premium paid by the bank 500Cheque deposited but not cleared 22,000Interest on Overdraft 1,000 23,500

Balance as per cash book (overdraft) 21,5000

Q.3. Prepare a Bank Reconciliation Statement on 31 December 2009 for the following [6] when overdraft as per pass book is Rs.20,000.

(1)Cheques i ssued, but not presented for payment Rs .25 ,000.

(2)Interest on bank overdraft charged by the bank, but not entered in cash book Rs.1,000.

(3 )Cheque depos i ted but not co l lec ted Rs .22 ,000 .(4)Insurance premium Rs .500 paid by bank under s s tanding order but not

recorded in cash book.

Ans. Bank Reconciliation Statement

Q.4 State the need for the preparation of bank reconciliation statement?

Answer :The need to prepare Bank Reconciliation Statement are given below.

It helps in finding out the errors and omissions committed in the Cash Book and the Pass Book. It shows uncleared cheques, which have already been debited in the Cash Book but

have not been yet recorded in the Pass Book. It helps in checking embezzlement of money from the bank account. It helps in measuring the accuracy of the transactions recorded in the Cash Book. It facilitates in preparing revised Cash Book that reflects true bank balance.

Long Questions

Q.1 Prepare a Bank Reconciliation Statement of Mr. Divij Jain on 31 May 2017 from the following:

Dr. Balance as per Pass Book Rs.50,000. Cheque issued to Mr. Himesh Rohatgi for Rs.2,000 not entered in Cash Book.

Mr. Dhanraj (debtor) deposited an amount of Rs.1,000 directly into the bank account of Mr. Divij Jain.

Cheque received from Mr. Dhruv Guleria for Rs.6,000 entered in cash book but not sent to bank.

There was a credit in the pass book for Rs.600 and another credit of Rs.200 for interest.

Bank charges Rs.500 entered twice in the cash book.Ans. Bank Reconciliation Statement

Particulars Amount Amount

Rs. Rs.

Balance as per passbook 50,000

Add : Direct deposit by customer 1,000

Add : Credit in pass book 600 + 200 800

Add: Bank charges 500 2,300

47,700

Less: Cheque of Mr. Himesh Rohtagi 2,000

Less: Cheque received not sent to bank 6,000 8,000

Balance as per cash book (Cr.) 39,700

Q.2 Explain the reasons where the balance shown by the bank passbook does not agree with the balance as shown by the bank column of the cash book.

Ans. Below given are the reasons on account of which the balance shown by the bank Pass Book does not agree with the balance shown by the bank column of the Cash Book.

1. Differences due to time lag: In the following situations, differences may arise, if the date of recording transactions in the bank column of the Cash Book is not same to that of in the Pass Book.

2. Cheques issued by the firm but presented after the date that is mentioned on the cheque or still not presented in the bank:Usually, issue of a cheque is recorded in the bank column of the Cash Book on the date that is mentioned (mentioned date) on the cheque. Sometimes, the holder of the cheque does not present the cheque on the date which is mentioned on it. This may lead to differences in the balance between the Pass Book and the bank balance of the Cash Book.

3. Deposit of cheque recorded in the Cash Book at the time of deposit but collected later or not collected by the bank: Deposit of a cheque is recorded in the bank column of the Cash Book on the date when it is deposited in the bank for payment but bank records it in the Pass Book on the date of clearance.

Usually, date of deposit and date of clearance are not the same. This difference in the two respective dates leads to a mismatch between the Pass Book and the bank balance of the Cash Book.

4. Transactions recorded only in the Pass Book: Transactions, like interest allowed by bank on the deposits, bank charges, etc., are recorded first in the Pass Book. After getting intimation from the bank, these are recorded in the bank column of the Cash Book. However, sometimes, due to delay in intimation of these transactions to the customers, the Cash Book remains not updated, which leads to the difference between the Pass Book and the bank balance of the Cash Book.

Q.3 Abdula sold goods to Tahir on Jan 17, 2006 for Rs 18,000. He drew a bill of exchange for the same amount on Tahir for 45 days. On the same date Tahir accepted the bill and returned it to Abdulla. On the due date Abdulla presented the bill to Tahir which was dishonoured. Abdulla paid Rs 40 as noting charges. Five days after the dishonour of his acceptance Tahir settled his debt by making a payment of Rs 18,700 including interest and noting charges. Record the necessary journal entries in the books of Abdulla and Tahir. Also prepare Tahir.s account in the books of Abdulla and Abdulla.s account in the books of Tahir.

Ans.

Books of Abdula

Journal

Date Particulars L.F.Debit

Amount Rs

Credit Amount

Rs

2006

Jan.17 Tahir Dr. 18,000

To Sales A/c

18,000

(Goods sold to Tahir)

Jan.17 Bills Receivable A/c Dr. 18,000

To Tahir

18,000

(Tahir's acceptance received)

Mar.06 Tahir Dr. 18,040

To Bills Receivable A/c

18,000

To Cash 40

(Tahir's acceptance dishonoured and Rs 40 paid as

noting charges)

Mar.06 Tahir Dr. 660

To Interest A/c

660

(Interest charged from Tahir on account of bill

dishonoured)

Mar.12 Cash A/c Dr. 18,700

To Tahir

18,700

(Tahir cleared his account by paying cash)


Q.1 Give any two differences between Reserve and Provision?

Ans. Differences between Reserve and Provision:

Reserve Provision

1. Reserve is an appropriation of profit. 1. A provision is a charge on profit.

2. Main purpose of creating a reserve is to 2. Main purpose of provision is to meet the

strengthen the financial position and to meet known liability.

the unforeseen losses or liabilities.

Q.2 How would you define ‘Provision for Doubtful Debts’?Ans. Provision for doubtful debts is always calculated as a percentage of debtors. This provision is made against debts of the amount that are doubtful of recovery.

Q.3 What are the two main basis of Depreciation?Ans. Cost of the Assets: When a good is purchased or a fixed assets is created all the over head would be added to its value and the total value should be considered as Fixed Assets proper value.Approximate Life of the Assets : A life period should be estimated for each of the assets and according to the certain percentage is should be reduced to year by year.

Short Questions

Q.1 Vinod Ltd., purchased a Plant on 1st April, 2005 for Rs.15,000. It purchased another plant on 1st October, 2005 costing Rs.20,000 and on 1st July, 2006 costing Rs.30,000. On 1st January, 2007 the Plant purchased on 1st April, 2005 became useless and was sold for Rs.2,000. Show Plant Account charging 10% p.a.depreciation by fixed installment method for four years. The plant purchased on 1st October, 2005 was sold for Rs.8,000 on 1st January, 2008. Accounts of the company are closed on 31st December each year.Ans.

1Machinery Account

Date Particulars Amount Date Particulars Amount

2005 To Bank 15,000 2005 By Depreciation A/c 1,625

April 1 To Bank 20,000 Dec.31 By Balance c/d 33,375

Oct 1 35,000 35,000

2006 To Balance b/d 33,375 2006 By Depreciation A/c

Jan.1 To Bank A/c 30,000 Dec 31 By Balance c/d 5,000

July 1 58,375

63,375 63,375

2007 To Balance b/d 2007 By Bank

Jan. 1 58,375 Jan 1 By P/L A/c 2,000

By Depreciation A/c 10,375

Dec 31 By Balance c/d 5,000

41,000

58,375 58,375

2008 To Balance b/d 41,000 2008 By Bank 8,000

Jan 1 Jan 1 By P/L A/c 7,500



41,000 41,000

2009

Jan 1 To Balance b/d 22,500

Q.2 Vinod Bros. providing you following information on 31st March 2015. Show the treatment of following items in related accounts without doing calculation of profit or loss:

Particulars Amount Amount

Debtors 51,000 --

Bad debts 1,500 --

Provision for doubtful debts -- 800

Prepaid salaries 300 --

Outstanding rent -- 400

Commission received -- 6,000

Additional Information:

(i) Further bad debts were Rs.1,000.

(ii) Bad debts recovered Rs.600.

(iii) Make provision for doubtful debts @ 5%. Commission received includes 1/3 for the next year.

Ans. Profit and Loss Account (Extract)

Particulars Amount Particulars Amount

Bad Debts 1,500 Bad debts recovered 600

Add : Further bad debts 1,000 2,500 Commission 6,000

Provision for bad debts: Less : 1/3 2,000 4,000

Debtors 51,000

Less : 1,000 (new bad debts)

50,000

Now; 50,000 x 5/100 = 2,500

Less : Old provision 800 1,700

Balance Sheet (Extract)

Liabilities Amount Assets Amount

Commission (advance) 2,000 Debtors 51,000

Outstanding Rent 400 Less : Bad debts 1,000

Less : Provision 2,500 47,500

Cash (bad debts recovered) 600

Prepaid Salaries 300

Q.3 Give any four examples of Provisions and four examples of Reserves?

Ans. Four Examples of Provisions (i) Provision for doubtful debts (ii) Provision for Depreciation (iii) Provision for Taxation (iv) Provision for Repairs

Four Examples of Reserves: (i) General Reserve (ii) Capital Reserve (iii) Securities Premium Reserve (iv) Specific Reserve i.e. Dividend Reserve & Capital Redemption Reserve etc.

Q.4 State briefly the need for providing depreciation.

Answer :The needs for providing depreciation are given below.

To ascertain true net profit or net loss- Correct profit or loss can be ascertained when all the expenses and losses incurred for earning revenues are charged to Profit and Loss Account. Assets are used for earning revenues and its cost is charged in form of depreciation from Profit and Loss Account.

To show true and fair view of financial statements- If depreciation is not charged, assets are shown at higher value than their actual value in the Balance Sheet; consequently, the Balance Sheet does not reflect true and fair view of financial statements.

For ascertaining the accurate cost of production- Depreciation on plant and machinery and other assets, which are engaged in production, is included in the cost of production. If depreciation is not included, cost of production is underestimated, which will lead to low sale price and thus leads to low profit.

Distribution of dividend out of profit- If depreciation is not charged, which leads to overestimating of profit and consequently more profit is distributed as dividend, out of capital instead of the profit. This leads to the flight of scarce capital out of the business.

To provide funds for replacement of assets- Unlike other expenses, depreciation is not a cash expense. So, the amount of depreciation charged will be retained in the business and will be used for replacement of fixed assets after its useful life.

Consideration of tax- If depreciation is charged, then Profit and Loss Account will disclose lesser profit as to when the depreciation is notcharged. This depicts reduced profit and thus the business will be liable for lesser tax amount.

Long Questions

Q.1 On January 01 2011, Vinod Transport Co. purchased five trucks for Rs. 20,000 each. Depreciation has been provided at the rate of 10% p.a. using straight line method and accumulated in provision for depreciation account. On January 01, 2012, one truck was sold for Rs. 15,000. On July 01, 2013, another truck (purchased for Rs. 20,000 on Jan 01, 2011) was sold for Rs. 18,000. A new truck costing Rs. 30,000 was purchased on October 01, 2013. You are required to prepare trucks account, Provision for depreciation account and Truck disposal account for the years ended on December 2011, 2012 and 2013 assuming that the firm closes its accounts in December every year.

Ans.


2011 2011

Jan 1 To Bank 1,00,000 Dec.31

By Balance c/d 1,00,000

1,00,000 1,00,000

2012 2012

Jan. 1 To Balance b/d 1,00,000 Jan. 1 By Asset Disposal 20,000


1,00,000 1,00,000

2013 2013

Jan. 1 To Balance b/d 80,000 July 1 By Asset Disposal 20,000

Oct. 1 To Bank A/c 30,000 Dec. 31 By Balance c/d 90,000

Truck Disposal Account


2012 Truck A/c 20,000 2012 Prov. for Dep. 2,000Bank A/c 15,000P/L A/c 3,000

20,000 20,000

2013 Truck A/c 20,000 2013 Prov. for Dep. 5,000P/L A/c 3,000 Bank A/c 18,000

23,000 23,000

Provision for Depreciation Account


2011 2011Dec 31 To Balance c/d 10,000 Dec 31


10,000 10,000

2012 2012

Jan. 1To Truck Disposal 2,000 Jan. 1 By Balance c/d 10,000

Dec 31 To Balance b/d 16,000 Dec 31By Depreciation A/c 8,000

18,000 18,000

2013To Truck Disposal 5,000 2013 By Balance c/d 16,000

Jan. 1 To Balance b/d 18,750 Jan. 1By Depreciation A/c 7,750

Dec 31 Dec 31

Q.2 Distinguish between capital and revenue expenditure and state whether the following statements are items of capital or revenue expenditure:

(a) Expenditure incurred on repairs and whitewashing at the time of purchase of an old building in order to make it usable.

(b) Expenditure incurred to provide one more exit in a cinema hall in compliance with a government order.

(c) Registration fees paid at the time of purchase of a building

(d) Expenditure incurred in the maintenance of a tea garden which will produce tea after four years.

(e) Depreciation charged on a plant.

(f) The expenditure incurred in erecting a platform on which a machine will be fixed.

(g) Advertising expenditure, the benefits of which will last for four years.

Ans.

Basis of Difference Capital Expenditure Revenue ExpenditureMeaning It is incurred to increase the earning capacity of

a business.It is incurred to maintain the earning capacity of a business.

Purpose It is incurred to acquire fixed assets to carry out operations.

It is incurred to conduct day to day activities.

Benefits The benefits of such expenditures can be availed for more than one year.

The benefits of such expenditures can only be availed for one year.

Nature It is non-recurring by nature. It is generally recurring in nature.Shown Capital expenditure is shown in the assets side

of the Balance Sheet.Revenue expenditure is shown in the debit side of the trading and Profit and Loss Account.

(a) Capital expenditure(b) Revenue expenditure

(c) Capital expenditure(d) Capital expenditure(e) Revenue expenditure(f) Capital expenditure(g) Deferred revenue expenditure

Q.3 Prepare trading and profit and loss account and balance sheet, as on March 31, 2005 :

Account Title Amount

Rs

Account Title

Machinery 27,000 Capital

Sundry debtors 21,600 Bills payable

Drawings 2,700 Sundry creditors

Purchases 58,500 Sales

Wages 15,000

Sundry expenses 600

Rent and taxes 1,350

Carriage inwards 450

Bank 4,500

Openings stock 6,000

Closing stock, as on March 31, 2005 Rs 22,400

Ans.

Trading Account as on March 31, 2005

Dr. Cr.

Particulars

Amount

Rs Particulars

Amount

Rs

Opening Stock 6,000 Sales 73,500

Purchases 58,500 Closing Stock 22,400

Wages 15,000

Carriage Inwards 450

Profit and Loss (Gross Profit) 15,950

95,900 95,900

Profit and Loss Account as on March 31, 2005

Dr. Cr.

Particulars

Amount

Rs Particulars

Amount

Rs

Sundry Expenses 600 Trading (Gross Profit) 15,950

Rent and Taxes 1,350

Net Profit 14,000

15,950 15,950

Balance Sheet as on March 31, 2005

Liabilities

Amount

Rs Assets

Amount

Rs

Capital 60,000 Fixed Assets

Add: Net Profit 14,000 Machinery 27,000

74,000

Less: Drawings 2,700 71,300 Current Assets

Bank 4,500

Sundry Creditors 1,400 Closing Stock 22,400

Bills Payable 2,800 Sundry Debtors 21,600

75,500 75,500


Q.1 What is public company?

Ans. A public company is defined as a company that offers a part of its ownership in the form of shares, debentures, bonds, securities to the general public through stock market. There must be

atleast seven members to form a public company. As per the section 3 (1) (iv) of Companies Act 1956, public company means a company which:

a) is not a private company,

b) has a minimum paid up capital of Rs 5,00,000 or such higher paid up capital, as may be prescribed,

c) is a private company, being a subsidiary of a company which is not a private company.

A public company should not be mistakenly understood as a publicly-owned company, as the latter is exclusively owned and controlled by the government. A public company issues its share to general public without any restriction on maximum number of persons. A public company can be segmented into two types:

1. Listed Company- A Company whose shares are listed and traded in the stock exchange like, Tata Motors, Reliance, etc.

2. Unlisted Company- A Company whose shares are not listed in the stock exchange and thereby these shares cannot be traded in the stock exchange.

Q.2 What is meant by a Debenture?

Ans. The word Debenture is derived from a Latin word 'debere' which means to borrow. A debenture is issued in the form of a certificate under the seal of a company and containing a contract for the repayment of the principal sum after a fixed period of time and payment of interest at regular intervals, generally half yearly. Debentures are issued by a company for acquiring long-term borrowings.

Q.3 What is a 'Preference Share'?

Ans. Preference Shares: Section 85 of the Company Act,1956 defines Preference Shares to be featured by the following rights:

a. Preference Shares entitle its holder the right to receive dividend at a fixed rate or fixed amount.

b. Preference Shares entitle its holder the preferential right to receive repayment of capital invested by them before their equity counterparts at the time of winding up of the company.

Short Questions

Q.1 Write a brief note on 'Minimum Subscription'.

Ans. When shares are issued to the general public, the minimum amount that must be subscribed by the public so that the company can allot shares to the applicants is termed as Minimum Subscription. As per the Company Act of 1956, the Minimum Subscription of share cannot be less than 90% of the issued amount. If the Minimum Subscription is not received, the company cannot allot shares to its applicants and it shall immediately refund the entire application amount received to the public.

Q.2 Bansal Heavy machine Ltd purchased machine worth Rs 3,20,000 from Handa Trader. Payment was made as Rs 50,000 cash and remaining amount by issue of equity share of the face value of Rs 100 each fully paid at an issue price of Rs 90 each.

Give journal entries to record the above transaction.

Ans.

Book of Bansal Heavy Machine Ltd


Debit

Amount

Rs

Credit

Amount

Rs

Machinery A/c Dr. 3,20,000

To Cash A/c 50,000

To Handa Traders 2,70,000

(Machine purchased from Handa Traders paid Rs 50,000 in

cash immediately)

Handa Trader Dr. 2,79,000

Discount on Issue of Shares A/c Dr. 30,000

To Share Capital A/c 3,00,000

(3,000 share issued at Rs 90 face value of Rs 100 each to

Handa Traders in consideration of amount due to him for

machinery purchased)

Q.3 Distinguish between a debenture and a share. Why is debenture known as loan capital? Explain.

Ans. Basis of Difference Shares Debenture

1. Owner or Creditor Share holders are the owners since shares forms a are part of owned capital

Debenture holder are Creditors since debentures are a part of loan

2. Voting Rights Share holders have the voting rights Debenture holders do not have any voting rights.

3. Returns Share holders are entitled for returns in the form of dividend.

Debenture holders are entitled for returns in the form of interest.

4. Rate of Return The rate of dividend is not fixed and varies from year to year.

The rate of interest is fixed and do not vary from year to year.

5. Obligations of Return

Dividend is appropriation of profit. Dividend will not be paid if losses are

Interest is charged against profit, interest is payable even if there is no

incurred by the company profit.

6. Repayment of Amount

The amount of share is not returned during the life time of the company

The amount of debenture is returned according to the term of issue.

7. Issue The issue of shares at discount need adherence to the restrictions imposed by the Section 79 of the Company Act.

There are no such restrictions for issuing debentures on discount.

8. Conversion Shares cannot be converted into debentures.

Debentures can be converted into shares.

9. Risk Shares are more risky than debenture as these are unsecured.

If debentures are secured against asset, the risk involved is the minimal.

10. Repayment Priority Payment to the share holders is made after settlement of all external liabilities, i.e. after debenture holders.

Payment to the debenture holders is made before the share holders.

Q.4 What is a 'Convertible Debenture'?

Ans. Convertible Debentures are those debentures that can be converted into equity shares after a specified period of time. These are of following two types:

i. Fully Convertible Debentures: When the whole amount of a debenture is convertible into equity shares worth of equivalent amount, then these debentures are called Fully Convertible Debentures. There is no need to maintain Debenture Redemption Reserves for such debentures.

ii. Partly Convertible Debentures: When only a part of the amount of a debenture is convertible into equity share, then these debentures are called Partly Convertible Debentures. In this regards, the Debenture Redemption Reserve is maintained only for the non-convertible part of the debenture.

Long Questions

Q.1 Naman Ltd issued 20,000 shares of Rs 100 each, payable Rs 25 on application, Rs 30 on allotment , Rs 25 on first call and The balance on final call. All money duly received except Anubha, who holding 200 shares did not pay allotment and calls money and Kumkum, who holding 100 shares did not pay both the calls. The directors forfeited shares of Anubha and kumkum.

Give journal entries.

Ans.

Books of Naman Ltd

Date Particulars L.F. Debit Credit

Amount

Rs

Amount

Rs

Bank A/c Dr. 5,00,000

To Share Application A/c 5,00,000

(Shares Application money received for 20,000 shares @ Rs 25 each)

Share Application A/c Dr. 5,00,000

To Share Capital 5,00,000

(Share Application money of 20,000 shares @ Rs 25 each

transferred to Share Capital Account)

Share Allotment A/c Dr. 6,00,000


(Share Allotment due on 20,000 shares @ Rs 30 each)

Bank A/c Dr. 5,94,000

To Share Allotment A/c 5,94,000

(Allotment money received for 19,800 shares @ Rs 30 per share)

Share First Call A/c Dr. 5,00,000


(Share First Call money due on 20,000 @ Rs 25 per share)

Bank A/c Dr. 4,92,500

To Share First Call A/c 4,92,500

(Share First Call received @ Rs 25 per share for 19,700 shares)

Share Final Call A/c Dr. 4,00,000


(Share Final Call money due on 20,000 shares @ 20 per share)

Bank A/c Dr. 3,94,000

Q.2 G.Ltd. issued 75,00,000, 6% Debenture of Rs 50 each at par payable Rs 15 on application and Rs 35 on allotment, redeemable at par after 7 years from the date of issue of debenture. Record necessary entries in the books of Company.

Ans.

Journal


Debit

Amount

Rs

Credit

Amount

Rs

Bank A/c Dr. 11,25,00,000

To 6% Debenture Application A/c 11,25,00,000

(Application money @ Rs 15 each received for 75,00,000 debentures)

6% Debenture Application A/c Dr. 11,25,00,000

To 6% Debenture A/c 11,25,00,000

(Application money of 75,00,000 debentures transferred to 6% Debentures Account)

6% Debenture Allotment A/c Dr. 26,25,00,000

To 6% Debenture A/c 26,25,00,000

(Allotment money @ Rs 35 each due for 75,00,000 debentures )

Bank A/c Dr. 26,25,00,000

To 6% Debenture Allotment A/c 26,25,00,000

(Allotment money received @ Rs 35 each on

75,00,000 debentures)

Q.3 X.Ltd. invites application for the issue of 10,000, 14% debentures of Rs 100 each payable as to Rs 20 on application, Rs 60 on allotment and the balance on call. The company receives applications for 13,500 debentures, out of which applications for 8,000 debentures are allotted in full, 5,000 only 40% and the remaining rejected. The surplus money on partially allotted applications is utilised towards allotment. All the sums due are duly received.

Ans.

Journal


Debit

Amount

Rs

Credit

Amount

Rs

Bank A/c Dr. 2,70,000

To 14% Debenture Application A/c

2,70,000

(14% Debenture application money for 13,500 debentures

@ 20 each received)

14% Debenture Application A/c

Dr. 2,70,000

To 14% Debenture A/c 2,00,000

To 14% Debenture Allotment A/c

60,000

To Bank 10,000

(14% Debenture Application money of 10,000 @ Rs 20 each

transferred to 14% Debentures Account and 500 debentures

were rejected and returned

and rest of the amount adjusted

on allotment)

14% Debenture Allotment A/c

Dr. 6,00,000


(14% Debenture Allotment money due on 10,000 debentures @

Rs 60 each)

Bank A/c Dr. 5,40,000

To 14% Debenture Allotment A/c

5,40,000

(14% Debenture Allotment money received)

14% Debenture First and Final Call A/c

Dr. 2,00,000


(14% Debenture First and Final Call money due on 10,000

debentures @ 20 each)

Bank A/c Dr. 2,00,000

To 14% Debenture First and Final Call A/c

2,00,000

(14% Debenture First and Final Call money received on 10,000

debentures @ Rs 20 each)

Documents

· Web viewAs name suggests the financial accounting is based on Financial terms the transaction which has the financial i.e. money value and can be measured in terms of money